The EFT dilemma

Can the creditor be derecognised?

The payment is done, it’s out of our hands now, right? Well… maybe not. A bank notification might not always be indicative of cash being delivered to the receiving entity’s bank account. The availability of funds for withdrawal may be subject to the bank's policies, and any potential hold or restriction on the deposited amount. Furthermore, some banks may allow for a period where payments can be cancelled or reversed.

Thus, the question: Should the financial liability be derecognised when the cash transfer is initiated (at your reporting date), or when the funds reflect in the creditor’s bank account (after your reporting date)?

Normally a financial liability is derecognised on settlement date, i.e. when the funds reflect in the creditor’s bank account.

To address this predicament, the International Accounting Standards Board (IASB) has published IFRS 9 and IFRS 7 Amendments to the Classification and Measurement of Financial Instruments.

According to the amendments, “when settling a financial liability, or a part of it, in cash using an electronic payment system, an entity is permitted to deem the financial liability, or a part of it, as discharged before the settlement date if the entity initiated a payment instruction”, and the following three criteria are met:

the entity has

(a) “no practical ability to withdraw, stop or cancel the payment instruction;

(b) “no practical ability to access the cash to be used for settlement as a result of the payment instruction; and

(c) the settlement risk associated with the electronic payment system is insignificant.” (Settlement risk is insignificant if the electronic payment system follows a standard administrative process, where the time from initiation to payment delivery is short and payment does not depend on the entity's ability to provide cash by the settlement date.)

If you want to derecognise a creditor or any other financial liability before settlement date using an electronic payment system, you will be required to apply the above requirements based on all settlements made through that electronic payment system.

The IFRS 9/IFRS 7 amendments have made it possible for an entity to derecognise the creditor before it reflects in the creditor’s bank if the three criteria are met. Without application of the amendments the entity would still have to recognise the creditor at year end.

Author:

Cleopatra Tsewu, Manager