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CA Final · Financial Reporting · Classification and Measurement of Financial Assets and Financial Liabilities

Kaveri Textiles Ltd gave a guarantee on 1 April. Initial fair value (premium received) was ₹1,20,000 for a 4-year term; it recognises income on a straight-line basis under Ind AS 115 principles. At 31 March (year-end 1), the 12-month expected credit loss allowance on the guarantee is ₹25,000. The guarantee is not at FVTPL. What carrying amount of the guarantee liability should be reported at year-end 1?

The liability is ₹90,000. The initial amount of ₹1,20,000 less one year's straight-line income of ₹30,000 gives ₹90,000, which exceeds the ₹25,000 loss allowance. Ind AS 109 requires the higher of the two amounts for a financial guarantee contract not at FVTPL.

  1. A₹25,000
  2. B₹90,000Correct
  3. C₹1,20,000
  4. D₹1,15,000

Explanation

Amount initially recognised less cumulative income = 1,20,000 - (1,20,000/4 = 30,000) = 90,000. Loss allowance is 25,000. Higher is 90,000 under para 4.2.1(c). The ₹25,000 option ignores the 'higher of' test; ₹1,20,000 ignores income recognised.

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