IFRS 9 - Scope, Recognition & Derecognition
The objective of IFRS 9 Financial Instruments is to establish principles for financial reporting of financial assets and financial liabilities.
IFRS 9 is to be applied by all entities to all of their financial instruments except (a) interests in subsidiaries, associates and joint ventures accounted for under other standards; (b) leases within the scope of IFRS 16 Leases (except to the extent of derecognition and impairment of lease receivables, and derivatives embedded in lease contracts), (c) employer’s rights and obligations arising from IAS 19 Employee Benefits, (d) equity instruments issued by the entity covered under IAS 32, (e) loan commitments (with certain exceptions), and (f) rights and obligations accounted for under IAS 37, IFRS 2, IFRS 15 (except for impairment of receivables) and IFRS 17 (except derivatives embedded in insurance contracts). The standard is also applied to certain purchase and sale of non-financial assets that can be settled net in cash or another financial instrument or by exchanging financial instruments.
Under IFRS 9, an entity recognizes a financial asset or a financial liability when and only when it becomes a party to the contractual provision of the instrument.
A regular way purchase, a purchase in which delivery is dictated by regulations, is recognized and derecognized based either on the trade date accounting or the settlement date accounting.
Derecognition of financial assets
A financial asset is derecognized when:
- An entity’s right to associated cash flows expire, or
- The asset is transferred, and the transfer qualifies for derecognition.
The requirement may be applied to a financial asset as a whole or, if certain conditions as specified in IFRS 18.104.22.168 are met, parts thereof.
An instrument is considered transferred if an entity:
- Transfers right to receive associated cash flows to another party or
- Retains the right to the cash flows but simultaneously undertakes an obligation to transfer all the cash flows provided requirements in IFRS22.214.171.124 are met.
An entity shall derecognize a financial asset (and create a new asset if any interest in the asset is retained) if it transfers substantially all risks and rewards. If no substantial transfer of risks and rewards occur, it continues to recognize the asset. If it cannot be determined whether significant risks and rewards are transferred, an entity shall continue to recognize (derecognize) an asset if it loses (retains) control of the asset. In respect of assets in which it continues to hold control, its continuing involvement is accounted for in accordance with IFRS126.96.36.199-IFRS188.8.131.52.
An assessment of whether substantially all risks and rewards are transferred is based on comparison of exposure of an entity to variability in returns after a transfer to before the transfer.
If an entity transfers an asset and the transfer qualifies for derecognition of the asset, but it retains a right to service the asset for a fee, it shall recognize a servicing asset (if the fee is greater than associated servicing costs) or servicing liability (if the fee is not sufficient to compensate for costs).
Any new financial asset or financial liability or servicing asset or servicing liability shall be measured at fair value. On derecognition, the difference between carrying amount before derecognition and consideration received (including new assets created minus liabilities assumed) is recognized in profit or loss. If a part of a larger financial asset is derecognized, the carrying amount must be allocated based on the fair values of the part on the date of transfer.
In respect of transfers which do not qualify for derecognition, an entity continues to recognize the asset in its entirety and recognizes a liability for any consideration received. No offsetting is allowed in respect of such assets and liabilities and their associated income.
Derecognition of financial liabilities
A financial liability is derecognized if it extinguishes or is cancelled. If a borrower or lender substantially change the terms of a facility, it is accounted for by derecognizing the original liability and recognizing a new liability. Any difference between carrying amount and consideration paid is recognized in profit or loss.