Accounting For
Financial
Instruments
AS-30, AS-31, AS-32
Financial Instruments
CONTRACT
Financial Asset
Asset Financial
Financial Liability
Liability
Financial Or
Of Or
Of Equity
Equity Instrument
Instrument
Entity
Entity Of
Of another
another entity
entity
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Scope of AS-30,31,32
AS-30 to establish principles for recognising and
measuring financial assets, financial liabilities
other than equity and some contracts to buy or sell
non-financial items.
AS-31 to establish principles for presenting
financial instruments as liabilities or equity and
for offsetting financial assets and financial
liabilities.
AS-32 The objective of this Standard is to require
entities to provide disclosures in their financial
statements related to financial instruments.
AS-30
AS-30
Financial Instruments:
Financial Instruments:
Recognition and
Recognition and
Measurements
Measurements
Scope
• AS-30 applies to financial instruments
other than:
• Interests in subsidiaries, associates and joint-
ventures (AS-21,23,27)
• Rights and obligations under leases (AS-19)
• Rights and obligations under insurance
contracts Except embedded derivatives
• Employers’ assets and liabilities under
employee benefit plans (AS-15)
Continued-Scope
• Equity instruments issued by the reporting
enterprise
• Contracts for Contingent Consideration in a
Business Combination
Financial assets is any asset that is:
• Cash
• An equity instrument of another entity
• A right to receive Cash
• A right to receive another financial asset
• A right to exchange financial assets/liabilities
• A contract to receive variable no. of own equity shares
for fixed consideration.
• A derivative Contract to receive fixed no. of equity
shares for variable consideration.
consideration
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• It includes investment in equity shares of
another company.
• But it does not include:
– Investment in subsidiary
(covered under AS 21)
– Investment in associates
(covered under AS 23)
– Interest in Joint Venture
(covered under AS 27)
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•• Accounts
Accounts receivable
receivable
•• Bills
Bills receivable
receivable
•• Investment
Investment in in debt
debt security
security of
of other
other entities:
entities:
––Debentures,
Debentures,
––Zero
Zerocoupon
couponbonds,
bonds,
––Deep
Deepdiscount
discountbonds,
bonds,
––Dated
Datedsecurities
securitiesof
ofgovt.
govt.on
onIndia
India
––Treasury
TreasuryBills
Bills
––commercial
commercialpaper,
paper,
––certificate
certificateof
ofdeposit,
deposit,
––Interbank
Interbankparticipation
participationcertificate,
certificate,
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– Units of open ended mutual fund.
– Pass through certificates (under asset
securitization) etc.
• Loan receivables
– Loan to parties
– Loan to employees
– Inter corporate deposits
• Advances & Deposits
– All type of security deposits
– Advance to employees
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• Derivatives on financial or non financial
(See para 4-6 of AS 30) underlying which
are settled in cash:
– Equity futures & options
– Index futures and options
– Commodity futures
– Currency futures
• If the above contract is in favorable
position then it is a financial assets, if
unfavorable it is a financial liability.
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•• This
This standard
standard applies
applies to
to contracts
contracts to
to
buy/sell
buy/sell non
non financial
financial items
items that
that can
can be
be
settled
settled net
net in
in cash
cash (para
(para 4-6).
4-6). These
These
includes:
includes:
––Terms
Terms ofof the
the contract
contract permits
permits cash
cash settlement.
settlement.
––Terms
Terms are
are not
not explicit
explicit but
but the
the entity
entity has
has aa
practice
practice of
of settling
settling net
net in
in cash
cash
––Taking
Taking delivery
delivery and
and selling
selling itit within
within aa short
short
period
period of
of time.
time.
––Readily
Readily convertible
convertible into
into cash.
cash.
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• Convertible Debentures
• Exchangeable bonds
• Foreign currency convertible bonds
• Warrants etc.
• Derivatives on financial underlying which are
settled by delivery:
– Equity futures & options
– Bond forwards & futures
– Currency Forwards
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• Swap contracts:
– Equity swap
– Commodity Swap
– Currency swap
– Interest rate swap etc.
• If the contract is favorable than it is a
financial assets
• If the contract is unfavorable than it is
a financial liability.
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Financial liability is any liability that is:
• An obligation to deliver Cash
• An obligation to deliver financial asset
• An obligation to exchange financial
assets/liabilities
• A contract to deliver variable no. of own
equity shares for fixed consideration.
• A derivative Contract to deliver fixed no. of
equity shares for variable consideration.
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Classification of FA…
Classification of FL
Category one -FVTPL
•Fair Value
through profit
and loss
account.
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Which Fulfill either of the following two
conditions:
It is classified as held for trading:
Acquired for the purpose of selling in near term.
It is part of portfolio, which has a pattern of short
term profit taking.
Derivatives
Upon initial recognition because it results in more
relevant information:
It eliminates inconsistency
Performance is evaluated on fair value basis.
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FVTPL
Designated
Designated
HFT
HFT as
as such,
such,
To sale Derivatives
near term.
portfolio –
short term profit taking 20
• NPA ltd. Has business which is of a
seasonal nature. It has surplus cash it will
not need until the next season (in six
month’s time). It acquires shares of XLtd.
with the cash, with a view to selling them
in six month’s time.These shares of XLtd.
Are financial assets of NPA Ltd. And will
be classified as financial assets at fair
value through profit or loss as they are
financial assets held for trading
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• A company issues its debentures to
acquire shares in another company. if:
– Shares are classified as available for sale.
Any downfall in the price of shares will go to
equity account.
– Debentures are classified as FVTPL. If the
interest rate rise fall in value of debentures
will increase profit.
Company can remove this inconsistency by
classifying equity shares as held for trading.
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HTM – Held To Maturities
• Held-to-maturity investments are non-
derivative financial assets with fixed or
determinable payments and fixed maturity
that an entity has the positive intention and
ability to hold to maturity other than:
• (a) those that the entity upon initial
recognition designates as at FVTPL
• (b) those that meet the definition LR
• (c) those that the entity designates as AFS
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Loans and Receivables (LR)
• are non-derivative financial assets with fixed
or determinable payments that are not quoted
in an active market, other than:
• (a) those that HFT or FVTPL
• (b) those that designated as AFS
• (c) those for which the holder may not recover
substantially all of its initial investment, other
than because of credit deterioration, which
should be classified as available for sale.
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Available For Sale (AFS)
• Available-for-sale financial assets are
those non-derivative financial assets
that are designated as available for sale
or are not classified as
• (a) LR,
• (b) HTM or
• (c) FVTPL
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Yes
Is it a Derivative? FV Index Futures, options
No
Yes Bonds, equity shares, loans
Designated as FV? FV etc. designated as FV
No
Yes Bonds, equity shares, loans
Designated as AFS? AFS
etc. designated as FV
No
No Equity shares, mutual
Payments are fixed? AFS fund units, ETF, foreign
Yes currency receivables etc.
Quoted in Active Market? No Debtors, Advances,
LR Deposits, unquoted debt
Yes securities etc.
Fixed Maturity and
Ability and intention to Yes All quoted debt securities
HTM
hold till maturity?
No
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AFS 26
Classification & Measurement of Financial Assets
FVTPL AFS LR HTM
Initial Fair Value Fair Value + Fair Value + Fair Value +
Recognition at Transaction Transaction Transaction
cost cost cost
Subsequent Fair Value Fair Value Amortized Cost Amortized Cost
Measurement
Except Unquoted Unquoted Short term
equity equity assets
-
measured at measured at measured at
cost cost Invoice value*
Change in P&L Equity Account P&L P&L
value goes to
Dividend / P&L P&L P&L P&L
Interest
Subject to No Yes Yes Yes
Impairment
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review *Because effectCAofTarun
discounting
Mahajan
is immaterial. 27
Classification & measurement of Financial
Liabilities
FVTPL Others
Initial Recognition at Fair Value Fair Value - Transaction
cost
Subsequent Fair Value Amortized Cost
Measurement
Except Short term payables
- measured at Invoice
value*
Change in value goes P&L P&L
to
Financial guarantee contracts and commitment to
provide loan below market interest Rate should be
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accounted for in accordance with AS 29
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Reclassification?
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Introduction –Concept of Hedging
Why 'Hedging' ?
A perfect hedge reduces investor's risk to nothing except for cost of
the hedge.
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Types of hedges
Fair Value hedges
Hedge of exposure to changes in fair value of:
- a recognized asset or liability; an unrecognised firm commitment; or an
identified
portion of any of the above two;
- that is attributable to a particular risk; and
- could affect P & L
Cash flow hedges
Hedge of exposure to variability in cash flows
that is
- attributable to a particular risk associated with a recognized
assets or liability or a
highly probable forecast transaction ( also an inter-company one)
and
- could
Hedge of affect
Net Pinvestment
&L
in a foreign 31
operation
Fair Value hedge accounting
model
Measurement of Derivaitves instrument Changes in FV
Fair Value
Measurement of hedge item P&L
Fair Value with respect
to risk being hedged
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Cash flow hedge accounting
model
Measurement of Derivative Instrument Changes in FV
Fair Value E ffec tive Equity
Ineffectiv e
P&L
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Application of Hedge
Accounting
Whether hedging instrument is NO
a “ Qualified Instrument” ?
Whether “ Hedge Relationship” NO
Is established ?
Does it Pass the “ Hedge NO
Effectiveness” test ?
Apply hedge accounting NO
Adjust MTM in P/L Account
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Cash Flow Hedge- Accounting
Importer A Ltd hedge the forecasted import purchase
cash flow through forward contract as per detail
given below :
Date Particulars Amount(FC) Rate Remarks
20.06.07 Pur. contract 100000 Delivery March 08 & Due June 08
30.06.07 Fwd contract 100000 1.096 Cash flow hedged for June 08
Date Spot Rate Fwd Rate June 08 Fair Value
30.06.07 1.072 1.096 0
31.12.07 1.08 1.092 (400)
31.03.08 1.074 1.076 (2,000)
30.06.08 1.072 1.072 (2,400)
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Cash Flow Hedge- Accounting
Date Particulars Debit Credit Remarks
30.06.07 No Change in fair value
31.12.07 Equity A/c 400 Being Loss on forward contract
Forward Liability 400 parked in equity account
31.03.08 Equity A/c 1600 Being Loss on forward contract
Forward Liability 1600 parked in equity account
31.03.08 Purchase A/c 107400 Being purchase recorded at spot
Payable 107400 rate on 31.03.2008
31.03.08 Purchase A/c 2000 Being cuulative loss on fwd
Equity A/c 2000 contract recognised in P&L A/c
30.06.08 Payable A/c 107400 Being settlement of payable at
Bank A/c 107200 spot rate
Profit & Loss A/c 200
30.06.08 P&L A/c 400 Being loss accountd on fwd
Forward Liabiliy 400 contract
30.06.08 Forward Liabiliy 2,400 36
Being forward contract settled
Bank A/c 2,400
