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Understanding
Ind AS
CA PRANAV JOSHI, PARTNER | P. G. JOSHI & CO.
Financial
Instruments
IND AS 32, IND AS 109, IND AS 107
Overview of the Session
3CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Ind AS 32
Financial
Instrumen...
Ind AS 109 ~190 Pages
Ind AS 107 ~60 Pages
Ind AS 32 ~60 Pages
Overview of the Session
Definitions
Recognition
Measurement...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
“The presentation covers only the central theme of
the...
Ind AS 32
Financial Instruments:
Presentation
DEFINITIONS
6CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Account...
“The objective of this Standard is to establish
principles for presenting financial instruments as
liabilities or equity a...
Objective
8CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Financial Instruments
Financial Asset
Finan...
Scope
9CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
This Standard shall be applied by all entities ...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Definitions
10
A financial instrument is any contract
...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Definitions
11
Financial Assets
Cash
An equity
instrum...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Understanding the Definition
12
Cash: Cash is by a def...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Understanding the Definition
13
A contractual right:
t...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Understanding the Definition
14
A contractual right:
t...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Understanding the Definition
15
A contract that will o...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Definitions
16
Financial Liability
A contractual oblig...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Understanding the Definition
17
A contractual obligati...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Understanding the Definition
18
A contractual obligati...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Understanding the Definition
19
A contract that will o...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Definitions
20
Equity Instrument
An equity instrument ...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Puttable Instruments
A puttable instrument is a financ...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Illustration
22
Issuer Purchaser
I want to
Sell it bac...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Recap
This standard gives rules for classification of ...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Let’s Classify
24
Borrowings from Bank
Financial
Liabi...
Ind AS 109
Financial Instruments
RECOGNITION, MEASUREMENT
& DE-RECOGNITION
CA Pranav Joshi, Partner | P. G. Joshi & Co., C...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Objective
“The objective of this Standard is to establ...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Scope
This Standard shall be applied by all entities t...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Recognition
An entity shall recognise a financial asse...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Classification – Financial Assets
29
Initial
Recogniti...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Basis of Classification – Amortised
Cost
A financial a...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Basis of Classification - FVTOCI
A financial asset sha...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Basis of Classification - FVTPL
All other Financial In...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Q&A
Q - Why do we classify Financial Assets held for C...
Fair Value through OCI
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Summary
34
Financial Asset with...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Classification – Financial Liabilities
An entity shall...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Reclassification
36
• When, and only when, an entity c...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Initial Measurement
At initial recognition, an entity ...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Subsequent Measurement
After initial recognition, an e...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Derecognition
39
The contractual rights to
the cash fl...
Ind AS 107
Disclosures
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 40
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Disclosures
The carrying amounts of each Category shal...
CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
Sections not discussed
Hedge Accounting
Impairment
Acc...
Thank You
CA Pranav Joshi
Partner
P. G. Joshi & Co., Chartered Accountants
www.pgjco.com
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Ind AS on Financial Instruments

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Ind AS on Financial Instruments

  1. 1. Understanding Ind AS CA PRANAV JOSHI, PARTNER | P. G. JOSHI & CO.
  2. 2. Financial Instruments IND AS 32, IND AS 109, IND AS 107
  3. 3. Overview of the Session 3CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Ind AS 32 Financial Instruments Presentation Ind AS 109 Financial Instruments Ind AS 107 Financial Instruments Disclosures
  4. 4. Ind AS 109 ~190 Pages Ind AS 107 ~60 Pages Ind AS 32 ~60 Pages Overview of the Session Definitions Recognition Measurement De-recognition Disclosures Initial Recognition Subsequent Recognition 4CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Classification
  5. 5. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants “The presentation covers only the central theme of the standards on Financial Instruments. Exceptions to rules are ignored unless relevant to the discussion and are specifically included in the presentation.” 5
  6. 6. Ind AS 32 Financial Instruments: Presentation DEFINITIONS 6CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
  7. 7. “The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.” Objective 7CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants
  8. 8. Objective 8CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Financial Instruments Financial Asset Financial Liability Equity Instruments
  9. 9. Scope 9CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants This Standard shall be applied by all entities to all types of financial instruments except: ◦ Share-based payments ◦ Insurance Contracts ◦ Employee benefits & Loan Co ◦ Interest in Subsidiaries, Associates & Joint Ventures
  10. 10. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Definitions 10 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 Instrument
  11. 11. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Definitions 11 Financial Assets Cash An equity instrument of another entity; 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 favorable to the entity; or 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
  12. 12. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Understanding the Definition 12 Cash: Cash is by a definition a Financial Asset. It includes cash held in foreign currency translated in to the asset’s functional currency. An equity instrument of another entity: Equity Shares of another entity. ◦ If I purchase 100 shares in Microsoft Inc., the investment would meet the definition of Financial Asset.
  13. 13. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Understanding the Definition 13 A contractual right: to receive cash or another financial asset from another entity; or ◦ A typical example of such an asset would be trade receivables as these represent contractual right to receive cash. Rs. 100 Receivable Rs. 100 Payable Financial Asset
  14. 14. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Understanding the Definition 14 A contractual right: to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity; ◦ An entity holds a contract to buy apples for Rs. 100/kg while the current selling price/market price of apples is Rs. 120/kg.
  15. 15. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Understanding the Definition 15 A contract that will or may be settled in the entity’s own equity instruments and is: ◦ 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 ◦ A Ltd. takes a Rs. 1 Crore loan from B Ltd. A Ltd. will repay the loan in 1 year in shares of A Ltd. The number of shares will be determined by dividing Rs. 1 Crore by the share price in 1 year’s time i.e. the number of shares to be given is variable.
  16. 16. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Definitions 16 Financial Liability 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 unfavorable to the entity; or 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.
  17. 17. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Understanding the Definition 17 A contractual obligation: to deliver cash or another financial asset to another entity; or ◦ A typical example of such an asset would be trade payables as these represent contractual obligation to deliver cash. Rs. 100 Receivable Rs. 100 Payable Financial Liability
  18. 18. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Understanding the Definition 18 A contractual obligation: to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity; ◦ An entity holds a contract to sell apples for Rs. 100/kg while the current selling price/market price of apples is Rs. 120/kg.
  19. 19. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Understanding the Definition 19 A contract that will or may be settled in the entity’s own equity instruments and is: 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 ◦ A Ltd. takes a Rs. 1 Crore loan from B Ltd. A Ltd. will repay the loan in 1 year in shares of A Ltd. The number of shares will be determined by dividing Rs. 1 Crore by the share price in 1 year’s time i.e. the number of shares to be given is variable.
  20. 20. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Definitions 20 Equity Instrument An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. These are instruments which are neither Financial Assets or Financial Liabilities. Eg: Ordinary Shares
  21. 21. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Puttable Instruments 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. May be classified as Financial Liability or Equity Instrument depending upon the nature of the Puttable Instrument 21
  22. 22. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Illustration 22 Issuer Purchaser I want to Sell it back! Yes Sir! $ $ $ $ $ $ $ $
  23. 23. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Recap This standard gives rules for classification of an Financial Instrument into:  Financial Asset  Financial Liability  Equity Instrument 23
  24. 24. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Let’s Classify 24 Borrowings from Bank Financial Liability Obligation to deliver cash Bank Deposits Financial Asset Right to receive cash Equity Shares of Infosys Financial Asset Equity Instrument of another entity Forward contract - In the money Financial Asset Favorable Contract Preference Shares redeemable after 3 years Financial Liability Obligation to deliver cash on redemption Instrument Classification Explanation
  25. 25. Ind AS 109 Financial Instruments RECOGNITION, MEASUREMENT & DE-RECOGNITION CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 25
  26. 26. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Objective “The objective of this Standard is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows.” 26
  27. 27. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Scope This Standard shall be applied by all entities to all types of financial instruments except those specified in the standard (Interests in subsidiaries, associated and joint ventures, Leasing commitments, Employee benefits, Financial Instruments resulting in Business Combinations, Insurance Contracts) “Applicable to all entities but not all financial instruments” 27
  28. 28. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Recognition An 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. ◦ Unconditional receivables and payables are recognised as assets or liabilities when the entity becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash. 28
  29. 29. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Classification – Financial Assets 29 Initial Recognition Classification as per Subsequent Measurement Amortised Cost Fair Value through P&L (FVTPL) Fair Value through OCI (FVTOCI) the entity’s business model for managing the financial assets the contractual cash flow characteristics of the financial asset. Based on
  30. 30. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Basis of Classification – Amortised Cost A financial asset shall be measured at amortized cost if both of the following conditions are met: 30 To hold financial assets in order to collect contractual cash flows; and Business Model Contractual Cash flows Solely payments of principal and interest on the principal amount outstanding.
  31. 31. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Basis of Classification - FVTOCI A financial asset shall be measured at Fair Value Through Other Comprehensive Income if both of the following conditions are met: 31 Business Model Contractual Cash flows Solely payments of principal and interest on the principal amount outstanding. To hold financial assets for collecting contractual cash flows and selling financial assets
  32. 32. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Basis of Classification - FVTPL All other Financial Instruments to be classified as Fair Value Through Profit & Loss A/c. – Residual Classification. ◦ Financial Assets maybe classified as FVTPL subject to conditions as specified in the standard. (Fair Value Option) Eg: Convertible Bonds ◦ Held for interest cash flows + Equity at maturity 32
  33. 33. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Q&A Q - Why do we classify Financial Assets held for Cash flows and Capital Appreciation as Fair Value through OCI and as Fair Value through P&L? A – If the Financial Assets held for sale are with an entity on the reporting date, any gain/loss by change in the FV of the Financial Asset is only notional. It is not actual gain. And thus it is not part of the P&L A/c. 33
  34. 34. Fair Value through OCI CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Summary 34 Financial Asset within scope of Ind AS 109 Contractual cash flows are Principal & Interest only? Held to collect Contractual Cash flows only? Held to collect contractual cash flows and for sale? FVTPL Option? Amortized Cost Fair Value through P&L NO NO NO NOYES YES YES FVTPL Option? YES NO YES
  35. 35. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Classification – Financial Liabilities An entity shall classify all financial liabilities as subsequently measured at amortized cost except in case of certain specific exceptions given in the standard including ◦ If measuring at Fair Value through Profit or Loss results in more relevant information. The standard does not talk about measuring Financial Liabilities at Fair Value through OCI. 35
  36. 36. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Reclassification 36 • When, and only when, an entity changes its business model for managing financial assets. Financial Assets • An entity shall not reclassify any financial liability. Financial Liabilities
  37. 37. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Initial Measurement At initial recognition, an entity shall measure a financial asset or financial liability at its Fair Value plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. In the case of a financial asset or financial liability at fair value through profit or loss, at Fair Value. 37
  38. 38. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Subsequent Measurement After initial recognition, an entity shall measure a financial asset at: 38 Amortised Cost Fair Value through P&L Fair Value through OCI
  39. 39. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Derecognition 39 The contractual rights to the cash flows from the financial asset expire  Entity transfers the financial asset and  the transfer qualifies for derecognition Financial Assets It is extinguished (Obligation specified in the contract is discharged, cancelled or expires) Financial Liabilities
  40. 40. Ind AS 107 Disclosures CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants 40
  41. 41. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Disclosures The carrying amounts of each Category shall be disclosed either in the balance sheet or in the notes: 41 FVTPL Amortized Cost FVTOCI Financial Assets showing separately : 1. those designated as such by the entity by choice (under FVTPL option) 2. those mandatorily measured at fair value through profit or loss. Financial liabilities 1. Financial Assets 2. Financial Liabilities Financial Assets showing separately 1. Financial assets that are measured at FVTOCI; and 2. Investments in equity instruments designated as such upon initial recognition
  42. 42. CA Pranav Joshi, Partner | P. G. Joshi & Co., Chartered Accountants Sections not discussed Hedge Accounting Impairment Accounting of Embedded Derivatives 42
  43. 43. Thank You CA Pranav Joshi Partner P. G. Joshi & Co., Chartered Accountants www.pgjco.com

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