Published On - Apr 28, 2025
Upcoming changes to the timing of recognition and derecognition of financial instruments: Are you ready?
Upcoming changes to the timing of recognition and derecognition of financial instruments: Are you ready?
While IFRS 9 or Ind AS 109 Financial Instruments deals with recognition and derecognition of financial assets and financial liabilities, one may argue that except for regular way purchases or sales of financial assets, the standards as currently drafted do not explicitly specify the date on which financial asset or financial liabilities should be recognized or derecognized.
In September 2021, the IFRS Interpretations Committee (IFRS IC) was asked when a financial asset settled by a cash payment received via an electronic transfer system is derecognized. The discussion was extended to the derecognition of a financial liability settled by a payment made through an electronic transfer system.
The feedback to the IFRS IC identified diversity in practice for the timing of derecognition of financial assets and financial liabilities, not just those settled via an electronic transfer system, but also using other methods. This includes settlement by cheque, debit card and credit card. The IFRS IC noted that the issue is sufficiently material to require a change to IFRS 9 rather than an interpretation of existing IFRS 9 by the IFRS IC, so it was brought into the scope of the IFRS 9 post-implementation review (PIR).
To address the above issue, the International Accounting Standards Board (IASB) issued amendments to IFRS 9, which are effective for annual reporting periods beginning on or after 1 January 2026, with earlier application permitted.
Date of initial recognition or derecognition of financial assets and liabilities: General principles
The amendments clarify that:
- Recognition: Financial assets and liabilities are recognized when the entity becomes party to the contractual provisions of the instrument. In case of regular way purchases or sales of financial assets, IFRS 9 contained an exception allowing entities to recognize/ derecognize the asset using either trade date or settlement date accounting. The said exception continues to apply and is not impacted by these amendments
- Derecognition:
- Financial Assets: Financial assets are derecognized when contractual rights to cash flows expire or are transferred. The Basis for Conclusions to the Amendments clarify that, in the absence of having access to the cash, a confirmation from a debtor that a payment instruction has been initiated does not lead to the expiry of the right to receive cash. It is only when the cash is received that such a right expires.
- Financial Liabilities: Financial liabilities are derecognized when the obligations specified in the contract are discharged, cancelled or expires, or the liability otherwise qualifies for derecognition, which is the settlement date. However, an entity may be permitted to derecognize financial liabilities settled by an electronic payment system earlier than their settlement date, subject to certain criteria being met (refer below).
The impact of the Amendments is that, when they become effective, entities will be unable to derecognize a financial asset or financial liability, for which a payment has been received or made outside electronic payment systems, until the amount has cleared in the receiving entity's bank account. This includes payments by cheque, debit card or credit card.
Financial Liabilities: Derecognition exception for electronic payments
The Amendments introduce an accounting policy choice to derecognize financial liabilities before the settlement date if certain conditions are met. An entity can derecognize a financial liability (or part of a financial liability) settled using an electronic payment system before the settlement date only if the following conditions (specified conditions) are met:
- The entity has no practical ability to withdraw, stop or cancel the payment instruction,
- The entity has no practical ability to access the cash to be used for settlement as a result of the payment instruction, and
- The settlement risk associated with the electronic payment system is insignificant. For this to be the case, the payment system must have both of the following characteristics:
- Completion of the instruction follows a standard administrative process, and
- There is only a short time between the entity: i) ceasing to have the practical ability to withdraw, stop or cancel the instruction and to access the cash, and ii) when the cash is delivered to the counterparty. However, settlement risk would not be insignificant if completion of the payment instruction were subject to the entity's ability to deliver cash on the settlement date.
Entities that make the accounting policy choice to derecognize the financial liability before settlement date must apply this treatment to all financial liabilities settled using the same electronic payment system. This part of the amendment does not apply and there is no accounting policy choice to derecognize financial liability settled by other means, such as, payments by cheque, debit card or credit card. A similar accounting policy election is not available for financial assets, whether settled through electronic payment system or otherwise.
An entity is permitted to make an accounting policy choice to derecognize a financial liability before the settlement date, if the entity uses an electronic payment system to settle the liability and certain conditions are met.
How we see it
Many entities receive payment for sale of goods or services thorough credit or debit cards which are typically not settled as cash until a later date. The entities must carefully consider classification of amounts receipts in their financial statements. It is expected that the judgment will be required to determine if these amounts qualify as trade receivables, cash and cash equivalents, or other financial asset. The amount can be classified as trade receivable only if the entity has a contractual right to receive cash flows from its customer. Similarly, the amount can be classified as cash equivalent if it meets the definition under Ind AS 7 Statement of Cash Flows, i.e., it meets the criteria of being highly liquid, readily convertible to cash, and subject to insignificant risk of change in value. If these criteria are not met, the amount should be classified as other financial asset.
We believe that the above criteria will require entities to evaluate each payment arrangement with each counter party individually, assess associated risks, and make appropriate determination. The entities may also evaluate whether they need to disclose accounting policies and/ or judgement applied.
How we see it
The Amendments clarify the recognition and derecognition requirements for financial assets and financial liabilities. Given that the IASB had to amend IFRS 9 to clarify the requirements in this area, in our view, an entity is not required to change its accounting policy on the timing of recognition or derecognition of a financial asset or financial liability to conform with the Amendments until they are adopted.
In preparation for adopting the Amendments, an entity needs to determine what derecognition date it currently applies to each of its financial assets and financial liabilities, and to what extent this conforms to the Amendments. The assessment should include all settlement methods such as cheques, debit cards and credit cards, as well as electronic transfer systems. This assessment requires a thorough understanding of the various cash settlement mechanisms, including when a receivable or payable is settled via each mechanism and when the cash balance is affected.
The Amendments make it clear that adjustments to an entity's reported cash balance at the reporting date for payments and receipts that are in-transit should not be made. This may be a change for most of the companies, especially for those with a long-established practice of such adjustments.
Position under Ind AS
At the time of writing this article, an Exposure Draft to a similar amendment to Ind AS 109 has been issued but not yet notified. However, in line with the practices followed in past, we expect that a change in similar lines will be finalized and notified in due course. We also expect that the change under Ind AS to be effective for financial year beginning on or after 1 April 2026.
Key implications
- Cheques payments - Once the amendment becomes effective, entities using cheques or other similar payment system will not be able to derecognize financial assets or liabilities until the cheque has been cleared and amount has been credited to debited from the bank account. This will require change in the long-standing practice of derecognizing financial assets or liabilities based on cheques received or issued, pending clearance.
- Evaluation of electronic payment systems - In today's environment, various electronic payments systems (NEFT, RTGS, IMPS, cards network) are prevalent. To avail derecognition exception for derecognition of financial liabilities, payment system should meet the specified criteria. For example, if the payer can cancel the payment instructions, such payments will not result in the derecognition of the associate financial liability and cash.
- Inter-company balances - If an entity or group elects to apply the exception, it may lead to inconsistencies in intercompany balances since derecognition exception applies to only financial liabilities and not financial assets. This will require additional adjustments to be made to eliminate intra-group balances in consolidated financial statements.
This will require entities to analyze contractual and legal requirements for each electronic settlement system in each jurisdiction, which may be complex, especially for entities operating in multiple jurisdictions or using multiple electronic payment systems. Different cut-off times may apply to different types of transactions or payment systems. Since the amendment requires the entity using this exception to apply the accounting policy consistently, an entity electing to apply the exception will need to analyze all transactions and payment systems in more comprehensive manner.
Way forward
The Amendments provide much-needed clarity on recognition and derecognition of financial assets and financial liabilities and will help addressing divergent practices on the matter.
Entities should evaluate their current practices, payment mechanisms, and legal frameworks to ensure compliance. This will involve operational and legal assessments, especially for electronic payment systems and intercompany balances. Additionally, organizations using traditional payment methods, such as cheques, may face significant changes in their accounting practices.
