5.8 Derecognition of Financial Assets

IFRS Accounting Standards and U.S. GAAP have different models for the determination of whether a transferred financial asset qualifies for derecognition. Under IFRS Accounting Standards, an entity applies a multistep derecognition model that (1) always considers the risks and rewards of ownership and (2) may include an assessment of control over a transferred financial asset. Under U.S. GAAP, an entity applies a control-based model and derecognizes assets when control is surrendered. The table below illustrates the differences between IFRS Accounting Standards and U.S. GAAP regarding the derecognition of financial assets.

Topic	IFRS Accounting Standards (IFRS 9)	U.S. GAAP (ASC 860)
Control versus risks and rewards of ownership	An entity applies a multistep derecognition model that (1) always considers the risks and rewards of ownership and (2) may include an assessment of control over a transferred financial asset.	An entity applies a control-based model to determine derecognition and derecognize assets when control is surrendered.
“Control” — definition	Control of a financial asset is surrendered if the transferee has the unilateral ability to sell that transferred asset. However, control is not the sole determining factor in the assessment of derecognition.	Control of a financial asset is surrendered only if (1) the transferred asset is legally isolated from the transferor; (2) the transferee has the ability to freely pledge or exchange the transferred financial asset (or third-party beneficial interest holders have the right to pledge or exchange the beneficial interests if the transferee’s sole purpose is to engage in securitization or asset-backed financing activities); and (3) neither the transferor nor its consolidated affiliates or agents maintain effective control over the transferred asset through other rights.
Concept of legal isolation	There is no concept or test of legal isolation of the transferred asset from the transferor. Accordingly, there is no requirement for the transferor to obtain a true sale opinion from a qualified attorney that practices bankruptcy law to demonstrate legal isolation of the transferred asset.	Unless the transferor has no continuing involvement in transferred financial assets, it generally must obtain a true sale opinion from a qualified attorney who practices bankruptcy law to determine whether the transferred asset meets the legal isolation condition. A true sale opinion may not be required if (1) the transferor’s only continuing involvement pertains to standard representations and warranties and (2) the transferor is able to conclude that a true sale opinion that would support the legal isolation could be obtained from an attorney if requested.
Transfers of a portion of a financial asset	For a specified portion of a financial asset to be assessed for derecognition, certain conditions must be met. If they are not met, the entire asset must be assessed for derecognition.	Derecognition of a portion of a financial asset is allowed if the portion of the financial asset meets the definition of a participating interest and certain conditions are met.
Retaining the rights to the cash flows of a financial asset (“pass-through arrangements”)	An entity can derecognize a financial asset regardless of whether it retains the right to the contractual cash flows of that asset, provided that three restrictive conditions for pass-through arrangements are met.	Derecognition of a financial asset is not allowed if the contractual rights to the cash flows of that asset are retained.
Impact of a cleanup call	Regardless of whether a call option is considered a cleanup call, an entity must consider the effect of that call option when determining whether (1) substantially all the risks and rewards of ownership of a financial asset are transferred or retained and (2) control over the financial asset is surrendered.	A call option held by a transferor that (1) is also the servicer and (2) meets the definition of a cleanup call does not cause the transferor to maintain effective control over the transferred financial assets.
Repurchase agreements	IFRS 9 does not provide conditions for derecognition that are specific to repurchase agreements.	ASC 860 provides restrictive conditions an entity must consider when determining whether continued recognition of a transferred financial asset subject to a repurchase agreement is appropriate.
Recognition and measurement of a secured borrowing	If an entity retains substantially all the risks and rewards of ownership of a financial asset, a secured borrowing equal to the consideration received is initially recognized. If an entity has neither retained nor transferred substantially all risks and rewards but has retained control over the financial asset, the secured borrowing is initially recognized only to the extent of the entity’s continuing involvement in the transferred asset.	A secured borrowing equal to the consideration received must be recognized if a transfer of financial assets fails to qualify for derecognition.
Recognition and measurement of a servicing asset or liability	A servicing asset retained as part of a transfer of financial assets is considered a retained interest in those transferred assets. Therefore, the servicing asset is initially recognized at its allocated previous carrying amount on the basis of its relative fair value as of the transfer date. No special guidance is provided on the subsequent measurement of a servicing right. Servicing assets are considered to be intangible, and servicing liabilities are considered to be provisions.	A servicing asset must be initially recognized at fair value. An entity has the option to subsequently measure a servicing asset or liability at either fair value or amortized cost.