Financial liabilities settled in cash using an electronic payment system
Amendments to AASB 9 / NZ IFRS 9 provide option to deem discharge before settlement date
In brief
- Clarifies when financial assets and financial liabilities must be recognised and derecognised
- New option introduced to derecognise financial liabilities when using an electronic payment system
- Certain criteria must be met in order to apply the option
The IASB issued an amending standard Amendments to the Classification and Measurement of Financial Instruments – Amendments to IFRS 9 and IFRS 7 in May 2024. This amending standard was subsequently issued in New Zealand and Australia (as AASB 2024-2) with an operative date for reporting periods beginning on or after 1 January 2026. Earlier application is permitted.
These amendments are in response to the IASB’s post-implementation review of the classification and measurement requirements in IFRS 9 Financial Instruments. The amendments to IFRS 9 Financial Instruments include clarifying when financial liabilities must be derecognised when settling them in cash using an electronic payment system. “Cash using an electronic payment system” means electronic transfers between a payer’s and payee’s bank accounts. The amendment provides an option for the derecognition of some financial liabilities (e.g., trade/accounts payable) of either; when the payee receives the payment (settlement date accounting), or when the payer makes the payment providing certain criteria are met. This option provides a pragmatic solution to the problem that a payer might not necessarily know when a payee receives the payment.
What are the changes?
The amendments introduce an alternative option to settlement date accounting for derecognising financial liabilities when they are being settled via bank transfer. This option allows for entities to derecognise a financial liability (and corresponding cash balance) when they initiate the payment instructions, although it may not yet be received by the payee. However, to apply this option, the following criteria in paragraph B3.3.8 must be met:
(a) the entity cannot withdraw, stop or cancel the payment instruction;
(b) the entity has no ability to access the cash to be used for settlement; and
(c) the settlement risk associated with the electronic payment system is insignificant.
An entity that elects to apply the option must apply it to all settlements made through the same electronic payment system.
This derecognition option does not apply to the corresponding financial asset. The amendments clarify that financial assets are derecognised on the date on which the contractual rights to the cash flows expire or the asset is transferred. For trade/accounts receivables this is essentially the same as the settlement date which would be the date it receives the cash in its bank account.
This derecognition option also does not apply to other methods of payment that are used to settle financial liabilities. For example, the amendments clarify that financial liabilities settled by cheque are derecognised on settlement date, which is the date the cheque clears.
What is the impact?
We do not expect significant changes to be needed to accounting systems or processes for many Australian or New Zealand entities making electronic transfers. This is because most Australian and New Zealand banks process transfers in real-time, therefore the settlement date is usually the same day as the payer makes the payment. Also, the criteria in paragraph B3.3.8 will likely be satisfied under the Australian and New Zealand banking environment.
However, it should be noted that this may not be the case for electronic payment systems in some other countries where the clearing systems are not as efficient. So, it is possible to have a scenario where the payer has derecognised the financial liability, but the payee has not derecognised the corresponding financial asset, and the cash is not recognised by either party. This mismatch could have some unintended consequences on intercompany balances within groups of companies, and for consolidation accounting. Groups of companies and multinationals may need to review the overall impact of their accounting policies.
Entities that still use cheques and derecognise trade/accounts payables (and the corresponding cash balance) once a cheque has been sent to the payee will need to reconsider their accounting treatment of outstanding/unpresented cheques.
Where can I find more details?
The following resources, while not an exhaustive list, could provide further information:
