Definition: Derecognition is the removal of a previously recognized financial asset or liability from an entity's balance sheet. A financial asset should be derecognized if either the entity's contractual rights to the asset's cash flows have expired or the asset has been transferred to a third party (along with the risks and rewards of ownership). If the risks and rewards of ownership have not passed to the buyer, then the selling entity must still recognize the entire financial asset and treat any consideration received as a liability.
Part of the year-end closing procedure may include a step to review all fixed assets currently on the books to see if any should be derecognized. Otherwise, an excessive amount of accumulated depreciation may clutter the balance sheet.