Derecognition under Ind explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Derecognition decides when a financial asset or liability leaves the balance sheet. The questions come up in every receivable factoring, bill discounting or securitisation, and every time a bank loan is renegotiated. Ind AS 109 gives a fixed sequence for assets and a separate, shorter test for liabilities.
A financial asset is removed when the contractual rights to its cash flows expire, or when it is transferred and substantially all risks and rewards go with it. If neither all nor none of the risks and rewards moved, the question is control; if control is kept, the asset stays only to the extent of continuing involvement. A financial liability is removed only when it is extinguished, and a substantial change in terms (at least a 10 per cent difference in present value) counts as extinguishment and a new liability.
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). Amendments notified after 1 April 2025 are not reflected in this article; check mca.gov.in before applying it to a later period.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| Ind AS 109, 3.2.1 | Apply the asset derecognition rules at consolidated level, after consolidating subsidiaries | A group assesses a transfer once, not company by company |
| 3.2.2 | Decide whether the test applies to a part or the whole asset | A part qualifies only if it is specific cash flows or a fully proportionate share |
| 3.2.3 | Derecognise only when rights expire or a qualifying transfer occurs | The two routes to removal |
| 3.2.4 and 3.2.5 | A transfer is a transfer of rights, or a pass-through meeting three conditions | A collection agent arrangement can qualify |
| 3.2.6 to 3.2.8 | Test risks and rewards, by comparing exposure to variability in present value of cash flows before and after | Often obvious; sometimes needs computation |
| 3.2.9 | Control rests on the transferee's practical ability to sell the asset alone | If the transferee can sell unilaterally, control is gone |
| 3.2.12 | Difference between carrying amount and consideration goes to profit or loss | The gain or loss on sale |
| 3.2.15 | If risks and rewards are retained, keep the asset and record a liability for the consideration | Recourse factoring is a borrowing |
| 3.2.16 and 3.2.17 | Continuing involvement: asset and associated liability measured on the rights and obligations kept | For example the lower of the asset and the guarantee amount |
| 3.2.22 | Do not offset the asset and the associated liability | Gross presentation |
| 3.3.1 to 3.3.3 and B3.3.6 | Liability leaves only on extinguishment; terms are substantially different at 10 per cent or more | The 10 per cent test uses the original effective rate |
The sequence for financial assets
First apply the rules at group level and decide whether you are looking at the whole asset or a part (3.2.1, 3.2.2). Then ask whether the rights to cash have expired (3.2.3(a)). If not, ask whether you have transferred them or have passed them on under the three conditions of paragraph 3.2.5: no obligation to pay beyond what you collect, a bar on selling or pledging the asset, and prompt remittance without reinvesting. Then comes the risks and rewards test. Where substantially all are transferred, derecognise. Where substantially all are kept, do not. In between, ask about control (3.2.6). The standard's decision chart (B3.2.1) follows this same order.
Risk and reward is measured by exposure to the variability of the present value of the net cash flows, at an appropriate current market rate, with more weight on likelier outcomes (3.2.7, 3.2.8). A sale with a fixed-price buy-back keeps the exposure; a sale with only a buy-back at fair value does not.
When an asset is derecognised in full, gain or loss is the difference between carrying amount and consideration, including any new asset obtained and less any new liability assumed (3.2.12). A retained servicing right creates a servicing asset or liability (3.2.10). If the asset stays because of recourse, the entity records a liability for the money received and shows income and expense on each, without offset (3.2.15, 3.2.22). Where it neither transfers nor keeps all risks and rewards but keeps control, continuing involvement applies (3.2.16 to 3.2.18).
Financial liabilities
A liability is removed only when the obligation is discharged, cancelled or expires (3.3.1). Paying a third party to take on the debt is not enough without a legal release (B3.3.3, B3.3.4). Under 3.3.2, a substantial modification counts as extinguishment, whether or not the borrower is in difficulty. Paragraph B3.3.6 sets the test: discounted at the original effective interest rate, the present value of the new cash flows, including fees paid net of fees received, is compared with that of the remaining original cash flows; a difference of at least 10 per cent is substantial. In an extinguishment, costs and fees go into the gain or loss; otherwise they adjust the carrying amount and are amortised (B3.3.6A). A modification that is not an extinguishment is recalculated at the original effective rate, and the adjustment goes to profit or loss (B5.4.6).
Debt renegotiations and bills discounting usually reach the finance team just before the year-end. If you want a second view of your conclusions, our virtual CFO services team can review the contracts and the workings with you.
Worked example
The entity and all figures in this example are invented for illustration. Amounts are in ₹ lakh and rounded to two decimals; the effective rate is assumed, for arithmetic only.
Part A: factoring twice. Ghaggar Textiles Limited factors two lots of trade receivables.
Lot 1, without recourse. Receivables of ₹200.00 lakh are sold to a factor for ₹190.00 lakh cash. The factor takes the full credit and late-payment risk, and Ghaggar has no buy-back and no guarantee. Substantially all risks and rewards pass (3.2.6(a)), so the receivables are derecognised and the loss is 200.00 - 190.00 = ₹10.00 lakh (3.2.12).
Lot 2, with full recourse. Receivables of ₹150.00 lakh are assigned for an advance of ₹142.50 lakh. Ghaggar must make good any customer default, so it keeps the credit risk and its exposure is unchanged (3.2.7). The receivables stay and a borrowing of ₹142.50 lakh is recorded (3.2.15). When customers pay ₹150.00 lakh, Ghaggar repays the advance with ₹3.00 lakh of factoring charges.
| Particulars | Debit (₹ lakh) | Credit (₹ lakh) |
|---|---|---|
| Lot 1: Bank | 190.00 | |
| Loss on sale of receivables (profit or loss) | 10.00 | |
| To Trade receivables | 200.00 | |
| Lot 2 at transfer: Bank | 142.50 | |
| To Borrowing from factor | 142.50 | |
| Lot 2 at collection: Bank | 150.00 | |
| To Trade receivables | 150.00 | |
| Borrowing from factor | 142.50 | |
| Finance cost (profit or loss) | 3.00 | |
| To Bank | 145.50 |
Check: Lot 1 debits 190.00 + 10.00 = 200.00. For Lot 2, cash in is 142.50 + 150.00 = 292.50 and cash out is 145.50, a net 147.00; that is the receivables of 150.00 less charges of 3.00, which equals the finance cost.
Part B: renegotiating a term loan. Krishna Polymers Limited has a term loan with a carrying amount of ₹500.00 lakh. Three years remain, with interest of 10 per cent (₹50.00 lakh) paid yearly and the principal at the end of year 3. The effective rate is 10 per cent, so the present value of the remaining cash flows at that rate is ₹500.00 lakh. The lender offers new terms: interest of 8 per cent (₹40.00 lakh) for five years from now, principal of ₹500.00 lakh at the end of year 5, and no fee.
| Year | New cash flow | Discount factor at 10% | Present value |
|---|---|---|---|
| 1 | 40.00 | 0.9091 | 36.36 |
| 2 | 40.00 | 0.8264 | 33.06 |
| 3 | 40.00 | 0.7513 | 30.05 |
| 4 | 40.00 | 0.6830 | 27.32 |
| 5 | 540.00 | 0.6209 | 335.30 |
| Total | 462.09 |
Check: 36.36 + 33.06 + 30.05 + 27.32 + 335.30 = 462.09. Each present value is the cash flow divided by 1.10 to the power of the year, rounded, so it differs slightly from cash flow times the four-place factor shown.
Test (B3.3.6): (500.00 - 462.09) ÷ 500.00 = 7.58 per cent, below 10 per cent. The terms are not substantially different, so this is a modification, not an extinguishment. The liability is recalculated at 462.09 and the gain, 500.00 - 462.09 = ₹37.91 lakh, goes to profit or loss (B5.4.6). Had a fee been paid to the lender, it would enter the test (B3.3.6) and then adjust the carrying amount (B3.3.6A).
| Particulars | Debit (₹ lakh) | Credit (₹ lakh) |
|---|---|---|
| Term loan | 37.91 | |
| To Gain on modification of borrowing (profit or loss) | 37.91 |
The liability then unwinds at the original rate:
| Year | Opening | Interest at 10% | Cash paid | Closing |
|---|---|---|---|---|
| 1 | 462.09 | 46.21 | 40.00 | 468.30 |
| 2 | 468.30 | 46.83 | 40.00 | 475.13 |
| 3 | 475.13 | 47.51 | 40.00 | 482.64 |
| 4 | 482.64 | 48.26 | 40.00 | 490.90 |
| 5 | 490.90 | 49.10 | 540.00 | Nil |
Check: year 5 interest is the balancing figure (540.00 - 490.90); total interest 46.21 + 46.83 + 47.51 + 48.26 + 49.10 = 237.91 = total cash 700.00 less 462.09.
A harder concession. If the lender had instead cut interest to 6 per cent (₹30.00 lakh) for five years, the present value would be 30.00 x 3.7908 + 500.00 x 0.6209 = ₹424.18 lakh (on unrounded factors), a difference of 15.16 per cent. That is at least 10 per cent, so the original loan is extinguished and a new liability recognised; the difference between the old carrying amount and the new liability's initial amount goes to profit or loss together with any fees (3.3.2, 3.3.3, B3.3.6A).
Presentation and disclosure
Present the asset and its associated liability without offset (3.2.22). For Division III line items on factoring and bills see the NBFC post on loan sub-heads under Division III; our Ind AS 109 summary covers the standard in outline. The transferred-asset disclosures are in Ind AS 107. Related ITFG clarifications are digested in our ITFG note on Ind AS 109 and 107.
Common mistakes
- Assessing a transfer at single-company level in a group (3.2.1).
- Treating a recourse arrangement as a sale because the legal form says "sale" (3.2.7, 3.2.15).
- Applying the 10 per cent test to a different discount rate than the original effective rate (B3.3.6).
- Leaving fees out of the test, or expensing fees on a non-substantial modification (B3.3.6, B3.3.6A).
- Offsetting a retained receivable against the factor's advance (3.2.22).
Need help with derecognition?
Factoring agreements, bill discounting lines and loan reschedulings need a written conclusion that an auditor can follow. Our virtual CFO services team can map each contract to the risks and rewards, control and 10 per cent tests, and prepare the entries with your finance team.
Key takeaways
- An asset leaves the balance sheet on expiry of rights or on a qualifying transfer.
- Test risks and rewards first, then control; continuing involvement applies when control is kept.
- Recourse factoring is a borrowing; the receivable stays gross.
- A liability changes only on extinguishment; the 10 per cent test uses the original effective rate.
- A non-substantial modification gives a gain or loss at the original rate through profit or loss.
Read next
- Classification and measurement of financial assets under Ind AS 109
- Expected credit loss under Ind AS 109: three stages and provision matrix
- ITFG clarifications on Ind AS 109 and 107: financial guarantees, loans, security deposits and processing fees
- Loan sub-heads under Division III: bills, term loans, leasing, factoring
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.