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

Sundaram Textiles Ltd. holds a quoted bond classified at amortised cost and sells it through the stock exchange on a regular way basis. The trade is executed on 28 March, and the bond is delivered on 2 April. The reporting date is 31 March. The entity follows settlement date accounting for regular way sales. When is the bond derecognised and the gain or loss on disposal recognised?

The bond is derecognised on 2 April, the delivery date. Under settlement date accounting, derecognition and the gain or loss on disposal are recognised on the day the asset is delivered by the entity, not on the trade date or the reporting date.

  1. AOn 28 March, the trade date, because the sale was agreed then
  2. BOn 31 March, the reporting date, because the asset is sold before year end
  3. COn 2 April, the day the bond is delivered by the entityCorrect
  4. DOn the date the sale proceeds are budgeted in the cash forecast

Explanation

Under settlement date accounting, derecognition of the asset and recognition of any gain or loss on disposal occur on the day the asset is delivered by the entity. Here that is 2 April. The trade date applies only if the entity uses trade date accounting, which is not the policy here.

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