De-recognition of Financial Assets and Financial Liabilities Ind AS 32

Ind AS 32, “Financial Instruments: Presentation,” provides guidance on the presentation of financial instruments, particularly how to classify them as liabilities or equity, and the associated information that should be disclosed in the financial statements. While the standard covers the presentation aspect, the de-recognition of financial assets and liabilities is actually addressed in more detail under Ind AS 109, “Financial Instruments,” which builds on the principles set out in Ind AS 32.

The principles of de-recognition for both financial assets and liabilities under Ind AS 109 are centered on the transfer of risks and rewards for assets, and the extinguishment of obligations for liabilities. These principles ensure that the financial statements accurately reflect the entity’s control over financial assets and its obligations for financial liabilities at any point in time. Proper de-recognition accounting is crucial for presenting the true financial position and performance of an entity, ensuring transparency and reliability in financial reporting.

De-recognition of Financial Assets

De-recognition of a financial asset occurs when the rights to receive cash flows from the asset have expired, or the entity has transferred the asset and substantially all the risks and rewards of ownership. Ind AS 109 outlines the following criteria for de-recognition of a financial asset:

1. Transfer of Rights:

If an entity transfers its rights to receive cash flows from a financial asset, it evaluates whether it has transferred substantially all risks and rewards of ownership.

2. Retention of Risks and Rewards:

If the entity has retained substantially all risks and rewards of ownership of the financial asset, it continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

3. Partial Transfer:

If the entity has neither transferred nor retained substantially all the risks and rewards of ownership, it considers whether it has retained control of the asset. If it has not retained control, it de-recognizes the asset to the extent of the consideration received. If it has retained control, it continues to recognize the financial asset to the extent of its continuing involvement.

De-recognition of Financial Liabilities

A financial liability should be de-recognized when it is extinguished – that is, when the obligation specified in the contract is discharged, canceled, or expires. The key points regarding the de-recognition of financial liabilities in Ind AS 109 are:

1. Settlement:

An entity de-recognizes a financial liability from its balance sheet when the obligation under the liability is discharged or cancelled, or expires.

2. Exchange or Modification:

If an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability. The difference between the carrying amount of the original financial liability and the consideration paid is recognized in profit or loss.