Limited recourse liability

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LindsayM
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Joined: 20 Oct 2020, 14:32

Limited recourse liability

Post by LindsayM »

In the balance sheet, there is a limited recourse liability which is linked to the performance of the assets as stipulated in the legal agreement. On each period end, all profits or losses on the PnL are allocated and recorded in this liability instead of retained earnings. The liability is recognized at amortized cost under IFRS9 and the company is an SPV. Can we account the liability in this manner and if yes under which IFRS/IAS it is permissible. Thanks
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Marek Muc
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Location: Warsaw, Poland

Re: Limited recourse liability

Post by Marek Muc »

A bit more information would be useful.

what are the key repayment terms of this liability when it comes to timing and amount?
On each period end, all profits or losses on the PnL are allocated and recorded in this liability instead of retained earnings.
I'm not sure I understand. So what happens, for example, if goods that cost $100 are sold to a customer for $120? What are the entries?
LindsayM
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Joined: 20 Oct 2020, 14:32

Re: Limited recourse liability

Post by LindsayM »

The Company is an SPV, ie the company has issued Notes and the proceeds of the Notes have been used to buy financial assets, like loan receivables. The repayment of the Notes depends on cash received on the assets and according to a waterfall. In the PnL, all profit or loss is sweeped up to the Notes payable as write down or write back. For eg, if the Notes payable nominal value is €10,000 and at the end of the year, the PnL is showing an excess of income over expenses of €500. A common practice in SPV accounting because of the limited recourse, is that a write back of the Notes payable of €500 is created in the PnL (ie an expense) to match the excess of €500. At the end, there is no profit or loss on the PnL and ultimately the Notes payable balance becomes €10,500 (10,000 + 500). The reasoning behind is that the Noteholders will bear all profit or loss because of the limited recourse nature of the liability. Both the asset and liability are accounted at amortized cost under IFRS 9.

My question is whether this is permissible under IFRS and under which IFRS it is applicable. Thks
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Marek Muc
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Location: Warsaw, Poland

Re: Limited recourse liability

Post by Marek Muc »

we're in the realm of classification and measurement of financial liabilities under IFRS 9:

https://ifrscommunity.com/knowledge-bas ... iabilities

If the liability is measured at amortised cost, we can say that the expected cash flows change, which causes the remeasurement of liability. However, for amortised cost, you cannot link the new value directly to some other value (e.g. some financial asset) - the approach to be followed is illustrated here:
https://ifrscommunity.com/knowledge-bas ... tual-terms

are you sure that these notes are measured at amortised cost, not at fair value?
LindsayM
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Joined: 20 Oct 2020, 14:32

Re: Limited recourse liability

Post by LindsayM »

Thank you very much. The asset is at amortised cost and because of the back to back structure, the Notes are measured also at amortised cost. I think the change in the expected cash flows can justify the remeasurement of the financial liability.
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