An entity will derecognize a financial asset when the contractual rights to the cash flows from the financial asset expire. Contractual rights to the cash flows can expire in any of the following two ways:
- Term of the financial asset has matured
- Financial asset has been sold and the contractual rights to the cash flows have been transferred
Gain or loss on derecognition of financial assets
On the disposal date, difference between cash received and carrying amount of a financial asset is recorded as gain or loss on the disposal of the financial asset.
Let’s see an example of disposal of a financial asset.
Example – Derecognition of financial assets
On 1 January 20X1, XYZ Company invested $200,000 in debentures carrying interest rate of 6% per annum. Interest is receivable in arrears. Commission of $4,000 was paid to a dealer who arranged this investment. As per contractual terms, the debentures will be redeemed at a premium of $10,000 over their nominal value. Term of the debentures is four years and will be redeemed on 31 December 20×4.
Fair value of the financial asset on 31 December 20×1 is $212,000. On 31 December 20×2, the company sold the debentures for $215,000.
Calculate the gain or loss on disposal of debentures, if the company’s business model is neither “hold to collect” nor “hold to collect and sell”?
As the company’s business model is neither “hold to collect” nor “hold to collect and sell”, therefore, it cannot be classified as financial asset at amortized cost or FVOCI. The investment in debentures will be classified as financial asset at fair value through profit or loss (FVTPL).
On 1 January 20×1, financial asset will be recognized at its fair value. Transaction costs of $4,000 are directly charged as expense in the statement of profit or loss.
Financial asset = $200,000
Subsequent measurement of the financial asset is shown below.