To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).
Day 32 (3 Mar)
We're nearly done with section 11 - today it's the derecognition paras (33-38) that are in view.
Section 11 has three possible criteria for derecognition of a financial asset and two for a financial liability. Today we'll cover assets.
An asset is derecognised when the contractual rights to cash flows expire or are settled. This should normally be pretty straightforward to determine.
Alternatively, if the asset's risk and rewards of ownership have been 'substantially' transferred to a third party, the asset can also be derecognised. This one will be harder to determine. The immediate example of factored debts (previously dealt with in FRS 5) springs to mind, and users will need to use judgement to decide what is 'substantial'.
The third alternative is even more convoluted. If the entity still keeps some significant risk and reward, but has transferred enough control to the third party such that the latter can sell on the asset in an unrestricted way, then the asset is derecognised but any remaining or new rights and obligations are separately recognised.
There are a couple of examples in the standard for debt factoring arrangements; one of which is derecognisable, the other isn't. To be frank, it all seems pleasantly common-sense and familiar enough for those of us used to FRS 5. Where non-cash collateral (debt or equity instruments) are provided to the transferee, 11.35 outlines some additional points to consider.
That's it for now. Liabilities will be covered tomorrow...
P.S. If you missed the last instalment please click here.