Broad Overview of Accounting Standard

(AS) 30 Financial Instruments :

Recognition & Measurement

Prepared by –

Navin Jain

Nidhi Sapra

Suyog Desarda

Contents

•Impact

•Scope

•Objective

•Definitions

•Financial Assets

•Hedging

•Financial Liabilities

•Gains and Losses

•Impairment

Impact

• Withdrawal of

– AS 4 – contingencies

– AS 11 – forward exchange contracts

– AS 13 – except investment properties

Scope

• Excludes items which are covered – By existing standards

• As 14• As 15• As 19• As 21, 23 & 27• As 29

Objective

• Establish principles for recognising & measuring

– Financial assets

– Financial liabilities

– Some contracts for non-financial items

Definition• Financial instrument is a CONTRACT giving rise to

Financial asset

Financial liabilityor

Equity instrument

Definition

• Equity instrument

– Contract evidencing residual interest in the assets of an entity after deducting all its liabilities

• Preference shares under section 80 will be ‘financial liability’

Examples of Financial Assets & Financial Liabilities

• Financial assets– Investments

– Debtors

– Cash & bank

– Loans & advances (except prepaid exps)

• Financial liabilities– Creditors

– Provisions (except income tax)

– Borrowings (including sales tax deferrals)

Definition

• Derivative instrument– Financial instrument / contract

• Value changes in response to change in specified interest rate, financial instrument price, commodity price, foreign exchange rate, credit rating or credit index OR non-financial variable which is not specific to a party to the contract

• No initial net investment / smaller investment• Settled at a future date

Examples of Derivative

• Financial options

• Forwards and futures

• Interest rate swaps

Financial Assets - Categories

• Fair value through profit or loss (FVTPL)

• Held to maturity (HTM)

• Loans & receivables (L&R)

• Available for sale (AFS)

Fair Value Concept

• Valuation techniques

– Recent arm’s length market transactions

– Reference to current fair value of another instrument

– Discounted cash flow analysis

– Option pricing model

Financial Assets - FVTPL

• Held for trading

• Reduces accounting mismatch

• Documented risk management / investment strategy

Financial Assets - FVTPL

• Held for trading

– Acquired for purpose of selling

– Evidence of recent actual pattern of short term profit taking

– Derivative (except hedging instrument)

Financial Assets - FVTPL

• Reduces accounting mismatch.– An instrument is said to reduce accounting

mismatch when it eliminates or significantly reduces a measurement inconsistency.

• Documented risk management / investment strategy.– A part of group of financial assets managed and

evaluated on fair value basis according to risk management or investment strategy of entity.

Embedded Derivative

• When a non-derivative (host) contract contains derivative (embedded) contract, it should be accounted separately, only if– Economic characteristics & risks are not closely

related to the host contract– Separate instrument with same terms would meet

the definition of derivative– Hybrid instrument is not measured at fair value

through profit or loss

Financial Assets - FVTPL

• Initial measurement

– At fair value on the date of acquisition

• Reclassification

– Not allowed, in OR out

• Subsequent measurement

– At fair value

Financial Assets - HTM

• Non-derivatives with fixed or determinable payments and fixed maturity

• Entity has positive intention and ability to hold to maturity

Financial Assets - HTM• Initial measurement

– At fair value +/- Transaction cost

• Reclassification– In case of change in intention / ability – Sale of more than insignificant amount

• Reclassify as available for sale for current year• Banned from using the category for next 2

financial years

Financial Assets - HTM

• Subsequent measurement

– At amortised cost using effective interest method

Examples of HTM

• Debt instruments

• Redeemable preference shares

Financial Assets - L&R

• Non-derivatives with fixed or determinable payments and not quoted in an active market

– Not allowed in case of doubt on recoverability of substantially all of its initial investment (in which case classified as AFS)

Financial Assets - L&R

• Initial measurement

– Long term

• At fair value

+/- Transaction cost

– Short term

• At invoice amount

Subsequent measurement

Long term

Amortised cost using effective interest method

Short term

At invoice amount

Financial Assets - AFS

• None of the three earlier classifications

Financial Assets - AFS

• Initial measurement

– At fair value

+/- Transaction cost

• Subsequent measurement

– At fair value

Financial Assets - AFS

• Investments in equity instruments with no quoted market price in active market & fair value cannot be reliably measured

– Initial measurement• At cost

– Subsequent measurement• At cost

Financial Assets

• Derecognition – entirely if– Contractual right to cash flows expire– Transfer of contractual right to cash flows– Assume contractual obligation to pay cash flows

• Payment of equivalent amount of collection• Selling / pledging of original asset prohibited• Remit collection without delay, interest earned,

if any, to be passed on

Financial Assets

• Derecognition – partly, only if transfer of

– Specifically identified cash flows

– Fully proportionate share of cash flows

– Fully proportionate share of specifically identified cash flows

Summary of Classification – Financial Assets

Category Description

FVTPL Acquired for the purpose of trading / profit from short term fluctuations

HTM Fixed maturity investments with intention and ability to hold to maturity

L&R Created by providing money, goods or services

AFS Equity investments

- with quoted price or

- unquoted but able to estimate fair value

Equity investments with no quoted price and entity is not able to estimate FV

Hedging

• Expected to be highly effective

• Reliable measurement of effectiveness

• Effective throughout the period of designation

• Forecast transaction should be highly probable (cash flow hedge)

Hedging

• Fair value hedge

• Cash flow hedge

• Net investment in non-integral foreign operation

Examples

• Fair value hedge– A company purchases bond with a fixed interest rate. In

order to offset the risk of decline in fair value of bond, the company enters into an variable interest rate swap

• Cash flow hedge– A company expects to purchase a fixed asset in a years

time for X euros. In order to offset the risk of increase in euro rate, the company enters into a forward contract to purchase X euros for a fixed amount

Hedging – Derecognition

• Fair value hedge– Hedge instrument expires

• Cash flow hedge– Forecast transaction not expected to occur

• Net investment in non-integral foreign operation– On disposal

Summing up – Financial Assets

Financial Liabilities – Categories

• Fair value through profit or loss (FVTPL).– Held for trading.

• Derivative liabilities not accounted for hedging instruments.

• Obligations to deliver securities or other financial assets by short seller.

• Financial liabilities incurred with the intention to repurchase them.

– Designated.• Designated on initial recognition.

• Irrevocable.

• Others (O).

Financial Liabilities – FVTPL

• Initial measurement

– At fair value on the date of issue

• Reclassification

– Not allowed – in OR out

• Subsequent measurement

– At fair value

Financial Liabilities – FVTPL (Exception)

• Derivative liability required to be settled by delivery of an equity instrument with no quoted market price in active market & fair value cannot be reliably measured– Initial measurement

• At cost– Subsequent measurement

• At cost

Financial Liabilities – Others

• Initial measurement– At fair value

+/- Transaction cost

• Subsequent measurement, higher of– Amount determined as per AS 29– Amount initially recognised less cumulative

amortisation recognised, if any

Financial Liabilities – Others

• Recognition criteria under AS 29

– Present obligation as a result of past event

– Probable outflow of resources

– Reliable estimate of obligation

Financial Liabilities

• Derecognition– Obligation is discharged / cancelled / expired

(partly / entirely)– Substantial modifications in terms of the contract

of the existing liability

Remeasure

• If a reliable measure becomes available subsequently where it was required, then the financial instrument should be remeasured

Gains & Losses

• Fair value through profit or loss

– To be taken to P&L

• Available for sale

– Recognised in appropriate equity account (except impairment impact + foreign exchange impact) until de-recognition, at which time cumulatively will be taken to P&L

– Interest under effective interest method & dividend from investments are taken to P&L

Gains & Losses• If it becomes appropriate to carry at cost / amortised cost what

was being carried at fair value– In case of fixed maturity

• The gain / loss as well as the difference between maturity amount and new amortised cost should be amortised using effective interest method over the remaining life of held to maturity investment

– In case of no fixed maturity• The gain / loss should remain in equity account until

derecognised– In both the cases if subsequently impaired, any previous gain /

loss recognised in equity account is taken to P&L

Gains & Losses

• Amortised cost

– Taken to P&L when derecognised / impaired

Hedging – Gains & Losses

• Fair value hedge

– P&L

• Cash flow hedge

– Equity

• Net investment in non-integral foreign operation

– Equity

Impairment

• Assess at each balance sheet date objective evidence

– Observable data

• Significant financial difficulty of the issuer

• Breach of contract

• Active market no longer exists

Impairment• Amortised cost

– Difference between carrying amount & present value of estimated future cash flows discounted at original effective interest rate

• Original invoice amount

– Difference between carrying amount & undiscounted estimated future cash flows

• Subsequent reversal should not exceed the value before impairment in both cases

Impairment

• Cost

– Difference between carrying amount & present value of estimated future cash flows discounted at current market rate of return for similar assets

– Subsequent reversal not permitted (since initial measurement at cost was an exception)

Impairment

• Available for sale

– Difference between cost & current fair value should be removed from equity account and taken to P&L

– Subsequent reversal allowed equal to the amount taken to P&L. However, no reversal permitted on equity instruments

Summing up Category

MeasurementFVTPL

HTM

assetsReceivables /

Payables *AFS *

Initial Fair

Value

FV

+/- TC

FV

+/- TC

FV

+/- TC

Subsequent Fair

value

Amortised

cost

Amortised

cost

Fair

value

Gains / Losses P&L P&L P&L Equity

Impairment /

DerecognitionP&L P&L P&L P&L

ReclassificationNot

permittedAFS

Not

applicableHTM

* Short term receivables / payables & unquoted equity instruments for which fair value is not ascertainable, measurement should be at cost

Transitional Provision

• At the time of implementing for the first time the resultant impact, net of tax, should be taken to reserves & surplus account, except

– Where the standard requires the impact to be taken to equity account

Thank You

Navin Jain

Nidhi Sapra

Suyog Desarda