Resources (This includes links to the latest standards, drafts, PwC interpretations, tools and practice aids for this topic)
In July 2014, the IASB published IFRS 9, 'Financial instruments', the complete version of IFRS 9, 'Financial Instruments', which replaces the guidance in IAS 39. This final version includes requirements on the classification and measurement of financial assets and liabilities; it also includes an expected credit losses model that replaces the incurred loss impairment model used today. This version includes the hedge accounting amendments released in November 2013. The new standard is effective 1 January 2018, and was endorsed by the EU in November 2016, with early application permitted.
The recognition and derecognition requirements in IFRS 9 are unchanged from the requirements of IAS 39.
For guidance on debt restructuring see the PwC Manual of Accounting paras 44.106 to 44.110.
Supplier finance arrangements
For guidance on supplier finance arrangements see the PwC Manual of Accounting FAQ 44.102.2 – Supplier finance and reverse factoring and Supplied finance: A practice aid to the accounting treatment.
Factoring of receivables and the effect on the cash flow statement
For guidance see the PwC Manual of Accounting FAQ 7.20.3 – Factoring arrangements.
Recognition for financial assets and financial liabilities tends to be straightforward. An entity generally recognises a financial asset or a financial liability at the time it becomes a party to a contract.
Derecognition is the term used for ceasing to recognise a financial asset or financial liability on an entity's statement of financial position. These rules are more complex.
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the entity has transferred substantially all the risks and rewards of ownership. If the entity neither retains nor transfers substantially all the risks and rewards, but has not retained control of the financial assets, it also derecognises the financial assets. When control of the transferred financial asset is retained, the accounting can be complex.
An entity may only cease to recognise (derecognise) a financial liability when it is extinguished – that is, when the obligation is discharged, cancelled or expired, or when the debtor is legally released from the liability by law or by the creditor agreeing to such a release.
Entities frequently negotiate with bankers or bond-holders to amend or cancel existing debt and replace it with new debt with the same lender on different terms. IAS 39 and IFRS 9 provide guidance to determine whether debt that is replaced by new debt and the restructuring or modification of existing debt should be accounted for as an extinguishment of the original financial liability. The distinction is based on whether or not the new debt has substantially different terms from the old debt.
Alternatively, an entity may negotiate with its third party lenders to exchange existing debt for equity. In these circumstances, the difference between the carrying amount of the financial liability extinguished and the fair value of the equity issued is recognised in the income statement.