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CA Final · Financial Reporting · Recognition and Derecognition of Financial Instruments

Godavari Pharma Ltd sells trade receivables with a carrying amount of Rs 50 lakh to a bank for Rs 45 lakh cash. The sale is with full recourse: Godavari must reimburse the bank for any customer default and for late payment. Godavari therefore retains substantially all the risks and rewards of the receivables, and the derecognition criteria are not met. Which accounting at the transfer date is correct?

Godavari keeps the receivables at Rs 50 lakh and recognises a Rs 45 lakh financial liability for the cash received, with no gain or loss at transfer. Because the derecognition criteria are not met, the assets stay on the balance sheet and a new liability is recognised against them.

  1. ADerecognise the receivables and recognise a loss of Rs 5 lakh
  2. BContinue to recognise the receivables at Rs 50 lakh and recognise a financial liability of Rs 45 lakh, with no gain or loss on transferCorrect
  3. CDerecognise the receivables and recognise a Rs 45 lakh provision for recourse
  4. DContinue to recognise the receivables at Rs 50 lakh and recognise a financial liability of Rs 50 lakh

Explanation

When the derecognition criteria are not met, the transferred assets are not derecognised and the entity recognises a new liability relating to the transferred assets. The liability reflects the consideration received, Rs 45 lakh. Cash rises by 45 and the liability rises by 45, so no gain or loss arises. Recognising a Rs 5 lakh loss assumes derecognition, which is not permitted here.

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