A comment letter about recognition and derecognition
Dear IASB:
I'm writing to share my views with you. I really approve of the
discussion on recognition and derecognition of the exposure draft.
First of all, This part is important and is worth studying in the
sense of recognition and derecognition. Recognition criteria decides
whether an item can enter into the financial statements, while,
derecognition criteria decides whether a recognized item should be
out of the financial item. At this level, the meaning and the criteria of
recognition and derecognition are directly related to the relativity
and reliability of the information of the financial statements. I will
express my views of recognition and derecognition according to the
discussion on these two aspects.
First part : Recognition
In the exposure draft, recognition of one of the criteria is to
provide information that the benefit should be greater than the cost.
According to the cost-benefit principle, in specific criteria, if
recognizing the benefits of an asset or liability can't make up for the
recognition cost, the assets or liabilities will probably not have
future economic benefits flowing into or out of the main body, so the
assets or liabilities do not be asked for recognition. And considering
the comparability, the proposal also has a practical significance.
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In addition to, the exposure draft puts forward the consideration
about relevance. If information can lead to financial statement users
to develop different policies, then the information is relevant, in
most cases, recognition for resources and obligations is able to
provide relevant information. But in some cases, recognition lacks
relevance, or its relevance can not compensate for the cost. In this
regard, the opinion that do not require all the assets and liabilities to
be recognized is reasonable. Through the literature data, for example
the following three conditions.
Firstly, when the estimated uncertainty degree is too large, the
correlation of estimation is in doubt. At this point, if there are no
other available measures to provide relevant information, it is
inappropriate to recognize the asset or liability. This situation, such
as the item in the development phase and internal generated
goodwill.
Secondly, in recognition of specific resources and obligations,
when other related resources and obligations cannot be recognized or
does not yet exist , the recognition for certain resources and
obligations lacks relevance, integrity, and understandability. For
example, for the purchase of a hedging contract for a commodity in
the production, if the purchase of a hedge has not been recognized,
recognition for hedging derivative instruments is also not relevant.
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thirdly, when the results of measurement of the intangible assets
that are produced in some of the interior are not related to users of
financial statements, or the cost of recognition and measurement of
these assets is too much, then, the benefits of measurement of such
assets can not make up for the cost.
Therefore, all assets and liabilities of the main body shall be
recognized, unless there are three cases mentioned in the exposure
draft. At the same time, the conceptual framework should provide
additional guidance to evaluate that under what circumstances
recognition for an asset or a liability will not be able to provide
relevant information.
Second part: Derecognition
In the exposure draft, the part of derecognition mainly
discussed the realization of the two objectives: One is remaining
assets and liabilities after the derecognition of the transaction or
other items occurred; Another is the change of assets and liabilities
causing by transactions or other events.
If an asset or liability is disposed of at one time or in proportion,
it's relatively simple and intuitive to achieve the above two
objectives, but, if the rest of the asset or liability is out of proportion
to the rest of the risks or rewards, it's extraordinarily complex. In this
case, literature shows that there are two models for derecognition.
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The first one is control model, that is, derecognition and
recognition simple relative. When the assets or liabilities are no
longer satisfied with the recognition criteria, they shall be
derecognized. In another words, derecognition criteria of assets
should focus on the control of assets rather than legal ownership or
the risks and rewards, while, derecognition criteria of liabilities
should focus on whether the main body still bear them.
The second one is risk and reward model, that is, an asset or
liability shall be recognized continually until the main body is no
longer responsible for the vast majority of the risks and rewards,
even when other part is disposed of, getting or bearing the remaining
part alone is no longer satisfied with the recognition criteria of assets
or liabilities.
From the perspective of control model, this kind of practice can
treat the same rights or obligations in the same way, regardless of
whether they have been recognized, in order to make the financial
statements of the main body reflect the economic resources and
obligations more neutrally and faithfully. At the same time, it avoids
to determine whether the main body has transferred enough risks and
rewards.
While, from the perspective of risk and reward model, in the
following cases, derecognition may not be able to reflect changes in
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the situation faithfully: Firstly, recognized assets and liabilities
significantly reduced, while, the obligations of the main body did not
significantly reduce, for example, when a receivable has been
transferred, at the same time, as the guarantee of all or most of the
future credit loss caused by the assets to the purchaser; Secondly,
income or gains arising from the delivery of an asset may or must
return to each other through forward contract, selling put options,
buying call options or lease.
In conclusion, derecognition criteria should truthfully reflect
the rights and obligations and its change of the main body. In most
cases, when an asset or liability does not meet the recognition
criteria, the asset or liability should be derecognized. But when some
of the assets or liabilities is remained, the IASB should determine
that how the main body better reflects the change of transaction
results in the specific standards and methods may include: To
strengthen the disclosure; Report the remained rights or obligations
as different items to the original rights or obligations, in order to
highlight the increase of risk.
Finally, I'm really waiting for you to response to me.
Yours sincerely,
Zhao Yan
November 24, 2015
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