IFRS 9 Financial Instruments: Derecognition of Financial Assets

KIDEA Savings and Credit Society were one of the models and vibrant SACCO in our village. By the year 2004, the SACCO was at the peak. It had grown its clientele to cover all the villages in Kizarafumbi sub-county. Their business model was simple; for any business, a person should get a loan from the SACCO. The loan officers would move on foot from one shop to another. The loan officers would visit Munteme village on Wednesdays. And this is a market day. The timing was spot on. The SCCO saw its clientele grow so big that it failed to make the assets.

An analysis of the end of year financial reports 2oo5 saw the asset base drop by 45% – coupled with high default rates. The assets deteriorated so bad that by mid-2007, the SACCO had written off half of the assets; loans and receivables. The loan book declined from Ugx30bn in 2004 to Ugx13bn by year-end 2007.

By this practice under IFRS 9, derecognition is the removal of a previously recognized financial asset (or financial liability) from an entity’s statement of financial position. IFRS 9 criteria for derecognition of a financial asset aims to answer the question whether an asset has been sold, or written off and should be derecognized or whether an entity obtained a kind of financing against this asset and simply a financial liability should be recognized.

To derecognize a financial asset, the criteria summarized in figure 1 are followed. The decision tree is reproduced from paragraph IFRS 9.B3.2.1

Figure 1: Decision tree to derecognize a financial instrument
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