As we know, Companies are required to comply with IND As Provisions and make the opening Ind-AS balance sheet on the date of transition. This is the starting point for adoption of Ind-AS. For this purpose, an entity should, in its opening Ind-AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind-AS;
(b) not recognise items as assets or liabilities if Ind-AS do not permit such recognition;
(c) reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind-AS; and
(d) apply Ind-AS in measuring all recognised assets and liabilities.
Opening balance sheet is to be prepared on the date of transition, i.e., the beginning of the earliest comparative period presented, e.g., if an entity adopts Ind-AS from 2016-17, its date of transition will be April 1, 2015 and, thus, it will be required to prepare its opening Ind-AS balance sheet on April 1, 2015.
One of the Major challenge is to identify their Financial Asset and Financial liability. This is new term with context to Indian economy therefore a detailed sudy is required to understand it. Firstly let us have the understanding what the standard is saying about the Financial Asset and Financial Asset.
As per Para 11 of Indian Accounting Standard (Ind AS) 32-Financial Instruments: Presentation
A financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) 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 favourable to the entity; or
(d) 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. 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.
A financial liability is any liability that is:
(a) 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 unfavourable to the entity; or
(b) 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. 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 aconvertible 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.
| Particular | Whether it is Financial Instrument? | Classification | Reason |
| Loans/Advances- Bank or Inter corporate |
√ |
Financial Liability | Financial liability as contractual obligation of the entity to pay cash to bank.(Para-11(a) |
| Cash | √ | Financial Asset | A financial asset is any asset that is:
(a) cash; (AG-3) |
| Share of Subsidiary Companies |
√ |
Financial Asset | a contractual right to receive cash by way of dividend or at the time sale of the investment |
| Capital Advances/Mobilization Advances |
X |
N.A | Since the advance will adjust against future supply of asset which is not cash neither a Financial instrument. |
| Prepaid Expenses |
X |
N.A | There is no contractual obligation to receive the cash/ financial Asset. future economic benefit of the same is the receipt of goods and services(AG 11) |
| TDS Receivable/Payable |
X |
N.A | Not arising out of any contractual arrangement (AG 12) |
| Financial Guarantee Given |
√ |
Financial Liability | Contractual liability arise at the time of default of original borrower |
| Provision for Expenses | X | N.A | Not arising out of any contractual arrangement |
| Trade Receivable | √ | Financial Asset | Trade Receivable are financial assets as they create a contractual right to receive cash for the entity.(AG-4) |
| Vendors | √ | Financial Liability | Contractual obligation on the company to pay cash or financial asset. |
| Perpetual debt instruments | √ | Financial Asset | Contractual right to receive cash(Interest) at the stated rate for the entity AG-6 |
| Warranty Obligation | X | NA | There is no contractual obligation to pay the cash/Financial but the obligation is for providing services only. |
| Advance Income Received | X | NA | There is no contractual obligation to pay the cash/Financial but the obligation is for providing services only. |
| Inventory | X | NA | Assets creates an opportunity to generate
an inflow of cash or another financial asset, but it does not give rise to a present right to receive cash or another financial asset (AG 10) |
| Property, plant and equipment | X | NA | |
| Leased Assets/Intangible Assets | X | NA | |
| Equity Share capital/Reserves |
√ |
Equity | An equity instrument is any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities. |
Financial Asset /Financial Liability
Application Guidance
AG4 Common examples of financial assets representing a contractual right to receive cash in the future and corresponding financial liabilities representing a contractual obligation to deliver cash in the future are:
(a) trade accounts receivable and payable;
(b) notes receivable and payable;
(c) loans receivable and payable; and
(d) bonds receivable and payable.
In each case, one party’s contractual right to receive (or obligation to pay) cash is matched by the other party’s corresponding obligation to pay (or right to receive).
AG6 ‘Perpetual’ debt instruments (such as ‘perpetual’ bonds, debentures and capital notes) normally provide the holder with the contractual right to receive payments on account of interest at fixed dates extending into the indefinite future, either with no right to receive a return of principal or a right to a return of principal under terms that make it very unlikely or very far in the future. For example, an entity may issue a financial instrument requiring it to make annual payments in perpetuity equal to a stated interest rate of 8 per cent applied to a stated par or principal amount of Rs. 1,000. Assuming 8 per cent to be the market rate of interest for the instrument when issued, the issuer assumes a contractual obligation to make a stream of future interest payments having a fair value (present value) of Rs. 1,000 on initial recognition. The holder and issuer of the Instrument have a financial asset and a financial liability, respectively.
AG11– Assets (such as prepaid expenses) for which the future economic benefit is the Receipt of goods or services, rather than the right to receive cash or another Financial asset, are not financial assets. Similarly, items such as deferred revenue and most warranty obligations are not financial liabilities because the outflow of economic benefits associated with them is the delivery of goods and services rather than a contractual obligation to pay cash or another financial asset.
AG-12 – Liabilities or assets that are not contractual (such as income taxes that are created as a result of statutory requirements imposed by governments) are not financial liabilities or financial assets. Accounting for income taxes is dealt with in Ind AS
12. Similarly, constructive obligations, as defined in Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, do not arise from contracts and are not financial liabilities.
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