The document outlines the key concepts and regulations regarding financial instruments under Indian Accounting Standards (Ind AS), including definitions of financial assets, liabilities, and equity instruments. It covers initial and subsequent measurement, classification, and reclassification methods, as well as impairment assessments and derecognition criteria. Additionally, it discusses disclosure requirements and the intent behind hedge accounting practices.

1. FINANCIAL INSTRUMENTS
Duliajan CPE Study Circle
(8th
October, 2016)
1
CA. Arvind Kumar
FCA, FCMA, CIMA Adv. Dip MA, DipIFR (ACCA, UK)

2. INTRODUCTION
The relevant Ind ASs are:
Ind AS 32 Financial Instruments:
Presentation
Ind AS 107 Financial Instruments:
Disclosures
Ind AS 109 Financial Instruments
2

3. SCOPE
Excluded
Share based payments
Interests in subsidiaries , associates and joint arrangements
Employers’ rights and obligations under employee benefits
plan
Rights and obligation arising under insurance contracts
Rights and obligations under leases however requirement of
impairment , derecognition and requirements of embedded
derivatives are covered
liability that it recognises as a provision
3

4. FINANCIAL INSTRUMENTS: DEFINITIONS
4
Financial instrument
This is a contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity.
Financial asset
This is defined as any asset that is:
cash;
an equity instrument of another entity;
a contractual right:
 to receive cash or another financial asset from another entity; or
 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:
 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 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.
For this purpose the entity’s own equity instruments do not include instruments that are
themselves contracts for the future receipt or delivery of the entity’s own equity
instruments.

5. FINANCIAL INSTRUMENTS: DEFINITIONS
5
Financial liability
This is defined as any liability that is:
a contractual obligation:
 to deliver cash or another financial asset to another entity; or
 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.
Equity instrument
Any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.

6. FINANCIAL INSTRUMENTS: EXAMPLES
6
Financial assets Non-financial assets
Investment Advances for raw material
Trade receivables Capital advances
Financial liabilities Non-financial liabilities
 Security Deposits Statutory dues
Trade payables Advances from customers
Equity Non-equity
Non redeemable Preference
shares
Redeemable Preference
shares
Non redeemable debenture
where the payment of
interest is optional
Redeemable debenture

7. TREASURY SHARES
7
If an entity reacquires its own equity instruments, those
instruments (‘treasury shares’) shall be deducted from equity.
No gain or loss can be recognised in profit or loss on the
purchase, sale, issue or cancellation of an entity’s own equity
instruments.
Such treasury shares may be acquired and held by the entity or
by other members of the consolidated group.
Consideration paid or received should be recognised directly in
equity.
To be disclosed separately either in the balance sheet or in the
notes as per Ind AS1 and Ind AS 24

8. COMPOUND FINANCIAL INSTRUMENT
Compound financial instrument: is a debt instrument with an
embedded conversion option, such as a bond convertible into ordinary
shares of the issuer, and without any other embedded derivative
features.
Requirement: Ind AS 32 requires compound financial instruments be
split into their component parts separately in the financial
- a financial liability (the debt)
- an equity instrument (the option to convert into shares)
For example: convertible debenture issued with the option to
holder to convert into equity shares at some future date
8

9. COMPOUND FINANCIAL INSTRUMENT : SPLITTING
•How to account for a convertible loan:
 Calculate liability component based on present value of future cash
flows assuming non­conversion
 Apply discount rate equivalent to interest on similar non­
convertible
debt instrument (i.e. discount the cash flows at the market rate of
interest).
 Equity = remainder (i.e. deduct the present value of the debt from the
proceeds of the issue)
9

10. COMPOUND FINANCIAL INSTRUMENT : SPLITTING
•Example of splitting:
ABC Ltd. issues a convertible loan that attracts interest of 2%.
The market rate is 8%, being the interest rate for an equivalent
debt without the conversion option.The loan of Rs.5 million is
repayable in full after three years or convertible to equity.
Split the loan between debt and equity at inception and
calculate the finance charge for each year until conversion
/redemption.
10

11. COMPOUND FINANCIAL INSTRUMENT : SPLITTING
11
Year(s) Cash flow Discount factor PresentValue
1 100 0.093 93
2 100 0.857 86
3 5100 0.794 4049
Cash inflow
4228
Value of Debt = 4228 and equity = 772
Year(s) Opening Finance(8%) Paid(2%) Closing
1 4228 338 (100) 4466
2 4466 357 (100) 4723
3 4723 377 (100) 5000
[Amount in Rs’ 000]

12. FINANCIAL INSTRUMENTS : MEASUREMENT
•Initial Measurement:
Financial asset or financial liability (except trade receivables and
financial asset or financial liability at fair value through profit or
loss) should be measured at fair value plus or minus
transaction costs
12
Description FVTPL FVOCI Amortised cost
Transaction cost Charged off Capitalised Capitalised

13. FINANCIAL INSTRUMENTS : MEASUREMENT
Situation:
If the fair value of the financial asset or financial liability at initial
recognition differs from the transaction price.
What is fair value:
Fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. [para 9 of Ind AS113]
Solution:
Recognise gain or loss as per B5.1.2A of Ind AS 109 if fair value
is based on level 1 input.
13

14. FINANCIAL INSTRUMENTS : SUBSEQUENT
MEASUREMENT
• Financial assets:
amortised cost;
fair value through other comprehensive income; or
fair value through profit or loss
• Financial liabilities:
amortised cost; or
fair value through profit or loss
14

15. FINANCIAL INSTRUMENTS : CLASSIFICATION
• Financial asset shall be measured at amortised
cost if
a) entity holds the financial asset within a business model
whose objective is to collect the contractual cash flows
(Business model test) and
b) the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of
principle and interest on the principal outstanding
(Contractual cash flow test)
• If Business model is such that it collects cash flows
and sells financial assets then the financial assets
must be classified as FairValue through OCI
15

16. FINANCIAL INSTRUMENTS : CLASSIFICATION
• Financial asset shall be measured at Fair Value through
Profit or Loss unless it is measured at amortised cost or
FairValue through OCI
• However, in case of equity instruments if it is not
held for trading an entity may make an irrevocable
election to present the subsequent changes in the fair
value in other comprehensive income instead of
presenting the same to Profit or Loss. [what about
foreign exchange gains or losses on such
investments – refer para B5.7.3 of Ind AS 109]
16

17. FINANCIAL INSTRUMENTS : CLASSIFICATION
• Financial liabilities are subsequent measured at
amortised cost except for:
Financial liabilities at fair value through profit or loss –
liabilities including derivatives
Financial guarantee contracts
Financial liabilities that arise when transfer of financial
asset does not qualify for derecognition
17

18. AMORTISED COST
18
Amortised cost =
Amount measured at initial recognition
Less: Repayments of principal
Add/ less: Cumulative amortisation of any
difference between initial
measurement and maturity amount
(using effective interest method)
Less: Reduction for impairment or
uncollectability (for assets)

19. EFFECTIVE INTEREST METHOD
19
Effective interest is Internal Rate of Return
that exactly discounts future cash payments
(receipts) to the carrying amount
Amortised cost = PV of future cash receipts
(payments) discounted at effective interest
rate
Interest expense (income) = carrying amount
at beginning of period x effective interest
rate

20. EFFECTIVE INTEREST METHOD: EXAMPLE
20
ABC Ltd. took a loan of Rs.4,00,000/- (Nominal) on year 1 and incurred Rs.
84,474/- as processing. Loan of Rs.4,00,000/- is repayable on year 5. Interest
rate = 4%. Considering the above facts IRR comes to 9.5%.
Year Op.
Balance
(a)
Finance cost
(P/L)
(b = a*9.5%)
Actual
Interest (c =
Rs. 4L*4%)
Closing
Balance
(a+b-c)
1 315526 29975 16000 329501
2 329501 31303 16000 344804
3 344804 32756 16000 361560
4 361560 34348 16000 379908
5 379908 36092 16000 400000

21. FAIR VALUATION OF EMPLOYEE LOAN: EXAMPLE
21
Loan of Rs. 4,00,000/- given to employee @ 2% pa (annual compounding)
interest for 4 years. Market rate of interest for such loan is @9% pa (annual
compounding).
Year Op.
Balance
(a)
Interest (P/L)
(b = a*9%)
Actual Annual
Instalment
(c )
Closing
Balance
(a+b-c)
1 340333 30630 105050 265913
2 265913 23932 105050 184795
3 184795 16632 105050 96377
4 96377 8673 105050 0
Annual instalment for the loan = Rs.1,05,050/-
Present value of instalments @ 2% = Rs. 4,00,000/-
Present value of instalments @ 9% = Rs. 3,40,333/- [at fair rate of interest]
Difference in PV = Deferred empl. cost = Rs.59,667/- charged to P/L
equally in 4 years

22. FINANCIAL INSTRUMENTS: RECOGNITION AND
MEASUREMENT – SUMMARY (FINANCIAL ASSETS)
22
Description Amortised cost
Fair value
through OCI
(FVOCI)
Fair value
through P/L
(FVPL)
Basic Rule Instrument is carried
at amortised cost
Gain / loss on
account of
revaluation is shown
in OCI
Gain / loss on
account of
revaluation is shown
in P/L
Transaction cost Capitalised Capitalised Charged off
Conditions Test to be passed:
1) Business model
test, and
2) Contractual cash
flow test
Collects cash flows
and sells financial
assets
Residue provision
Interest income Recognised to P/L Not recognised Not recognised
Note: In case of equity instruments, not held for trading an option for irrevocable election is
available to present the subsequent changes in the fair value through OCI instead of
P/L.

23. FINANCIAL INSTRUMENTS: RECOGNITION AND
MEASUREMENT – SUMMARY (FINANCIAL LIABILITIES)
23
Description Amortised cost
Fair value through
P/L (FVPL)
Basic Rule Instrument is carried at
amortised cost
Gain / loss on account of
revaluation is shown in P/L
Transaction cost Capitalised Charged off
Conditions It is default provision Liabilities are either
derivative or held for
trading
Finance Cost Recognised to P/L Not recognised

24. FINANCIAL INSTRUMENTS: RECLASSIFICATION
24

Shall be applied prospectively from the reclassification date
Principles governing the reclassification are as below:
Category before
reclassification
Category after
reclassification
Treatment on
reclassification
Amortised cost FVTPL Gain / loss is shown in P/L
FVTPL Amortised cost
FV on reclassification date
becomes new gross carrying
amount
Amortised cost FVOCI Gain / loss is shown in OCI
FVOCI Amortised cost
Cumulative gain or loss
previously recognised in OCI
is removed from equity and
adjusted against the fair value
of financial assets
Continued….

25. FINANCIAL INSTRUMENTS: RECLASSIFICATION
25
Category before
reclassification
Category after
reclassification
Treatment on reclassification
FVTPL FVOCI
Financial assets continues to be
measured at fair value
Effective interest rate is determined
on the basis of the fair value of the
asset at the reclassification date
FVOCI FVTPL
Financial assets continues to be
measured at fair value
Cumulative gain or loss previously
recognised in OCI is reclassified
from equity to Profit or Loss
Amount recognised in OCI on
account of irrevocable election of
equity investment are never
classified to profit or loss

26. FINANCIAL INSTRUMENTS: IMPAIRMENT
26
In scope Out of scope
Debt instruments measured at
amortised cost or at FVOCI (e.g. Loans,
trade receivables and debt securities)
Equity investment
Loan commitment issued that are not
measured at FVTPL
Loan commitment issued that are
measured at FVTPL
Lease receivables Other financial instruments measured
at FVTPL
Financial guarantee contracts that are
measured at FVTPL

27. FINANCIAL INSTRUMENTS: IMPAIRMENT –
GENERAL APPROACH
27
• Expected Credit loss approach has been
laid down in Ind AS 109 for impairment
instead of previously used incurred loss
model.
Expected credit loss are the present value of all
cash shortfalls over the expected life of the
financial instruments.
Cash shortfall is the difference between the cash
flows due as per contract and the expected cash
flows

28. FINANCIAL INSTRUMENTS: IMPAIRMENT –
ASSESSMENT
28
• Under Ind AS 109, impairment is measured as either
12-month expected credit loss; or
Lifetime expected credit loss
 12-month expected credit losses are all cash shortfalls that will
result if a default occurs in the 12 months after the reporting
date.
 Lifetime expected credit losses are the result from all possible
default events over the expected life of the financial instrument
 Default is not defined in standard and entities will have to define it
in the context of their specific types of assets and in a way that is
consistent with their credit risk management practices. However,
standard contains a rebuttable presumption that default does not
occur later than 90 days past due.

29. FINANCIAL INSTRUMENTS: IMPAIRMENT –
ASSESSMENT
29
• Expected credit losses are measured :
as 12-month expected credit losses if credit risk on a
financial instrument has not increased significantly since initial
recognition
as lifetime expected credit losses if credit risk on a financial
instrument has increased significantly
12-month
expected
credit losses
Transfer if the credit
risk on the asset has
increased significantly Lifetime
expected
credit losses
Move back
if transfer condition is
no longer met

30. FINANCIAL INSTRUMENTS: IMPAIRMENT –
ASSESSMENT
30
• Grouping of financial instruments on the basis of
shared credit risk characteristics is allowed to
assess significant increase in credit risk
• Example of shared credit risk characteristics:
Instrument type
Credit risk ratings
Collateral type
Remaining term of maturity
Industry
Date of originator
Geographical location of borrower

31. FINANCIAL INSTRUMENTS: IMPAIRMENT
31
• Presentation of expected credit losses in
balance sheet:
The carrying amount of the assets in the
statement of Balance Sheet is stated net of the
loss allowance
• Presentation of expected credit losses in
profit or loss:
At each reporting date the change in expected
credit losses is recognised as an impairment
gain or loss

32. FINANCIAL INSTRUMENTS: DERECOGNITION
32
• Derecognition of a financial asset:
Derecognition = remove from balance sheet
Only when:
a. Rights to cash flows expire or settled
b. Substantially all risks and rewards (cash flows)
transferred to other entity
c. Transferred some but not substantially all
risks and rewards, and physical control of
asset transferred to another party who has
the right to sell the asset to an unrelated
third party.

33. FINANCIAL INSTRUMENTS: DERECOGNITION
33
• Derecognition of a financial asset:
• In case (c) above:
Derecognise old asset entirely, and
Recognise separately any rights and
obligations retained or created in the
transfer (measure at fair value)
• If transfer does not result in derecognition, keep
transferred asset on books and recognise financial
liability for the consideration received
Do not offset

34. FINANCIAL INSTRUMENTS: DERECOGNITION
34
• Derecog. of financial asset – examples:
√ Must derecognise: Sell receivables to bank but
we continue to collect and remit, for a handling
fee. Bank assumes credit risk.
√ May not derecognise: Same facts, as above
except entity agrees to buy back any
receivables in arrears for more than 90 days.
Entity continues to recognise the receivables
until collected or writeoff as uncollectible.

35. FINANCIAL INSTRUMENTS: DERECOGNITION
35
• Derecognition of a financial liability:
Only when extinguished, that is:
a. Discharged
b. Cancelled
c. Expired
• If existing debt is replaced with new one
with substantially different terms (or there
is a significant modification of terms):
Treat as new liability and extinguishment of
original liability

36. FINANCIAL INSTRUMENTS: DISCLOSURE
36
• Disclose accounting policies for FI
• Disclose financial assets and liabilities by
categories in the balance sheet:
Equity or debt at FVTPL
Debt at amortised cost
Liabilities at FVTPL
Liabilities at amortised cost

37. FINANCIAL INSTRUMENTS: DISCLOSURE
37
• Terms, conditions, and restrictions of financial
assets and liability
• For those at FVTPL, details of how FV was
determined
• Details of transfer of financial asset that did not
qualify for derecognition
• Details of financial assets pledged as collateral
• Details of defaults and breaches on loans
payable

38. FINANCIAL INSTRUMENTS: DISCLOSURE
38
• Items of income, expense, gains and losses:
Changes in FV for instruments measured at
FVTPL
Total interest income and total interest
expense on FI not measured at FVTPL
Impairment gain or loss by class of financial
asset
loss allowance along with reconciliation for
movement of balance

39. FINANCIAL INSTRUMENTS: HEDGE ACCOUNTING
39
• Objective:
 is to represent in the financial statements, the
effect of an entity’s risk management activities that
use financial instruments to manage exposures
arising from particular risks
• Types of hedging relationships:
 Fair value hedge
 Cash flow hedge and
 Hedge of a net investment in a foreign operation

40. 40
Thank you
&
wish you a very happy Durgapuja