The IFRS® Interpretations Committee (the Committee) discussed the submission Cash Received via Electronic Transfer as Settlement for a Financial Asset (IFRS 9), which addressed when a payee derecognises a trade receivable and recognises cash when using an electronic transfer system for settlement.
Following feedback from respondents on the Committee’s tentative agenda decision, the International Accounting Standards Board (IASB) has decided to explore narrow-scope standard setting on electronic payments as part of its post-implementation review of IFRS 9 Financial Instruments.
We welcome the IASB’s intention to explore this as part of its post-implementation review of IFRS 9, having considered stakeholder concerns on this issue.
What’s the accounting issue?
When settling a trade receivable using an electronic transfer system (e.g. the BACS payment system in the UK), the settlement process is automated and can take three working days. This means that if a company has a trade receivable due from a customer and the customer pays using an electronic transfer system, the company will receive the cash after a further two working days.
This raises the question of when a company recognises the cash received for settlement of the receivable – on the date the customer initiated the payment or on the cash transfer settlement date? This is a particularly significant issue when a customer initiates payment before the company’s reporting date but the cash transfer is not settled until after this date.
What did the Committee propose?
When the Committee considered this issue in its June 2022 meeting, it concluded that under IFRS 9 the company:
- derecognises the trade receivable on the date on which its contractual right to receive cash expires. This date would depend on the specific facts and circumstances including laws and regulations; and
- recognises cash only when IFRS 9’s recognition requirements are met – i.e. when the cash transfer is settled.
In other words, under this analysis a company would recognise cash only on the transfer settlement date and not before. For trade receivables derecognised before the transfer settlement date, a company would recognise another financial asset (e.g. a right to receive cash from the bank): it would not recognise cash.
What was the feedback and the IASB’s response?
Stakeholders raised particular concerns that finalising the Committee’s decision could:
- cause disruption to existing accounting practices – e.g. accounting for cheques and performing bank reconciliations;
- cause unintended consequences in the accounting for other payment methods – e.g. payments made by cheque or credit card, and for payments a company makes to settle payables; and
- be costly and complex to apply – e.g. companies may need to adapt systems and processes and seek legal analysis to determine when rights to cash flows expire across different payment methods and jurisdictions.
Given this feedback and the Committee’s discussions, in its September 2022 meeting the IASB decided to explore narrow-scope standard setting instead of finalising the decision proposed by the Committee.