Financial assets must be recognized on the balance sheet date if the entity has become a party to the contractual provisions of the instrument. There are two approaches to recognition - trade date accounting and settlement date accounting. Trade date accounting recognizes assets and liabilities on the trade date, while settlement date accounting uses the settlement date. The appropriate accounting also depends on how the financial asset is classified and whether it is measured at amortized cost, fair value through other comprehensive income, or fair value through profit or loss.

2. Accounting for financial asset – Recognition
When to recognize?
On balance sheet date and
When the entity becomes party to the contractual provisions of the instrument
For example: an entity becomes party to contractual provisions when it commits to
purchase securities or to write derivative option.
Planned but not committed future transactions, no matter how likely they may be, are not
financial assets or liabilities.
For example: an entity’s estimated but uncommitted sales do not qualify as financial
assets or liabilities.
Timing of recognition of financial asset
It depends on whether the accounting is done by
•Trade date
•Settlement date.

3. Trade date accounting:
Financial asset purchased is recognized on the trade date along with simultaneous
recognition of related liability to pay for it.
Financial asset sold is derecognized on trade date along with recognition of gain/loss
on sale of that asset and related receivables.
If the financial asset is interest bearing instrument like debt or bond, interest does not
accrue on and from trade date.
Settlement date accounting:
Financial asset purchased is recognized on settlement date along with simultaneous
recognition of liability to pay for it
Financial asset sold is derecognized on settlement date along with recognition of
gain/loss on sale of that asset and related receivables.

4. An important issue is the accounting treatment of fair value change between the trade
date and settlement date.
Example: A ltd purchases a financial asset as on 29th March 2012 for Rs 100 lakh. The
fair value of the asset on 31st March 2012 (year end) and 2nd April 2012 (settlement
date) are Rs 105 lakh and Rs 103 lakh respectively. Accounting treatment of the
transaction would depend upon classification of the financial asset.

5. Trade date accounting:
Date HTM investment AVS asset re- Assets at FVTPL re-
carried at amortized measured at fair measured at fair
cost value with changes in value with changes in
equity P&L
29th March 2012
Financial Asset Dr 100 100 100
to Financial liability 100 100 100
31st March 2012
Financial Asset Dr 5
to P&L A/c 5
Financial Asset Dr 5
To fair value reserve 5
A/c
2nd April 2012
P&L A/c Dr 2
To financial asset 2
Fair value reserve Dr 2
To financial asset 2
Financial liability Dr 100 100 100
To cash 100 100 100

6. Settlement date accounting:
Date HTM investment AVS asset re- Assets at FVTPL re-
carried at amortized measured at fair measured at fair
cost value with changes in value with changes in
equity P&L
29th March 2012 No entry on trade No entry on trade No entry on trade
date date date
31st March 2012
Receivables Dr 5
to P&L A/c 5
Receivables Dr 5
To fair value reserve 5
A/c
2nd April 2012
Financial Asset Dr 100
To Financial 100
liability/cash

7. Financial Asset Dr 103
Fair value reserve A/c Dr 2
To financial liability/cash 100
To Receivable 5
Financial Asset Dr 103
Fair value reserve A/c Dr 2
To financial liability/cash 100
To Receivable 5

8. Initial and subsequent recognition and measurement of financial assets:
A financial asset or financial liability at FVTPL should be measured at fair value on the
date of acquisition or issue.
Short-term receivables and payable with no stated interest rate should be measured at
invoice amount if the effect of discounting is immaterial.
Other financial asset or financial liability should be measured at fair value plus/minus
transaction costs that are directly attributable to the acquisition or issue of financial asset
or liability.
Fair value:
It is the amount at which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction.
Fair value hierarchy can be followed as under:
Active market- quoted price
No active market- valuation techniques- DCF, option pricing model
No Active market- equity investment less impairment loss
Fair value concept presumes that the entity is a going concern. Therefore fair value is
not an amount that an entity would receive or pay in a forced transaction, involuntary
liquidation or distress sale.

9. Transaction cost:
Transaction costs are the incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or financial liability.
The various transaction costs that an entity incurs in issuing financial instrument might
include:
Registration and other regulatory fees
Printing costs
Stamp duty
Transaction cost of an equity transaction which are directly attributable to it and are
incremental will be deducted from equity.

11. Category of financial Measurement at Measurement at Impairment test (if
assets initial recognition subsequent reporting objective evidence)
date
FVTPL At fair value, on At fair value No
All stand-alone acquisition date, Change in fair value
derivatives come here which is acquisition between two click here for example
price. reporting dates is
Directly attributable charged/credited to
transaction cost is profit and loss A/c
charged to profit and directly
loss A/c separately
Available for sale At fair value, on At fair value Yes
acquisition date, Change in fair value
which is acquisition between two
price plus transaction reporting dates is Click here for example
costs that are directly charged/credited to a
attributable to separate component
acquisition or issue of of equity, say,
financial asset investment valuation
reserve

12. Category of financial Measurement at Measurement at Impairment test (if
assets initial recognition subsequent reporting objective evidence)
date
Held to maturity At fair value, on At amortized cost Yes
acquisition date, applying effective
which is acquisition interest rate.
price plus transaction
costs that are directly Click here for example
attributable to
acquisition or issue of
financial asset
Loans and receivable Short term receivable At amortized cost Yes
with no stated interest applying effective
rate should be measured interest rate.
at original invoice
amount if the effect of
discounting is Click here for example
immaterial. Other items
at fair value, on
acquisition date, which is
acquisition price plus
transaction costs that are
directly attributable to
acquisition or issue of
financial asset

13. Category of financial Measurement at Measurement at Impairment test (if
assets initial recognition subsequent reporting objective evidence)
date
Financial assets, fair At cost At cost Yes
value of which can not
be reliably measured Click here to go to
next slide

14. Example: Held for trading securities (FVTPL)
A ltd began operations on January 1, 2012. during the year A ltd purchased
various marketable equity securities. The cost and fair value of these securities
at the end of 2012 were as follows:
Face value cost Market Unrealised
loss gain
P ltd Rs. 10 2000 2500 500
Q ltd Rs. 10 3000 2600 400
R ltd Rs. 10 1000 1200 200
S ltd Rs. 10 1500 1350 150
7500 7650 550 700

15. Solution:
Adjusting entry
Valuation Allowance Dr 150 (7650-7500)
To Profit and Loss A/c 150
Debit balance in Valuation Allowance A/c indicates fair value is larger than cost and
credit balance indicates fair value is less than cost.
Dr. (Cr.)
Trading securities A/c (cost) 7500
Valuation Allowance 150
Trading securities at fair value 7650
A ltd’s securities would be reported on its December 31, 2012 balance sheet in the
Current asset section at their fair value of Rs 7650.
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16. Example: Available for sale
Assume same information as given in previous example except that the securities
qualify as available for sale.
Solution:
Adjusting entry
Valuation Allowance Dr 150 (7650-7500)
To Investment valuation reserve A/c 150
Investment valuation reserve account is included in the stockholder’s equity section
of the balance sheet.
A ltd’s available for sale securities would be reported on it’s December 31, 2012
balance sheet at their fair value of Rs 7650. Each security would be evaluated to
determine whether it should be classified in current asset or in non-current assets.
Those that are expected to be sold within the next year should be included in
current assets. The others should be included in non-current assets.
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17. Example: Held to Maturity
On January 1, year 1, A ltd purchased Rs 100000 face value , 3 year, 8% bonds of B ltd
for Rs 94924 which provides an effective interest rate of 10%. The bonds pay interest
semi-annually on June 30 and December 31.
Solution:
Amortized schedule -effective interest method
date cash interest effective interest Discount Carrying value of bonds
(4% semi annually) (5% semi annually) Amortization or amortized cost
01/01 Yr 1 94924
30/06 Yr 1 4000 4746 746 95670
31/12 Yr 1 4000 4784 784 96454
30/06 Yr2 4000 4823 823 97276
31/12 Yr 2 4000 4864 864 98140
30/06 Yr 3 4000 4907 907 99047
31/12 Yr 3 4000 4952 952 100000
Cash interest is to be calculated on face value and effective interest is to be calculated
on previous amortized cost.

18. Entries for the first year and maturity date:
01/01/yr 1
Investment in bonds Dr 94924
To Cash 94924
(initial recording at fair value)
30/06/Yr 1
Cash Dr 4000
Investment in bonds Dr 746
To Interest income 4746
31/12/Yr 1
Cash Dr 4000 Click here to go back
Investment in bonds Dr 784
To Interest income 4784
31/12/Yr 3
Cash Dr 4000
Investment in bonds Dr 952
To Interest income 4952
Cash Dr 100000
To Investment in binds 100000

19. Example: Loans and receivable
A ltd grants Rs 10 lakhs loan to its employees on January 1, 2012 at a concessional
interest rate of 4% p.a. Loan is to be repaid in five equal annual installments along with
interest. Market rate of interest for such loan is 10% p.a. At what value loan should be
recognized initially and also calculate the amortized cost for all the subsequent five
years.
Solution:
(a) Calculation of initial recognition amount of loan that will be discounted present value
of future cash flows from re-payment of the loan
Year end Cash in flows Total Discount factor Discounted
Principal Interest At 10% value
2012 200000 40000 240000 0.9090 218160
2013 200000 32000 232000 0.8263 191702
2014 200000 24000 224000 0.7512 168269
2015 200000 16000 216000 0.6829 147506
2016 200000 8000 208000 0.6208 129126
Present value or Fair value 854763

20. Entries
1/1/2012
Staff loan A/c Dr 1000000
To Bank 1000000
Staff cost A/c Dr 145267 (1000000-854763)
To staff loan 145267
(loan will be initially recognized at its fair value i.e. Rs 854763 and balance amount will
be debited to staff cost)
(b) Calculation of amortized cost at the end of each year
Year Balance Interest to be Re-payment Amortized cost
recognized (10%) (including interets)
2012 854763 85476 240000 700239
2013 700239 70024 232000 538263
2014 538263 53826 224000 368090
2015 368090 36809 216000 188899
2016 188899 18890 208000 NIL

21. Entry for 2012
Staff loan A/c Dr 85476
To Interest on staff loan 85476
Bank A/c Dr 240000
To staff loan 240000
Interest on staff loan Dr 85476
To Profit & Loss A/c 85476
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23. Roshankumar S Pimpalkar