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An entity sells short-term receivables to a transferee but guarantees to compensate the transferee for ANY credit losses likely to occur. Under Ind AS 109, this transaction:
AResults in retention of substantially all risks and rewards (credit risk is the dominant risk in short-term receivables) — derecognition is NOT permitted
BQualifies for partial derecognition equal to the non-guaranteed portion
CFalls outside Ind AS 109 because of the credit guarantee
DQualifies for derecognition because legal title has passed
Answer & Solution
Correct answer: A. Results in retention of substantially all risks and rewards (credit risk is the dominant risk in short-term receivables) — derecognition is NOT permitted
In a short-term receivables portfolio, CREDIT RISK is the dominant risk. A full-recourse guarantee means the transferor still bears that risk — substantially all risks and rewards are retained. Derecognition is denied. The receivable stays on balance sheet, and the cash received is treated as borrowing. (Contrast: a non-recourse sale of receivables would pass the risks-rewards test and qualify for derecognition.)
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