broad overview of accounting standard (as) 30 financial instruments : recognition & measurement
TRANSCRIPT
Broad Overview of Accounting Standard
(AS) 30 Financial Instruments :
Recognition & Measurement
Prepared by –
Navin Jain
Nidhi Sapra
Suyog Desarda
Contents
•Impact
•Scope
•Objective
•Definitions
•Financial Assets
•Hedging
•Financial Liabilities
•Gains and Losses
•Impairment
Impact
• Withdrawal of
– AS 4 – contingencies
– AS 11 – forward exchange contracts
– AS 13 – except investment properties
Scope
• Excludes items which are covered – By existing standards
• As 14• As 15• As 19• As 21, 23 & 27• As 29
Objective
• Establish principles for recognising & measuring
– Financial assets
– Financial liabilities
– Some contracts for non-financial items
Definition• Financial instrument is a CONTRACT giving rise to
Financial asset
Financial liabilityor
Equity instrument
Definition
• Equity instrument
– Contract evidencing residual interest in the assets of an entity after deducting all its liabilities
• Preference shares under section 80 will be ‘financial liability’
Examples of Financial Assets & Financial Liabilities
• Financial assets– Investments
– Debtors
– Cash & bank
– Loans & advances (except prepaid exps)
• Financial liabilities– Creditors
– Provisions (except income tax)
– Borrowings (including sales tax deferrals)
Definition
• Derivative instrument– Financial instrument / contract
• Value changes in response to change in specified interest rate, financial instrument price, commodity price, foreign exchange rate, credit rating or credit index OR non-financial variable which is not specific to a party to the contract
• No initial net investment / smaller investment• Settled at a future date
Examples of Derivative
• Financial options
• Forwards and futures
• Interest rate swaps
Financial Assets - Categories
• Fair value through profit or loss (FVTPL)
• Held to maturity (HTM)
• Loans & receivables (L&R)
• Available for sale (AFS)
Fair Value Concept
• Valuation techniques
– Recent arm’s length market transactions
– Reference to current fair value of another instrument
– Discounted cash flow analysis
– Option pricing model
Financial Assets - FVTPL
• Held for trading
• Reduces accounting mismatch
• Documented risk management / investment strategy
Financial Assets - FVTPL
• Held for trading
– Acquired for purpose of selling
– Evidence of recent actual pattern of short term profit taking
– Derivative (except hedging instrument)
Financial Assets - FVTPL
• Reduces accounting mismatch.– An instrument is said to reduce accounting
mismatch when it eliminates or significantly reduces a measurement inconsistency.
• Documented risk management / investment strategy.– A part of group of financial assets managed and
evaluated on fair value basis according to risk management or investment strategy of entity.
Embedded Derivative
• When a non-derivative (host) contract contains derivative (embedded) contract, it should be accounted separately, only if– Economic characteristics & risks are not closely
related to the host contract– Separate instrument with same terms would meet
the definition of derivative– Hybrid instrument is not measured at fair value
through profit or loss
Financial Assets - FVTPL
• Initial measurement
– At fair value on the date of acquisition
• Reclassification
– Not allowed, in OR out
• Subsequent measurement
– At fair value
Financial Assets - HTM
• Non-derivatives with fixed or determinable payments and fixed maturity
• Entity has positive intention and ability to hold to maturity
Financial Assets - HTM• Initial measurement
– At fair value +/- Transaction cost
• Reclassification– In case of change in intention / ability – Sale of more than insignificant amount
• Reclassify as available for sale for current year• Banned from using the category for next 2
financial years
Financial Assets - HTM
• Subsequent measurement
– At amortised cost using effective interest method
Examples of HTM
• Debt instruments
• Redeemable preference shares
Financial Assets - L&R
• Non-derivatives with fixed or determinable payments and not quoted in an active market
– Not allowed in case of doubt on recoverability of substantially all of its initial investment (in which case classified as AFS)
Financial Assets - L&R
• Initial measurement
– Long term
• At fair value
+/- Transaction cost
– Short term
• At invoice amount
Subsequent measurement
Long term
Amortised cost using effective interest method
Short term
At invoice amount
Financial Assets - AFS
• None of the three earlier classifications
Financial Assets - AFS
• Initial measurement
– At fair value
+/- Transaction cost
• Subsequent measurement
– At fair value
Financial Assets - AFS
• Investments in equity instruments with no quoted market price in active market & fair value cannot be reliably measured
– Initial measurement• At cost
– Subsequent measurement• At cost
Financial Assets
• Derecognition – entirely if– Contractual right to cash flows expire– Transfer of contractual right to cash flows– Assume contractual obligation to pay cash flows
• Payment of equivalent amount of collection• Selling / pledging of original asset prohibited• Remit collection without delay, interest earned,
if any, to be passed on
Financial Assets
• Derecognition – partly, only if transfer of
– Specifically identified cash flows
– Fully proportionate share of cash flows
– Fully proportionate share of specifically identified cash flows
Summary of Classification – Financial Assets
Category Description
FVTPL Acquired for the purpose of trading / profit from short term fluctuations
HTM Fixed maturity investments with intention and ability to hold to maturity
L&R Created by providing money, goods or services
AFS Equity investments
- with quoted price or
- unquoted but able to estimate fair value
Equity investments with no quoted price and entity is not able to estimate FV
Hedging
• Expected to be highly effective
• Reliable measurement of effectiveness
• Effective throughout the period of designation
• Forecast transaction should be highly probable (cash flow hedge)
Hedging
• Fair value hedge
• Cash flow hedge
• Net investment in non-integral foreign operation
Examples
• Fair value hedge– A company purchases bond with a fixed interest rate. In
order to offset the risk of decline in fair value of bond, the company enters into an variable interest rate swap
• Cash flow hedge– A company expects to purchase a fixed asset in a years
time for X euros. In order to offset the risk of increase in euro rate, the company enters into a forward contract to purchase X euros for a fixed amount
Hedging – Derecognition
• Fair value hedge– Hedge instrument expires
• Cash flow hedge– Forecast transaction not expected to occur
• Net investment in non-integral foreign operation– On disposal
Summing up – Financial Assets
Financial Liabilities – Categories
• Fair value through profit or loss (FVTPL).– Held for trading.
• Derivative liabilities not accounted for hedging instruments.
• Obligations to deliver securities or other financial assets by short seller.
• Financial liabilities incurred with the intention to repurchase them.
– Designated.• Designated on initial recognition.
• Irrevocable.
• Others (O).
Financial Liabilities – FVTPL
• Initial measurement
– At fair value on the date of issue
• Reclassification
– Not allowed – in OR out
• Subsequent measurement
– At fair value
Financial Liabilities – FVTPL (Exception)
• Derivative liability required to be settled by delivery of an equity instrument with no quoted market price in active market & fair value cannot be reliably measured– Initial measurement
• At cost– Subsequent measurement
• At cost
Financial Liabilities – Others
• Initial measurement– At fair value
+/- Transaction cost
• Subsequent measurement, higher of– Amount determined as per AS 29– Amount initially recognised less cumulative
amortisation recognised, if any
Financial Liabilities – Others
• Recognition criteria under AS 29
– Present obligation as a result of past event
– Probable outflow of resources
– Reliable estimate of obligation
Financial Liabilities
• Derecognition– Obligation is discharged / cancelled / expired
(partly / entirely)– Substantial modifications in terms of the contract
of the existing liability
Remeasure
• If a reliable measure becomes available subsequently where it was required, then the financial instrument should be remeasured
Gains & Losses
• Fair value through profit or loss
– To be taken to P&L
• Available for sale
– Recognised in appropriate equity account (except impairment impact + foreign exchange impact) until de-recognition, at which time cumulatively will be taken to P&L
– Interest under effective interest method & dividend from investments are taken to P&L
Gains & Losses• If it becomes appropriate to carry at cost / amortised cost what
was being carried at fair value– In case of fixed maturity
• The gain / loss as well as the difference between maturity amount and new amortised cost should be amortised using effective interest method over the remaining life of held to maturity investment
– In case of no fixed maturity• The gain / loss should remain in equity account until
derecognised– In both the cases if subsequently impaired, any previous gain /
loss recognised in equity account is taken to P&L
Gains & Losses
• Amortised cost
– Taken to P&L when derecognised / impaired
Hedging – Gains & Losses
• Fair value hedge
– P&L
• Cash flow hedge
– Equity
• Net investment in non-integral foreign operation
– Equity
Impairment
• Assess at each balance sheet date objective evidence
– Observable data
• Significant financial difficulty of the issuer
• Breach of contract
• Active market no longer exists
Impairment• Amortised cost
– Difference between carrying amount & present value of estimated future cash flows discounted at original effective interest rate
• Original invoice amount
– Difference between carrying amount & undiscounted estimated future cash flows
• Subsequent reversal should not exceed the value before impairment in both cases
Impairment
• Cost
– Difference between carrying amount & present value of estimated future cash flows discounted at current market rate of return for similar assets
– Subsequent reversal not permitted (since initial measurement at cost was an exception)
Impairment
• Available for sale
– Difference between cost & current fair value should be removed from equity account and taken to P&L
– Subsequent reversal allowed equal to the amount taken to P&L. However, no reversal permitted on equity instruments
Summing up Category
MeasurementFVTPL
HTM
assetsReceivables /
Payables *AFS *
Initial Fair
Value
FV
+/- TC
FV
+/- TC
FV
+/- TC
Subsequent Fair
value
Amortised
cost
Amortised
cost
Fair
value
Gains / Losses P&L P&L P&L Equity
Impairment /
DerecognitionP&L P&L P&L P&L
ReclassificationNot
permittedAFS
Not
applicableHTM
* Short term receivables / payables & unquoted equity instruments for which fair value is not ascertainable, measurement should be at cost
Transitional Provision
• At the time of implementing for the first time the resultant impact, net of tax, should be taken to reserves & surplus account, except
– Where the standard requires the impact to be taken to equity account
Thank You
Navin Jain
Nidhi Sapra
Suyog Desarda