In the borrower`s accounts, the bonds are recognised as an asset and the cash received from the lender would be recognised as a liability as a « loan in a repo transaction ». Paragraph 66 provides that the client has no control over the asset in repo transactions and that, therefore, the entity must continue to record the asset in its financial statements, even though the asset is used by a third party, because the client has limited the ability to use the asset, since it is a repo transaction. In the first contract with customer 1, a machine is sold for 3,500,000, with the right or obligation to buy back the asset for 2,900,000, the maximum exercise period of the repurchase option is one year from January 2018. Going back to the examples above, we find in the first contract that the redemption price is lower than the initial sale price. Balance sheet (financial assets): When the financial asset (borrowing) is sold as part of a repo transaction, it cannot be recognised in the accounts, as the transferor essentially retains all the risks and opportunities of the property. IFRS 15 provides that if the redemption price is higher than the original sale price, the customer is incentivized, but if the repurchase price is lower than the original sale price, there is no incentive for the customer. Pursuant to paragraph B70 IFRS 15 , where an entity is required to repurchase the asset at the request of the customer (a put option) at a price lower than the initial sale price of the asset, the entity must verify at the beginning of the contract whether the customer has a significant economic incentive to exercise that right. And in the third contract, we have that the repurchase price is 2,900,000 and a fair value of 4,000,000, unlike previous contracts for which the company had the possibility or the obligation to buy back the asset, in this third contract, the company is obliged to buy back the asset at the request of the customer. On the other hand, if the company has the obligation to buy back the asset at the request of the customer and the repurchase price is lower than the initial sale price, we can analyze that the customer has no incentive to exercise the repurchase option, so it is very likely that the option will not be exercised. in this case, the transaction must be recognized as the sale of a product with a right of return. To easily understand retirement transactions, let`s look at the following diagram Based on IFRS 15, the retirement activity should be treated as a financing agreement that does not generate income. •the obligation for an entity to repurchase the asset (futures contract – see point 3.7.2); An accounting entry appears as a secured loan and not as a « sale transaction ». Please see the accounting treatment with journal articles.
A B70 option Where an entity is required to repurchase the asset at the request of the client (a put option) at a price lower than the initial sale price of the asset, the entity verifies, at the beginning of the contract, whether the client has a significant economic incentive to exercise that right. The exercise of this right by the customer leads the customer to effectively pay the company consideration for the right to use a given asset for a given period. Therefore, if the customer has a significant economic incentive to exercise this right, the entity must recognise the agreement as a lease in accordance with IAS 17. . . .