CHAPTER THREE

Recognition and de-recognition

CONSIDER THE ISSUES OF RECOGNITION and de-recognition at pwcinform.pwc.com/inform2/show?action=informContent&id=0939113203146678. More so, another page at the PwC site indicates Revenue recognition: full speed ahead (pwcinform.pwc.com/inform2/show?action=informContent&id=1034093207156960). This reports that an exposure draft released by the IASB and the FASB in 2010 proposes a new revenue recognition standard that could significantly change the way entities recognise revenue.

The proposed standard is likely to have a more significant effect on some industries than others. For instance:

Recognition

Recognition issues for financial assets and financial liabilities tend to be straightforward. An entity recognises a financial asset or a financial liability at the time it becomes a party to a contract.

De-recognition

De-recognition is the term used for ceasing to recognise a financial asset or financial liability on an entity's balance sheet. These rules are more complex.

Assets

An entity that holds a financial asset may raise finance using the asset as security for the finance or as the primary source of cash flows from which to repay the finance. The de-recognition requirements of IAS 39 determine whether the transaction is a sale of the financial assets (and therefore the entity ceases to recognise the assets) or whether finance has been secured on the assets (and the entity recognises a liability for any proceeds received). This evaluation might be straightforward. For example, it is clear with little or no analysis that a financial asset is de-recognised in an unconditional transfer of it to an unconsolidated third party, with no risks and rewards of the asset being retained. Conversely, de-recognition is not allowed where an asset has been transferred but substantially all the risks and rewards of the asset have been retained through the terms of the agreement. However, the analysis may be more complex in other cases. Securitisation and debt factoring are examples of more complex transactions where de-recognition will need careful consideration.

Liabilities

An entity may cease to recognise (de-recognise) a financial liability only when it is extinguished – that is, when the obligation is discharged, cancelled or expired, or when the debtor is legally released from the liability by law or by the creditor agreeing to such a release.