3.3 Management of Capital Invested in Assets 25Transfer of risks and rewards of ownership. It is not possible to derecognise an as-
set unless the entity transfers substantially all the risks and rewards of ownership
of the asset (see above).
There are many examples of such transfers: an unconditional sale of a financial
asset; a sale of a financial asset together with an option to repurchase the financial
asset at its fair value at the time of repurchase; and a sale of a financial asset to-
gether with a put or call option that is deeply out of the money (an option so far
out of the money it is highly unlikely to go into the money before expiry).
On the other hand, the entity must continue to recognise the asset if it retains
substantially all the risks and rewards of ownership of the asset. Derecognition re-
quires the transferor’s exposure to the risks and rewards of ownership to change
substantially.^12
There are many examples of when an entity has retained substantially all the risks and re-
wards of ownership and must continue to recognise the asset: a sale and repurchase transac-
tion where the repurchase price is a fixed price or the sale price plus a lender’s return; a se-
curities lending agreement; a sale of a financial asset together with a total return swap that
transfers the market risk exposure back to the entity; a sale of a financial asset together with
a deep in-the-money put or call option (that is an option that is so far in the money that it is
highly unlikely to go out of the money before expiry); and a sale of short-term receivables
in which the entity guarantees to compensate the transferee for credit losses that are likely
to occur.
Loss of control. The asset is derecognised if the entity has lost control of it. The
entity continues to recognise the asset to the extent of its continuing involvement
if it has retained control.^13 Control is based on the transferee’s practical ability to
sell the asset.^14 The transferee has this ability if it unilaterally can sell the asset in
its entirety to an unrelated third party without needing to impose further restric-
tions on the transfer.
3.3.3 Leasing
Introduction
The lease of an asset is a particular type of hire contract. One party, the lessor,
owns an asset and permits another party, the lessee, to use it in exchange for pay-
ment of rent.
Importance. Leasing and hire purchase are important sources of funding.^15 In
2005, leasing of equipment and hire purchase accounted for more than 17% of
gross fixed capital formation in Europe.
(^12) IAS 39R.20 (b).
(^13) IAS 39R.30.
(^14) IAS 39R.20(c); AS39R.23.
(^15) See, for example, Drury C, Braund S, The Leasing Decision: A Comparison of Theory
and Practice, Accounting and Business Research 20 (1990) pp 179–191.