IASB proposes improvements to derecognition requirements as part of review of off balance sheet risk

The International Accounting Standards Board (IASB) published for public comment an exposure draft of proposals to improve the derecognition requirements for financial instruments. Derecognition is when an entity removes a financial instrument from its financial statements. This occurs if the entity no longer controls a financial asset or no longer has an obligation to settle a financial liability.

The IASB is also proposing to enhance disclosure requirements, especially in situations where an entity continues to have an ongoing involvement in a financial asset that would be derecognised under the proposals. The additional disclosures would allow users to make a better assessment of the risks associated with such an asset.

The proposals are part of the IASB’s comprehensive review of off balance sheet activities and follow the publication of proposals in December 2008 to strengthen and improve the requirements for identifying which entities a company controls, known as consolidation.

The use of special structures by reporting entities, particularly banks, to manage securitisations and other complex financial arrangements was highlighted as a matter of concern by the G20 leaders at their meeting in Washington, DC, in November 2008. The IASB’s comprehensive review of off balance sheet risk is a response to that concern.

The IASB intends to hold public round tables to seek wider views on its derecognition and consolidation proposals and to broaden understanding of the interaction between the two projects. The IASB and the US Financial Accounting Standards Board (FASB) have already announced their intention that these will become joint projects once the FASB has completed short-term amendments to its existing standards.Introducing the exposure draft, Sir David Tweedie, Chairman of the IASB, said:

This project has been on our agenda since before the financial crisis broke but the market turmoil has highlighted the urgency of the matter and we have accelerated our work. Financial structures have become increasingly complex and sophisticated, creating the need for improved ways of assessing whether an entity should derecognise assets or not. The financial crisis has also shown that users of financial statements require better information to understand any remaining risks related to assets that are off balance sheet. Our proposals are addressing these concerns.

Exposure draft