IND AS 109-Financial Instruments- Valuation
a) Objective: The objective of standard 109- Financial Instruments 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.
b) Key Principle: The principle for recognition under IND AS 109 is that an entity should recognize a financial asset or financial liability on its balance sheet when, and only when, the entity becomes a party to the contractual provisions of the instrument. The important classifications are as under:
| Financial asset | Financial Liability | Equity |
| a) Cash;
b) Equity instrument of another entity; c) Contractual right to receive cash or another financial asset or to exchange with entity financial assets or financial liabilities under potentially favourable conditions; d) Certain contracts settled in Entity’s own equity. |
a) Contractual obligation to deliver cash or another financial asset or to exchange financial assets or financial liabilities under potentially unfavourable conditions;
b) Certain contracts settled in the entity’s own equity |
Contract evidencing residual interest in the assets of an entity after deducting all its liabilities. |
c) Classification of financial instruments: At Initial recognition, all financial assets & liabilities are measured at Fair Value (normally evidenced by Transaction Price). All subsequent recognition shall be measured as under:
| Financial asset | Financial Liability |
| 1) Amortised cost.
2) Fair value through other comprehensive income (FVTOCI) 3) Fair value through profit or loss (FVTPL) |
1) Amortised cost.
2) Fair value through profit or loss. 3) Guidance on specific financial liabilities. |
An entity shall classify financial assets as subsequently measured at Amortised cost, FVTOCI or FVTPL based on the Entity’s business model for managing the financial assets & the contractual cash flow characteristics of the financial assets.
| CLASSIFICATION TESTS | Amortised Cost | FVTOCI | FVTPL |
| CASH FLOW TEST | Contractual cash flows are solely principal & interest. | Contractual cash flows are solely principal & interest | The rest of the cases fall under this category |
| BUSINESS MODEL TEST | financial assets held by the Investor as per their Business Model for receiving such contractual cash flows only | financial assets held by the Investor as per their Business Model for receiving such contractual cash flows and for sale given a good opportunity. |
IND AS 109 requires all financial liabilities to be measured at amortized cost unless: (a) The financial liability is required to be measured at FVTPL because it is held for trading (b) The entity elects to measure the financial liability at FVTPL (fair value option) (c) The financial liability arises when a transfer of financial asset does not qualify for derecognition or when the continuing involvement approach applies (d) The financial liability is a financial guarantee contract. (5) The financial liability commits to provide a loan at a below-market interest rate (6) The financial liability is a contingent consideration recognized by an acquirer in a business combination to which IND AS 103 applies.
d) Reclassification: The entity has a choice of selecting a particular measurement method irrevocably meaning without considering or passing the results of the above tests. In such cases, it cannot be changed at a later stage but in all cases otherwise, it can be changed. An entity shall not reclassify any financial liability. Equity is not premeasured after initial recognition.
e) Fair Value Measurement (FMV): The following methodology applies to business valuation is also applicable to financial instruments valuation (i) Income Approach (2) Market approach (3) Cost approach. The choosing of a particular method depends upon the facts and circumstances of each case, the Entity and Valuer’s best judgement
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