CA Final Financial Instruments Summary of Ind as 32,107,109

Shree Guru Kripa’s Institute of Management

CA Final Financial Reporting – Additional Material

Highlights of Principles under Ind AS – 32, 107 & 109 1.

Financial Instrument

Contract that gives rise to a – (a) Financial Asset of one Entity, and (b) Financial Liability / Equity Instrument of another Entity. 2. Chain of contractual rights / obligation is a Financial Instrument, if it will ultimately lead to – (a) Receipt / Payment of Cash, or (b) Acquisition / Issue of an Equity Instrument. Note: Ability to exercise a Contractual right / requirement to satisfy a Contractual Obligation may be absolute or contingent on the occurrence of a future event. Hence, Contingent Right / Obligation is a Financial Instrument even if it is not recognized in the Financial Statements.

Classification

1. 2.

Non–Financial Instruments

Prepaid Expenses, Inventory, Property, Plant and Equipment, Intangible Assets, Advances given / received for Goods and Services, Deferred Revenue, Warranty Obligations, Income Taxes, Operating Leases, Gold. 1. 2.

Financial Asset

Examples of Financial Assets

Primary Financial Instruments: Receivables, Payables, etc. Derivative Financial Instruments: Forward, Futures, Options, Interest Rate / Currency Swaps etc.

Cash / Equity Instrument of another Entity, Contractual right to – (a) receive Cash / another Financial Asset from another Entity, or (b) exchange Financial Assets or Financial Liabilities with another Entity under conditions that are potentially favourable to the Entity.

Cash, Cash Equivalents, Bank Balance, Deposits given, Trade and Other Receivables, Bills Receivables, Investments in Equity Shares / Debentures, Promissory Note to receive Government Bonds, Perpetual Debt Instruments held, Financial Guarantee received, Finance Lease for Lessor, Gold Bond held.

Financial Liability

Contractual Obligation to – (a) deliver Cash or another Financial Asset to another Entity, or (b) exchange Financial Assets or Financial Liabilities with another Entity under conditions that are potentially unfavourable to the Entity.

Examples of Fin. Liability

Deposits received, Trade and Other Receivables, Bills Payables, Loans including Bank Loan, Finance Lease for Lessee, Financial Guarantee given, and Promissory Note payable in Government Bonds.

Contracts settled in own Equity Instruments

Financial Asset / Liability includes Contract that may besettled in Entity’s Own Equity Instruments& is – 1. Non–Derivativefor which the Entity is or may be obliged to receive/ deliver a deliver a variable numberof the Entity‘s own Equity Instruments; or 2. Derivativethat will or may be settled other than bythe exchange of a fixed amount of Cash / another Financial Asset for a fixed numberof the Entity‘s own Equity Instruments.

Equity Instrument

Conditions for Equity Instrument

Puttable / Pro–Rata

Any Contract that evidences a residual interest in interest in the Entity’s Assets after deducting all of its Liabilities. Examples: (a) Non–PuttableOrdinary Shares,(b) Warrants / Written Call Option that allow the Holder to purchase a fixed number of Non–PuttableOrdinary Shares for a fixed amount of Cash/ another Fin. Asset. Instruments

Classification

Puttable Instruments / Instruments imposing obligation to deliver pro rata share in Net Assets only on Liquidation[See Liquidation[See Next Point]

If Instrument specific conditions and Issuer specific conditions are met, classified as Equity Instrument. If not satisfied, it is classified as Financial Liablity.

Preference Shares that provides for Redemption on a specific date or at the option of the Holder

Financial Liability, since the Issuer has an Obligation to transfer Financial Asset to the Holder.

Preference Shares that provides for Redemption at the option of Issuer/ Non–Redeemable Pref. Shares

Classification is based on other rights that attach to them, and substance of contractual arrangements.

Cumulative / Non–Cumulative Pref. Shares,the distributions are at the discretion of the Issuer

Equity Instruments

1. A Puttable Financial Instrument includes a contractual obligation for the Issuer to repurchase / redeem that Instrument for Cash / another Financial Asset on exercise of the put. 2.

Pro–rata share =

Entity' s Net Assets on Liquidation Total Number of Units 1

× No. of Units held by Holder

Shree Guru Kripa’s Institute of Management Instrument specific conditions for Equity Instrument

Issuer specific conditions for Equity Instrument


1. 2.

Holder is entitled for a pro–rata share of the Entity’s Net Assets on Liquidation, Puttable Instrument is subordinate to all other classes of Instrument, i.e. – (a) It has no priority over other claims to the Assets on Liquidation, and (b) Does not require to be converted to another Instrument before it is in the Subordinate Class. 3. All Instruments in the class have identical features. Issuer must have no other Financial Instrument / Contract that has – (a) Total Cash Flows substantially based on – Profit / Loss, Change in the recognized Net Assets, Change in the Fair Value of the recognized and unrecognized Net Assets of the Entity (excluding any effects of such Instrument) (b) The effect of substantially restricting / fixing the residual return to the Puttable Instrument Holders. Note: If Entity cannot carry out the above tests, the Puttable Instrument is classified as Financial Liability. • • •

1. 2. Derivatives

Classification of Financial Assets

Financial Instrument / any Contract whose value changes in response to the change in an underlying, It requires no / vey less Initial Investment than it would be required otherwise to enter into a contract in normal course. 3. It is settled at a future period. Settlement can either by delivery of the Underlying or Cash settlement. Example: Forward Contracts, Futures, Options, Interest Rate & Currency Swaps, etc. 1. 2. 3.

Financial Assets measured at Amortised Cost, Financial Assets measured at Fair Value Through Profit or Loss (FVTPL) Financial Assets measured at Fair Value Through Other Comprehensive Income (FVTOCI)

Classification of Fin. Liability

1. Fair Value Through Profit and Loss (FVTPL), or 2. Amortised Cost.

Classification of Derivatives

Derivatives classified as Financial Assets would be measured at Fair Value Through Profit and Loss (FVTPL) only.

Criteria for Classification

Entity shall classify Financial Assets depending upon the following criteria and options elected by it – (a) Entity’s Business Model (BM) for managing the Financial Assets, and (b) Contractual Cash Flow Characteristics (CCFC) of the Financial Assets.

Business Model (BM)

Entity assesses whether its Financial Assets meet the conditions on the basis of Business Model as determined by its Key Managerial Personnel (KMP). [As defined in Ind AS 24 Related Party Disclosures] 1. 2. 3.

4.

5. Determination of BM 6. 7.

Entity’s Business Model is determined at a level that reflects how groups of Financial Assetsare managed together to achieve a particular business objective. BM does not depend on Management’s intentions for an Individual Instrument. So, it is not an Instrument– by–Instrument Approach to classification, and should be determined on a higher level of aggregation. It refers to how an Entity manages its Financial Assets in order to generate Cash Flows, i.e. it determines whether Cash Flows will result from collecting Contractual Cash Flows, selling Financial Assets or both. This assessment is not performed on the basis of scenarios that the Entity does not reasonably expect to occur, such as so called Worst / Stress Case Scenarios. Example: If an Entity expects that it will sell a particular Portfolio of Financial Asset only in a Stress Case Scenario, that scenario would not affect the Entity‘s Assessment of BM for those Assets if the Entity reasonably expects that such a scenario will not occur. If Cash Flows are realised in a way that is different from the Entity’s expectations at the date of assessment of BM, it is not (a) Prior Period Error, or (b) change the classification of the remaining Financial Assets held in that BM. Example: Entity sells more or fewer Financial Assets than it expected when it classified the Assets. However, when an Entity assesses BM for newly originated / purchased Fin. Assets, it must consider information about how CF were realised in the past, along with all other relevant information. BM is a matter of fact and not merely an assertion. Entity will need to use judgement when it assesses its BM for managing Financial Assets and that assessment is not determined by a single factor or activity. Instead, the Entity must consider all relevant evidence that is available at the date of the assessment. Such relevant evidence includes, but is not limited to: (b) How the Performance of BM and Financial Assetsheld within that BM are evaluated and reported to the Entity‘s KMP, (c) Risks that affect its performance & the way in which those risks are managed, and (d) How Managers of the Business are compensated (Example: Whether the Compensation is based on the Fair Value of the Assets managed or on the Contractual Cash Flows collected). 2


Business Model Types

1. 2. 3.


Hold to collect Contractual Cash Flows (CCF), Hold to collect Contractual Cash Flows (CCF) and Selling Financial Assets, Other Business Models.

1. Contractual Cash Flow Characteristic (CCFC) Test

SPPI Payments

Entity should classify Financial Assets on the basis of CCFC, if it is held within a BM whose objective is – (a) to hold the Assets to collect CCF, or (b) achieved by both collecting CCF and selling Financial Assets. 2. To do so, an Entity has to determine whether the Asset‘s Contractual Cash Flows are Solely Payments of Principal and Interest (SPPI) on the Principal Amount outstanding. 3. CCF that are SPPI on the principal amount outstanding are consistent with a Basic Lending Arrangement. In such arrangement, consideration for the Time Value of Money and Credit Risk are typically the most significant elements of interest. If there are repayments of Principal, Interest consists of consideration for – (a) Time Value of Money, (b) Credit Risk associated with the Principal amount outstanding during a particular period of time, and (c) For other Basic Lending Risks and Costs, (d) As well as a Profit Margin. Situation

Classification of Debt Instruments (Financial Assets)

1.

Held Trading

for

If Conditions of CCFC Test is fulfilled, BM test will be applied – (a) Held to collect Contractual Cash Flows

FVTOCI (with Recycling)

(c) If above conditions are not satisfied or FVTPL Option is selected

FVTPL

If conditions of CCFC Test is not fulfilled

FVTPL

Situation (CCFC Test will not apply) 1.

If it is held for trading

2.

If it is not held for trading and FVTOCI Option is selected

3.

If it is not held for trading and FVTOCI Option is not selected

Classification FVTPL FVTOCI (No Recycling) FVTPL

Financial Asset / Liability that – (a) is acquired / incurred principally for the purpose of selling / re–purchasing it in the near term, (b) on initial recognition is part of a portfolio of identified Financial Instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit taking, or (c) is a Derivative, except Financial Guarantee Contract or Hedging Instrument. Assets / Liabilities

Initial Recognition

Amortised Cost

(b) Results in collecting CCF and selling Financial Assets 2.

Classification of Equity (Financial Assets)

Classification

Time of Initial Recognition

Receivables / Payables

When the Entity becomes a party to the Contract and has a legal right to receive or a legal obligation to pay cash.

Firm Commitment to Buy / Sell Goods / Service

When one of parties has performed,e.g.Entity that places order recognizes the Liability only when the Goods are shipped / delivered.

Forward Contract

Commitment Date, Not on the Settlement Date.

Option Contracts

When the Holder / Writer becomes a Party to the Contract.

Planned Future Transactions

Not Assets / Liabilities,since Entity has not become a Party to it.

Regular Way Purchase or Sale

Trade Date / Settlement Date Accounting.

1. 2. Trade Date Accounting

Timing: Date in which an Entity commits itself to purchase / sell an Asset. Recognition: (a) Buyers’ Book: Asset to be Received & Liability to pay. (b) Sellers’ Book: Gain / Loss on Disposal & Receivable. 3. Derecognition: Asset on Trade Date Note: Interest accrues on Asset &corresponding Liability only on the Settlement Date when title passes. 1. 2.

Settlement Date Accounting

Timing: Date in which an Asset is delivered to / by an Entity. Recognition: (a) Buyers’ Book: Asset on the day it is received. (b) Sellers’ Book: Gain / Loss from the Buyer for Payment. 3. Derecognition: Asset on the day in which it is delivered. Note: Change in Fair Value of Asset from Trade to Settlement Date shall be accounted in the same way as it accounts for Acquired Asset. 3


Measurement (Not apply for Trade Receivables)


Entity shall measure a Financial Asset / Liability (except FVTPL) at its Fair Value plus / minus Transaction Costs directly attributable to its acquisition / issue. Hence, Transaction Costs are – (a) Fin. Instr. measured at FVTPL:Charged to P&L, i.e. not added to Fair Value at Initial Recognition, (b) Fin. Assets at FVTOCI / Amortised Cost: Added to Initial Recognition Amount, (c) Fin. Liab. atAmortised Cost: Deducted from Amount of Liability originally recognized. Note: Transaction Costs on Disposal / Transfer are not included in measurement of all Categories of Financial Assets / Liabilities. They are charged to Profit and Loss. (a) Best evidence of the Fair Value of a Financial Instrument at initial recognition is normally the Transaction Price i.e. Fair Value of Consideration given/ received. (b) If – •

Fair Value

•

Fair Value differs from the Transaction Price, and Fair Value is evidenced by a Quoted Price in an active market for an identical Asset / Liability or based on a Valuation technique that uses only data from observable markets,

Difference between Fair Value at initial recognition and the Transaction Price is recognized as a Gain/ Loss

(c) In all other cases, Fair Value is adjusted to defer the difference between the Fair Value at initial recognition and the Transaction Price i.e. Transaction Price is treated as Fair Value. 1. Measurement of Financial Asset

2.

3. Measurement of Fin.Liability Option FVTPL Assets)

Option FVTPL (Financial Liabilities)

to (Fin.

to

Financial Asset (Debt Instrument only) shall be measured at Amortised Cost, if – (a) It is held within a BM whose objective is to hold it to collect Contractual Cash Flows (CCF), and (b) Contractual terms give rise on specified dates to Cash Flows that are SPPI on Principal outstanding Financial Asset (Debt & Equity) shall be measured at FVTOCI, if – (a) It is held within a BM whose objective is achieved by both collecting CCF & selling Fin. Assets, and (b) Contractual terms give rise on specified dates to Cash Flows that are SPPI on Principal outstanding Financial Asset shall be measured at FVTPL if it is not measured at above. (Residuary Category)

An Entity shall classify all Financial Liabilities as subsequently measured at Amortised Cost, except Financial Guarantee Contracts, Commitments to provide Loan at a below Market Interest Rate, Contingent Consideration recognized by an Acquirer in a Business Combination. Entity may, at initial recognition, irrevocably designate a Financial Asset as measured at FVTPL, if doing so eliminates or significantly reduces Measurement / Recognition Inconsistency (called Accounting Mis–match) that would otherwise arise from measuring them / recognizing their Gains & Losses on different basis. Entity may, at initial recognition, irrevocably designate a Financial Liability as measured at FVTPL, if – (a) It eliminates or significantly reduces Measurement / Recognition Inconsistency (referred as Accounting Mismatch) that would otherwise arise from measuring them / recognizing their Gains & Losses on different basis. (b) Group of Financial Assets / Liabilities is managed and its performance is evaluated on a Fair Value basis, in accordance with a documented Risk Management or Investment Strategy and information about the group is provided internally on that basis to the entity’s Key Management Personnel.

Reclassification

Only when an Entity changes its BM for managing Fin. Assets, it shall re–classify all affected Fin. Assets prospectively. Such changes are determined by Entity’s Senior Management as a result of external / internal changes and must be significant to its operation and demonstrable to external parties. BM Change will occur only when it either begins or ceases to perform an activity that is significant to its operations.

Change in BM

The following are considered as a change in Business Model – 1. Acquisition / Disposal / Termination of a Business Line. 2. Entity has Commercial Loans Portfolio which it holds to sell in Short Term. It acquires a Company having a BM that holds Loans to collect Contractual Cash Flows. Commercial Loans Portfolio is no longer for sale.It is now managed together with the acquired loans and all are held to collect CCF. 3. Financial Services Firm decides to shut down its Retail Mortgage Business. It no longer accepts new business and it is actively marketing its Mortgage Loan Portfolio for sale.

Not a change in BM

The 1. 2. 3.

Disclosures – Reclassification

1. Date of Reclassification, 2. Detailed explanation of change in BM and a qualitative description of its effect on Fin. Statements, 3. Amount re–classified into and out of each category.

following are not considered as a change in Business Model – Change in intention related to particular Fin. Assets, even in case of significant change in market, Temporary disappearance of a particular market for Financial Assets, Transfer of Financial Assets between parts of the Entity with different BM.

4

Shree Guru Kripa’s Institute of Management 1. 2.

Derecognition

3. Exchange Modification

/


Entity shall derecognize a Financial Asset only when the Contractual rights to the Cash Flows from the Financial Asset expire. Entity shall derecognize a Financial Liability only when it is extinguished, i.e. when the obligation specified in the contract is discharged or cancelled or expires. On Derecognition, Amount recognized in P&L A/c = Carrying Amount on De–recognition – [Consideration received + New Asset Obtained – New Liability Assumed]

Exchange between Existing Borrower and Lender of Debt Instruments with substantially different terms or substantial modification of the terms of an existing Financial Liability shall be accounted for as an extinguishment of Original Financial Liability and recognition of New Financial Liability.

Impairment

Entity shall recognize a Loss Allowance for expected Credit Losses on – (a) Financial Asset that is measured at Amortised Cost or FVTOCI, (b) Lease Receivable, (c) Contract Asset, (d) Loan Commitment, (e) Financial Guarantee Contract to which the impairment requirements apply.

Credit Loss =

Contractual Cash Flow due as per the Contract Less Discounted Cash Flows that Entity expects to receive. (a) Discount Rate = Effective Interest Rate / Credit Adjusted Effective Interest Rate for purchased / originated Credit–Impaired Financial Assets. (b) Cash Flows = All Cash Flows throughout the expected life of that Instrument including CF from the sale of collateral held and other Credit enhancements that are integral to the contractual terms.

Crieteria for Measurement of Credit Loss

An Entity shall measure Expected Credit Losses of a Financial Instrument in a way that reflects – (a) Unbiased & Probability Weighted Amount determined by evaluating a range of possible outcomes, (b) Time Value of Money, and (c) Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. Situation

Measurement of Loss Allowance

Loss Allowance at Reporting Date

Credit Risk has increased significantly since initial recognition

Disclosures Credit Loss

1. 2.

–

Embedded Derivative

Credit Risk has not increased significantly since initial recognition

(a) Component of a Hybrid Contract that also includes a Non–Derivative Host, with the effect that some of the Cash Flows of the Combined Instrument vary in a way similar to a Stand–Alone Derivative. (b) However, a Derivative that is attached to a Financial Instrument but is contractually transferred independently of that Instrument, or has a different counterparty is not an Embedded Derivative but a Separate Fin. Instrument. Host Contract

Embedded Derivative

Leases with Contingent Rent

Annual Lease Rental Payments

Contingent Rent

Forex Construction Contracts

Construction Contract

Changes in Foreign Exchange Rate

Situation Accounting of Embedded Derivative

12 Months Expected Credit Losses

Entity shall not present Loss Allowance separately in Balance Sheet as reduction in Carrying Amount. However, it shall disclose the Loss Allowance in the Notes to the Financial Statements.

Contract Examples

Lifetime Expected Credit Losses

Treatment

(a) Host Contract is an Asset within the scope of this AS (b) Host Contract is not an Asset, Contract will give rise to Standalone Derivative if separated, & Not closely related to Host Contract

Apply Classification & Measurement Rules to the entire Hybrid Contract Split the contract and account for Embedded Derivative separately No need of segregating the Contract & accounting separately

(c) Any one of the conditions not satisfied Non–Financial Contracts

Contracts to buy or sell Non–Financial Items. It is not a Financial Instrument as the contractual right to receive a Non–Financial Asset / Service and corresponding obligation do not establish a present right / obligation to receive, deliver / exchange a Financial Asset. Example: Options, Futures, Forward on Silver.

Exception

Non–Financial Contract that continue to be held for the purpose of receipt / delivery of a Non–Financial Item is a Non–Financial Instruments. However, the following are Financial Instrument. (a) Non–Financial Contract that can be settled net or by exchanging Financial Instruments, (b) Non–Financial Contract in which the Non–Financial Item is readily convertible to Cash.

Compound Fin. Instruments

Issuer of a Non–Derivative Financial Instrument shall evaluate the terms of the Financial Instrument to determine whether it contains both a Liability and Equity Component. Example: Convertible Bonds. 5



If Compound Financial Instrument has been issued and it has multiple Embedded Derivatives whose values are interdependent (like Callable Convertible Bond), it shall disclose the existence of those features.

Disclosures

Components

Recognition on conversion

Nature of Liability

Component

Measurement

Contractual Arrangement to deliver Cash / another Financial Asset

Financial Liability Component

Fair Value = Contractual Future Cash Flows discounted at Market Interest Rate of Comparable Instruments without the Conversion Option

Option to convert into fixed number of Ordinary Shares

Equity Component

Fair Value of the Compound Financial Instrument Less: Fair Value of Financial Liability Component

On conversion at maturity, the Entity derecognizes the Liability Component and recognizes it as Equity. Original Equity Component remains as Equity. There is no gain or loss on conversion at maturity. 1.

Treasury Shares (Own Equity Instrument)

2. 3. 4.

Entity‘s own Equity Instrument are not recognised as Fin. Asset regardless of the reason for which they are re–acquired. If an Entity re–acquires its own Equity, they shall be deducted from Equity. No Gain / Loss shall be recognised in Profit / Loss on the purchase, sale, issue or cancellation. Treasury Shares may be acquired and held by Entity / other Members of the Group. Consideration paid or received shall be recognised directly in Equity. Exception: When an Entity holds its own Equity on behalf of others, there is an agency relationship. They are not included in Balance Sheet. Example: Bank holding its own Equity on behalf of Client.

1. Amount of Treasury Shares held is disclosed separately in Balance Sheet / Notes as per Ind AS 1. 2. Entity should provide disclosure as per Ind AS 24, if it re–acquires its own Equity from Related Parties.

Treatment

Items Interest, Dividends, Losses and Gains

Disclosures Collateral

Defaults Breaches

–

1.

Interest, Dividends, Losses and Gains relating to a Financial Instrument or a component that is Financial Liability

2.

Distributions to holders of Equity Instrument

3.

Transaction Costs of an Equity Transaction

4.

Income Tax relating to distributions to holders and Transaction Costs of an Equity Transaction

1.

Carrying Amount of Financial Assets it has pledged as Collateral for Liabilities / Contingent Liabilities including amounts that have been reclassified, Terms and conditions relating to its pledge.

2.

&

Offsetting Financial Asset and Liability Objective of Hedge Accounting

Treatment: Recognised

For 1. 2. 3.

In Profit & Loss A/c Directly in Equity As deduction from Equity As per Ind AS 12, Income Taxes

Loans Payable recognized at the end of the Reporting Period, an Entity shall disclose – Details of any defaults during the period of Principal, Interest, Sinking Fund, or Redemption terms, Carrying Amount of the Loans Payable in default at the end of the Reporting period, and Whether the default was remedied, or the terms of the Loans payable were re–negotiated before the Financial Statements were approved for issue.

Financial Asset and Liability shall be offset and the Net Amount presented only when an Entity – (a) has a legally enforceable right to set off the recognized amounts currently, and (b) intends to settle on a Net bases, or to realize the Asset and settle the Liability simultaneously. To represent in the Financial Statements, the effect of an Entity’s Risk Management Activities to manage Exposures arising from particular risks that could affect Profit or Loss or Other Comprehensive Income. Entity’s Risk Management Activities use Financial Instruments to manage Exposures.

Identifying and designating Hedged Item

Hedged Item can be a single item or a group of items of the following – (a) Recognised Asset / Liability, (b) Unrecognised Firm Commitment, (c) Forecast Transaction, and (d) Net Investment in a Foreign Operation.

Conditions for Hedged Item

1. 2.

Designation of Hedging Instrument

Hedged Item must be reliably measurable. If a Hedged Item is a Forecast Transaction, it must be highly probable. Hedging Instrument

Condition

(a) Derivative measured at FVTPL

It cannot be designated for some Written Options.

(b) Non–Derivative Financial Asset / Liability measured at FVTPL

Non–Derivative Financial Liability for which the amount of change in Fair Value attributable to changes in its Credit risk is presented in Other Comprehensive Income cannot be designated. 6

Shree Guru Kripa’s Institute of Management Conditions for Hedging Instrument

1. 2.

Qualifying Criteria for Hedge Accounting


Only Contracts with Party external to Reporting Entity can be designated as a Hedging Instrument. Foreign Currency Risk Component of Investment in an Equity Instrument measured at FVTOCI cannot be designated as a Hedging Instrument for Hedge of Foreign Currency Risk.

1. Hedging relationship consists only of Eligible Hedging Instruments and Eligible Hedged Items. 2. At the inception of Hedging relationship, there is a formal designation and documentation of Hedging relationship and the Entity’s Risk Management Objective and Hedging Strategy. 3. It meets all of the following Hedge Effectiveness requirements – (a) There is an economic relationship between the Hedged Item and the Hedging Instrument, (b) Effect of Credit Risk does not dominate the value changes that result from that economic relationship, (c) Hedge Ratio = Ratio resulting from the Quantity of Hedged Item and Hedging Instrument.

Types of Hedging Relationship

(a) Fair Value Hedge: Hedge of the exposure to changes in Fair Value ofHedged Item attributable to a particular risk and could affect Profit or Loss. (b) Cash Flow Hedge: Hedge of the exposure to variability in Cash Flows of Hedged Item attributable to a particular risk and could affect Profit or Loss. (c) Hedge of Net Investment in a Foreign Operations, including a Hedge of a Monetary Item.

Fair Value Hedge Accounting

Gain / Loss on

Accounted in –

(a) Hedging Instrument

OCI, if the Hedging Instrument hedges an Equity Instrument measured at FVTOCI. Otherwise in P&L.

(b) Hedged Item being a Financial Asset measured at FVTOCI

Cash Flow Hedge Accounting

(c) Hedged Item being Equity Instrument measured at FVTOCI

Other Comprehensive Income (OCI)

(d) Hedged Item being Unrecognised Firm Commitment

Cumulative change its Fair Value is recognized as an asset or liability with a corresponding gain or loss recognized in P&L

1.

2. 3. Hedge of Net Investment in a Foreign Operations Disclosures

Profit and Loss (P&L)

Separate Cash Flow Hedge Reserve A/c is adjusted to the lower of the following – (a) Cumulative Gain / Loss on the Hedging Instrument from inception of the Hedge, (b) Cumulative Change in Fair Value of the Hedged Item from inception of the Hedge. Portion of Gain / Loss on the Hedging Instrument that is determined to be an effective Hedge shall be recognized in Other Comprehensive Income. Remaining Gain / Loss is hedge ineffectiveness that shall be recognized in profit or loss. Items

Recognised

Portion of Gain / Loss on Hedging Instrument that is determined to be an Effective Hedge

In OCI

Ineffective Portion

In P&L

Entity shall apply Disclosure requirements for those Risk Exposures that an Entity hedges and for which it elects to apply Hedge Accounting. Hedge Accounting Disclosures shall provide information about – (a) Entity’s Risk Management Strategy and how it is applied to manage risk, (b) How Entity’s hedging activities may affect the amount, timing & uncertainty of its future Cash Flows, (c) Effect that Hedge Accounting has had on Balance Sheet, P&L and Statement of Changes in Equity.

1. Exchange of Financial Liability at unfavourable terms A Company b orrowed 50 Lakh s @ 12% p.a. Tenu re of the Loan is 10 Year s. Interest is payab le ever y year and the Prin cip al is repayable at the end of 10 th Year. The Company defaulted in payment of interest for the Year 4, 5 and 6. A Loan Reschedule Agreemen t t ook p lace at t he en d o f 7 Year. As per the agr eement , th e Com pany is required to pay 90 Lakhs at t he end o f 8 th Year. Calculate the additional amount to b e paid on account of reschedulin g and also the Book Value of Loan at the end of 8 th year when the Reschedule Agreement took place. Assumption: Interest is compounded in case of default. Particulars Computation

Solution: Loan Amount

50,00,000

Period of default

4 to 8 Years th

Book Value at the end of 8 Year (i.e Year 4 to Year 8 = 5 Years Compounding) th

Rescheduled amount to be paid at the end of 8 Year

5 Years 5

5,00,000 × (1.12)

88,11,708 90,00,000

Additional Amount to be paid on Rescheduling 7

1,88,291



2. Option Contracts Entity A holds an Option to purchase Equity Shares in a Listed Entity B for 100 per Share at the end of a 90 day period. Evaluate the Contract w hether a Financial Asset or a Financial Liability? What if th e Entity A has wr itten the Option? Solution: If Entity A is Call Option Holder 1. 2.

3.

If Entity A is Call Option Writer 1.

Entity A will exercise the Option, if MPS exceeds `100 at the end of the 90 day period. Since Entity A stands to gain if the call option is exercised, it is potentially favourable to the Entity. Therefore, the option is a Derivative Financial Assets from the time it becomes a party to the contract.

2.

In this case, Counterparty can force Entity A to sell Equity Shares, if MPS exceeds `100 at the end of the 90 day period. Since Entity A stands to lose if the Option is exercised, it is potentially unfavourable and the option is a Derivative Financial Liability from the time the Entity becomes a party to the Option Contract.

Evaluate whether the foll owing are cons idered as a Financial Instruments – Instruments

FI or not

Reasoning

(a) Note payable in Government Bonds

FI

It gives the Holder the contractual right to receive and the Issuer the contractual obligation to deliver Government Bonds. These are Fin. Assets since it represent obligations of the Government to pay Cash.

(b) Financial Guarantee

FI

It gives the Lender the right to receive cash from the Guarantor and corresponding contractual obligation of the Guarantor to pay the lender, if the Borrower defaults.

(c) Operating Leases

Not FI

Lessor provides the use of an Asset in future periods in exchange for consideration, similar to Fee for a Service. However, Individual payments currently due and payable are considered as Primary Financial Instruments.

(d) Financial Leases

FI

It gives a contractual right of the Lessor to receive and an obligation of the Lessee to pay a stream of payments that are substantially the same as blended payments of Principal and Interest under a Loan Agreement.

FI

It provides the Holder with the contractual right to receive payment, interest at a fixed dates extending into the indefinite future, with no right to receive Principal or a return of Principal under unfavourable terms or very far in the future.

(f) Physical Assets incl. Intangible Assets

Not FI

It only creates an opportunity to generate Cash Inflow or another Financial Asset, but does not give rise to a present right to receive Cash or other Financial Asset.

(g) Prepaid Expenses / Warranty Obligations

Not FI

Future economic benefit is the receipt of goods or services, rather than the right to receive Cash or other Financial Asset.

(h) Constructive Obligations

Not FI

It means those obligations defined in Ind AS 37 “Provisions, Contingent Assets or Contingent Liabilities”. They do not arise from Contracts and hence, not a FI.

FI

It gives the Depositor the contractual right to receive Cash or to draw a Cheque or other similar Instrument against the balance in favour of a Creditor in payment of a Financial Liability, and the Bank the contractual obligation to deliver.

(e) Perpetual Debt Instruments

(i)

Deposit with Bank

4.

Classify the follo wing as Financial Liabilit y (FL) or Equity Instru ments (EI) – Particulars

Type

Reasoning

(a) Rights, Options or Warrants used to acquire a fixed number of the Equity Instruments for a fixed amount of any Currency.

EI

Entity offers the Rights, Options or Warrants to all of its existing owners of the same class of its own Non–Derivative Equity Instruments.

(b) Convertible Bond denominated in Foreign Currency to acquire a fixed number of the Equity Instruments

EI

The Exercise Price is fixed in any Currency.

(c) Mandatorily Redeemable Preference Shares with mandatory Fixed Dividends

FL

There is a contractual obligation to deliver Cash that cannot be avoided mandatory periodic Fixed Dividend Payments and mandatory Redemption by the Issuer for a fixed amount at a fixed future date. 8



Particulars

Type

Reasoning

(d) Non–Redeemable Preference Shares with Dividend linked to Ordinary Shares

EI

Since Dividends are payable only if Dividend on Ordinary Shares are paid, it contains no contractual obligation to pay Dividends & Principal.

(e) Cumulative Non–Redeemable Preference Shares with Dividend Payments linked to Ordinary Shares (f) Zero Coupon Discount Bond

Bond

/

Deep

(g) Non–Redeemable Callable Bond with Fixed Coupon. Coupon can be deferred in perpetuity. Current Bond Price is predicated on the expectation that the Coupon will be paid each year. Policy that it will be paid each year has been publicly communicated.

EI

If the Dividends can be deferred indefinitely, it will be classified as Equity only, since the Entity does not have any contractual obligations whatsoever to pay those dividends. A liability for the dividend payable would be recognised once the dividend is declared.

FL

Although there are no mandatory periodic Interest payments, it provides for mandatory redemption by the Issuer for a determinable amount at a fixed or determinable future date. Hence, there is a contractual obligation to deliver cash for the Redemption Value.

EI

Although there is both pressure on the Issuer to pay the Coupon, to maintain the Bond Price, and a constructive obligation to pay the Coupon, there is no contractual obligation to do so.

5. Non–Redeemable Preference Shares with mandatory f ixed Dividends A Company iss ued Non–Red eemabl e Pr eference Shares with mand ator y Fixed Divi dend s. Evalu ate whether suc h Prefer ence shares are an Equity Inst ruments or a Financial Liability to t he Issuer Entity. Solution: 1. When Pref. Shares are Non–Redeemable, appropriate classification is determined by the other rights attached to them. 2.

In such case, the Principal has Equity characteristics. However, the Entity has a contractual obligation to pay dividends, even in case of lack of funds, or insufficient distributable profits. Hence, obligation to pay dividends is a Fin. Liability.

3.

Overall Classification may be as follows – Situation

6.

Classification

(a) If the Coupon Rate is other than the prevailing market rate or there is a payment of discretionary dividends in addition to the fixed coupon

Compound Instrument

(b) If the Coupon was initially set at market rate and there were no provisions for payment of discretionary dividends

Financial Liability

Determination o f Busi ness Model Types Situation

BM

ABC Ltd holds Investments to collect their Contractual Cash Flows (CCF). Maturity of its Financial Assets is matched to the Funding Needs. In the past, when Financial Assets Credit Risk has increased, they have been sold out.In addition, infrequent sales have occurred as a result of unanticipated funding needs. The Company also monitors Fair Values of Financial Assets, among other information.

Hold to CCCF

XYZ Ltd anticipates Capital Expenditure in a few years. It invests its excess Cash in Short and LongTerm Financial Assets, having Contractual Lives more than its anticipated Period. The Company will hold them to collect CCF and, when an opportunity arises, it will sell them to re–invest the Cash.

Hold to CCCF OR Hold to CCCF& selling 9

Reasoning Although the Company considers Fair Values from a liquidity perspective, its objective is to hold to collect CCF. Sales in response to an increase in Credit Risk or ifrequent sales resulting from unanticipated funding needs (i.e. in a Stress Case Scenario) would not contradict that objective, even if such sales are significant in value.

The Company invests excess Cash in ShortTerm Financial Assets, until the Company requires the Funds for making Capital Expenditure. When they mature, it re–invests the Cash in new Short Term Assets. It maintains this strategy until the Funds are needed, at which time the Company uses the proceeds to fund the Capital Expenditure.



Situation

BM

Reasoning

A Company collects Cash from Trade Receivables and has no intention to dispose Trade Receivables.

Hold to CCCF

The objective is to collect CCF from the Trade Receivables and, therefore, the Trade Receivables meet BM Test.

7.

CCF that are Solely Payments of Prin cipal & Interest on t he Principal Amoun t Outstanding Situation

SPPI

Reasoning

Payments of Principal and Interest are linked to an Inflation Index of the Currency in which the Instrument is issued. Inflation Link is not leveraged.

SPPI

Linking payments to an Unleveraged Inflation Index resets the Time Value of Money to a current level. Interest Rate reflects Real Interest. Thus, it is a consideration for Time Value of Money on the principal amount outstanding.

Interest Payments are indexed Debtor‘s income or Equity Index

to

Not SPPI

CCF reflects a Return that is inconsistent with a Basic Lending Arrangement. However, it only compensates the Holder for changes in the Credit Risk of the Instrument, such that actual Cash Flows are SPPI.

Bond convertible into a fixed number of Equity Instruments of the Issuer.

Not SPPI

Return is inconsistent with a Basic Lending Arrangement, i.e. the Return is linked to the Value of the Equity of the Issuer.

8. Methods of Accounting On 30.03.2015, an Entity enters into an agreement to purchase a Financial Asset for 100 which is the Fair Value on that date. On Balance Sheet date, the Fair Value is 102 and on Settlement Date, i.e. 02.04.2015 the Fair Value is 103. Pass Journal Entries on Trade and Settlement Date, when the Asset acquired is measured at – (a) Amortised Cost, (b) FVTPL, (c) FVTOCI. Solution:

1. If Financial Asset is accounted as Amortised Cost Trade Date Accounting Settlement Date Accounting

Date 30.03.2015

Journal Entry Financial Asset A/c

Dr. Dr.

Cr.

100

To Payables 31.03.2015 02.04.2015

100

No Entry

Journal Entry

Dr.

Cr.

No Entry No Entry

Payables A/c To Cash A/c

Dr.

100 100

Financial Assets A/c To Cash A/c

Dr.

100 100

2. If Financial Asset is accounted at FVTPL Trade Date Accounting Settlement Date Accounting Date 30.03.2015

Journal Entry Financial Asset A/c

Dr. Dr.

100

To Payables 31.03.2015 02.04.2015 02.04.2015

Date 30.03.2015

100

Financial Asset A/c Dr. To Profit & Loss A/c

2

Financial Asset A/c Dr. To Profit & Loss A/c

1


3.

Dr.

Journal Entry

Dr.

2

2

1

1

Fair Value Change A/c Dr. To Profit & Loss A/c

100

Cr.

No Entry Fair Value Change A/c Dr. To Profit & Loss A/c

100

Financial Assets A/c To Cash A/c To Fair Value Change A/c

2 1 Dr.

103 100 3

If Financial Asset is accounted at FVOCI [OCI = Other Comprehensive Income] Trade Date Accounting Settlement Date Accounting Journal Entry

Financial Asset A/c

Dr. Dr.

Financial Asset A/c To OCI A/c

Cr.

100

To Payables 31.03.2015

Cr.

100 Dr.

2 2 10

Journal Entry

Dr.

Cr.

No Entry Fair Value Change A/c To OCI A/c

Dr.

2 2



Trade Date Accounting Date

Settlement Date Accounting

Journal Entry

02.04.2015 02.04.2015

Dr.

Financial Asset A/c To OCI A/c

Dr.

Cr.

1 1


Dr.

100 100

Journal Entry Fair Value Change A/c To OCI A/c

Dr.

Dr.

Cr.

1 1

Financial Assets A/c To Cash A/c To Fair Value Change A/c

Dr.

103 100 3

9. Treatment of Transaction Costs A Company invest ed in Equi ty Shares of anot her Entity on 15 th March for 10,000. Transaction Cost = 200 (not included in 10,000). Fair Value on Balance Sheet Date = 12,000. Pass Entr ies, when the Asset acquired is measur ed at FVTPL/ FVTOCI. Solution: Asset acquired is measured at FVTPL Date 15.03.2015

Journal Entry

Dr.

Investment A/c

Dr.

10,000

Transaction Cost A/c

Dr.

200

To Bank 31.03.2015

Investment A/c

Asset acquired is measured at FVTOCI Cr.

Investment A/c

Profit & Loss A/c Fair Value Gain A/c

Dr.

Cr.

10,200 10,200

10,200 Dr.

2,000

Investment A/c 2,000

Dr.

200

To Transaction Cost A/c 31.03.2015

Dr.

To Bank A/c

To Fair Value Gain A/c 31.03.2015

Journal Entry

Dr.

Fair Value Gain A/c

2,000

1,800

To Fair Value Gain A/c

200

To Profit & Loss A/c

Dr.

1,800

Dr.

1,800

To OCI A/c OCI A/c

2,000

1,800 Dr.

1,800

To Fair Value Reserve A/c

1,800

10. Partial De–recognition o f Financial Asset Hari Ltd has lent a sum of 10 Lakhs @ 18% per annum for 10 years. The Loan had a Fair Value of 12,23,960 at the effecti ve interest rate of 13%. To mitigate repayment risks but at the same time retaining control over the Loan, Hari Ltd transferred its right to receive the Principal Amount of the Loan on its maturity with interest, after retaining rights over 10% of Principal and 4% Interest that carr ied Fair Value of 29,000 and 1,84,620 respect ively . The cons iderat ion for the trans actio n was 9,90,000. The Interest Component retained included a 2% Fee towards collection of Principal and Interest that has a Fair Value of 65,160. Defaults if any are deductible to a maximum extent of the Company’s claim on the Principal Portion . You are required to show the Journal Entries to record de–recognition of the Loan. Solution:

Less: Less: Less:

Fair Fair Fair Fair

1.Computation of Fair Value of Portion transferred (Principal and Interest) Particulars Proportionate Carrying Amnt [Note] Value Value Value Value

of of of of

Loan Asset (given) Principal Retained (given) Interest Retained (Balancing Figure) Collection Asset (i.e. Servicing Asset)

12,23,960 (29,000) (1,19,460) (65,160)

Fair Value of Portion transferred Note: Carrying Amount apportioned in ratio of Fair Value. e.g. FV of Principal =

(1,84,620)

10,00,000 (23,694) (97,601) (53,237)

10,10,340

(8,25,468)

10,00,000

× 29,000 = 23,694.

12,23,960 2. Journal Entries Particulars

Dr. ( )

Bank A/c (Consideration Received)

Dr.

Cr. ( )

9,90,000

To Loan Receivable (Asset) A/c (Carrying Amt of de–recognised portion)

8,25,468

To Profit and Loss A/c (Gain on De–Recognition)

1,64,532 11



Particulars

Dr. ( )

Principal Strip A/c (Carrying Amt of Principal retained)

Dr.

Cr. ( )

23,694

Interest Strip A/c (Carrying Amt of Interest Retained)

Dr.

97,601

Servicing Asset (Carrying Amt of Servicing Asset retained)

Dr.

53,237

To Loan Receivable (Asset) A/c

1,74,532

Financial Asset A/c

1,00,000

To Financial Liability A/c

1,00,000

Note: Maximum Default that may be borne by the Company = its Maximum Principal Claim for 10% of Loan = `1,00,000. So, an Asset and Liability is recognised to that extent.

11. De–recognition – Applicability Situation

To Derecognise or not?

Entity A transfers its Portfolio of Receivables to Entity B under Factoring Arrangement. Debtors will pay amounts due to Entity Bdirectly. Entity A has no additional obligations to repay any sums and has no rights to any additional sums.

Since Entity B has no recourse to Entity A for late payment / Credit Risk, Entity A has transferred substantially all the risks and rewards of ownership of the Portfolio. Hence, Entity A should de–recognize entire Portfolio. Difference between the Carrying Value and Cash received is recognized immediately as a Financing Cost in Profit or Loss A/c.

Same as above, but (a) Entity A has not transferred There is no complete transfer of risk and rewards. In such case, Entity its rights to receive the Cash Flows, or (b) Any A should not derecognize the Portfolio. Credit Default Guarantee is given by Entity A.

12. Impairment – Probability of Default (POD) Approach Entity has lent 1 Million. At initi al recognition, POD over the next 12 months is 0.5%. At the reporting date, there is no change in 12–Month POD and the Entity assesses that no significant increase in Credit Risk since initial recognition. Loss Given Default (LGD) is determined to be 25% of Gross Carryin g Amount . What is th e Loss Allo wance to be recognized? Solution: 1. As there is no increase in Credit Risk since initial recognition, Lifetime Expected Credit Loss is not required to be recognised. 2.

12–Months Expected Credit Loss to be recognized = ` 1 Million × LGD25% × 12–Months POD 0.5% = ` 1,250.

13. Impairment – Loss Rate Approach A Bank has lent 5,00,000. Portfolio segm ented int o Bor rower Grou ps (X & Y) bas ed on shared Credit Risk charact eristics at initial recogn ition. Group X compris es 1,000 Loans with a Gross Carrying Value (GCV) per client of 200, for a total GCV of 2,00,000. Similar ly, the GCV per Client is 300 and the tot al GCV is 3,00,000 for Group Y. Histo rical defaults per 1,000 Loans sample: 4 Defaults (Group X), 2 Defaults (Group Y). Bank considers forward looking information and expects an additional 1 increase per Group in defaults over the next 12 Months comp ared to the histor ical rate. PV of Observed Loss is 750 (Grp X), 675 (Grp Y). At reporting date, the Entity assesses that the expected increase in defaults does not represent a signifi cant increase in Credit risk since initial recognition . Comment. Solution: 1. As there is no increase in Credit Risk since initial recognition, Lifetime Expected Credit Loss is not required to be recognised. 2.

Computation of Loss Rate: Group No. of Clients X

3.

GCV per Client

PV of Loss

Loss Rate [Note]

200

`

750

0.375%

Y ` 1,000 ` 300 Note: Loss Rate = PV of Loss ÷ [No. of Client × GCV per Client]

`

675

0.225%

`

1,000

`

Loss Rates are used to estimate 12 Month ECL on new loans in Group X & Y that originated during the year and for which the Credit Risk has not increased significantly since initial recognition. 12



14. Impairment – Loss Rate Approach At th e rep orting date, an En tity asses ses th at t he ex pect ed i ncrease in defau lts r epr esent s a s ignificant inc rease in Credit Risk since initial recognit ion. Additio nal Information is an under. Compute the Expected Credit Loss to be recognized. Age (In Days) Cur rent 1 – 30 31 – 60 61 – 90 91 + Default Rate

0.3%

1.6%

3.6%

6.6%

10.6%

Gross Carrying Amount ( in Lakhs)

150

75

40

25

10

Solution: 1. As there is increase in Credit Risk since initial recognition, Lifetime Expected Credit Loss is required to be recognised. 2.

Computation of Lifetime Expected Credit Loss (LECL): Age Default Rate (DR)

GCV ( in Lakhs)

LECL = DR × GCV ( 000)

Current

0.3%

150

45

1 – 30

1.6%

75

120

31 – 60

3.6%

40

144

61 – 90

6.6%

25

165

91 + Days

10.6%

10

106

LECL Allowance

580

15. Explain the treatment of the followin g items – Item

Treatment

Dividend on Shares recognized as Liabilities

Recognised as Expenses in the same way as Bond Interest. However, it is desirable to disclose them separately in P&L than with Interest because of the difference between Interest and Dividends.

Issuing & Acquiring Cost of its own Equity Instruments

Deduction from Equity to the extent they are Incremental Costs directly attributable to Equity Transaction that would otherwise have been avoided

Cost of Equity Transaction that is abandoned

Recognised as Expenses

Transaction Costs relating to Compound Financial Instruments

issue

of Allocated to the Liability and Equity Component in proportion to the allocation of proceeds.

Gains & Losses related to changes in the Carrying Amount of a Financial Liability

Recognised as Income / Expenses in Profit / Loss even when they relate to an Instrument that includes a right to the residual interest in the assets of the Entity in exchange for Cash or another Financial Asset.

Entity B places its privately held Ordinary Shares that are classified as Equity with a Stock Exchange and simultaneously raises New Capital by issuing New Ordinary Shares on the Stock Exchange. Transaction Costs are incurred in respect of both transactions.

Since the issue of New Shares is the issue of an Equity Instrument, but the placing of the existing Equity Instruments with the Exchange is not, the Transaction Costs should be allocated between the two transactions. Transaction Costs in respect of the New Shares issued will be recognised in Equity whereas the Transaction Costs incurred in placing the existing Shares with the Stock Exchange will be recognised in Profit or Loss.

16. Offsetting X Ltd owes Y Ltd 20 Lakhs at the end of 31st March. As part of another Contract, Y Ltd owes X Ltd 15 Lakhs at 31st March. X Ltd has the legal right to set off the Asset and Liability but historically, X Ltd has settled one month after Y Ltd settles. Can X Ltd offset the Asset and Liability? Solution: No, since X Ltd cannot demonstrate the intention to settle net or simultaneously for all payments.

17. Financial Asset Accounted as Amortised Cost A Company lend s 100 Lakh s to an other Comp any @ 12% p.a. Int erest on 01.04.2015. It incurs 40,000 inc remen tal Cost s for Documentation. Loan Tenure is 5 Years with Interest charged annually. Pass necessary Journal Entries. Assume Fair Value of Loan = 99,40,000 (1,00,00,000 – 1,00,000 + 40,000). 13



Solution: Date 01.04.2015

Particulars

Dr. ( )

Loan A/c

Dr.

100 Lakhs

To Bank A/c 01.04.2015

100 Lakhs

Loan Processing Expenses A/c

Dr.

40,000

To Bank A/c 01.04.2015

Cr. ( )

40,000

Loan A/c

Dr.

40,000

To Loan Processing Expenses A/c

40,000

Note: Fair Value of the Loan is irrelevant.

18. App ropriate Metho d of Accou nting An Enti ty is about to purch ase a p ortf olio of Fixed Rate Asset s t hat will be f inanced by Fixed Rate Debentu res. Both Finan cial Ass ets and Liab ili ties are sub ject to th e same Interest Rate Risk th at gives rise to opposit e c hanges in Fair Value that end to offset each other. Comment on the Appropriate Method of Accounti ng. Solution: 1. In the absence of Fair Value Option, the Entity may have classified the Fixed Rate Assets as FVTOCI with Gains & Losses on changes in Fair Value recognized in Other Comprehensive Income and the Fixed Rate Debentures at Amortised Cost. 2.

Reporting both the Assets and the Liabilities at FVTPL corrects the measurement and inconsistency and produces more relevant information.

19. Reclassification Bonds (Assets) are for 1,25,000. Fair Value on Reclassification is (a) Amo rt ised Cost to FVTPL, (c) FVTPL t o Am or tised Co st, (b) Amo rt ised Cost to FVTOCI, (d) FVTPL t o FVTOVI,

90,000. Pass Entries for the follow ing reclassification s – (e) FVTOCI to Amort ised Cost , (f) FVTOCI to FVTPL.

Solution: (a) Amortised Cost to FVTPL

(b) Amortised Cost to FVTOCI

Bonds (FVTPL) A/c

Dr.

90,000

Bonds (FVTOCI) A/c

Dr.

90,000

P&L A/c

Dr.

35,000

OCI A/c

Dr.

35,000

To Bond (Amortised Cost) A/c

1,25,000

To Bond (Amortised Cost) A/c

(c) FVTPL to Amortised Cost

1,25,000

(d) FVTPL to FVTOCI

Bonds (Amortised Cost) A/c Dr.

90,000

Bonds (FVTOCI) A/c

Dr.

90,000

Impairment Loss (P&L A/c) Dr.

35,000

Impairment Loss (OCI A/c)

Dr.

35,000

To Bond (FVTPL) A/c

1,25,000

To Bond (FVTPL) A/c

(e) FVTOCI to Amortised Cost

1,25,000

(f) FVTOCI to FVTPL

Bonds (Amortised Cost) A/c Dr.

90,000

Bonds (FVTPL) A/c

Dr.

90,000

Loss Allowance (P&L A/c)

35,000

Reclassification Loss (OCI A/c)

Dr.

35,000

To Bond (FVTOCI) A/c

Dr.

1,25,000

To Bond (FVTOCI) A/c

1,25,000

20. Derivative – Recogniti on Entity XYZ enters into a fixed price Forward Contract to purchase 10,00,000 Kg of Copper in accordance with its expected usage requirements. The contract permits XYZ to take physical delivery of t he Copper at the end of 12 months or t o pay or receive a net settlement in Cash, based on the change in Fair Value of Copper. Is the Contract covered under Financial Instruments Standard? 14



Solution: 1. The Contract is a Derivative Instrument as there is no Initial Investment, it is based on the Price of Copper and it is to be settled at a future date. 2.

However, if XYZ intends to settle the contract by taking delivery of the Copper and has no history of settling net in Cash or of taking delivery and selling it within a short period after delivery for the purpose of generating a profit from short term fluctuations in price / dealers’ margin, it is not accounted for as a Derivative.

21. Recognition o f Loan at Reduced Rate to Employees XYZ Ltd grants Loans to its Employees at 4% amounting to 10,00,000 at the beginning of 2015–16. The Principal amount is repaid over a period of 5 Years whereas the accumulated interest compu ted on reducin g balance at simple interest is co llected in 2 equal annual instalments after collection o f the princip al amount. Assume the Benchmark Interest Rate is 8%. Show the Acc ounting Entr ies o n 01.04.2015 and 31.03.2016. Solution:

1. Computation of Fair Value at initial recognition & Interest

Year

Opening Balance

Cash Flow

Closing Balance

Interest @ 4%

Cumulative Interest

PVIF @ 8%

2016

10,00,000

2,00,000

8,00,000

40,000

40,000

0.926

1,85,185

2017

8,00,000

2,00,000

6,00,000

32,000

72,000

0.857

1,71,468

2018

6,00,000

2,00,000

4,00,000

24,000

96,000

0.794

1,58,766

2019

4,00,000

2,00,000

2,00,000

16,000

1,12,000

0.735

1,47,006

2020

2,00,000

2,00,000

1,20,000

8,000

1,20,000

0.681

1,36,117

2021

1,20,000

60,000

60,000

Note

–

0.630

37,810

2022

60,000

60,000

–

–

0.584

35,009

Less:

Discounted Cash Flow

Fair Value of the Loan at Initial Recognition

8,71,361

Loan Amount

10,00,000

Difference to be recognized as Employee Benefits Expense

1,28,639

Note: Accumulated Interest is collected in 2 Equal Annual Instalments after collection of the principal amount at simple Interest = 1,20,000 ÷ 2 = 60,000 p.a. 2. Computation of Interest on Amortised Cost Year

Opening Balance

Cash Flow

Interest @ 4%

Principal Repayment

Closing Balance

2016

8,71,361

2,00,000

69,709

1,30,291

7,41,070

2017

7,41,070

2,00,000

59,286

1,40,714

6,00,356

2018

6,00,356

2,00,000

48,028

1,51,972

4,48,384

2019

4,48,384

2,00,000

35,871

1,64,129

2,84,255

2020

2,84,255

2,00,000

22,740

1,77,260

1,06,995

2021

1,06,995

60,000

8,560

51,440

55,555

2022

55,555

60,000

4,445

55,555

–

Fair Value of the Loan 3. Journal Entries Particulars

Date 01.04.2015

8,71,361

Dr.

Loans to Employees A/c

Dr.

8,71,361

Employee Benefits Expense A/c

Dr.

1,28,639

To Bank A/c 31.03.2016

10,00,000

Loans to Employees A/c

Dr.

69,709

To Interest Accrued A/c 31.03.2016

Cr.

69,709

Bank A/c

Dr.

To Loans to Employees A/c

2,00,000 2,00,000

15



Date

Particulars

31.03. 2016

Dr.

Interest Accrued A/c

Dr.

69,709

To Profit & Loss A/c 31.03. 2016

Cr. 69,709

Profit & Loss A/c

Dr.

1,28,639

To Employee Benefits Expense A/c

1,28,639

22. Recognition of Debentures ABC L td issued Debentures amou nting to 100 Lakh s. As p er t he ter ms o f the is sue i t h as been agreed to issue Eq uity Shares amounting to 150 Lakhs to redeem the Debentures at the end of Year 3. Assume comparable Market Yield is 10% for Year 0 and 1, and 10.5% for Year 2 end. Show Account ing Entries. Solution: Year

1. Computation of Debenture Value to be recognised

Years to Maturity (N)

Market Yield (R m)

PVIF @ R m for N Years

Book Value = PVIF × 150

Issue Proceeds

Interest = Increase in Book Value

100.00

0

3

10%

0.751

112.65

12.65

1

2

10%

0.826

123.90

11.25

2

1

10.5%

0.905

135.75

11.85

3

0

10.5%

1

150.00

14.25

2. Journal Entries (Amounts in Date st

1 Year Beginning

Lakhs)

Particulars

Dr.

Bank A/c

Dr.

100.00

Profit and Loss A/c

Dr.

12.65

To Debentures A/c 1st Year End

112.65

Interest A/c

Dr.

11.25

To Debentures A/c st

1 Year End

11.25

Profit and Loss A/c

Dr.

11.25

To Interest A/c nd

2

Year End

11.25

Interest A/c

Dr.

11.85

To Debentures A/c 2nd Year End

11.85

Profit and Loss A/c

Dr.

11.85

To Interest A/c 3rd Year End

11.85

Interest A/c

Dr.

14.25

To Debentures A/c rd

3 Year End

14.25

Profit and Loss A/c

Dr.

14.25

To Interest A/c rd

3 Year End

Cr.

14.25

Debentures A/c

Dr.

150.00

To Equity Share Capital A/c

100.00

To Securities Premium A/c

50.00

16

CA Final Financial Instruments Summary of Ind as 32,107,109

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