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

Sundaram Textiles Ltd holds a 5-year bond of another company, classified at amortised cost. The bond reaches maturity and the issuer pays the full principal and final interest into Sundaram's bank account. The finance team asks when Ind AS 109 permits derecognition of a financial asset. Which statement is correct?

A financial asset is derecognised when, and only when, the contractual rights to its cash flows expire, or it is transferred in a way that qualifies for derecognition. A matured bond that has been fully paid meets the first test. Delinquency, impairment or an intention to sell does not.

  1. AOnly when the asset becomes more than 90 days past due
  2. BOnly when the entity has decided in its board meeting to sell the asset
  3. CWhen, and only when, the contractual rights to the cash flows expire, or the asset is transferred and the transfer qualifies for derecognitionCorrect
  4. DWhenever the asset is credit-impaired, because its carrying amount is then unrecoverable

Explanation

Ind AS 109 permits derecognition of a financial asset when, and only when, the contractual rights to its cash flows expire, or it is transferred and the transfer qualifies for derecognition. On maturity and full payment, Sundaram's rights expire, so the bond is derecognised. Being past due, impaired or intended for sale does not by itself trigger derecognition.

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