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

Godavari Traders Ltd transfers trade receivables with a carrying amount of Rs 10,00,000 to a bank for Rs 9,40,000 cash. The bank has full recourse to Godavari for any customer default, so Godavari retains substantially all the risks and rewards. The derecognition criteria for the transfer are not met. Which accounting is correct at the date of transfer?

Godavari keeps the receivables at Rs 10,00,000 and recognises a liability of Rs 9,40,000 for the cash received, with no gain or loss at the transfer date. Because the derecognition criteria are not met, the transferred assets stay on the balance sheet and a new liability is recognised.

  1. ADerecognise the receivables and recognise a loss of Rs 60,000 in profit or loss
  2. BContinue to recognise the receivables of Rs 10,00,000 and recognise a liability of Rs 9,40,000, with no gain or loss at transferCorrect
  3. CContinue to recognise the receivables and recognise a liability of Rs 10,00,000, with Rs 60,000 expensed at transfer
  4. DDerecognise the receivables and recognise a provision of Rs 10,00,000 for the recourse obligation

Explanation

A financial asset is derecognised only if the transfer qualifies under the derecognition criteria. If those criteria are not met, the transferred assets are not derecognised and the entity recognises a new liability relating to the transferred assets. Cash of Rs 9,40,000 is received, so the liability is Rs 9,40,000 and the receivables stay at Rs 10,00,000. Nothing is recognised as a loss at transfer, so derecognition with a Rs 60,000 loss is wrong.

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