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

Mahanadi Traders Ltd sells trade receivables to a financier under an arrangement where it transfers the receivables, but the derecognition criteria for financial assets are not met. Under this arrangement, the entity receives cash from the financier. Which treatment is consistent with the standard?

The entity continues to recognise the transferred receivables and recognises a new liability relating to them for the cash received. When the derecognition criteria are not met, the transferred assets are not derecognised, so treating the transfer as a sale would be incorrect.

  1. ADerecognise the receivables and recognise a gain equal to cash received
  2. BContinue to recognise the transferred receivables and recognise a new liability relating to the transferred assetsCorrect
  3. CDerecognise the receivables and recognise no liability
  4. DOffset the cash received against the receivables and disclose nothing

Explanation

If the derecognition criteria are not met for the financial assets transferred, the transferred assets are not derecognised, and the entity recognises a new liability relating to the transferred assets. Hence the receivables remain on the balance sheet and the cash received is shown as a liability. Option C is wrong because derecognition is only allowed when the criteria are met.

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