The document discusses financial instruments and their accounting treatment under Indian Accounting Standards. It defines financial instruments and covers their classification as financial assets, financial liabilities or equity. It discusses recognition, measurement, impairment and derecognition of financial instruments. The presentation also covers debt vs equity classification, compound financial instruments and accounting for derivatives like forward contracts.
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Annual IFRS update delivered by Paul Rhodes to partners and managers group at Crowe Soberman LLP.
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Aptivaa is pleased to launch a series of blogs to apprise readers of some of the key aspects related mostly to Impairment Modeling, for compliance with the new accounting standards (IFRS 9), as well as to have a conversation with the readers about the challenges that banks are facing in their implementation efforts.
Summary and Overview of new IFRS 9 on Financial instruments - covering valuation models, the impairment approach for trade receivables, and hedge accounting examples
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IFRS 9 is an International Financial Coverage Standard (IFRS) published by the International Audit Requirement Board (IASB). It includes 3 main subjects: category and measurement of economic tools, disability of financial properties, and hedge bookkeeping.
Annual IFRS update delivered by Paul Rhodes to partners and managers group at Crowe Soberman LLP.
Topics covered are two of the big shiny new standards: Financial Instruments IFRS 9; Revenue IFRS 15 plus an update of other standards changes
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https://seribangash.com/difference-public-and-private-company-law/
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2. Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial instruments – Definition
Presentation – Debt v/s Equity
Recognition and Initial Measurement
Subsequent Measurement
Derecognition
Disclosures
3. Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments - Definition
Financial instruments are defined as any contract that gives rise
to:
- financial asset of one entity and
- financial liability or equity instrument of another entity.
4. Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
FinancialAssets, Financial Liabilities and
Equity
FINANCIALASSETS
• Cash;
• Equity instrument of
another entity;
• Contractual right to
receive cash or another
financial asset or to
exchange financial assets
or financial liabilities under
potentially favorable
conditions;
• Certain contracts settled in
entity’s own equity.
FINANCIALLIABILITIES
• Contractual
obligation to
deliver cash or
another financial
asset or to
exchange financial
assets or financial
liabilities under
potentially
unfavorable
conditions;
• Certain contracts
settled in entity’s
own equity.
EQUITYINSTRUMENT
• Contract
evidencing
residual interest in
the assets of an
entity after
deducting all its
liabilities.
5. Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Presentation of Financial Instruments
• Presentation sets out principles for –
Debt v/s Equity;
Compound Financial Instruments;
Treasury shares;
Offsetting financial assets and financial liabilities
6. Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Debt v/s Equity
(Para 15 of IAS 32)
Assess at initial recognition
Classification continues until disposal
Determine liability component
Equity is residual
No gain or loss
Yes
Liability
No
Equity
Part
Compound instrument
Is there a contractual obligation that the issuer cannot avoid?
7. Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Compound Financial Instruments
• IStaR Ltd. issues 1000 bonds convertible into
its own shares in 3 years. The bonds are
issued at par with a face value of INR 100/-
per bond. Interest is payable annually at
nominal interest at 6% p.a. Each bond is
convertible at anytime up to maturity in 125
equity shares. When bonds are issued the
prevailing market interest rate for similar debt
without conversion options is 9% p.a.
• Solution:
Under this approach, the liability element is
valued first, and the difference between the
proceeds of the bond issue and the fair value
of the liability is assigned to the equity
component. The present value of the liability
component is calculated using a discount rate
of 9%, the market rate for similar bonds with
no conversion rights.
• PV of the principal 100,000/-
payable at the end of 3 yrs (77,200)
PV of the interest 6,000/-
payable annually for
3 years (15,186)
------------
Total Liability Component (92,386)
• Proceeds of the Bond 100,000
------------
• Equity component (bal. fig) 7,614
=======
• Discounting factor @ 9%
1 year 0.917
2 year 0.842
3 year 0.772
8. Recognition & Initial Measurement of
Financial Instruments
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
All financial assets and financial liabilities, including derivatives,
should be recognised on the balance sheet at fair value when the entity
becomes party to the contractual provisions of the instrument
Financial assets
@
“fair value of
consideration
given”
Financial liabilities
@
“fair value of
consideration
received”
Fair value is the amount for which an asset could be exchanged or a liability
settled, between knowledgeable, willing parties in an arm‟s length transaction
9. Classification – Financial Assets
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Category Definition
Financial assets at fair
value through profit or
loss (FvPL)
• Financial assets held for trading
• Derivatives (unless accounted for as hedges)
• Financial assets designated to this category under the
fair value option
Loans and receivables
(L&R)
Non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market
Held-to-maturity (HTM) Non-derivative financial assets with fixed or determinable
payments and fixed maturity that the entity has the
positive intent and ability to hold to maturity
Available-for-sale
(AFS)
• All financial assets that are not classified in another
category. Called the ‘residual’ category
10. Classification – Financial Liabilities
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Category Definition
Financial liabilities at
fair value through
profit or loss (FvPL)
• Financial liabilities held for trading
• Derivatives (unless accounted for as hedges)
• Financial liability designated to this category under the
fair value option
Other financial
liabilities
All financial liabilities that are not classified at fair value
through profit or loss. „Residual‟ category
11. Subsequent Measurement of Financial
Instruments
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Instrument
Financial Assets at fair value
through profit & loss
Loans & Receivables (L&R)
Held to maturity (HTM)
Available for sale (AFS)
Financial Liabilities at fair
value through profit & loss
Other Financial liabilities
Measurement
Fair Value
Amortized Cost
Amortized Cost
Fair Value
Fair Value
Amortized Cost
Value
Changes
Profit & Loss
Not relevant
(unless impaired)
Not relevant
(unless impaired)
Equity
(unless impaired)
Profit & Loss
Not relevant
12. Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Amortized Cost & Effective Interest Rate
(EIR)
Amortisation is calculated using the effective interest rate method.
Initial
recognition
amount -
Amortised
cost =
Principal
repayments
-/+
Accumulated
interest -
Impairment
reduction
The effective interest rate is defined as “the rate that exactly discounts estimated future
cash flows through the expected life of the financial instrument or, where appropriate, a
shorter period to the net carrying amount of the financial asset or financial liability”.
13. Effective Interest Rate (EIR)
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
15. Zero Coupon Bond
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Modi & Kejriwal Ltd. issued a zero coupon bond of par value ` 100 at `68 ; maturity 5
years
Years Cash flows Interest Amortized Cost Journal Entry
0 68 68
Bank A/c Dr 68
Zero Coupon Bond A/c 68
1 0 5.453 73.4526
2 0 5.89 79.3424
3 0 6.362 85.7045
4 0 6.872 92.5767
5 -100 7.423 100
IRR 8.02%
16. Derivatives
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Derivatives are instruments with all three of the following
characteristics
Value changes in response to changes in specified underlying
price/ index (e.g. interest rate, FX rate, share price)
Requires no or little net investment
Settled at a future date
Examples of derivatives:
Forward FX contract
Interest rate swap
Collar and Caps
“If you don’t
know where
you’re going
you’re highly
unlikely to get
there”
17. Forward Contract Accounting
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Purchase of Buy USD - Sell INR forward contract (Assume Incremental Borrowing rate @ 6% or alternatively use WACC)
Forward Spot
Forecast purchase $ 10000
1.10.2010 45.6 45.20 6 month
31.12.2010 45.5 45.10 3 month
31.3.2011 45.00 0 month
Journal Entries
1.10.2010 Entry with zero amount Discounted Undiscounted
31.12.2010 Unrealized P & L A/c Dr 985.22 -985.22 -1,000
Forward Liability Cr 985.22
31.3.2011 Unrealized P & L A/c Dr 5,014.78 - -6,000
Forward Liability 5,014.78
31.3.2011 Purchases Dr 4,50,000
To Bank 4,50,000
Forward Liability Dr 6,000.00
To Bank 6,000.00 4,56,000
“Jack be
nimble
Jack be quick”
18. Derecognition
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
• De-recognition rules were developed to deal with „off balance
sheet financing’
• The standard combines the „risk and rewards approach‟ and
„control approach‟
• IAS 39 details principles for:
• Complete de-recognition
• Partial de-recognition (e.g. servicing rights retained)
• De-recognition combined with recognition of a new liability
(e.g. credit risk guaranteed)
19. Derecognition flowchart – Financial Assets
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Part or entire asset?
Rights to cash flows expired? Derecognition
Rights to cash flows transferred?
Pass through arrangement? No derecognition
DerecognitionSubstantially all risks and rewards transferred?
Substantially all risks and rewards retained?
Control retained?
Continuing involvement
Consolidation
No derecognition
Derecognition
NO
YES
NO
YES
NO
NO
YES
NO
YES
YES
NO
YES
20. Derecognition – Financial Liabilities
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
• Financial liability (or part thereof) is removed from the
balance sheet when it is extinguished, i.e. when the
obligation is discharged or cancelled or expires
