24 3 Reduction of External Funding Needs
ognised).^2 An entity that derecognises a financial asset in its entirety includes the
difference between the carrying amount and the consideration received (including
any cumulative gain or loss that had been recognised directly in equity) in the in-
come statement.^3
Assessing whether or not a financial asset should be derecognised is normally
straight-forward. Financial assets are removed from the balance sheet through
sale, payment, renegotiation, or default of the counter-party.^4 For example, when a
manufacturer receives a payment from a customer for the delivery of spare parts,
the manufacturer no longer has any rights to further cash flows from the receiv-
able. It should remove the receivable from the balance sheet (in other words, de-
recognise it).^5
However, where an entity sells a portfolio of trade receivables or mortgages for
funding reasons, it is less obvious whether those financial assets should be derec-
ognised. Examples of such arrangements include debt factoring and securitisation
schemes.
The Application Guidance in IAS 39 summarises the criteria for derecognition in IAS 39.
The derecognition process consists of five main steps:^6 (1) the consolidation of all subsidi-
aries (an entity first consolidates all subsidiaries and special purpose entities and then ap-
plies the derecognition principles to the resulting group);^7 (2) identification of the assets or
parts of assets that will be tested for derecognition (an entire asset, a fully proportionate
share of the cash flows from an asset, specifically identified cash flows from an asset, or a
fully proportionate share of specifically identified cash flows from an asset);^8 (3) assess-
ment of whether the firm’s contractual rights to the cash flows from the financial asset (or
part of the asset) have expired or are forfeited (derecognition only provided that they have
expired or are forfeited, the asset has no value and should be derecognised if there are no
longer cash flows accruing to the entity);^9 (4) assessment of whether the firm has trans-
ferred its contractual rights to another party (an entity that has sold a financial asset has
transferred its rights to receive the cash flows from the asset, but additional requirements
have to be fulfilled to conclude that so-called pass-through arrangements meet the criteria
for a transfer);^10 and (5) the application of derecognition tests. An entity derecognises an
asset if two things apply: (a) the entity transfers substantially all the risks and rewards of
ownership of the asset;^11 and (b) the entity loses control of the asset.
(^2) IAS 39R.9.
(^3) IAS 39R.34.
(^4) IAS 39R.9.
(^5) IAS 39R.17(a).
(^6) For a detailed explanation of each step, see IAS 39R.AG36.
(^7) IAS 39R.15.
(^8) IAS 39R.16. The tests may be applied to any of the following: an entire asset (for exam-
ple, an unconditional sale of a financial asset); a fully proportionate share of the cash
flows from an asset (for example, a sale of 10 percent of all principal and interest cash
flows); specifically identified cash flows from an asset (for example, a sale of an inter-
est-only strip of a loan); or a fully proportionate share of specifically identified cash
flows from an asset (for example, a sale of 10% of an interest-only strip of a loan).
(^9) IAS 39R.17(a).
(^10) IAS 39R.17(b); IAS39R.18(a). For “pass-through arrangements”, see IAS 39R.18(b).
(^11) IAS 39R.20(a).