ind as on financial instruments

Understanding Ind AS CA PRANAV JOSHI, PARTNER | P. G. JOSHI & CO.

Financial Instruments IND AS 32, IND AS 109, IND AS 107

Overview of the Session

3 CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

Ind AS 32

Financial Instruments Presentation

Ind AS 109

Financial Instruments

Ind AS 107

Financial Instruments Disclosures

Ind AS 109 ~190 Pages

Ind AS 107 ~60 Pages

Ind AS 32 ~60 Pages

Overview of the Session

Definitions

Recognition

Measurement

De-recognition

Disclosures

Initial Recognition

Subsequent Recognition


Classification

CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants

“The presentation covers only the central theme of

the standards on Financial Instruments. Exceptions

to rules are ignored unless relevant to the

discussion and are specifically included in the

presentation.”

5

Ind AS 32 Financial Instruments:

Presentation DEFINITIONS


“The objective of this Standard is to establish

principles for presenting financial instruments as

liabilities or equity and for offsetting financial

assets and financial liabilities.”

Objective


Objective


Financial Instruments

Financial Asset

Financial Liability

Equity Instruments

Scope


This Standard shall be applied by all entities to all

types of financial instruments except:

◦ Share-based payments

◦ Insurance Contracts

◦ Employee benefits & Loan Co

◦ Interest in Subsidiaries, Associates & Joint Ventures


Definitions

10

A financial instrument is any contract

◦ that gives rise to a financial asset of one entity; and

◦ a financial liability or equity instrument of another

entity.

Financial Instrument


Definitions

11

Financial Assets

Cash

An equity instrument of another

entity;

A contractual right:

i. to receive cash or another financial asset from another entity; or

ii. to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity; or

A contract that will or may be settled in the entity’s own equity instruments and is:

i. a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or

ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments


Understanding the Definition

12

Cash: Cash is by a definition a Financial Asset. It

includes cash held in foreign currency translated in

to the asset’s functional currency.

An equity instrument of another entity: Equity

Shares of another entity.

◦ If I purchase 100 shares in Microsoft Inc., the investment

would meet the definition of Financial Asset.



13


to receive cash or another financial asset from

another entity; or

◦ A typical example of such an asset would be trade

receivables as these represent contractual right to receive

cash. Rs. 100 Receivable

Rs. 100 Payable

Financial Asset



14


to exchange financial assets or financial liabilities

with another entity under conditions that are

potentially favorable to the entity;

◦ An entity holds a contract to buy apples for Rs. 100/kg

while the current selling price/market price of apples is

Rs. 120/kg.



15

A contract that will or may be settled in the entity’s

own equity instruments and is:

◦ a non-derivative for which the entity is or may be obliged

to receive a variable number of the entity’s own equity

instruments; or

◦ A Ltd. takes a Rs. 1 Crore loan from B Ltd. A Ltd. will repay the loan

in 1 year in shares of A Ltd. The number of shares will be

determined by dividing Rs. 1 Crore by the share price in 1 year’s

time i.e. the number of shares to be given is variable.


Definitions

16

Financial Liability A contractual obligation

i. to deliver cash or another financial asset to another entity; or

ii. to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity; or

A contract that will or may be settled in the entity’s own equity instruments and is:

i. a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or

ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.



17

A contractual obligation:

to deliver cash or another financial asset to another

entity; or

◦ A typical example of such an asset would be trade

payables as these represent contractual obligation to

deliver cash. Rs. 100 Receivable

Rs. 100 Payable

Financial Liability



18

A contractual obligation:

to exchange financial assets or financial liabilities

with another entity under conditions that are

potentially unfavorable to the entity;

◦ An entity holds a contract to sell apples for Rs. 100/kg

while the current selling price/market price of apples is

Rs. 120/kg.



19

A contract that will or may be settled in the entity’s

own equity instruments and is:

a non-derivative for which the entity is or may be

obliged to deliver a variable number of the entity’s own

equity instruments; or

◦ A Ltd. takes a Rs. 1 Crore loan from B Ltd. A Ltd. will repay the

loan in 1 year in shares of A Ltd. The number of shares will be

determined by dividing Rs. 1 Crore by the share price in 1

year’s time i.e. the number of shares to be given is variable.


Definitions

20

Equity Instrument

An equity instrument is any contract that

evidences a residual interest in the assets of an

entity after deducting all of its liabilities.

These are instruments which are neither Financial

Assets or Financial Liabilities.

Eg: Ordinary Shares


Puttable Instruments

A puttable instrument is a financial instrument that

◦ gives the holder the right

◦ to put the instrument back to the issuer

◦ for cash or another financial asset

◦ or is automatically put back to the issuer on the

occurrence of an uncertain future event or the death or

retirement of the instrument holder.

May be classified as Financial Liability or Equity Instrument

depending upon the nature of the Puttable Instrument

21


Illustration

22

Issuer Purchaser

I want to Sell it back!

Yes Sir!

$ $

$ $

$ $

$ $


Recap

This standard gives rules for classification of an

Financial Instrument into:

Financial Asset

Financial Liability

Equity Instrument

23


Let’s Classify

24

Borrowings from Bank Financial Liability

Obligation to deliver cash

Bank Deposits Financial

Asset Right to receive cash

Equity Shares of Infosys Financial

Asset Equity Instrument of

another entity

Forward contract - In the money

Financial Asset

Favorable Contract

Preference Shares redeemable after 3 years

Financial Liability

Obligation to deliver cash on redemption

Instrument Classification Explanation

Ind AS 109 Financial Instruments

RECOGNITION, MEASUREMENT

& DE-RECOGNITION

CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 25


Objective

“The objective of this Standard is to establish

principles for the financial reporting of financial

assets and financial liabilities

that will present relevant and useful information to

users of financial statements for their assessment

of the amounts, timing and uncertainty of an

entity’s future cash flows.”

26


Scope

This Standard shall be applied by all entities to all

types of financial instruments except those

specified in the standard (Interests in subsidiaries, associated

and joint ventures, Leasing commitments, Employee benefits, Financial

Instruments resulting in Business Combinations, Insurance Contracts)

“Applicable to all entities but not all financial

instruments”

27


Recognition

An entity shall recognise a financial asset or a

financial liability in its balance sheet when, and

only when, the entity becomes party to the

contractual provisions of the instrument.

◦ Unconditional receivables and payables are recognised as

assets or liabilities when the entity becomes a party to

the contract and, as a consequence, has a legal right to

receive or a legal obligation to pay cash.

28


Classification – Financial Assets

29

Initial Recognition

Classification as per Subsequent Measurement

Amortised Cost Fair Value

through P&L (FVTPL)

Fair Value through OCI

(FVTOCI)

the entity’s business model for managing the

financial assets

the contractual cash flow characteristics of the

financial asset.

Based on


Basis of Classification – Amortised Cost

A financial asset shall be measured at amortized

cost if both of the following conditions are met:

30

To hold financial assets in order to collect

contractual cash flows; and Business Model

Contractual Cash flows

Solely payments of principal and interest

on the principal amount outstanding.


Basis of Classification - FVTOCI

A financial asset shall be measured at Fair Value

Through Other Comprehensive Income if both of

the following conditions are met:

31

Business Model

Contractual Cash flows

Solely payments of principal and interest

on the principal amount outstanding.

To hold financial assets for collecting

contractual cash flows and selling financial

assets


Basis of Classification - FVTPL

All other Financial Instruments to be classified as

Fair Value Through Profit & Loss A/c. – Residual

Classification.

◦ Financial Assets maybe classified as FVTPL subject to

conditions as specified in the standard. (Fair Value

Option)

Eg: Convertible Bonds

◦ Held for interest cash flows + Equity at maturity

32


Q&A

Q - Why do we classify Financial Assets held for Cash

flows and Capital Appreciation as Fair Value through

OCI and as Fair Value through P&L?

A – If the Financial Assets held for sale are with an

entity on the reporting date, any gain/loss by change in

the FV of the Financial Asset is only notional. It is not

actual gain. And thus it is not part of the P&L A/c.

33



Summary

34

Financial Asset within scope of Ind AS 109

Contractual cash flows are Principal & Interest only?

Held to collect Contractual Cash flows only?

Held to collect contractual cash flows and for sale?

FVTPL Option?

Amortized Cost

Fair Value through P&L

NO

NO

NO

NO YES

YES

YES

FVTPL Option?

YES

NO YES


Classification – Financial Liabilities

An entity shall classify all financial liabilities as

subsequently measured at amortized cost except in

case of certain specific exceptions given in the

standard including

◦ If measuring at Fair Value through Profit or Loss results in

more relevant information.

The standard does not talk about measuring

Financial Liabilities at Fair Value through OCI.

35


Reclassification

36

• When, and only when, an entity changes its business model for managing financial assets.

Financial Assets

• An entity shall not reclassify any financial liability.

Financial Liabilities


Initial Measurement

At initial recognition, an entity shall measure a

financial asset or financial liability at its Fair Value

plus or minus transaction costs that are directly

attributable to the acquisition or issue of the

financial asset or financial liability.

In the case of a financial asset or financial liability

at fair value through profit or loss, at Fair Value.

37


Subsequent Measurement

After initial recognition, an entity shall measure a

financial asset at:

38

Amortised Cost

Fair Value through P&L



Derecognition

39

The contractual rights to the cash flows from the

financial asset expire

Entity transfers the financial asset and

the transfer qualifies for derecognition

Financial Assets

It is extinguished (Obligation specified in the contract is

discharged, cancelled or expires)

Financial Liabilities

Ind AS 107 Disclosures

CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 40


Disclosures

The carrying amounts of each Category shall be disclosed

either in the balance sheet or in the notes:

41

FVTPL Amortized Cost FVTOCI

Financial Assets showing separately : 1. those designated as

such by the entity by choice (under FVTPL option)

2. those mandatorily measured at fair value through profit or loss.

Financial liabilities

1. Financial Assets 2. Financial Liabilities

Financial Assets

showing separately 1. Financial assets that

are measured at FVTOCI; and

2. Investments in equity instruments designated as such upon initial recognition


Sections not discussed

Hedge Accounting

Impairment

Accounting of Embedded Derivatives

42

Thank You CA Pranav Joshi

Partner

P. G. Joshi & Co. , Chartered Accountants

www.pgjco.com

ind as on financial instruments

Economy & Finance