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CA Final · Financial Reporting · Classification and Measurement of Financial Assets and Financial Liabilities

Sagar Textiles Ltd issued a financial guarantee on a bank loan taken by its subsidiary. The guarantee is not designated at fair value through profit or loss and does not arise from a failed derecognition transfer. Under Ind AS 109, how is the guarantee measured after initial recognition?

The issuer measures the guarantee at the higher of the Section 5.5 loss allowance and the amount initially recognised less, where appropriate, cumulative income recognised under Ind AS 115. This applies unless the guarantee is designated at FVTPL or arises from a failed derecognition transfer.

  1. AAt the higher of the loss allowance under Section 5.5 and the amount initially recognised less, where appropriate, cumulative income recognised under Ind AS 115Correct
  2. BAt the lower of the loss allowance under Section 5.5 and the amount initially recognised less cumulative income recognised
  3. CAt fair value through profit or loss in every case
  4. DAt amortised cost using the effective interest method on the guaranteed loan amount

Explanation

Paragraph 4.2.1(c) requires an issuer of a financial guarantee contract, unless it is at FVTPL or arises from a failed transfer, to measure it subsequently at the higher of the loss allowance and the unamortised initial amount. The 'lower of' option reverses the rule. FVTPL applies only if designated.

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