MFRS 137, also known as “Derecognition of Financial Assets”, is a Malaysian Financial Reporting Standard that outlines the accounting treatment for derecognizing financial assets. It provides guidance on when and how a company should remove a financial asset from its balance sheet.
Key Concepts in MFRS 137:
- Derecognition: The process of removing a financial asset from a company's balance sheet.
- Transfer of Control: This is the primary criterion for derecognition. A company must have transferred substantially all the risks and rewards of ownership to another party.
- Continuing Involvement: If a company retains significant control over a derecognized asset, it may need to continue recognizing it on its balance sheet.
Examples of Derecognition:
- Sale of a Loan: A bank sells a loan to another financial institution. The bank derecognizes the loan from its balance sheet if it has transferred control to the buyer.
- Securitization of a Mortgage Portfolio: A bank securitizes a portfolio of mortgages, creating a new financial asset that is sold to investors. The bank derecognizes the mortgages from its balance sheet if it has transferred control to the investors.
Practical Insights:
- MFRS 137 is crucial for financial institutions. It helps ensure that the financial statements accurately reflect their holdings of financial assets.
- Understanding derecognition is essential for analysts and investors. It can impact the financial performance and risk profile of a company.
