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

Sundaram Textiles Ltd issued a financial guarantee to a bank on behalf of a customer. The guarantee is not designated at fair value through profit or loss, and no transfer of a financial asset is involved. Under Ind AS 109, how should Sundaram subsequently measure the guarantee liability after initial recognition?

The guarantee is measured at the higher of the Section 5.5 loss allowance and the initially recognised amount less cumulative income recognised under Ind AS 115. This is the specific rule for issuers of financial guarantee contracts, overriding the default amortised cost measurement for financial liabilities.

  1. AAt amortised cost using the effective interest method
  2. BAt the higher of the loss allowance under Section 5.5 and the amount initially recognised less 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 the issuer of a financial guarantee contract, unless FVTPL or the transfer rules apply, to measure it at the higher of the loss allowance and the amount initially recognised less cumulative income recognised. Amortised cost is the default for other liabilities, and the 'lower of' option reverses the required test.

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