ExpertMedium2 marksMultiple Choice
ACCA · Question 06 · Financial Instruments
Section A
ServeCo, a facilities management firm, factors $500,000 of its trade receivables to a bank for $470,000. The factoring agreement is 'without recourse', meaning the bank bears all the risk of bad debts. ServeCo will not be required to repay the bank if customers default. How should ServeCo account for this transaction under IFRS 9?
Section A
ServeCo, a facilities management firm, factors $500,000 of its trade receivables to a bank for $470,000. The factoring agreement is 'without recourse', meaning the bank bears all the risk of bad debts. ServeCo will not be required to repay the bank if customers default. How should ServeCo account for this transaction under IFRS 9?
Answer options:
A.
Keep the receivables on the statement of financial position and recognize a $470,000 loan
B.
Derecognize the receivables and recognize a $30,000 loss in profit or loss
C.
Derecognize the receivables and recognize the $30,000 as an intangible asset
D.
Keep the receivables but write them down to $470,000
How to approach this question
Assess whether the risks and rewards of ownership have transferred. 'Without recourse' means they have. Therefore, derecognize the asset and take any difference to P&L.
Full Answer
B.Derecognize the receivables and recognize a $30,000 loss in profit or loss✓ Correct
Under IFRS 9, a financial asset is derecognized when the contractual rights to the cash flows expire, or when the entity transfers the financial asset and substantially all the risks and rewards of ownership. 'Without recourse' means the bank absorbs the credit risk. ServeCo must derecognize the $500,000 receivables, recognize $470,000 cash, and record a $30,000 loss on derecognition in profit or loss.
Common mistakes
Confusing 'without recourse' (derecognize) with 'with recourse' (treat as a secured loan).
Practice the full ACCA FR — Financial Reporting Practice Exam 2
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