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Changes to settlement by electronic payments

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Victor Chan

International Director, Global IFRS Services, Ernst & Young Global Limited

5 minute read 22 Jul 2024
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IFRS
Assurance

What companies need to know about changes to the derecognition of a financial asset or liability under IFRS.

In brief
  • Clarification of the derecognition date of a financial asset or liability when companies derecognize a financial asset or liability.
  • Companies using electronic payment systems may deem a financial liability to be discharged before settlement date if certain criteria are met.
  • The targeted improvements include new requirements not only for financial institutions, but also for companies, who may need to make changes to their systems.

 In May 2024, the International Accounting Standards Board (IASB) published amendments to the classification and measurement requirements for financial instruments in IFRS 9 Financial Instruments. The amendments are effective for annual reporting periods beginning on or after 1 January 2026 and earlier application is permitted.

Amendments to the derecognition of a financial asset or liability under IFRS

The amendments clarify that a financial asset is derecognized on the date on which the contractual rights to the cash flows expire or the asset is transferred. Similarly, a financial liability is derecognized on the settlement date, which is the date on which the liability is extinguished (unless a company applies the election discussed in the paragraph below).

The IASB also developed a new requirement whereby a company using an electronic payment system is permitted to deem the financial liability (or part of it) to be discharged before the settlement date. However, this option is only available when: (a) the company has no practical ability to withdraw, stop or cancel the payment instruction; (b) the company 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.

Moreover, such an option is not available for the derecognition of a financial asset; this means that a company receiving cash from a counterparty derecognizes the corresponding receivable when the cash has been delivered to the company.

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Potential impact to companies

The clarification of the date of recognition under IFRS 9 applies to both financial assets and financial liabilities regardless of whether or not the transfers are via electronic means. This means that the amendments cover both the situation where a customer derecognizes its financial liability, for example, a trade payable, and where a supplier/financier derecognizes its financial asset, for example, a trade receivable, upon cash delivery by the counterparty. 

The amendments may potentially require a large number of companies, including financial institutions and large retail chains, to make system changes affecting balance sheet items and the statement of cash flows to reflect these derecognition requirements. 

Currently there is diversity in the timing of derecognition of a financial asset or liability. Companies using the same system are expected to have a consistent determination of the settlement date. For this reason, in some jurisdictions, financial institutions are considering whether to join forces in order to make the necessary assessment. 

It is important for a company to evaluate the settlement date for each payment system (electronic or otherwise) by carefully considering the terms and conditions of the relevant contracts, as well as the rights and obligations of each party associated with the system.

Summary

The IASB’s amendments to IFRS 9 clarify the date on which financial assets and liabilities are derecognized. This applies to all transfers, including those made by electronic means. This clarification will likely require many companies operating in multiple jurisdictions to change their systems, controls and processes.

The IASB also introduced a new option which permits companies using electronic payment systems to deem a financial liability discharged before the settlement date, provided that a number of specific criteria are met. This option does not apply to financial assets. 

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    About this article

    Photographic portrait of Victor Chan
    Victor Chan
    International Director, Global IFRS Services, Ernst & Young Global Limited
    Develops insights on applying IFRS to emerging accounting issues. Focuses on leases, crypto-assets, investment property and latest standard-setting activities. Enjoys relaxing with family.
    Related topics
    IFRS
    Assurance

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