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Entity A transfers 90% of the cash flows from a portfolio of receivables to Entity B but GUARANTEES to compensate B for any credit losses up to 8% of the principal. Under Ind AS 109, derecognition rules are applied to:
AOnly the 10% retained — that's what Entity A still owns
BOnly the 90% share — Entity A has clearly sold that portion
CThe entire receivable portfolio (not just the 90% share) — because the credit-loss guarantee breaks the "fully proportionate share" condition
DThe 8% guarantee portion only, with the rest derecognised in full
Answer & Solution
Correct answer: C. The entire receivable portfolio (not just the 90% share) — because the credit-loss guarantee breaks the "fully proportionate share" condition
When a transferor retains a guarantee that absorbs first losses (credit risk) on the transferred portion, the cash flows to the transferee are NOT a fully proportionate share — the transferor effectively keeps the credit risk. Derecognition rules must be applied to the asset IN ITS ENTIRETY, not to the 90%.
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