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Background
The timing for recognizing cash received via an electronic transfer system as settlement for a financial asset was highlighted in a discussion of a submission request at the IFRS Interpretations Committee (IFRS IC) meeting in September 2021. The submission request describes a situation in which a company has a trade receivable with a customer and the customer has initiated a cash transfer via an electronic transfer system. The company receives the cash in its bank account two days after the reporting date, so the question is whether the company can derecognize the trade receivable and recognize cash on the date the cash transfer is initiated, rather than on the date the cash transfer is settled. The IFRS IC, in a tentative agenda decision, concluded that the company derecognizes the trade receivable on the settlement date, when its contractual rights to the cash flows from the trade receivable expire, and recognizes the cash on the same date. However, the IASB did not ratify the IFRS IC agenda decision; instead, it decided to explore narrow-scope standard-setting as part of its post-implementation review of IFRS 9.
Proposed amendments
Although the submission to the IFRS IC referred only to the derecognition of a financial asset, the standard-setting project was extended to the derecognition of a financial liability settled by a payment made through an electronic transfer system. According to the exposure draft, the IASB has proposed to:
- Clarify that a financial asset or financial liability is not derecognized until the cash has arrived in the recipient’s bank account and is available for their use
- Permit a company to make an accounting policy election to derecognize the liability, settled in full, or in part, using an electronic payment system, before settlement date if and only if the company has initiated the payment instruction and the following conditions are met:
- The company has no ability to withdraw, stop or cancel the payment instruction.
- The company has no practical ability to access the cash to be used for settlement as a result of the payment instruction.
- The settlement risk associated with the electronic payment system is insignificant.
Companies would make an accounting policy election to apply this treatment to all financial liabilities settled using a particular electronic payment system. This accounting policy election is limited to electronic payment systems and excludes other payment systems, such as checks.
The IASB’s efforts to develop guidance to clarify certain aspects of the derecognition requirements in IFRS 9 for financial assets and liabilities, in response to discussion at the IFRS IC, is welcome. The optional exception to settlement date accounting for financial liabilities settled via electronic payment systems under certain conditions is a practical response to comments received from stakeholders. It is meant to address concerns raised on the impact on existing practices of moving to a settlement date approach for this type of payment.