IND AS 109 Financial Instruments deals with classification, recognition, de-recognition and measurement requirements for all the financial assets and liabilities. This standard provides guidelines for accounting and reporting of the Financial Instruments (FI) which will enable the stakeholders to assess the timing and uncertainty of a business future cash flow.
An entity shall classify its financial assets based on its business model for managing the financial assets or the contractual cash flow pattern of financial asset subsequently measured at:
|1||The financial asset is held to collect contractual cash flows and the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.||Amortised cost*|
|2||Financial asset is held by both collecting contractual cash flows & selling financial assets The financial asset gives rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.||Fair Value Through Other Comprehensive Income (FVTOCI)|
|3||If it does not meet the criteria for the above two methods – residual||Fair Value Through Profit & Loss (FVTPL)|
*Amortised cost is the cost of asset or liability adjusted to achieve a constant effective rate of interest over the life of asset or liability. Amortized Cost method generally involves calculation of present value of all future cash flows expected throughout the life of the FI at the market prevailing rate of interest.
All financial liabilities are measured at amortized cost, except: (a) At FVTPL shall be subsequently measured at fair value (b) Transfers that do not qualify for derecognition (continuing involvement approach) (c) Financial guarantee contracts (d) Commitments to provide a loan at a below-market interest rate (e) Contingent consideration shall be measured at fair value with changes recognized in profit or loss
Initial recognition is at fair value (transaction value) otherwise, the direct transaction cost of the FI is considered. Effective Interest Rate (EIR) method explained below:
|Sl.No||Nature of Financial Asset||Interest Revenue calculation|
|1||Normal||EIR to Gross Carrying Amount (GCA)|
|2||Purchased Credit-impaired||Use credit adjusted EIR|
|3||Becomes Credit-impaired||Use EIR in subsequent period|
|4||Contractual cash flow Modified||Recalculate GCA and modify gain or loss in P&L|
An entity shall recognize a financial asset or a financial liability in its balance sheet only when the entity executes the Contractual agreement involving the Instrument. A regular way purchase or sale of financial assets can be recognized and de-recognized using either the trade date accounting or the settlement date accounting.
This concept is applied at a consolidated level and hence, an entity first consolidates all subsidiaries in accordance with IND AS 110. De-recognition shall be applied to a part of a financial asset or to its entirety or group subject to certain conditions. An entity shall de-recognize a financial asset only when the contractual rights to the cash flows from the financial asset expire, or it transfers the financial asset and the transfer qualifies for de-recognition. When an entity transfers a financial asset, it shall evaluate the extent to which it retains the risks and rewards of ownership of the financial asset.
|Sl.No||All Risk and Rewards of ownership||Result|
|1||Transfers substantially||De-recognise the financial asset and recognize separately the obligations created or retained in the transfer|
|2||Retains substantially||Continue to recognize the financial asset|
|3||Neither transfers nor retains substantially||Determine if entity has retained control of the financial asset|
An entity shall remove a financial liability (or a part of a financial liability) only when it is extinguished (Contract obligation is discharged or canceled or expires).
Let’s see the various situation of the accounting process:
|1||Exchange between existing borrower and lender with substantial modification||Extinguishment of the original financial liability and the recognition of a new financial liability|
|2||On extinguishment or transferred to another party (entirely or part)||Difference between the carrying amount and the consideration paid (including any non-cash assets) to be recognized in profit or loss|
|3||Repurchase a part of a financial liability||Allocate the previous carrying amount between the part that continues to be recognized and the part that is de-recognized based on the fair values as on the date of the repurchase|
An embedded derivative is a component of a hybrid contract that also includes a non-derivative host contract. Some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. A derivative that is attached to an FI but is contractually transferable independently of that instrument, or has a different counter party, is not an embedded derivative, but a separate FI.
A hybrid contract contains both derivative and non- derivative which is not possible to transfer independent of host contract. If a hybrid contract contains a host that is not an asset, an embedded derivative shall be separated from the host and accounted for as a derivative only if:
When an entity changes its business model for managing financial assets then reclassify all affected financial assets. An entity cannot reclassify any financial liability. Classification is done based on certain principles, hence reclassification to be done if principles changes. Measurement has to be done on the date of reclassification.
Measurement of Reclassification
|Amortised Cost||FVTPl||FV on reclassification date and difference in PL
|Amortised Cost||FVOCI||FV on reclassification date and difference in OCI|
|FVOCI||Amortised Cost||FV on reclassification date is carrying value. Cumulative gain/loss in OCI adjusted to FV
|FVOCI||FVTPL||Asset considered at FV. Cumulative gain/loss in OCI adjusted in PL
|FVTPL||FVOCI||Asset considered at FV
|FVTPL||Amortised Cost||FV on reclassification date is carrying value. New EIR computed|
Gross Carrying Amount of a financial asset is directly reduced when no reasonable expectations of recovering a financial asset in its entirety or a portion thereof.
Impairment obligations/ recognition is based on Expected Credit Loss (ECL) model. The ECL method is required to be applied to: 1. FI measured at amortised cost 2. FI measured at FVOCI 3. lease receivables, and trade receivables or contract assets 4. financial guarantee contracts to which Ind AS 109 applies and not accounted for at FVTPL 5. all loan commitments not measured at FVTPL
|1||General Approach||If there is no considerable increase in credit risk since initial recognition then 12 month ECL is used. If credit risk has increased significantly, life-time ECL is used. In future, if credit quality improves to the extent there is a no longer significant increase in credit risk, an impairment loss is based on 12 month ECL.|
|2||Simplified Approach||Tracking changes in credit risk are not required an impairment loss is recognized based on lifetime ECLs at each reporting date. This is mandatory for trade receivables or contact receivables per IND AS 115 if is no significant finance component. Provision is done based on the past overdue.|
A hedged item can be a recognized asset or liability, an unrecognized firm commitment, a forecast transaction or a net investment in a foreign operation. The hedged item can be a single item or a group of items which are reliably measurable or probable. A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:
A. Fair value hedge:
B. Cash flow hedge:
C. A hedge of a net investment in a foreign operation: 1