When should an entity derecognize an asset according to IFRS?

The correct understanding of when an entity should derecognize an asset according to IFRS revolves around the concept of control and the transfer of risks and rewards associated with the asset. Derecognition occurs when an entity no longer controls the asset and has transferred the risks and rewards of ownership to another party. This means that if the economic benefits associated with the asset no longer flow to the entity, or if it is effectively no longer in charge of the asset, it should be removed from the financial statements.

This approach aligns with the substance over form principle in accounting, prioritizing the actual economic situation over mere legal titles or documentation.

In contrast, simply selling the asset, marking it as fully depreciated, or declining market value does not inherently indicate a loss of control or transfer of risks. An asset can still be owned and not derecognized even if it's fully depreciated or loses market value, as long as the entity retains control over it. Therefore, the focus is on the transfer of risks and control for the correct timing of derecognition.