The International Accounting Standards Board (IASB) has this week, published for public comment an exposure draft of proposals to improve the derecognition requirements for financial instruments. Derecognition is when an entity removes a financial instrument from its financial statements. This occurs if the entity no longer controls a financial asset or no longer has an obligation to settle a financial liability.
The IASB is also proposing to enhance disclosure requirements, especially in situations where an entity continues to have an ongoing involvement in a financial asset that would be derecognised under the proposals. The additional disclosures would allow users to make a better assessment of the risks associated with such an asset.
The proposals are part of the IASB's comprehensive review of off balance sheet activities and follow the publication of proposals in December 2008 to strengthen and improve the requirements for identifying which entities a company controls, known as consolidation.
The use of special structures by reporting entities, particularly banks, to manage securitisations and other complex financial arrangements was highlighted as a matter of concern by the G20 leaders at their meeting in Washington, DC, in November 2008. The IASB's comprehensive review of off balance sheet risk is a response to that concern.
The IASB intends to hold public round tables to seek wider views on its derecognition and consolidation proposals and to broaden understanding of the interaction between the two projects. The IASB and the US Financial Accounting Standards Board (FASB) have already announced their intention that these will become joint projects once the FASB has completed short-term amendments to its existing standards.
The IASB invites comments on the exposure draft, Derecognition, by 31 July 2009.