When is the appropriate time to derecognise trade receivables and payables settled via electronic bank transfers?

Up to now, IFRS 9 Financial Instruments has not explicitly specified whether an entity must apply trade date accounting or settlement date accounting when recognising or derecognising a financial asset or liability, except for regular way purchase or sale of assets (such as ASX trades). This resulted in diversity in practice, with different interpretations as to when the right to receive cash flows has expired, or when an obligation has been discharged.

Date for recognising financial assets and financial liabilities

International Accounting Standards Board amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures (Amendments) in 2024 clarify when financial assets and financial liabilities must be recognised.

Date for derecognising financial assets and financial liabilities

IFRS 9 requires derecognition for financial assets and liabilities as follows:

• Financial assets - when the contractual rights to the cash flows from the financial asset expire
• Financial liabilities - when it is extinguished, i.e. when the obligation is discharged, is cancelled, or expires.

Because of differing interpretations of when contractual rights to cash flows expire, or a financial liability is extinguished, the Amendments clarify the appropriate date for derecognising financial assets and liabilities. These are shown in the table below.

	Financial assets	Financial liabilities
		Other than those being settled with cash using an electronic payment system1	Liabilities being settled with cash using an electronic payment system1
Recognition (except for regular way purchase or sale)	On the date on which the entity becomes party to the contractual provisions of the instrument
Derecognition	On the date on which the contractual rights to the cash flows expire or the asset is transferred	Settlement date	Option to deem discharge before the settlement date if specific criteria are met (IFRS 9.B3.3.8)
1 Financial liabilities settled with cash using an electronic payment system mean electronic cash transfers between a transferor’s and a recipient’s bank accounts. When the cash leaves the transferor’s bank account, it is not simultaneously recognised in the recipient’s bank account because not all banks process cash transfers in real-time.

Therefore, financial assets are derecognised on the date on which the contractual rights to cash flows expire, and financial liabilities are derecognised on the ‘settlement date’. However, there is an exception where financial liabilities are settled with cash using an electronic payment system. In such cases, there is an option to deem the financial liability discharged before the ‘settlement date’ if certain criteria are met. This is discussed in more detail below.

Settlement date

Other than those settled with cash using an electronic payment system, financial liabilities are derecognised on the ‘settlement date’. The settlement date is described in IFRS 9 as the date that an asset is delivered to or by an entity. Settlement date accounting refers to:

1. The recognition of an asset on the day the entity receives it, and
2. The derecognition of an asset and recognition of any gain or loss on disposal on the day that the entity delivers it.

The ‘settlement date’ for trade receivables is essentially the same as ‘the date on which the contractual rights to cash flows expire’, which is the derecognition requirement for financial assets noted in the above table. The Exposure Draft to these Amendments proposed ‘settlement date’ accounting for derecognising both financial assets and financial liabilities. However, to avoid the risk of unintended consequences, the International Accounting Standards Board (IASB) decided to only apply settlement date accounting for the derecognition of financial liabilities.

The IASB noted in its Basis for Conclusions to the Amendments that the derecognition of a financial asset is based on the expiry of the right to receive cash (or another financial asset). When a creditor receives notification that a debtor has submitted a payment instruction, the creditor does not have the practical ability to access the cash. Therefore, the creditor still has a right to receive cash. The right to receive cash only expires when the cash is delivered into the creditor’s bank account.

Financial liabilities settled using an electronic payment system (option to deem discharge before settlement date)

As noted above, the settlement date for a trade payable is the date on which the asset – cash – is credited into the supplier’s bank account, which is also the date the entity’s obligation is extinguished.

The Amendments permit an entity to deem a financial liability (or part of it) to be discharged before the settlement date if it is settled in cash using an electronic payment system. This option is available if, and only if, the entity has initiated a payment instruction that resulted in:

1. The entity having no practical ability to withdraw, stop or cancel the payment instruction
2. The entity having no practical ability to access the cash to be used for settlement as a result of the payment instruction, and
3. The settlement risk associated with the electronic payment system being insignificant.

If an entity elects to use this option, it is required to do so for all settlements made through the same electronic payment system.

The requirement to settle ‘in cash’ does not necessarily mean that settlement has to be from a bank account with a positive balance. Therefore, this exception can also apply to payments made via an electronic payment system from a bank overdraft if the payment amount is within the available overdraft limit at the time the exception requirements are met (refer FAQ 2 in our publication).

What is meant by insignificant settlement risk?

The Amendments clarify that the settlement risk associated with an electronic payment system is insignificant if:

• The completion of the payment instruction follows a standard administrative process, and
• The time between i. and ii. below is short:
  1. The entity ceasing to have the practical ability to withdraw, stop or cancel the payment instruction and to access the cash to be used for settlement as a result of the payment instruction (i.e. the point in time when criteria a. and b. specified above are met)
  2. The cash being delivered to the counterparty.

If completion of the payment instructions were subject to the entity’s ability to deliver cash on the settlement date, the settlement risk would not be insignificant.

Option not available for financial assets

It is important to note the following key points:

• The accounting policy election to deem a financial liability to be discharged before the settlement date applies only to financial liabilities settled in cash using an electronic payment system.
• A similar accounting policy election is not available for financial assets.
• This accounting policy election is not available for other modes of settling financial liabilities, such as cheques, debit/ credit cards. This is because the entity would still have the practical ability to withdraw, stop or cancel the payment instruction (i.e. stop the cheque).

Implications for entities using an electronic payment system

We do not anticipate significant impacts on entities receiving and paying cash via electronic payments in Australia because the clearing system is relatively efficient, and Australian dollar transfers between Australian financial institutions usually settle the same or the following business day. However, we may see asymmetrical accounting between the recipient and payer as follows:

• The recipient must wait until cash is in its bank account to derecognise the receivable and recognise cash received
• The payer, if they meet the criteria for the exception to settlement date accounting described above, may be able to derecognise the trade payable and corresponding cash balance once the electronic payment has been made.

Implications for entities still using cheques

Although in the minority, some Australian businesses may still use cheque payments to settle their financial liabilities. Some of these entities may derecognise trade payables (and cash) once a cheque has been sent to the supplier, even if the cheque has not been deposited by the customer and cleared by the debtor’s bank from their account prior to the reporting date. This would usually occur if the funds were debited to the bank account within a reasonable period (a few days) of the reporting date (referred to as ‘outstanding cheques’).

Not all electronic payment systems will meet the criteria to deem discharge before the settlement date

We anticipate that most Australian entities will be able to apply the option to deem the discharge of financial liabilities before the settlement date, given the relatively efficient Australian banking clearing system. However, if other electronic payment methods are used, or if electronic payment systems in other countries are used, entities will need to prove that the exception criteria above have been met. For example, if the payer can cancel the instruction within the first 48 hours, such payments will not meet the necessary criteria to apply the exemption, and therefore, the financial liabilities (trade payables) and cash are only derecognised when the cheque is cleared and funds deposited into the recipient’s bank account.

When do these amendments first apply?

The amendments apply for the first time to annual periods beginning on or after 1 January 2026. Early adoption is permitted provided that the other amendments contained in this amending standard (AASB 2024-2 in Australia) are also early adopted in the same period.

Transition requirements

Regardless of whether early adopted, or adopted from the effective date, the amendments must be applied retrospectively. However, prior period financial statements do not have to be restated. In fact, entities are only allowed to restate prior periods if they can do so without using hindsight.

If comparatives are not restated, how are opening balances adjusted for the new requirements?

If an entity does not restate prior periods, it will recognise the effect of applying these derecognition amendments for the first time on the initial application date (for example, 1 January 2026 for a December year-end and 1 July 2026 for a June year-end). The opening balance of financial assets and financial liabilities will be adjusted on this date, and any difference, if any, will be adjusted against the opening balance of retained earnings (or other component of equity, as appropriate).

Transition example – No restatement of comparatives

The following example illustrates the effect on the statement of financial position and statement of cash flows when comparatives are not restated.

Fact pattern

Entity A initially applies the derecognition amendments on 1 January 2026 and elects not to restate the comparatives. Prior to applying the amendments, Entity A derecognised financial liabilities (trade payables) when issuing cheques.

The amendments require Entity A to derecognise financial liabilities (trade payables) when the cheque is cleared, and the funds are deposited into the recipient’s bank account.

Entity A’s bank balance on 1 January 2025 is $100.

On 30 December 2025, Entity A issues a cheque of $30 to settle a trade payable. The cheque clears on 3 January 2026.

The balance of Entity A’s trade payables as at 31 December 2025 (prior to issuing the above cheque of $30) is $80.

Assume there are no other bank transactions during 2025 and 2026, and no other transactions affecting trade payables during 2026.

Question

What effect will the amendments have on the presentation of trade payables and cash and cash equivalents in the statement of financial position, and on the statement of cash flows, for the annual reporting period ended 31 December 2026?

Answer

Accounting entry on 30 December 2025

On 30 December 2025 (i.e. prior to the initial application of the amendments), Entity A records the following entry to derecognise the trade payables on the date the cheque is issued:

Dr         Trade payable                           $30
Cr         Cash and cash equivalents                     $30

Therefore, the balances reported in the financial statements for the annual reporting period ended 31 December 2025 are:

• Trade payable - $50 ($80 on 31 December 2025, prior to the cheque payment, less $30 cheque)
• Cash and cash equivalents - $70 ($100 on 1 January 2025, less $30 cheque payment).

Initial application of the amendments on 1 January 2026

On 1 January 2026, Entity A reverses the entry above to again recognise the trade payables and cash and cash equivalents of $30.

On 3 January 2026, when the cheque is cleared, Entity A derecognises the trade payables and cash and cash equivalents of $30.

Effect on the statement of financial position and statement of cash flows for the annual reporting period ending 31 December 2026

Entity A elected not to restate the comparatives on the initial application of the amendments.

Therefore, the amounts presented in the statement of financial position for trade payables and cash and cash equivalents for the comparative period, i.e. as at 31 December 2025, remain at $50 and $70, respectively.

Entity A is then required to recognise the effect of initially applying the amendments as an adjustment to the opening balance of financial assets and financial liabilities (i.e. an additional $30 is added back to both trade payables and cash balances on 1 January 2026). There is no difference between these two amounts, so no adjustment is made to the opening balance of retained earnings on 1 January 2026.

As Entity A has elected not to restate prior periods, there will be a difference in the closing balance of cash and cash equivalents as at 31 December 2025 ($70) and the adjusted opening balance after the initial application of the amendments on 1 January 2026 ($100). A reconciliation of these balances needs to be presented in the statement of cash flows.

The following is an illustration of the reconciliation:

Extract of the statement of cash flows for the year ended 31 December 2026

	2026	2025
	$	$
Net increase/(decrease) in cash and cash equivalents Note 1	(30)	(30)
Cash and cash equivalents at the beginning of the year, prior to adjustment of initial application of the amendments to IFRS 9	70
Adjustment on the initial application of the amendments to IFRS 9	30
Cash and cash equivalents at the beginning of the year	100	100
Cash and cash equivalents at the end of the year	70	70
Note 1: There are no other bank transactions in 2025 and 2026 except the payment of $30 to settle a trade payable. Since Entity A has elected not to restate the comparatives, issuing a cheque of $30 on 30 December 2025 results in a decrease in cash and cash equivalents in the year ended 31 December 2025. Entity A adopts the amendments on 1 January 2026. Because of the journal entry to reverse the cheque back to trade payables on 1 January 2026, the trade payable and cash and cash equivalents are again derecognised on 3 January 2026, resulting in a decrease in cash and cash equivalents of $30 in 2026.

Similar to cash and cash equivalents, there would be a difference in the closing balance of trade payables as at 31 December 2025 ($50) and the adjusted opening balance after the initial application of the amendments as at 1 January 2026 ($80). Since Entity A is not required to disclose the movement in trade payables during the year, it is not required to disclose a reconciliation on the above lines for trade payables.

However, entities that follow the indirect method for reporting cash flows from operating activities in accordance with IAS 7 Statement of Cash Flows would need to present the movement in trade payables in the statement of cash flows. In this example, the movement in trade payables would be a reduction of $30 in both 2025 and 2026.

We recommend restatement of comparatives

Our example above illustrates the complexity in disclosures relating to the cash flow statement when entities choose not to restate comparative financial statements on first-time adoption of these amendments. In particular, the cash flow statement is confusing because the same $30 cash outflow is shown twice (once in 2025 under the old policy and again in 2026 under the new policy). We therefore recommend that entities restate the comparative period financial statements if possible.

More information

Please refer to our IFRB Bulletin for more information on these Amendments.

Need help?

The requirements for recognising and derecognising financial assets and financial liabilities are complex, and are soon to become more so. Please contact our IFRS & Corporate Reporting team if you require assistance.