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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 associate. At initial recognition, the guarantee was measured at its fair value of Rs 6,00,000. The guarantee is not designated at fair value through profit or loss. Under Ind AS 109, how must Sagar Textiles measure the guarantee after initial recognition?

The issuer measures the guarantee at the higher of two amounts: the loss allowance determined under Section 5.5, and the amount initially recognised less the cumulative income recognised under Ind AS 115. It is not measured at the lower amount, at amortised cost, or at fair value through profit or loss.

  1. AAt the higher of the loss allowance under Section 5.5 and the amount initially recognised less 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 at each reporting date
  4. DAt amortised cost using the effective interest method

Explanation

Para 4.2.1(c) requires an issuer of a financial guarantee contract, unless it is at FVTPL or arises from a failed derecognition, to measure it at the higher of the loss allowance and the amount initially recognised less cumulative income recognised under Ind AS 115. The 'lower of' option reverses the rule.

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