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

Mahi Finance Ltd transfers a pool of loan receivables to a trust and receives cash. The transfer does not meet the derecognition criteria for the financial assets. The borrower of an unrelated liability is not involved. How does Ind AS 109 require Mahi to account for the transfer?

Mahi continues to recognise the transferred loan receivables and recognises a new liability relating to them for the cash received. Since the derecognition criteria are not met, the assets stay on the balance sheet and no derecognition gain or loss arises.

  1. ADerecognise the loans and recognise a gain equal to the cash received
  2. BNot derecognise the transferred assets, and recognise a new liability relating to the transferred assetsCorrect
  3. CDerecognise the loans and recognise a provision for the cash received
  4. DOffset the cash received against the loans and report net

Explanation

Where 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 those assets. Derecognising the loans or netting them off contradicts this, because the entity continues to recognise the assets.

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