Derecognition for both Financial Asset (Receivable) and Financial Liability (Payable) - What Companies Need to Know

There has been diversity in practice over the timing of the recognition and derecognition of financial assets and financial liabilities, particularly when they are settled using electronic payment systems. In practice, an electronic transfer system could have an automated settlement process that takes three working days to settle a cash transfer. Cash transfers made via the system are therefore settled (deposited in the recipient’s bank account) two working days after they are initiated by the payer.

 In the fact pattern received by the International Financial Reporting Standards Interpretation Committee (IFRS IC) based on which the clarification below was provided, an entity has a trade receivable with a customer. At the entity’s reporting date, the customer has initiated a cash transfer via the electronic transfer system to settle the trade receivable. The entity receives the cash in its bank account two days after its reporting date.  The question raised was whether the entity can derecognise the trade receivable and recognise cash on the date the cash transfer is initiated (its reporting date), rather than on the date the cash transfer is settled (after its reporting date).

 In May 2024, the International Accounting Standards Board (IASB) issued ‘Amendments to the Classification and Measurement of Financial Instruments (Amendments to IFRS 9 and IFRS 7)' which address two issue - the derecognition of a financial liability settled through electronic transfer and the classification of financial assets and also introduces new and amended disclosure requirements (not covered here).

Prior to the amendments, IFRS 9 did not explicitly specify whether an entity is required to apply trade date accounting or settlement date accounting when recognising or derecognising a financial asset or a financial liability, except for regular way purchase or sale of assets. 

Clarification from IFRS IC

Financial Assets

An entity derecognises a financial asset when, and only when the contractual right to the cash flows from the financial asset expire, or the asset is transferred. What this means in practice is that you derecognise a financial asset (i.e., Trade Receivable) when cash is received (so in your bank account). Thus, a company receiving cash from a counterparty derecognizes the corresponding Receivable when the Cash has been delivered to the company - the entity recognise cash as a financial asset on the transfer settlement date, and not before.

Financial Liability

For financial liability, the principle of derecognition is the settlement date – this is the date is payment is completed.

There is now however, an exception to the derecognition of financial liability settled by electronic payments - entities may be permitted to derecognise financial liabilities settled by electronic payment system earlier than their settlement date, subject to certain criteria being met.

a)     No practical ability to withdraw, stop or cancel the payment.

b)     No practical ability to access cash as a result of payment instruction (i.e., once payment instruction is initiated, that money cannot be accessed)

c)     Settlement risk associated with electronic payment system is insignificant.

For example, following from the bullet points above, a company that settles its trade payables using an electronic payment system would have a timeline similar to the below.

•   30 June 2024 – Payment is Initiated.
• 01 July 2024 – Payment cannot be cancelled.
• 03 July 2024 – Payment Completed 

The company generally derecognises its trade payable on the settlement date (i.e., 03 July 2024 shown above).

 Provided the company can demonstrate the 3 criteria above, the exception allows them to derecognise the financial liability (trade payable) before the settlement date, i.e., potentially on 30 June 2024.

 What is meant by insignificant settlement risk?

1.     the completion of the payment instruction follows a standard administrative process; and

2.     the time between (2.1) and (2.2) below is short:

2.1.  the entity ceasing to have the practical ability to withdraw, stop or cancel the payment instruction and to access the cash to be used for settlement as a result of the payment instruction (i.e., the point in time when criteria (a) and (b) specified above are met); and    

2.2.  the cash being delivered to the counterparty. If completion of the payment instruction were subject to the entity’s ability to deliver cash on the settlement date, the settlement risk would not be insignificant.

The amendment applies for reporting periods beginning on or after 1 Jan 2026.