The IASB mentioned a while ago that to “reduce diversity in practice and assist with the consistent application of the derecognition requirements in IFRS 9, (it) decided to clarify that for the derecognition of financial assets (except for ‘regular way’ transactions) and financial liabilities, an entity applies settlement date accounting”…
The exposure draft to make all that happen is now out, titled Amendments to the Classification and Measurement of Financial Instruments: Proposed amendments to IFRS 9 and IFRS 7, with comments to be received by July 19, 2023. Here’s the full text of what it proposes regarding the above-mentioned accounting policy choice:
- Notwithstanding the (proposed requirement) to apply settlement date accounting, an entity is permitted to deem a financial liability (or a part of a financial liability)—that will be settled with cash using an electronic payment system—to be discharged before the settlement date if, and only if, the entity has initiated the payment instruction and: (a) the entity has no ability to withdraw, stop or cancel the payment instruction; (b) the entity has no practical ability to access the cash to be used for settlement as a result of the payment instruction; and (c) the settlement risk associated with the electronic payment system is insignificant.
- For the purposes of applying (the above) settlement risk is insignificant if the characteristics of the electronic payment system are such that completion of the payment instruction follows a standard administrative process and the time between initiating a payment instruction and the cash being delivered is short. However, settlement risk would not be insignificant if the completion of the payment instruction is subject to the entity’s ability to deliver cash on the settlement date.
The criteria are intended to be applied rigorously and narrowly. For example, on item (a), depending on the nature of the payment system, an entity might be committed to settling a liability in the sense of having issued an instruction, while still being able to cancel or stop that instruction. The IASB specifies here that for an entity to deem a financial liability to be discharged before the settlement date, it must have no ability to withdraw, stop or cancel the relevant payment instruction. On item (b), the IASB acknowledges a situation in which while a particular cash amount might still be part of the entity’s cash balance at the bank, the ‘available’ balance is reduced by the amount of the payment instruction, and the entity is no longer able to access the cash or direct its use for a purpose other than settling the payment obligation.
The IASB had considered amending some of the existing requirements regarding derecognition, in particular to clarify when the contractual rights to the cash flows from a financial asset expire or when a financial liability is extinguished. But, among other things: “Respondents to the Committee’s tentative agenda decision said that determining exactly when a liability is extinguished, or the rights to the cash flows from a financial asset expire, could be time-consuming, costly and involve extensive (legal) analysis of each payment platform and the related individual contractual terms. This is because the relevant regulations and requirements to determine the point of extinguishment vary between jurisdictions and could potentially lead to economically similar financial assets and financial liabilities being derecognized at different times.” This leads then to the narrow amendment being proposed.
The IASB acknowledges that this approach “would not resolve all of the concerns that stakeholders had raised, nor would it reduce the costs of applying the derecognition requirements in IFRS 9 to all financial liabilities—because the criteria would be met only in specified circumstances. However, the IASB was of the view that such a narrow-scope amendment would: (a) provide a timely and effective response to many of the concerns raised by stakeholders; (b) mitigate the risk of unintended consequences by retaining the current derecognition requirements without fundamental change; (c) lead to consistency in applying the derecognition requirements by clarifying the use of settlement date accounting and ensure that the usefulness of the information provided to users of financial statements was not compromised; (d) limit the circumstances in which financial liabilities could be derecognized before the settlement date through the use of specified criteria; and (e) be operable if the scope of the amendment were sufficiently narrow.” The IASB considered whether the proposed requirements could be applied to a wider population of cash payments instead of just electronic payment systems, for example, all cash payments from demand deposits, but decided against this; among other things, it might have generated different accounting outcomes when an entity settles a transaction with cash rather than by delivering another financial asset such as a security.
Presumably most respondents wouldn’t find too much reason to object to the proposals. Although I’ve been wrong about such things in the past!
The opinions expressed are solely those of the author.