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

Sundaram Finance Ltd issues a financial guarantee contract to a bank for a loan taken by its associate. The contract is not designated at fair value through profit or loss and does not arise from a failed derecognition transfer. How should the issuer subsequently measure it under Ind AS 109?

The issuer measures the guarantee at the higher of two amounts: the Section 5.5 loss allowance, and the amount initially recognised less, where appropriate, cumulative income recognised under Ind AS 115. This is the specific exception in paragraph 4.2.1(c) to the default amortised cost measurement for financial liabilities.

  1. AAt amortised cost using the effective interest method only
  2. BAt the higher of the loss allowance under Section 5.5 and the amount initially recognised less, when appropriate, cumulative income recognised under Ind AS 115Correct
  3. CAt the lower of the loss allowance and the amount initially recognised
  4. DAlways at fair value through profit or loss

Explanation

Paragraph 4.2.1(c) requires an issuer of a financial guarantee contract, unless it is at FVTPL or arises from failed derecognition, to measure it at the higher of the loss allowance and the amount initially recognised less cumulative income under Ind AS 115. The 'lower of' option reverses the rule. Amortised cost is the general default for other liabilities, not for guarantees.

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