Indian Accounting Standards

Standards applicable to Financial Instruments:

Ind AS 32 : Financial Instruments: Presentation

Ind AS 39 : Financial Instruments: Recognition and Measurement

Ind AS 107 : Financial Instruments: Disclosures

Ind AS 109 : Financial Instruments

OBJECTIVES

Standard No. Standard Objective
Ind AS 32

(Complement to Ind AS 39 and Ind AS 107)

Establish principles for –

> presenting financial instruments as liabilities or equity and

> offsetting financial assets and financial liabilities

> classification of financial instruments, from the perspective of the issuer

> classification of related interest, dividends, losses and gains

Ind AS 39

(Replaced by Ind AS 109)

Establish principles for –

> recognizing,

> measuring and

> financial assets, financial liabilities and

> some contracts to buy or sell non-financial items

Ind AS 107

(Complement to Ind AS 32 and Ind AS 39)

Provide disclosures on –

> the significance of financial instruments for the entity’s financial position and performance; and

> the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks

Ind AS 109

(New standard, replacing Ind AS 39)

Establish principles for –

> recognition, derecognition,

> classification,

> measurement of financial instruments

> impairment of financial instruments

> hedge accounting

DEFINITIONS

Defined term Ind AS Source Definition
Financial instrument 109 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 asset 109 A financial asset is any asset that is:

1) cash;

[Examples, currency notes, coins, etc.]

2) an equity instrument of another entity;

[Example, investments in equity shares of another company, etc.]

3) a contractual right:

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

[Examples, investment in debt instruments, other investments, cash equivalents, loans and advances, trade receivables, etc.]

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

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

a. 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

b. 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. For this purpose the entity’s own equity instruments do not include puttable financial instruments classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.

Financial liability 109 A financial liability is any liability that is:

1) a contractual obligation :

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

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

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

a. 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

b. 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. For this purpose, rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. Apart from the aforesaid, the equity conversion option embedded in a convertible bond denominated in foreign currency to acquire a fixed number of the entity’s own equity instruments is an equity instrument if the exercise price is fixed in any currency. Also for these purposes the entity’s own equity instruments do not include puttable financial instruments that are classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.

As an exception, an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the features and meets the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D.

Equity instrument 109 An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Fair value 109 Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Puttable instrument 109 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.
Derivative 39 (Para 9) A derivative is a financial instrument or other contract within the scope of this Standard (see paragraphs 2–7) with all three of the following characteristics:

1) its value changes in response to the change in a specified interest rate, financial instrument price, commodity price foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’);

2) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and

3) it is settled at a future date.

Financial asset or financial liability at fair value through profit or loss 39 (Para 9) A financial asset or financial liability at fair value through profit or loss is a financial asset or financial liability that meets either of the following conditions.

1) It is classified as held for trading.

2) Upon initial recognition it is designated by the entity as at fair value through profit or loss.

Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured (see paragraph 46(c) and Appendix A paragraphs AG80 and AG81), shall not be designated as at fair value through profit or loss.

Held for trading 39 (Para 9) A financial asset or financial liability is classified as held for trading if:

1) it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term;

2) on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or

3) it is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).

Held-to-maturity investments 39 (Para 9) 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 (see Appendix A paragraphs AG16–AG25) other than:

(a) those that the entity upon initial recognition designates as at fair value through profit or loss;

(b) those that the entity designates as available for sale; and

(c) those that meet the definition of loans and receivables.

An entity shall not classify any financial assets as held to maturity if the entity has, during the current financial year or during the two preceding financial years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity (more than insignificant in relation to the total amount of held-to-maturity investments) other than sales or re-classifications that:

1) are so close to maturity or the financial asset’s call date (for example, less than three months before maturity) that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value;

2) occur after the entity has collected substantially all of the financial asset’s original principal through scheduled payments or prepayments; or

3) are attributable to an isolated event that is beyond the entity’s control, is non-recurring and could not have been reasonably anticipated by the entity.

Loans and receivables 39 (Para 9) Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than:

1) those that the entity intends to sell immediately or in the near term, which shall be classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss;

2) those that the entity upon initial recognition designates as available for sale; or

3) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available for sale.

An interest acquired in a pool of assets that are not loans or receivables (for example, an interest in a mutual fund or a similar fund) is not a loan or receivable.

Available-for-sale financial assets 39 (Para 9) Available-for-sale financial assets are those non-derivative financial assets that are

1) designated as available for sale or

2) are not classified as

a) loans and receivables,

b) held-to-maturity investments or

c) financial assets at fair value through profit or loss.

Financial guarantee contract 39 (Para 9) A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
Amortised cost of a financial asset or financial liability 39 (Para 9) The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition

1) minus principal repayments,

2) plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and

3) minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.

Effective interest method (EIR) 39 (Para 9) The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, an entity shall estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) but shall not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate (see Ind AS 18 Revenue), transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to estimate reliably the cash flows or the expected life of a financial instrument (or group of financial instruments), the entity shall use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments).
Derecognition 39 (Para 9) Derecognition is the removal of a previously recognised financial asset or financial liability from an entity’s balance sheet.
Fair value 39 (Para 9) Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Regular way purchase or sale 39 (Para 9) A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.
Transaction costs 39 (Para 9) Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability (see Appendix A paragraph AG13). An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.
Firm commitment 39 (Para 9) A firm commitment is a binding agreement for the exchange of a specified quantity of resources at a specified price on a specified future date or dates.
Forecast transaction 39 (Para 9) A forecast transaction is an uncommitted but anticipated future transaction.
Hedging instrument 39 (Para 9) A hedging instrument is a designated derivative or (for a hedge of the risk of changes in foreign currency exchange rates only) a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item (paragraphs 72–77 and Appendix A paragraphs AG94–AG97 elaborate on the definition of a hedging instrument).
Hedged item 39 (Para 9) A hedged item is

1) an asset,

2) liability,

3) firm commitment,

4) highly probable forecast transaction or

5) net investment in a foreign operation that

(a) exposes the entity to risk of changes in fair value or future cash flows and

(b) is designated as being hedged (paragraphs 78–84 and Appendix A paragraphs AG98–AG101 elaborate on the definition of hedged items).

Hedge effectiveness 39 (Para 9) Hedge effectiveness is the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument (see Appendix A paragraphs AG105–AG113).
Fair value hedge 39 (Para 86) A hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss.
Cash flow hedge 39 (Para 86) a hedge of the exposure to variability in cash flows that

1) is attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction and

2) could affect profit or loss.

Hedge of a net investment in a foreign operation 39 (Para 86) A hedge of net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that operation
Embedded derivative 39 (Para 10) An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract—with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative.
Modification gain or loss 109 (Para 5.4.3) When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial asset in accordance with this Standard, an entity shall recalculate the gross carrying amount of the financial asset and shall recognise a modification gain or loss in profit or loss

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