First of all, according to IFRS 9 - Financial Instruments para 3.3.1, an entity shall remove a financial liability (or a part of a financial liability) from its statement of financial position when, and only when, it is extinguished - ie when the obligation specified in the contract is discharged or cancelled or expires.
Let's understand this through an example:
IFRS Library | Researching... borrows an A$50,000 business loan from amr. microfinance bank. The entity records an A$50,000 financial liability (Business loan payable) on its Statement of Financial Position (SoFP).
Double Entry
1 Jan 20X1 - Bank A$50,000 (Debit) <Asset>
1 Jan 20X1 - Business Loan A$50,000 (Credit) <Liability>
According to IFRS 9, the entity cannot remove this A$50,000 liability until it meets one of the specific "extinguished" scenarios.
1. Discharged (Paying the Debt)
Example: IFRS Library transfers A$50,000 from its current account to amr. microfinance bank to pay off the loan. The bank receives the funds. From an IFRS accounting perspective, the entity has fulfilled its contractual obligation by paying the bank. The debt is officially discharged. The entity removes (derecognises) the A$50,000 liability from its SoFP.
Double Entry
30 June 20X2 - Business Loan A$50,000 (Debit) <Liability>
30 June 20X2 - Bank A$50,000 (Credit) <Asset>
2. Cancelled (Legal forgiveness)
Example: The entity faces financial difficulties and cannot pay the full amount. It negotiates a settlement with the bank. The bank agrees to accept A$30,000 in cash and legally forgives the remaining A$20,000. The A$30,000 is derecognised because it was discharged (paid). The remaining A$20,000 is derecognised because the bank legally cancelled the obligation. The entity records an A$20,000 gain on debt extinguishment.
Double Entry
30 June 20X2 - Business Loan A$50,000 (Debit) <Liability> / SoFP
30 June 20X2 - Bank A$30,000 (Credit) <Asset> / SoFP
30 June 20X2 - Gain on loan cancelled A$20,000 (Credit) <Income> / Income Statement
3. Expires (Statute of Limitations)
Example: IFRS Library (IL) owes amr webbox (AWB) A$5,000 for web development services previously rendered. A dispute occurs, and IL refuses to pay AWB. Years pass, and the entity never takes legal action. Eventually, the legal "statute of limitations" in their jurisdiction passes, meaning the supplier is legally barred from collecting the debt. Since the debt is no longer enforceable, the obligation expires. IL removes the A$5,000 liability from its accounts.
Double Entry
30 June 20X2 - Financial liability A$5,000 (Debit) <Liability> / SoFP
30 June 20X2 - Gain on loan expired A$5,000 (Credit) <Income> / Income Statement
4. Why 'when, and only when' is used in IFRS 9 para 3.3.1
Example: IFRS Library owes amr. microfinance bank A$50,000, due in one month. In order to set aside the money, the entity transfers A$50,000 into a completely separate, restricted bank account named "Loan Repayment A/C".
Even though the entity has set the money aside and fully intends to pay, the liability remains on the SoFP. This is because the debt has not been discharged (the bank has not been paid yet), cancelled (the bank has not forgiven it), or expired. The rule states the liability is removed "when, and only when" it is extinguished. Setting aside cash does not extinguish the legal obligation to the creditor.
Double Entry
30 May 20X2 - Loan Repayment A/C A$50,000 (Debit) <Asset>
30 May 20X2 - Current Account A$50,000 (Credit) <Asset>
5. Exception for settlement by electronic payments
Despite the requirement in paragraph B3.1.2A to derecognise a financial liability on the settlement date, when settling a financial liability (or part of a financial liability) in cash using an electronic payment system, an entity is permitted to deem the financial liability (or part of it) to be discharged before the settlement date if, and only if, the entity has initiated a payment instruction that resulted in:
(a) the entity having no practical ability to withdraw, stop or cancel the payment instruction;
(b) the entity having no practical ability to access the cash to be used for settlement as a result of the payment instruction; and
(c) the settlement risk associated with the electronic payment system being insignificant.
The IASB recognises that some electronic payment systems are incredibly fast and secure. Therefore, an entity is allowed to remove the debt before the settlement date (when the payment is initiated) only if the payment system meets all three of the strict criteria stated above.
Scenario:
IFRS Library purchases IFRS book inventory and currently owes X Publish Co. A$1,000. On 2 January 20X5, it transfers the balance via an electronic payment platform (EPP) and it settles on 5 January 20X5.
Based on the original IFRS 9 requirements (before the B3.3.8 amendment), the financial liability should be derecognised on 5 January 20X5. However, under the B3.3.8 exception, the financial liability can be derecognised on 2 January, provided the EPP immediately holds the funds on 2 January. Moreover, the risk of the EPP failing to ultimately settle the transaction is insignificant. The entity cannot cancel the card transaction, and it cannot spend that A$1,000 on anything else.
6. Effective from 1 January 2026
The amendments apply for reporting periods beginning on or after 1 January 2026.
Earlier application is permitted.
amr.
Researched and written by Aamir Sheikh
FCCA, CA (CAANZ), MCOM, BSc in Applied Accounting