Achieving IFRS Off-Balance-Sheet Treatment in Trade Receivables Securitizations

Abstract

Changes in accounting requirements made in response to the financial crisis of 2007-2008 have made achieving off-balance-sheet treatment for trade receivables securitizations more challenging, particularly under IFRS. Fortunately, a cost-efficient solution has emerged and is proving practical and efficient. Despite the need to transfer a significant portion of variability of cash flows to a third party, this solution makes it possible to satisfy this requirement in a cost-efficient manner by adding a small, carefully sized and positioned subordinated note. We present techniques to maximize transfer of variability of cash flow while keeping costs associated with this additional tranche down. Ongoing monitoring and occasional resizing ensure that off-balance-sheet treatment is maintained over the entire life of the securitization. In contrast, derecognition under U.S. GAAP is more readily achieved without the need for a subordinated tranche because the requirement to transfer control can be satisfied more directly by transferring ownership of the receivables all the way through to the investor.

This publication was originally posted here.

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