and either the transferred asset or the liability arising from the transfer would result in recognising the same rights or
obligations twice. E.g., a call option retained by the transferor
may prevent a transfer of FAs from being accounted for as a
sale. In that case, the call option is not separately recognised
as a derivative asset. 49
– The transferee derecognises the cash or other consideration paid and recognises a receivable from the transferor. If the transferor has both a right and an obligation to reacquire control of the entire transferred asset for a fixed amount (such as under a repurchase agreement), the transferee may account for its receivable as a loan or receivable. 50
Examples
a)Repurchase agreements and securities lending. If a FA is sold
under an agreement to repurchase it at a fixed price or at the
sale price plus a lender’s return or if it is loaned under an
agreement to return it to the transferor, it is not derecognised
because the transferor retains substantially all the risks and
rewards of ownership. If the transferee obtains the right to sell
or pledge the asset, the transferor reclassifies the asset on its
BS, e.g., as a loaned asset or repurchase receivable.
b) Repurchase agreements and securities lending—assets that are substantially the same. If the FA to be repurchased or return is the same or substantially the same as the asset sold or lent, it is not
derecognised because the transferor retains substantially all the risks and rewards of ownership.
c) Repurchase agreements and securities lending—right of substitution.
If the agreement provides the transferee with a right to substitute
assets that are similar and of equal FV to the transferred asset, the FA is not derecognised because the transferor retains substantially all the risks and rewards.
d) Repurchase right of first refusal at FV .* If an entity sells a FA and retains only a right of first refusal to repurchase the transferred asset at FV if the transferee subsequently sells it, the entity derecognises the asset because it has transferred substantially all the risks and rewards of ownership.
e) Wash sale transaction. The repurchase of a FA shortly after it has been sold is sometimes referred to as a wash sale. Such a
repurchase does not preclude derecognition provided that the
original transaction met the derecognition requirements. However, if an agreement to sell a FA is entered into concurrently with an agreement to repurchase the same asset at a fixed price or the sale price plus a lender’s return, then the asset is not derecognised.
f) Put options and call options that are deeply in the money. The transferred FA does not qualify for derecognition because the transferor has retained substantially all the risks and rewards of ownership.
g) Put options and call options that are deeply out of the money. The transferor is derecognised because the transferor has transferred substantially all the risks and rewards of ownership.
h) Readily obtainable assets subject to a call option that is neither deeply in the money nor deeply out of the money. The asset is derecognised because the entity (i) has neither retained nor
transferred substantially all the risks and rewards of ownership, and (ii) has not retained control. However, if the asset is not
readily obtainable in the market, derecognition is precluded to the extent of the amount that is subject to the call option because the entity has retained control.
i) A not readily obtainable asset subject to a put option written by an entity that is neither deeply in the money nor deeply out of the
money. The entity neither retains nor transfers substantially all the risks and rewards of ownership. The entity retains control if the put option is sufficiently valuable to prevent the transferee from selling the asset, in which case the asset continues to be recognised to the extent of continuing involvement (AG44).*
– The entity transfers control of the asset if the put option is not sufficiently valuable to prevent the transferee from selling the asset, in which case the asset is derecognised.
j) Assets subject to a FV put or call option or a forward repurchase agreement. A transfer of a FA that is subject only to a put or call option or a forward repurchase agreement that has an exercise or repurchase price equal to the FV of the FA at the time of
repurchase results in derecognition because of the transfer of substantially all the risks and rewards of ownership.
k) Cash settled call or put options. The fact that the put or the call or the forward repurchase agreement is settled net in cash does not automatically mean that the entity has transferred control (AG44 and (g), (h) and (i) above).*
l) Removal of accounts provision.** Is an unconditional repurchase (call) option that gives an entity the right to reclaim assets
transferred subject to some restrictions.
– Provided that such an option results in the entity neither retaining nor transferring substantially all the risks and rewards, it
precludes derecognition only to the extent of the amount subject to repurchase (assuming that the transferee cannot sell the
assets). E.g., if the carrying amount and proceeds from the
transfer of loan assets are 100,000 and any individual loan could be called back but the aggregate amount of loans that could be repurchased could not exceed 10,000, 90,000 of the loans would qualify for derecognition.*
m) Clean-up calls. The right to purchase remaining transferred assets when the amount of outstanding assets falls to a specified level at which the cost of servicing those assets becomes burdensome in relation to the benefits of servicing. Provided that the entity neither retaining nor transferring substantially all the risks and rewards and the transferee cannot sell the assets, it precludes derecognition only to the extent of the amount of the assets that is subject to the call.
n) Subordinated retained interests and credit guarantees. An entity
may provide the transferee with credit enhancement by subordinating some or all of its interest retained in the transferred asset (or in the form of a credit guarantee that could be unlimited or limited to a specified amount). If the entity retains substantially all the risks and rewards, the asset continues to be recognised in its entirety.* If the entity retains some, but not substantially all, of the risks and rewards and has retained control, derecognition is precluded to the extent of the amount of cash or other assets that the entity could be required to pay.**
o) Total return swaps. All of the interest payment CFs from the
underlying asset are remitted to the seller in exchange for a fixed or variable rate payment and any changes in the FV of the underlying asset are absorbed by the seller.
– Derecognition of all of the asset is prohibited.
p) Interest rate swaps. Transfer a fixed rate FA and enter into an
interest rate swap to receive a fixed interest rate and pay a variable interest rate based on a notional amount that is equal to the
principal amount of the transferred FA. The interest rate swap does not preclude derecognition of the transferred asset provided the payments on the swap are not conditional on payments being made on the transferred asset.*
q) Amortising interest rate swaps. Transfer a fixed rate FA that is paid off over time, and enter into an amortising interest rate swap to receive a fixed interest rate and pay a variable interest rate
based on a notional amount that equals to the principal amount of the transferred FA outstanding at any point in time. The swap would generally result in the entity retaining substantial
prepayment risk, the entity continues to recognise either all of the transferred asset or to the extent of its continuing involvement.
– Conversely, if the amortisation of the notional amount of the swap is not linked to the principal amount outstanding of the transferred asset, such a swap would not result in the entity retaining prepayment risk. Hence, it would not preclude
derecognition of the transferred asset provided the payments on the swap are not conditional on interest payments being made on the transferred asset and the swap does not result in the entity retaining any other significant risks and rewards. 51