ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
other significant risks and rewards of ownership on the transferred
asset.
AG67. This paragraph illustrates the application of the continuing involvement
approach when the entity’s continuing involvement is in a part of a financial
asset.
Assume an entity has a portfolio of prepayable loans whose coupon and effective interest
rate is 10 percent and whose principal amount and amortized cost is CU10,000. It enters
into a transaction in which, in return for a payment of CU9,115, the transferee obtains the
right to CU9,000 of any collections of principal plus interest thereon at 9.5 percent. The
entity retains rights to CU1,000 of any collections of principal plus interest thereon at 10
percent, plus the excess spread of 0.5 percent on the remaining CU9,000 of principal.
Collections from prepayments are allocated between the entity and the transferee
proportionately in the ratio of 1:9, but any defaults are deducted from the entity’s interest
of CU1,000 until that interest is exhausted. The fair value of the loans at the date of the
transaction is CU10,100 and the estimated fair value of the excess spread of 0.5 percent
is CU40.
The entity determines that it has transferred some significant risks and rewards of
ownership (e.g., significant prepayment risk) but has also retained some significant risks
and rewards of ownership (because of its subordinated retained interest) and has retained
control. It therefore applies the continuing involvement approach.
To apply this Standard, the entity analyses the transaction as (a) a retention of a fully
proportionate retained interest of CU1,000, plus (b) the subordination of that retained
interest to provide credit enhancement to the transferee for credit losses.
The entity calculates that CU9,090 (90 percent × CU10,100) of the consideration
received of CU9,115 represents the consideration for a fully proportionate 90 percent
share. The remainder of the consideration received (CU25) represents consideration
received for subordinating its retained interest to provide credit enhancement to the
transferee for credit losses. In addition, the excess spread of 0.5 percent represents
consideration received for the credit enhancement. Accordingly, the total consideration
received for the credit enhancement is CU65 (CU25 + CU40).
The entity calculates the gain or loss on the sale of the 90 percent share of cash flows.
Assuming that separate fair values of the 90 percent part transferred and the 10 percent
part retained are not available at the date of the transfer, the entity allocates the carrying
amount of the asset in accordance with paragraph 30 as follows:
Estimated fair
value Percentage
1097
Allocated carrying
amount
Portion transferred 9,090 90% 9,000
Portion retained 1,010 10% 1,000
Total 10,100 10,000
The entity computes its gain or loss on the sale of the 90 percent share of the cash flows
by deducting the allocated carrying amount of the portion transferred from the
consideration received, i.e., CU90 (CU9,090 – CU9,000). The carrying amount of the
portion retained by the entity is CU1,000.
In addition, the entity recognizes the continuing involvement that results from the
subordination of its retained interest for credit losses. Accordingly, it recognizes an asset
of CU1,000 (the maximum amount of the cash flows it would not receive under the
subordination), and an associated liability of CU1,065 (which is the maximum amount of
IPSAS 29 APPLICATION GUIDANCE
PUBLIC SECTOR