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Ind AS 109, Financial Instruments, Summary

Indian Accounting Standard (Ind AS) 109 Summary

Indian Accounting Standard (Ind AS) 109, Financial Instruments establishes principles for the financial reporting of financial assets and financial liabilities.

Ind AS 109 shall be applied by the entity to all types of financial instruments except for interests in subsidiaries, associates and joint ventures, rights and obligations under leases, employers’ rights and obligations under employee benefit plans, financial instruments issued by the entity that are classified as equity instruments, rights and obligations under insurance contracts, forward contracts to buy or sell an acquiree in a business combination, loan commitments, share based payment transactions and certain reimbursement rights.

The entity shall recognise a financial asset or a financial liability in its balance sheet when, and only when, the entity becomes party to the contractual provisions of the instrument.

A derivative is a financial instrument or other contract (within the scope of the standard), the value of which changes in response to some underlying variable (other than a non-financial variable specific to a party to the contract), that has an initial net investment smaller than would be required for other instruments that have a similar response to the variable and that will be settled at a future date.

An embedded derivative is a component of a hybrid contract that affects the cash flows of the hybrid contract in a manner similar to a stand-alone derivative instrument. An embedded derivative is not accounted for separately from the host contract if it is closely related to the host contract, if a separate instrument with the same terms as the embedded derivative would not meet the definition of a derivative or if the entire contract is measured at fair value through profit or loss. An embedded derivative in a financial asset is also not separated and the hybrid contract is measured at fair value through profit or loss. In other cases, an embedded derivative is accounted for separately as a derivative. All derivatives (including separated embedded derivatives) are measured at fair value with changes in fair value recognised in profit or loss.

When the entity first recognises a financial asset, it shall measure it at its fair value and classify it as a financial asset measured at:

  • Amortised cost, if the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and the contractual terms of the financial asset give 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 (FVOCI), if the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding,
  • FVOCI, if the financial asset is an investment in an equity instrument within the scope of this standard, that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination, for which the entity makes an irrevocable election to present subsequent changes in fair value in other comprehensive income, or
  • Fair Value Through Profit or Loss (FVTPL).

When the entity first recognises a financial liability, it shall classify it as a financial liability measured at amortised cost, or FVTPL and measure it at fair value.

The entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at FVTPL, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

When, and only when, the entity changes its business model for managing financial assets it shall reclassify all affected financial assets prospectively. The entity shall not reclassify any financial liability.

The entity has to determine whether derecognition should be applied to a part of a financial asset (or a part of a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety. The entity shall derecognise a financial asset when, and only when: (a) the contractual rights to the cash flows from the financial asset expire, or (b) it transfers the financial asset and the transfer qualifies for derecognition.

The entity shall remove a financial liability (or a part of a financial liability) from its balance sheet when, and only when, it is extinguished—i.e. when the obligation specified in the contract is discharged or cancelled or expires. The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss.

Financial assets are subsequently measured at fair value or amortised cost. Changes in the fair value of financial assets are recognised as follows:

  • Debt financial assets measured at FVOCI: Changes in fair value are recognised in other comprehensive income except for foreign exchange gains and losses and expected credit losses, which are recognised in profit or loss. On derecognition, any gains or losses accumulated in other comprehensive income are reclassified to profit or loss,
  • Equity financial assets measured at FVOCI: All changes in fair value are recognised in other comprehensive income and not reclassified to profit or loss, and
  • Financial assets at FVTPL: All changes in fair value are recognised in profit or loss.

Financial liabilities, other than those classified as FVTPL are generally measured at amortised cost.

Impairment is recognised using an expected credit loss model, which means that it is not necessary for a loss event to occur before an impairment loss is recognised.

The general approach to impairment uses two measurement bases: 12-month expected credit losses and lifetime expected credit losses, depending on whether the credit risk on a financial asset has increased significantly since initial recognition.

Hedge accounting is voluntary and allows an entity to measure assets, liabilities and firm commitments selectively on a basis different from that otherwise stipulated in Ind AS or to defer the recognition in profit or loss of gains or losses on derivatives.

The objective of hedge accounting is to represent, in the financial statements, the effect of the entity’s risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss (or other comprehensive income, in the case of investments in equity instruments for which the entity has elected to present changes in fair value in other comprehensive income).

There are three hedge accounting models:

  • Fair value hedges of fair value exposures,
  • Cash flow hedges of cash flow exposures, and
  • Net investment hedges of currency exposures on net investments in foreign operations.

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