Question 4b

Rachel Bhd held a portfolio of trade receivables with a carrying amount of RM8 million on 30 June 2021. At that date, the entity entered into a factoring agreement with a bank whereby Rachel Bhd has transferred the receivables in exchange for RM7.2 million in cash. Rachel Bhd has agreed to reimburse the bank for any shortfall between the amount collected and RM7.2 million. Once the receivables have been collected, any amounts above RM7.2 million less interest on this amount, will be repaid to Rachel Bhd. The directors of Rachel Bhd believe that these trade receivables should be derecognized.

Required:

Discuss the appropriate accounting treatment of this transaction in the financial statements for the year ended 30 June 2021, and evaluate this treatment in the context of Conceptual Framework for Financial Reporting.