The International Financial Reporting Interpretations Committee of the International Accounting Standards Board has published two tentative agenda decisions on IAS 39 regarding recognition and measurement on both retention of servicing rights as well as revolving structures. IFRIC has tentatively decided not to add these issues to its agenda for the November meeting as it did not expect significant diversity in practice to arise.
But the European Securitization Forum is in the process of gauging industry response to the tentative decision and last week met with some industry players who have worked with IASB since the inception of IAS 39. Carlos Echave, a director at the ESF who is looking into the matter, said that contrary to the conclusions reached by the IFRIC, there is a diversity in practice regarding these matters.
On the first point regarding the recognition and measurement on the retention on servicing rights, Echave said that the industry agreed on what was written. The IFRIC was asked to provide guidance on whether an arrangement under which an entity has transferred the contractual rights to receive the cash flows of a financial asset but continues to provide servicing on the transferred asset would fail the definition of a transfer of cashflows in terms of IAS 39 paragraph 18(a). The IFRIC reported that paragraph 18(a) focuses on whether an entity transfers the contractual rights to receive the cash flows from a financial asset. The determination of whether the contractual rights to cash flows have been transferred is not affected by the transferor retaining the role of an agent to administer collection and distribution of cash flows. Therefore, retention of servicing rights by the entity transferring the financial asset does not in itself cause the transfer to fail the requirements in paragraph 18 (a) of IAS 39.
But on the second issue regarding the recognition and measurement of revolving structures, Echave said the decisions aren’t as clear-cut, because the issues were a bit more complicated and did prescribe to some diversity in practice. The IFRIC discussed a request for guidance on whether revolving structures would meet the pass-through requirements in paragraph 19(c) of IAS 39. In a revolving structure, an entity collects cashflows on behalf of eventual recipients and uses the amounts collected to purchase new assets instead of remitting the cash to the eventual recipients.
On maturity the principal amount is remitted to the eventual recipients from the cashflows arising from the reinvested assets. The IFRIC noted that in order to meet the pass-through arrangement requirements in IAS 39 paragraph 19 (c) an entity is required to remit any cashflows it collects on behalf of eventual recipients without material delay, while also limiting permissible reinvestments to items that qualify as cash or cash equivalents. Most revolving arrangements would involve a material delay before the original collection of cash is remitted. “The nature of the new assets typically acquired means that most revolving arrangements involve reinvestment in assets that would not qualify as cash or cash equivalents,” reported the IFRIC. “Therefore, it is clear that such structures would not meet the requirements in paragraph 19 (c) of IAS 39.” As of press time members of the ESF met to discuss the possible implications of the IFRIC decision.
Industry participants who disagreed with the IFRIC decision had until Oct. 19 to raise their concerns.
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