A financial asset is derecognized (removed from an entity’s accounts/ financial statements) when the contractual rights to receive the cash flows from the asset expire or are transferred (along with the asset) to another party. For example, a loan would be derecognized when the entity has received its principal back (by means of settlement by the borrower) or it has waived the debt.
For derecognition of financial assets, an entity must conduct an asset transfer test and a risks/ rewards test (whether the entity has transferred substantially all the risks and rewards of ownership of the financial asset to another party). If both tests are passed, then the asset should be derecognized, otherwise it remains on the financial statements.
In case an entity only passes the asset transfer test, but not the risks and rewards test, it needs to examine whether it has retained control over the asset and, if so, to what extent it continues to be involved in that asset.
