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

Pragati Foods Ltd holds trade receivables of Rs 80,00,000 and transfers them to a bank for Rs 72,00,000 cash. The arrangement is full recourse: Pragati must compensate the bank for any customer default. Pragati concludes that the derecognition criteria for financial assets are not met. How should Pragati account for the transaction?

Pragati keeps the receivables of Rs 80,00,000 on its balance sheet and records a liability of Rs 72,00,000 for the cash received. Where derecognition criteria are not met, the transferred assets are not derecognised and a new liability is recognised. No sale loss of Rs 8,00,000 arises.

  1. ADerecognise the receivables and recognise a loss of Rs 8,00,000
  2. BDerecognise the receivables and recognise a Rs 72,00,000 investment in the bank
  3. CContinue to recognise the receivables of Rs 80,00,000 and recognise a liability of Rs 72,00,000 for the cash receivedCorrect
  4. DContinue to recognise the receivables at Rs 72,00,000 with no liability

Explanation

If the derecognition criteria are not met, the transferred assets are not derecognised and the entity recognises a new liability relating to the transferred assets. The receivables stay at Rs 80,00,000, and the cash of Rs 72,00,000 is recorded as a liability. The Rs 8,00,000 difference is not a loss on sale. Derecognition with a loss would be correct only if the criteria were met.

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