Extinguishment of debt in exchange for transfer of assets not meeting derecognition criteria
An entity has a bank loan of €1 million. The bank agrees to accept in full payment of the loan the transfer to it by the entity of a portfolio of corporate bonds with a market value of €1 million. The entity and the bank then enter into a put and call option over the bonds, the effect of which will be that the entity will repurchase the bonds in three years’ time at a price that gives the bank a lender’s return on €1 million. As discussed further at 3 above, this would have the effect that the entity is unable to derecognise the bonds.
Under the provisions of IAS 39 (IFRS 9), the entity would be able to derecognise the original bank loan, as it has been legally released from it. The provisions under discussion here have the overall result that a loan effectively continues to be recognised. Strictly, however, the analysis is that the original loan has been derecognised and a new one recognised. In effect the accounting is representing that the entity has repaid the original loan and replaced it with a new one secured on a bond portfolio.
However, as the new loan is required to be initially recognised at fair value whereas the old loan may well have been recognised at amortised cost (see Chapter 49 at 5), there may well be a gain or loss to record as the result of the different measurement bases being used – see 6.2 and 6.3 below.