ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments
Omega Group transferred $20 million of trade receivables to a bank for cash of $18 million, but retained the risk of default and so continues to recognise the receivables in full. The finance director proposes to describe the cash received only as 'other income' and omit any note. Which response is correct under IFRS 7 and ethical reporting principles?
The proposal is not acceptable. IFRS 7 requires disclosure for transferred assets that are not derecognised, covering their nature, retained risks and the associated liabilities. Cash received is effectively a financing liability, so calling it income misleads users and breaches professional integrity.
- AAcceptable, because the assets remain recognised so no transfer disclosure is needed
- BAcceptable if the amount is below overall materiality for the group
- CNot acceptable; IFRS 7 requires disclosure of transferred assets not derecognised, including their nature, risks retained and the carrying amount of associated liabilitiesCorrect
- DNot acceptable only if the bank is a related party
Explanation
Where transferred financial assets are not derecognised, IFRS 7 requires disclosure of their nature, the risks and rewards retained, and the carrying amounts of the assets and associated liabilities. Treating the cash as income misrepresents a financing arrangement, raising integrity concerns under the ACCA ethical code. Retaining the assets does not remove disclosure.
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