Derecognition is the removal of all or a part of an asset or liability from an entity’s balance sheet.  An entity derecognizes a financial asset when:

  • Its contractual rights to the cash flows asset expire; or
  • All of the asset’s risks, rewards and control have been substantially transferred to another party, such as through a true sale of the asset.

A financial liability is derecognized when it is extinguished.

The derecognition model for transfers of financial assets under US GAAP focuses on surrendering control over the transferred assets. A financial asset is transferred when it has been conveyed by and to someone other than its issuer. An entity derecognizes a transferred financial asset or a participating interest therein if it surrenders legal, actual and effective control of the financial asset or participating interest; otherwise, it continues to recognize the asset. On derecognition, any gains or losses accumulated in OCI are recognized in net income.

After a transfer of a financial asset, or a participating interest therein, an entity continues to recognize the financial assets that it controls.

How are Financial Assets Derecognized under IFRS 9?

An entity derecognizes a transferred financial asset if it has transferred substantially all of the risks and rewards of ownership or control of the financial asset. A financial liability is derecognized with the discharge, cancellation or expiration of the contractual obligation or when its terms are substantially modified.

A financial asset is derecognized when (a) the contractual rights to receive the cash flows from the financial asset expire; (b) the financial asset is transferred and the transfer meets certain conditions; or (c) the entity enters into a qualifying pass-through arrangement. If transferred, then the entity evaluates whether it has retained any risks and rewards of ownership of the transferred financial asset.

Derecognition of Financial Assets under IFRS
Category Derecognition
Amortized cost Gain or loss to profit or loss
FVTOCI Cumulative OCI gain or loss to profit or loss
FVTPL Gain or loss to profit or loss

To derecognize financial instruments, an entity must determine whether the whole or a part of a financial asset or portfolio of similar financial assets is involved. If the risks, rewards and control of a financial asset or portfolio been transferred and it relates to only a part of a financial asset or portfolio, the derecognition must comprise a fully proportionate share of specifically identified asset cash flows. An entity continues to recognize a financial asset to the extent of its continuing involvement in the financial asset.

On derecognition, any gains or losses on financial assets carried at fair value through profit or loss is recognized to profit or loss. Any cumulative gain or loss previously recognized in OCI is reclassified (“recycled”) from equity to profit or loss on derecognition.

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