ind as on financial instruments
TRANSCRIPT
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
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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
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Classification
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“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.”
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Ind AS 32 Financial Instruments:
Presentation DEFINITIONS
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“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
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Objective
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Financial Instruments
Financial Asset
Financial Liability
Equity Instruments
Scope
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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
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Definitions
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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
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Definitions
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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
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Understanding the Definition
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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.
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Understanding the Definition
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A contractual right:
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
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Understanding the Definition
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A contractual right:
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.
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Understanding the Definition
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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.
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Definitions
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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.
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Understanding the Definition
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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
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Understanding the Definition
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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.
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Understanding the Definition
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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.
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Definitions
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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
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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
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Illustration
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Issuer Purchaser
I want to Sell it back!
Yes Sir!
$ $
$ $
$ $
$ $
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Recap
This standard gives rules for classification of an
Financial Instrument into:
Financial Asset
Financial Liability
Equity Instrument
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Let’s Classify
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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
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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.”
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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”
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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.
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Classification – Financial Assets
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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
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Basis of Classification – Amortised Cost
A financial asset shall be measured at amortized
cost if both of the following conditions are met:
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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.
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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:
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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
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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
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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.
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Fair Value through OCI
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Summary
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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
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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.
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Reclassification
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• 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
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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.
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Subsequent Measurement
After initial recognition, an entity shall measure a
financial asset at:
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Amortised Cost
Fair Value through P&L
Fair Value through OCI
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Derecognition
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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
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Disclosures
The carrying amounts of each Category shall be disclosed
either in the balance sheet or in the notes:
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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
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Sections not discussed
Hedge Accounting
Impairment
Accounting of Embedded Derivatives
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Partner
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