DipIFR Syllabus B. Elements of financial statements - De-recognition of Financial Instruments - Notes ^{11 / 12}

De-recognition of a financial asset occurs where:

1. The contractual rights to the cash flows of the financial asset have expired (debtor pays), or

2. The financial asset has been transferred (e.g., sold) including the risks and rewards.

Illustration 1

A company sells an investment in shares, but retains the right to repurchase the shares at any time at a price equal to their current fair value.

• The company should de-recognise the asset

Illustration 2

A company sells an investment in shares and enters into an agreement whereby the buyer will return any increases in value to the company and the company will pay the buyer interest plus compensation for any decrease in the value of the investment.

• The company should not de-recognise the investment as it has retained substantially all the risks and rewards

The risks and rewards transfer does not apply for financial liabilities. Rather, the focus is on whether the financial liability has been extinguished.