ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments
Kestrel Co sells receivables with a carrying amount of $10m to a bank for $9.6m. Kestrel guarantees to compensate the bank for any customer default, so it retains substantially all of the credit risk, which is the main risk of the receivables. What is the correct IFRS 9 treatment?
Kestrel should keep the receivables at $10m and recognise a $9.6m financial liability for the cash received. Because it guarantees against default and so keeps substantially all risks and rewards, the transfer does not qualify for derecognition, whatever the legal form of the sale.
- ADerecognise the receivables and recognise a $0.4m loss because legal title has passed
- BDerecognise $5m of the receivables and retain the remaining half as continuing involvement
- CContinue to recognise the receivables at $10m and recognise a $9.6m financial liability for the proceedsCorrect
- DDerecognise the receivables and recognise a $9.6m provision for the guarantee
Explanation
Kestrel has retained substantially all risks and rewards through the default guarantee, so the transfer fails derecognition. The asset stays at $10m and the cash received is shown as a liability of $9.6m. Legal title passing is not the test; risks and rewards are.
Did you get it right without looking?
One question tells you little. A timed set on Financial instruments shows your real accuracy, how long you take and where you lose marks.
More Financial instruments questions
- Omega Group transferred $20 million of trade receivables to a bank for cash of $18 million, but retained the risk of default and so continue…
- Dara plc holds a portfolio of trade receivables with no significant financing component. Under IFRS 9, which approach to measuring the loss …
- Zeta Co holds a contract to buy 10,000 tonnes of copper in six months at a fixed price of $8,000 per tonne. Zeta does not intend to take del…
- Using the Hale bonds, the liability component at 1 January 20X1 was $921,272 with an effective rate of 7% and a coupon of $40,000 paid on 31…
- Hale plc issues a convertible bond for $10m. It is convertible at the holder's option into a fixed number of Hale's own ordinary shares, and…
- Under IFRS 9, which of the following is a requirement for a hedging relationship to qualify for hedge accounting?