Conditional sale or secured borrowing

PFRS 9, paragraph 3.2.3, provides that an entity shall derecognize a financial asset when either one of
the following criteria is met

a. The contractual rights to the cash flows of the financial asset have expired.
b. The financial asset has been transferred and the transfer qualifies for derecognition based on
the extent of transfer of risks and rewards of ownership.

The first criterion is usually easy to apply.

The contractual rights to the cash flows may expire, for example when a note receivable from a
customer is fully collected.

The application of the second criterion is often complex.

It relies on the assessment of the extent of the transfer of risks and rewards of ownership.

PFRS 9, paragraph 3.2.6, provides the following guidelines for derecognition based on transfer of
risks and rewards

1. If the entity has transferred substantially all risks and rewards, the financial asset shall be
derecognized.
2. If the entity has retained substantially all risks and rewards, the financial asset shall not be
derecognized.
3. If the entity has neither transferred nor retained substantially all risks and rewards,
derecognition depends on whether the entity has retained control of the asset.
a. If the entity has lost control of the asset, financial asset is derecognized in entirely.
b. If the entity has retained control over the asset, the financial asset is not derecognized.