IFRIC recently issued for comment a tentative agenda decision, Cash Received via Electronic Transfer as Settlement for a Financial Asset, with comments requested by November 25, 2021.
Here’s the description of the issue:
- The Committee received a request about the recognition of cash received via an electronic transfer system as settlement for a financial asset. In the fact pattern described in the request:
- the electronic transfer system has an automated settlement process that takes three working days to settle a cash transfer. All cash transfers made via the system are therefore settled (deposited in the recipient’s bank account) two working days after they are initiated by the payer.
- an entity has a trade receivable with a customer. At the entity’s reporting date, the customer has initiated a cash transfer via the electronic transfer system to settle the trade receivable. The entity receives the cash in its bank account two days after its reporting date.
- The request asked whether the entity can derecognize the trade receivable and recognize cash on the date the cash transfer is initiated (its reporting date), rather than on the date the cash transfer is settled (after its reporting date).
The submission indicated that some see this as an issue not specifically addressed in the standards, such that an entity might use its judgment in developing and applying an appropriate accounting policy. Noting also that IFRS 9 allows adopting either a trade date or settlement date policy for recognizing and derecognizing financial assets arising under regular way transactions, this might allow recognizing the cash on the reporting date in the above example. The submission notes: “This treatment is consistent with the generally accepted practice of recognizing as cash cheques deposited prior to the year-end but not yet cleared at the year-end. There are also other situations in practice where cash may be recognized before the cash has been cleared in the bank account, for example, cash received from credit card sale transactions.”
The Committee set out its analysis as follows:
- Except when an entity transfers a financial asset, paragraph 3.2.3 of IFRS 9 requires an entity to derecognize a financial asset when, and only when, ‘the contractual rights to the cash flows from the financial asset expire’. In the fact pattern described in the request, the entity therefore derecognizes the trade receivable on the date on which its contractual rights to the cash flows from the trade receivable expire.
- Determining the date on which the entity’s contractual rights to those cash flows expire is a legal matter, which would depend on the specific facts and circumstances including the applicable laws and regulations and the characteristics of the electronic transfer system. In the fact pattern described in the request, if the entity’s contractual right to receive cash from the customer expires only when the cash is received, the entity would derecognize the trade receivable on the transfer settlement date (the date it receives the cash in its bank account).
- Paragraph 3.1.1 of IFRS 9 requires an entity to recognize a financial asset when, and only when, ‘the entity becomes party to the contractual provisions of the instrument’. In the fact pattern described in the request, the entity is party to the contractual provisions of an instrument—its bank account—under which it has the contractual right to obtain cash from the bank for amounts it has deposited with that bank. In the fact pattern described in the request, it is therefore only when cash is deposited in its bank account that the entity would have a right to obtain cash from the bank. Consequently, the entity recognizes cash as a financial asset on the transfer settlement date, and not before.
- The Committee observed that, if an entity’s contractual rights to the cash flows from the trade receivable expire before the transfer settlement date, the entity would recognize any financial asset received as settlement for the trade receivable (for example, a right to receive cash from the customer’s bank) on that same date. An entity would not however recognize cash (or another financial asset) received as settlement for a trade receivable before it derecognizes the trade receivable.
The Committee didn’t consider the above-cited requirements for a regular way purchase or sale of a financial asset to be relevant, given that the entity in this fact pattern isn’t buying or selling anything. The point about recognizing as cash cheques deposited prior to the year-end also isn’t applicable – a cheque is a legally enforceable promise to the payee that a payment will be made, and is controlled by the recipient once received, representing a new asset and the extinguishment of the related receivables. This all being the case, the Committee felt the issue could be adequately analyzed within the standards as they stand, and decided not to add a standard-setting program to the work plan.
One might have imagined at this point that as far as basic matters of cash recognition are concerned, there would be nothing left for anyone to discuss. So if nothing else, the issue might reinforce that little in accounting should be taken for granted…
The opinions expressed are solely those of the author.