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?

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.