Strategic Business Reporting (International) · Financial instruments

IFRS 9 Derecognition of Financial Assets and Liabilities

Updated 11 October 2026

Derecognition means removing a financial asset or liability from the statement of financial position. For an asset, you test whether contractual rights have expired or been transferred, then whether risks and rewards and control have passed. A liability is removed when it is extinguished, or when its terms change substantially.

Understand Derecognition of Financial Assets and Liabilities

A financial asset or liability sits in the statement of financial position only while it still meets the Conceptual Framework definitions. Derecognition asks one question: has the entity really got rid of it? The answer decides whether you show a receivable and a loan, or just cash.

For financial assets, IFRS 9 gives a sequence. First decide the level at which you test: the whole asset, or a part (only if the part is specifically identified cash flows, or a fully proportionate share). Then ask whether the contractual rights to the cash flows have expired. If yes, derecognise. If not, ask whether the entity has transferred the rights, or has assumed an obligation to pass the cash on under a pass-through arrangement. A pass-through arrangement qualifies only if all three conditions are met: the entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the asset, it is prohibited from selling or pledging the asset other than as security to the eventual recipients, and it must remit the cash it collects without material delay. Any other obligation to pass on cash does not qualify. If there is neither a transfer nor a qualifying pass-through, keep the asset.

If there is a transfer, look at risks and rewards. If substantially all are transferred, derecognise. If substantially all are retained, keep the asset in full. If neither, look at control. If the entity has lost control (the buyer can sell the asset freely to a third party without extra restrictions), derecognise. If it kept control, keep the asset to the extent of its continuing involvement.

Factoring is the classic exam case. If the receivables are sold with full recourse for bad debts, the seller still bears credit risk, so substantially all risks stay and the receivables remain. The cash received is shown as a liability (a secured borrowing). If the factor takes all the credit risk and late-payment risk without recourse, the receivables are normally derecognised and any difference is a gain or loss.

For financial liabilities, derecognise when the obligation is discharged, cancelled or expires. An exchange of debt with the same lender on substantially different terms is treated as extinguishing the old liability and recognising a new one. Terms are substantially different if the present value of cash flows under the new terms, discounted at the original effective interest rate and including fees paid net of fees received, differs by at least 10% from the present value of the remaining cash flows of the original liability. Otherwise it is a modification, not an extinguishment.

Key rules to remember

Gain or loss on derecognising an asset: Gain or loss = Carrying amount of asset − (Consideration received + any new asset obtained − any new liability assumed); Any cumulative amount previously in OCI for a debt asset at FVOCI is also reclassified to profit or loss. Present the net result in profit or loss.
Gain or loss on extinguishing a liability: Gain or loss = Carrying amount of liability extinguished − Consideration paid (including non-cash assets and new liabilities); Recognise in profit or loss.
10% test for liabilities: |PV of new cash flows − PV of old remaining cash flows| ÷ PV of old remaining cash flows ≥ 10% → substantial modification; Discount both at the original effective interest rate. Include fees paid or received in the new cash flows.
Asset derecognition sequence: Rights expired? → Transferred (or pass-through)? → Substantially all risks and rewards transferred? → If neither transferred nor retained, control lost?; Consolidate subsidiaries first, then apply the test at group level.
Non-substantial modification of a liability: New carrying amount = PV of modified cash flows at original effective interest rate; difference goes to profit or loss; Costs or fees incurred adjust the carrying amount and are amortised over the remaining term.

How to solve Derecognition of Financial Assets and Liabilities questions

Use this approach for any derecognition question, asset or liability.

1Identify the item: is it a financial asset (receivable, loan, investment) or a financial liability (loan, bond)?
2For an asset, check whether the contractual rights to cash flows have expired. If so, derecognise.
3If not, check for a transfer of rights or a qualifying pass-through arrangement. If there is none, keep the asset.
4Assess risks and rewards: credit risk, late payment risk, interest rate risk, prepayment risk. Use recourse, guarantees and repurchase terms as evidence.
5Conclude: substantially all transferred means derecognise; substantially all retained means keep the asset and recognise a liability for proceeds; otherwise test control and continuing involvement.
6For a liability, decide whether it is extinguished or modified. Run the 10% test using the original effective interest rate and include fees.
7Calculate the gain or loss, or the new carrying amount, and give the journal entries.
8Add commentary: state the effect on gearing, receivable days and ratios, and note any disclosure under IFRS 7.

Quickest way: Recourse and 10% shortcut

When to use it: Use when the question is a short scenario on factoring or a loan renegotiation and time is tight.

Factoring: ask who bears bad debts and late payment. Seller bears them: keep receivable, record a loan. Factor bears them: derecognise.
Check for repurchase options or guarantees. These point towards retained risk.
Loan change: calculate the PV of new cash flows at the original effective rate, add fees, compare with the old carrying amount.
Gap of 10% or more: write off old loan, record new at fair value, gain or loss in profit or loss.
Gap below 10%: keep the loan, adjust the carrying amount to the PV and take the difference to profit or loss.
Finish with one sentence on the effect on gearing or liquidity.

Common mistakes in Derecognition of Financial Assets and Liabilities

Derecognising receivables on any factoring deal because cash was received.
Students focus on legal sale and cash, not on who bears the risk.
Fix: Look at recourse, late payment risk and repurchase terms. If the seller keeps substantially all risks, keep the receivable and record a liability.
Discounting the 10% test at the new market rate.
Students use the current rate by habit from fair value work.
Fix: Discount both sets of cash flows at the original effective interest rate.
Leaving out fees in the 10% test.
Fees feel like separate expenses.
Fix: Include fees paid or received between borrower and lender in the new cash flows.
Skipping the control test when risks and rewards are neither transferred nor retained.
Students think the test is binary.
Fix: Use the full sequence: if neither, ask whether the transferee can sell the asset freely. If so, derecognise; if not, show continuing involvement.
Treating a substantial modification as a simple adjustment of the carrying amount.
Students confuse modification with extinguishment.
Fix: If the 10% test is met, derecognise the old liability, recognise the new at fair value and take the difference and any fees to profit or loss.
Giving calculations without comment on the financial statements.
Students treat the question as numeric only.
Fix: State the effect on gearing, receivables, profit and disclosures. Professional skills marks reward commentary.

Worked examples

Example 1

Alpha sells trade receivables with a carrying amount of $2,000,000 to a finance company for $1,800,000 cash. Alpha must reimburse the finance company for any amount not collected from customers. Advise on the accounting and give the entries.

Show the solution

Rights to cash flows have not expired, but they have been transferred legally.
Alpha reimburses all uncollected amounts, so it keeps substantially all credit risk. Risks and rewards are retained.
Therefore the receivables are not derecognised.
Record the cash as a liability: Dr Cash $1,800,000, Cr Liability to finance company $1,800,000.
The $200,000 difference is a financing cost, recognised over the period until collection, not a loss on sale.
Commentary: gearing is higher than if receivables were derecognised; disclose the transferred assets and associated liabilities under IFRS 7.

Answer: Keep receivables of $2,000,000 and recognise a $1,800,000 liability. The $200,000 is a finance cost over the term.

Example 2

Beta has a loan with a carrying amount of $1,000,000 at an effective interest rate of 8%. Under the old terms, Beta pays interest of $80,000 at the end of year 1 and $1,080,000 (principal of $1,000,000 plus interest of $80,000) at the end of year 2. The lender agrees to new terms: the repayment of the principal moves to the end of year 3, and the interest rate rises to 9% to compensate the lender. Beta pays $90,000 at the end of year 1, $90,000 at the end of year 2 and $1,090,000 at the end of year 3. There are no fees. Is the modification substantial?

Show the solution

Old PV at 8%: 80,000 ÷ 1.08 + 1,080,000 ÷ 1.08² = 74,074 + 925,926 = 1,000,000.
New cash flows at the original 8%: year 1 payment 90,000, year 2 payment 90,000, year 3 payment 1,090,000.
New PV: 90,000 ÷ 1.08 = 83,333; 90,000 ÷ 1.08² = 90,000 ÷ 1.1664 = 77,160; 1,090,000 ÷ 1.08³ = 1,090,000 ÷ 1.259712 = 865,277.
Total new PV = 1,025,771 (calculated on unrounded figures; the rounded items above add to 1,025,770, a $1 rounding difference).
Check: if the old 8% terms were simply extended by a year, the cash flows would be 80,000, 80,000 and 1,080,000, worth $1,000,000 at 8%. The new cash flows are each $10,000 higher than these (90,000, 90,000 and 1,090,000). The three-year annuity factor at 8% is 2.577097, so the extra is 10,000 × 2.577097 = 25,771.
Difference = 1,025,771 − 1,000,000 = 25,771. The new PV is higher because Beta now pays a higher rate, so Beta records a loss.
Percentage = 25,771 ÷ 1,000,000 = 2.6%, which is below 10%.
So this is not a substantial modification. The loan is not derecognised.
Adjust the carrying amount to $1,025,771: Dr Profit or loss $25,771, Cr Loan $25,771. Continue using the 8% rate as the effective interest rate.

Answer: Difference is about 2.6%, below 10%. Treat as a modification: increase the loan to about $1,025,771 and charge $25,771 to profit or loss.

Exam tips

Always state the test you apply: recourse for factoring, 10% for liabilities. Markers give marks for the criteria, not only the conclusion.
Use scenario facts: guarantees, repurchase options, late payment penalties and servicing arrangements show retained risk.
Show the 10% calculation with clear PV workings and a stated percentage, even if the answer is not close.
Add the effect on gearing, liquidity and covenants. These earn professional skills marks.
Link to ethics: off-balance-sheet factoring can be used to flatter gearing, so comment on whether the treatment is appropriate.

Practice questions from Financial instruments

Derecognition of Financial Assets and Liabilities: frequently asked questions

When can an entity derecognise a financial asset under IFRS 9?

When the contractual rights to the cash flows expire, or when the asset is transferred and substantially all risks and rewards pass. If neither substantially all is transferred nor retained, derecognise only if control has passed.

How does factoring with recourse affect the financial statements?

The receivables stay on the statement of financial position because the seller keeps the credit risk. The cash received is shown as a liability, and the difference between the receivable and proceeds is a finance cost.

What is the 10% test for a modified financial liability?

Compare the present value of the new cash flows, including fees and discounted at the original effective interest rate, with the present value of the remaining old cash flows. A difference of 10% or more means the old liability is extinguished and a new one recognised.

What happens if the modification is not substantial?

The liability is not derecognised. Recalculate the carrying amount as the PV of the modified cash flows at the original effective rate and take the difference to profit or loss.