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

Kaveri Textiles Ltd holds a trade receivable from a customer. The customer pays the full amount due on the contractual date, and Kaveri receives the cash. Under Ind AS 109, when may an entity derecognise a financial asset?

A financial asset is derecognised when, and only when, the contractual rights to its cash flows expire, or the entity transfers it and the transfer qualifies for derecognition. Management intent, the age of the asset or a matching liability do not trigger derecognition under Ind AS 109.

  1. AWhen, and only when, the contractual rights to the cash flows expire, or it transfers the asset and the transfer qualifies for derecognitionCorrect
  2. BWhenever management decides the asset is no longer needed in the business
  3. CWhen the asset has been outstanding for more than one financial year
  4. DWhen the entity has recognised a matching liability for the same amount

Explanation

Ind AS 109 permits derecognition of a financial asset when, and only when, the contractual rights to its cash flows expire, or the entity transfers the asset and the transfer qualifies for derecognition. Kaveri's receivable is settled in full, so the rights expire and it is derecognised. Management intention, age of the asset or recognising a liability are not derecognition tests.

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