Derecognition of Financial Asset - Ind AS - Indian Accounting Standards - Companies Law

Derecognition of Financial Asset [Paragraph 3.2, Chapter 3, Ind AS 109] An entity shall derecognize Financial Asset when The right to cash flow from an asset has expired. Entity has transferred its rights to receive cash flows AND Entity has transferred substantially all the risks and rewards. Entity has neither retained nor transferred substantially all the risks and rewards AND Entity has not retained control of the assets. Derecognition requirements are applied to a part of a financial asset if that part meets any of the following three conditions: The part comprises only specifically identified cash flows from a financial asset (or a group of similar financial assets). Example- when an entity enters into an interest rate strip whereby the counterparty obtains the right to the interest cash flows, but not the principal cash flows from a debt instrument, derecognition principles are applied to the interest cash flows The part comprises only a fully proportionate (pro rata) share of cash flows from a financial asset (or a group of similar financial assets). Example- when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90% share of all cash flows of a debt instrument , derecognition principles are applied to 90% of those cash flows. The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets) Example- when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90% share of interest cash flows from a financial asset , derecognition principles are applied to 90% of those interest cash flows. In some situations, though an entity retains the contractual rights to receive the cash flows of a financial asset (the original asset ), but assumes a contractual obligation to pay those cash flows to one or more entities (the eventual recipients ), the entity treats the transaction as a transfer of a financial asset if, and only if, all of the following three conditions are met. The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset. Short-term advances by the entity with the right of full recovery of the amount lent plus accrued interest at market rates do not violate this condition. The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows. The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the entity is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents (as defined in Ind AS 7 Statement of Cash Flows) during the short settlement period from the collection date to the date of required remittance to the eventual recipients, and interest earned on such investments is passed to the eventual recipients. Transfers that qualify for derecognition Servicing Contract - If an entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety and retains the right to service the financial asset for a fee, it shall recognise either a servicing asset or a servicing liability for that servicing contract. If the fee to be received is not expected to compensate the entity adequately for performing the servicing, a servicing liability for the servicing obligation shall be recognised at its fair value. If the fee to be received is expected to be more than adequate compensation for the servicing, a servicing asset shall be recognised for the servicing right at an amount determined on the basis of an allocation of the carrying amount of the larger financial asset. If, as a result of a transfer, a financial asset is derecognised in its entirety but the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the entity shall recognise the new financial asset, financial liability or servicing liability at fair value. On derecognition of a financial asset in its entirety, the difference between: the carrying amount (measured at the date of derecognition) and the consideration received (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss. If the transferred asset is part of a larger financial asset (eg when an entity transfers interest cash flows that are part of a debt instrument, and the part transferred qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset shall be allocated between the part that continues to be recognised and the part that is derecognised, on the basis of the relative fair values of those parts on the date of the transfer. For this purpose , a retained servicing asset shall be treated as a part that continues to be recognised. The difference between: the carrying amount (measured at the date of derecognition) allocated to the part derecognised and the consideration received for the part derecognised (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss.