CA R. Venkata Subramani

Role of Chartered Accountants in BRSR

“The focus on sustainable investing among equity market participants is expected to rise with more companies and countries implementing policies to meet ESG targets, particularly with respect to carbon emissions…….Stocks in Asia with high ESG scores on the MSCI are trading at a 40% premium to stocks with low ESG scores
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Key disclosures in BRSR

A few of the key disclosures sought in the BRSR are highlighted below: a. An overview of the entity’s material ESG risks and opportunities, approach to mitigate or adapt to the risks along-with financial implications of the same
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Foundation stone for BRSR

There are various international and local frameworks used by organisations across the globe for their corporate sustainability reporting. In November 2018, the Ministry of Corporate Affairs (MCA) constituted a Committee on Business Responsibility Reporting for finalising Business Responsibility Reporting formats for listed and unlisted companies, based on the framework of the National Guidelines for Responsible Business Conduct’ (NGRBCs) . Note:   The existing format of BRR is based on ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business’ (“NVGs”) issued by the Ministry of Corporate Affairs (“MCA”), Government of India.
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What is BRSR?

Sustainability Reporting is an emerging discipline encompassing the disclosure and communication of an entity’s non -financial – environmental, social, and governance (ESG) performance and its overall impact. Over the last few years, more and more entities are now preparing and disclosing their sustainability reports either under a mandate or voluntarily as per the reporting frameworks/ standards provided by standard-setting bodies/ regulators.
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CA Kamal Garg

CA Kamal Garg CA Kamal Garg CA Kamal Garg (Kamal) is a Fellow Member of The Institute of Chartered Accountants of India (ICAI) and a First Class Commerce Baccalaureate from Deen Dayal Upadhyaya College, University of Delhi He holds a Diploma in Information System Audit (DISA) conducted by ICAI Kamal is an Insolvency Professional registered with Insolvency and Bankruptcy Board of India (IBBI) Kamal has also qualified Certificate Course on BRSR conducted by ICAI Member of Board of Studies (BOS) Study Material Research Group (2009-2010) of NIRC of ICAI Special invitee member of the following: Accounting Standards Board (ASB) [2012-2013,…

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What is SPPI test?

What is SPPI Test? SPPI test means Solely Payment of Principal and Interest. The SPPI test is performed at the instrument level. So, if the test passes for one, it means the test passes for everyone in respect of that instrument. SPPI test should be passed for an instrument to be eligible to be classified as “Amortised Cost” instrument. If the test fails then no other test is applied on that instrument and the instrument would be classified as FVTPL only. If the contractual terms of the financial asset give rise to cash flows that are solely payments of principal…

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Are RBI circulars relevant for ECL computation as per Ind AS 109?

A cash flow hedge is a hedge of the exposure to variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a component thereof. It covers future interest payments on variable-rate debt. It also covers a highly probable forecast transaction. The requirement is that such cash flows should affect the profit and loss account.
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Hedging fixed rate debt instrument with IRS

To calculate the change in the value of the hedged item for the purpose of measuring hedge ineffectiveness, an entity may use a derivative that would have terms that match the critical terms of the hedged item (this is commonly referred to as a ‘hypothetical derivative’), and, for example, for a hedge of a forecast transaction, would be calibrated using the hedged price (or rate) level.
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Discontinuance of hedge accounting

As per the new requirements, hedge accounting cannot be voluntarily discontinued. Hedge accounting can be discontinued only if the hedge effectiveness requirements are not met or that the hedging instrument is liquidated. Even when the hedge effectiveness requirements are not met, the entity should adjust the hedge ratio through the process of rebalancing and continue with hedge accounting so long as the hedging relationship continues to meet the risk management objectives of the enterprise.
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Rebalancing by changing the hedge ratio

Rebalancing is a new concept introduced by a major amendment to IFRS 9 during November 2013. Rebalancing means adjustments made to the quantities of the hedged item or the hedging instrument of an existing hedging relationship for the purpose of maintaining a hedge ratio that complies with the hedge effectiveness requirements.
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Hedge effectiveness requirements

Rebalancing is permitted for the purpose of maintaining the hedge ratio to comply with the hedge effectiveness requirements. Changes to designate quantities of a hedged item or hedging instrument for a different purpose do not constitute rebalancing.
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Accounting for the time value of options

The time value of options contract may be separated from the fair value of options contracts and the entity can designate only the change in the intrinsic value of the option. If the entity chooses to do so, then the time value of the option contract is dealt with in the following manner:
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Treatment of time value /forward points in derivatives

An entity is allowed to designate only the change in the intrinsic value of an option contract in a hedging instrument. Similarly an entity can also designate only the change in the spot value of a forward contract in a hedging instrument. In such cases, the time value of the option/forward points is accounted for depending upon the type of the hedged item that the option/forward contract hedges. The option/forward contract could be to either to hedge a transaction-related hedged item or a time-period-related hedged item.
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Accounting for the forward element

Change in the fair value of the forward element of a forward contract that hedges a transaction related hedged item should be recognised in other comprehensive income to the extent it relates to the hedged item. The cumulative change in the fair value arising from the forward element of the forward contract shall be accounted for as follows:
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Accounting for fair value hedge

The hedge should be designated at the inception of the hedging relationship and a formal designation and documentation of the same required. The documentation should contain the entity’s risk management strategy and objective for undertaking the hedge. The effect of the credit risk involved in the hedging instrument, viz, the counterparty credit risk should not be such that it would vitiate the fair value changes of the hedging instrument.
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What is a fair value hedge?

Fair value hedging as the name implies strives to hedge the fair value of an existing asset or liability and certain other firm commitments. In a fair value hedge, the fair value changes to the hedging instrument and the hedged item are recognised in profit and loss account.
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Steps in a cash flow hedge

Identify the hedged item Identify the hedging instrument Designation/qualifying criteria of the hedge Hedge effectiveness requirements to be fulfilled Account for the hedging relationship Rebalancing and discontinuance of hedge accounting
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Illustration of a net investment hedge by a parent entity

Entity A is the Parent having INR as its functional currency. Subsidiary B has Euro as its functional currency. Subsidiary C has GBP as its functional currency and the functional currency of Subsidiary D is USD. Subsidiary B has ECB amounting to $ 50 million. The following diagram best illustrates the hierarchy with corresponding investments in the subsidiary entities.
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Hedges of a net investment in a foreign operation

As per Ind AS 21, net investment in any foreign operation is the amount of the reporting entity’s interest in the net asset of that operation. Such foreign operations may be subsidiaries, associates, joint ventures or branches. Ind AS 21 requires an entity to determine the functional currency of each of its foreign operations as the currency of the primary economic environment of that operation. When translating the results and financial position of a foreign operation into a presentation currency, the entity is required to recognise foreign exchange differences in other comprehensive income until the foreign operation is disposed off.
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Hedging a net position – cash flow hedge

The previous conversion of IFRS 9, viz, IAS 39 did not allow a net position to be hedged. However, for several group companies, it is a normal practice for the risks to be transferred to one central business unit within the enterprise and take hedging position on a net basis. The risks transferred to the central business unit usually off sets one another’s risk. This enables the entity to reduce the transaction cost and also minimise the counter party credit risk. Ind AS 109 effectively allows hedging on the basis of net position for fair value hedge and for cash…
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Relationship between components – cash flow hedge

If a component of the cash flows of a financial or a non-financial item is designated as the hedged item, that component must be less than or equal to the total cash flows of the entire item. However, all of the cash flows of the entire item may be designated as the hedged item and hedged for only one particular risk (for example, only for those changes that are attributable to changes in LIBOR or a benchmark commodity price).
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What is a Cash flow hedge?

A cash flow hedge is a hedge of the exposure to variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a component thereof. It covers future interest payments on variable-rate debt. It also covers a highly probable forecast transaction. The requirement is that such cash flows should affect the profit and loss account.
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Key takeaways from the RBI notification dated 12th Nov 2021

The Reserve Bank of India vide its notification dated 12th Nov 2021 regarding Prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP) pertaining to Advances have provided clarifications which is likely to have a significant impact on the provisioning for all financial institutions including Banks and NBFCs. The notification applies to all lending institutions and issued to clarify and harmonise certain aspects of the extant regulatory guidelines.
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Lease Right of use 1

Lease accounting, lease period extended after year 1 – Journal entries

Lease accounting, lease period extended after year 1 – Journal entries Details for lease accounting for lease extension Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9% Lease extension on 1-4-2020: Lease Modification effective date: 1-Apr-2020 Lease end date extended up to: 31-Mar-2026 All other terms remain the same When the lease is modified without any increase in the scope of the lease then lease liability and the right-of-use are recomputed on the effective date of…

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Lease Liability

Lease accounting, interest-free deposit lease period extended after year 1

Lease accounting, interest-free deposit lease period extended after year 1 Details for lease accounting for lease extension When the lease is modified without any increase in the scope of the lease then lease liability and the right-of-use are recomputed on the effective date of such modification. This would result in amortising an additional amount and the finance charges based on the revised lease liability should be recomputed. Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Lease Deposit: Rs. 3,00,000 Payment frequency: Annual – payable at the end…

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Lease accounting Journal Entries for Modification

Lease accounting Journal entries for Modification Details for lease accounting with modification When the lease is modified without any increase in the scope of the lease then lease liability and the right-of-use are recomputed on the effective date of such modification. This would result in amortising an additional amount and the finance charges based on the revised lease liability should be recomputed. Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Lease Deposit: Rs. 3,00,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9% Lease…

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Lease accounting with an interest-free deposit

Lease accounting with an interest-free deposit Details for lease accounting Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Lease Deposit: Rs. 3,00,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9% Right-of-use Recognition of Lease liability Amortisation of Right-of-use Finance cost Interest free deposit Imputed interest income Amortisation of Right-of-use Trial balance Profit and Loss Account Balance Sheet Lease Accounting Software Pricing

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Journal entries for lease accounting

Journal entries for lease accounting Details for lease accounting Let us assume the following details for lease accounting: Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9%  Right-of-use  Recognition of Lease liability Amortisation of Right-of-use Finance cost Trial balance Profit & Loss Account Balance Sheet

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Steps in lease accounting

Steps in lease accounting Details for lease accounting Let us assume the following details for lease accounting as per Ind AS 116 Lease start date: 1-Apr-2019 Lease end date: 31-Mar-2024 Lease payments: Rs. 2,75,000 Payment frequency: Annual – payable at the end Incremental borrowing rate: 9% Step 1: Calculate the right-of-use The right-of-use is first calculated as follows: Step 2: Prepare amortisation schedule The amortisation schedule based on straight line method is calculated as follows: Step 3: Calculate Lease Liability The lease liability is computed as follows: Step 4: Calculate the finance charges The finance charges for the lease liability…

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Operating lease vs financing lease

Operating lease vs financing lease Classification of Lease Leases are classified as either finance lease or operating lease. A finance lease is like buying an asset with the finance provided by an external party. It allows a lessee to own an asset with the help of finance from the lessor. The lessee has the option to be the permanent owner of the asset at the end of the lease term, subject to certain terms.An operating lease is like an asset rental. It allows the lessee to use the leased asset for a specific period of time. The specified period of…

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Lease Accounting as per IFRS 16 vs. AS 19

Lease Accounting as per IFRS 16 vs. AS 19 Sl. No.TopicInd AS 116AS 191Applicability to land & buildingSpecific provisions dealing with leases of land and building exists in Ind AS 116Not applicable to lease of lands2Residual ValueNo definition of “Residual Value”The term “Residual Value” is defined3Inception & commencement of leaseInception of lease and commencement of lease are different as per Ind AS 116Both the terms are used at some places in AS 19, and these terms are not defined and distinguished4Recognition dateLease recognised as finance leases as assets and liabilities in balance sheet at the commencement of the lease termRecognition…

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Presentation & Disclosure – lease accounting standard

Presentation & Disclosure – lease accounting standard Presentation A lessee should either present in the balance sheet, or disclose in the notes: right-of-use assets separately from other assets. If a lessee does not present right-of-use assets separately in the balance sheet, the lessee should:include right-of-use assets within the same line item as that within which the corresponding underlying assets would be presented if they were owned; anddisclose which line items in the balance sheet include those right-of-use assets.lease liabilities separately from other liabilities. If a lessee does not present lease liabilities separately in the balance sheet, the lessee should disclose…

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Lease modifications

Lease modifications What is meant by lease modification? A lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of its original terms and conditions. Examples of lease modifications are as follows: increasing the scope of the lease by adding the right to use additional underlying assetsdecreasing the scope of the lease by removing the right to use of some underlying assetsincreasing the scope of the lease by extending the contractual lease termchanging the consideration in the lease by increasing or decreasing the lease payments Changes that result from…

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How to compute right-to-use asset

How to compute right-to-use asset Initial measurement of the right-of-use asset At the commencement date, a lessee should recognise a right-of-use asset and a lease liability. At the commencement date, a lessee should measure the right-of-use asset at cost.The cost of the right-of-use asset should comprise: the amount of the initial measurement of the lease liabilityany lease payments made at or before the commencement date, less any lease incentives received;any initial direct costs incurred by the lessee; andan estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it…

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How to determine the lease term as per the standard

How to determine the lease term as per the standard What is meant by ‘lease term’? An entity should determine the lease term as the non-cancellable period of a lease, together with both:periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; andperiods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. In assessing whether a lessee is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease, an entity should…

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How to separate the components of a lease contract

How to separate the components of a lease contract Account for each component An entity should account for each lease component as a lease separately from non-lease components of the contract, unless the entity applies the practical expedient guidanceAn entity should assess whether a contract contains a lease for each potential separate lease component. Determining the separate component The right to use an underlying asset is a separate lease component if both: the lessee can benefit from use of the underlying asset either on its own or together with other resources that are readily available to the lessee.Readily available resources…

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How to identify a lease contract as per the lease accounting standard

How to identify a lease contract as per the lease accounting standard General At inception of a contract, an entity should assess whether the contract is a lease or contains a lease The contract should convey the right to control the use of an identified asset for a period of time in exchange for considerationA period of time may be described in terms of the amount of use of an identified asset (for example, the number of production units that an item of equipment will be used to produce).Should reassess only if the terms and conditions of the contract are…

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Lease Accounting as per Ind AS 116

Lease Accounting as per Ind AS 116 Summary of the key provisions of Ind AS 116 Ind AS 116 covers Lease Accounting, and this has replaced the earlier accounting standard Ind AS 17A lease is an agreement by which the owner known as ‘lessor’, of a specific asset allows another person known as the ‘lessee’ to use the asset for a specified period in exchange for certain periodic payments known as ‘lease rentals’ to the lessor.A finance lease is like buying an asset with the finance provided by an external party. It allows a lessee to own an asset with…

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Lease Accounting as per IFRS 16

Lease Accounting as per IFRS 16 Summary of the key provisions of IFRS 16 IFRS 16 covers Lease Accounting, and this has replaced the earlier accounting standard IAS 17A lease is an agreement by which the owner known as ‘lessor’, of a specific asset allows another person known as the ‘lessee’ to use the asset for a specified period in exchange for certain periodic payments known as ‘lease rentals’ to the lessor.A finance lease is like buying an asset with the finance provided by an external party. It allows a lessee to own an asset with the help of finance…

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What is the new lease accounting standard

What is the new lease accounting standard? What’s changed under IFRS 16? IFRS 16 / Ind AS 116 is the most significant change to lease accounting in the last several years. IFRS 16 is introduced with effect from 1 January 2019, while Ind AS 116 is applicable from 1st April 2019. This new standard will affect most companies reporting and will have a significant impact on the financial statements of lessees of property and high-value equipment. The new standard takes a totally new approach for accounting for leases. The new model is known as the ‘right-of-use’ model. So when a…

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Extracts from Annual reports – Lease Accounting

Extracts from Annual reports – Lease Accounting Infosys Ltd Annual Report YE 31-Mar-2021 Leases            Accounting policy The Group as a lessee      The Group’s lease asset classes primarily consist of leases for land, buildings and computers. The Group assesses whether a contract contains a lease at the inception of a contract. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether:…

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Exemptions that can be availed in lease accounting

Exemptions that can be availed in lease accounting Exemptions A lessee can avail exemption in respect of the following items: short-term leasesleases for which the underlying asset is of low valueIf a lessee elects not to apply then the lessee should recognise the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basisThe lessee should apply another systematic basis if that basis is more representative of the pattern of the lessee’s benefit Short term lease If a lessee avails short-term leases exemption, the lessee should consider the lease…

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Lease Accounting as per IFRS 16 vs. IAS 17

Lease Accounting as per IFRS 16 vs. IAS 17 For Lessees For LesseesSl. NoTopicIFRS 16IAS 171Definition of a leaseAs per IFRS 16, a lease is a contract that conveys the right to control the use of an underlying asset for a period of time in exchange for a considerationThroughout the period of use, the customer should have the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified assetIAS 17 defines a lease as an agreement whereby the lessor conveys to the lessee, in return…

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Observations about financial assets and liabilities

Observations about financial assets / liabilities Observations about financial assets / liabilities Chain of contractual rights / obligations: A chain of contractual rights or contractual obligations meets the definition of a financial instrument if it will ultimately lead to the receipt or payment of cash or to the acquisition or issue of an equity instrument. Cash: Cash is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements. Also, it is specifically included in the definition of financial asset. Bank deposit: A bank deposit…

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What is a Financial instrument?

What is a Financial instrument? What is a Financial instrument? A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. The following financial instruments do not fall within the scope of Ind AS 32: Financial asset A financial asset is any asset that is: cash;an equity instrument of another entity;a contractual right:to receive cash or another financial asset from another entity; orto exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; ora contract that will…

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Is the bitcoin worth ZERO?

Is the bitcoin worth ZERO?? Is the bitcoin worth ZERO? There is an article by Nassim Nicholas Taleb who is a distinguished Professor of Risk Engineering at NYU’s Tandon School of Engineering. Taleb has applied quantitative finance concepts and economic arguments to cryptocurrencies and argues that bitcoin fails to satisfy the notion of ‘currency without government’. As per Taleb: Cryptocurrency  can be neither a short or long term store of value – its expected value is no higher than 0 (yes you got it right ZERO). It cannot operate as a reliable inflation hedge. It does not constitute a tail…

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Discontinuation of hedge accounting

Discontinuation of hedge accounting Only prospective discontinuation Discontinuation of hedge accounting applies prospectively from the date on which the qualifying criteria are no longer met. An entity shall not de-designate and thereby discontinue a hedging relationship that: still meets the risk management objective on the basis of which it qualified for hedge accounting (ie, the entity still pursues that risk management objective); andcontinues to meet all other qualifying criteria (after taking into account any rebalancing of the hedging relationship, if applicable). The distinction between the entity’s risk management strategy and the risk management objectives is already discussed earlier. To recapitulate,…

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Objective & Scope of lease accounting standard

Objective & Scope of lease accounting standard Objective Sets out the principles for recognition, measurement, presentation and disclosure of leasesObjective is to ensure that lessees and lessors provide relevant information that faithfully represents those transactionsEnables users to assess the effect that leases have on the financial position, financial performance and cash flows of an entityConsistently applied to contracts with similar characteristics and in similar circumstances Scope Ind AS 116 is applied to all leases, including leases of right-of-use assets in a sublease. Out of scope: leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;leases of…

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Lease Accounting Software Modification and Termination

Lease Accounting Software Modification and Termination 1. Processing is done on a quarterly basis. 2. Journal entries are passed on a monthly basis always. All entries will be dated the end of each month. Exception is the payment of lease rental and other payments which will be the actual date of such payment. 3. There may be some modifications in the lease term when we receive the data for the next quarter. 4. So every time we process the data, the first job is to check the following: New leasesExisting leases with no modificationExisting leases with modifications For a. New…

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Lease Accounting Software – Deposit Management

Lease Accounting Software – Deposit Management Upload Lease Deposit Deposits with sample data Import ‘Lease advance’ file Click the import data and upload the advance.csv in the given format Deposits uploaded Compute the Lease Deposit Prepare the schedule of dates first. 1. Discount factor is based on the rate given in the Advances file by adding the two fields – Let us call the sum total of these two as ‘Rate for Deposit’ 2. For the first line, where the advance amount is given the discount factor is found by the number of days from the start date to the…

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Lease Accounting Software Computation Process

Lease Accounting Software Computation Process Generate cash flows Based on the start date, effective date, end date, frequency of the lease, payable at beginning or end etc, cash flows for the entire period is generated as follows: Change the following data – only start from 1-4-2019 onwards Variable cashflows If you upload lease with Cash flow as “YES” then click the export cash flow. If the Cash Flow field is not ‘YES’ then the ‘Upload Cash Flow’ and ‘Export Cash Flow’ buttons will not be active. The Status of the record for which Cash flows should be updated will be…

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Lease Accounting Software – Data Input Process

Lease Accounting Software – Data Input Process Creation of Company Super Admin is the administrative contact from RVSBELL Analytics, who will create the company and the user login ids for all the users of the application. Creation of users Three users are created by the Super Admin viz., Accountant, Manager and Auditor. All the three login ids should be created before the user starts to work with the system. If the user wants more ‘Accountant’ logins, it can be requested at additional cost and the Super Admin will create the same. Before the user starts to upload the data etc.,…

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Fair value hedge on discontinuation of hedge accounting

Fair value hedge on discontinuation of hedge accounting What happens to a fair value hedge on discontinuation of hedge accounting? Fair value hedge accounting as per the approach mentioned in the guidance note is significantly different from the fair value hedge accounting as per Ind AS 109. The fundamental difference arises on account of the concept known as ‘effective interest rate’ which runs through the entire literature of Ind AS. The effective ‘interest rate’ concept is conspicuously missing in the present iGAAP (AS). Since this guidance note is meant for those entities not covered by Ind AS, effective interest rate…

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Key accounting principles in the guidance note?

Key accounting principles in the guidance note? What are the key accounting principles mentioned in this guidance note? All derivatives should be accounted for at the inception and measured at fair value too at the inception as well as at every reporting period.If hedge accounting is not applied, then the derivatives should be measured at fair value. Fair value changes should be recognised in P&L.If hedge accounting is applied, then the risk management objective and the risk that is hedged should be identified and documented. Also, the entity should satisfy how the risk management objective is being met by the…

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Transactions within the scope of this guidance note

Transactions within the scope of this guidance note What type of transactions are within the scope of this guidance note and which are outside the scope? All transactions covered by AS 11, accounting for embedded derivative contracts and accounting for non-derivative financial assets/liabilities designated as hedging instruments are outside the scope of the guidance note. The following derivative contracts are covered by this guidance note irrespective of whether it is used as hedging instruments or not: Foreign exchange forward contracts hedging highly probable forecast transactions and firm commitments;Other foreign currency derivative contracts that are outside the scope of AS 11;Equity…

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Entities that are required to follow the guidance note

Entities that are required to follow the guidance note What are the entities that are required to follow the guidance note? Banking, non-banking finance companies (NBFCs), housing finance companies and insurance entities follow derivative accounting promulgated by the respective regulatory authorities, viz, Reserve Bank of India (RBI), National Housing Bank (NHB), Insurance Regulatory and Development Authority (IRDA), etc. If the concerned regulatory authority has not prescribed any accounting treatment, then the recommendations as per this guidance note become applicable. It should be noted that as per the press note issued by the Ministry of Corporate Affairs dated 18 January, 2016,…

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Need for the guidance note on accounting for derivatives

Need for the guidance note on accounting for derivatives What is the need for the guidance note on accounting for derivatives? Currently, none of the notified accounting standards prescribe the proper accounting treatment for derivative contracts. Foreign exchange forward contracts, which are speculative in nature, ie, which do not hedge the payment of monetary asset or monetary liability, are within the scope of AS 11 and, as such, are not included within the scope of this guidance note. Even derivative contracts that are regulated by certain regulations specific to a particular sector or a specified group of entities are also…

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Guiding principle in guidance note on accounting for derivatives?

Guiding principle in guidance note on accounting for derivatives? What is the main guiding principle in the guidance note on accounting for derivatives? The main accounting principle enshrined in this guidance note is that all derivative contracts should be accounted for in the books of accounts and the same should be measured at fair value irrespective of whether it is part of hedging relationship or not. If a derivative contract is not part of any hedging relationship, then such a derivative is entered into for speculative purposes and the fair value changes of such derivative should be recognised in the…

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Current standards for financial instruments as per AS?

Current standards for financial instruments as per AS? What are the current accounting standards for financial instruments as per AS? Currently there are no accounting standards that specifically address financial instruments except for certain forward foreign exchange contracts covered by AS 11. The Accounting Standards relating to financial instruments, viz, AS 30, AS 31 and AS 32 which form the Indian GAAP, did not see the light of the day as these were withdrawn by March 2011, just before the scheduled date on which these were supposed to become mandatory. This created a vacuum for accounting standards relating to financial…

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Exchange differences from the presentation currency

Exchange differences from the presentation currency How are the exchange differences arising from the presentation currency dealt with? Exchange differences are recognised in other comprehensive income.These exchange differences are not recognised as income or expenses for the period because the changes in exchange rates have little or no direct effect on the present and future cash flows from the entity’s operations.The cumulative amount of the exchange differences is presented in a separate component of equity until disposal of the foreign operation.When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from…

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Exchange differences from non-monetary items

Exchange differences from non-monetary items How are the exchange differences arising from non-monetary items dealt with? Non-monetary items When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss is also recognised in profit or loss.When a gain or loss on a non-monetary item is recognised directly in other comprehensive income, any exchange component of that gain or loss is recognised directly in other comprehensive income (for example, gain or loss on equity securities measured at FVOCI). Other comprehensive income Other Ind ASs require some gains and losses…

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Exchange differences on monetary items

Exchange differences on monetary items How are the exchange differences on monetary items dealt with?  Exchange differences arise from: the settlement of monetary items at a subsequent date to initial recognition;remeasuring an entity’s monetary items at rates different from those at which they were initially recorded (either during the reporting period or at the previous reporting periods);Such exchange differences must be recognised as income or expenses in the period in which they arise; andIf the transaction is settled in a different accounting period to that of the initial recognition of the transaction, the exchange difference to be recognised in each…

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Carrying amount of a non-monetary item

Carrying amount of a non-monetary item How is the carrying amount of a non-monetary item determined on a valuation date for a foreign currency transaction? The carrying amount is determined by comparing the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that amount was determined (ie, the rate at the date of the transaction for an item measured in terms of historical cost); and the net realisable value or recoverable amount, as appropriate, translated at the exchange rate at the date when that value was determined (eg, the closing rate at the end…

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Carrying amount of a monetary item

Carrying amount of a monetary item How is the carrying amount of a monetary item determined on a valuation date for a foreign currency transaction? The carrying amount of an item is determined in conjunction with other relevant Standards. For example, property, plant and equipment may be measured in terms of fair value or historical cost in accordance with Ind AS 16 ‘Property, Plant and Equipment’. Whether the carrying amount is determined on the basis of historical cost or on the basis of fair value, if the amount is determined in a foreign currency it is then translated into the…

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Difference between FX translation and FX revaluation

Difference between FX translation and FX revaluation What is the difference between FX translation and FX revaluation? Foreign currency translations are first recorded initially in the units of the foreign currency. Foreign currency is a currency other than the functional currency of the entity. Each and every foreign currency translation is revalued in the functional currency based on the official exchange rate at the end of the day. Therefore, for each transaction in foreign currency, there will be a corresponding transaction in the functional currency of the entity. This process is known as effects revaluation. The standard permits the revaluation…

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Difference between monetary and non-monetary items

Difference between monetary and non-monetary items What is the difference between monetary and non-monetary items? Monetary items are those assets and liabilities that are cash or readily convertible into cash. However, the essential feature is the existence of a right to receive or obligation to deliver a fixed or determinable number of units of a currency. For example, provisions to be settled in cash or cash dividends which are already recognised as liability or liabilities such as employee benefits to be paid in cash are examples of monetary items that are liabilities. Investments in debt securities held solely with the…

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Financial statements presented in any currency

Financial statements presented in any currency Can an entity present its financial statements in any currency of its choice? Yes, an entity can present its financial statements in any currency of its choice which is known as presentation currency. Needless to say that these statements would be in addition to the financial statements prepared in the functional currency of the entity. While the application of certain factors are necessary to determine the functional currency based on a set of facts and circumstances, presentation currency is a currency which the entity can chose on its own. Such selected presentation currency has…

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Importance of functional currency?

Importance of functional currency? What is the importance of functional currency? The determination of functional currency is extremely important as incorrectly determining the same will affect the financial statements in a big way, causing the transactions in the functional currency to be treated as, though they were foreign currency transactions. Exchange differences will be recognised on transactions for which no foreign exchange difference should have arisen.Similarly, transactions that should have led to recognition of foreign exchange differences, will not be provided for.This may have a significant impact on both the statement of comprehensive income and the statement of financial position.

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Transaction are outside the scope of Ind AS 21

Transaction are outside the scope of Ind AS 21 What type of transaction are outside the scope of Ind AS 21? Derivative transactions and balances that are within the scope of Ind AS 109 ‘Financial Instruments’.Ind AS 109 applies to many foreign currency derivatives and, accordingly, these are excluded from the scope of this Standard. However, those foreign currency derivatives that are not within the scope of Ind AS 109 (eg some foreign currency derivatives that are embedded in other contracts) are within the scope of this Standard. In addition, this Standard applies when an entity translates amounts relating to…

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Transaction are covered by Ind AS 21

Transaction are covered by Ind AS 21 What type of transaction are covered by Ind AS 21? Accounting for transactions and balances in foreign currenciesTranslating the results and financial position of foreign operations, included in the financial statements of the entity by consolidation or the equity methodTranslating an entity’s results and financial position into a presentation currencyApplies to the presentation of an entity’s financial statements in a foreign currency and sets out requirements for the resulting financial statements to be described as complying with Indian Accounting Standards (Ind ASs).For translations of financial information into a foreign currency that do not…

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Difference between AS 11 and Ind AS 21?

Difference between AS 11 and Ind AS 21? Conceptually, is there any difference between AS 11 and Ind AS 21? In AS 11, there is no concept of functional currency. Foreign currency is a currency other than the reporting currency. Also, there is no concept of presentation currency in AS 11. As per Ind AS 21, functional currency is the currency of the primary economic environment in which an entity operates. Foreign currency is a currency other than the functional currency. Presentation currency is the currency in which the financial statements are prepared. AS 11 is applicable to exchange differences…

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Designation of contracts deal a non-financial item on first time aoption

Designation of contracts deal a non-financial item on first time aoption Is there a choice available with an entity in respect of designation of contracts to buy or sell a non-financial item? Ind AS 109 allows a contact to buy or sell a non-financial item to be designated at fair value through profit or loss provided it is done at inception without undue delay and it reduces an accounting mismatch. Ind AS 101, however, permits such contracts to be designated at fair value through profit or loss at the date of transition to Ind AS provided it meets the requirements…

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Recognition of financial instruments on first-time adoption

Recognition of financial instruments on first-time adoption Financial assets and financial liabilities are allowed to be recognised at fair value only on initial recognition, subject to the fulfilment of certain requirements. How are these dealt with during first-time adoption? An entity is required to measure a financial asset or financial liability at its fair value. Where the fair value at initial recognition differs from the transaction price, the entity should recognise the difference between the fair value at initial recognition and the transaction price as gain or loss. However, for a first-time adopter, an entity is allowed to apply these…

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Designate a previously recognised financial instrument

Designate a previously recognised financial instrument How should an entity designate a previously recognised financial instrument? A financial liability may be designated as a liability measured at fair value through profit or loss provided it eliminates or significantly reduces the accounting mismatch. The requirement for such a designation is that it must be done only at the time of inception of the financial liability without undue delay. Ind AS 101 permits a financial liability to be designated at fair value through profit or loss account on the date of transition to Ind AS provided the aforementioned conditions are satisfied as…

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Treatment of embedded derivatives on first-time adoption?

Treatment of embedded derivatives on first-time adoption? How are embedded derivatives treated on first-time adoption? As per Ind AS 101, the assessment of embedded derivative that requires to be separated from the host contract and accounted for as a derivative should be based on the conditions that existed on the date when the entity first became a party to the contract. Subsequent reassessment is prohibited unless there is change in the terms of the contract having a potential to modify the cash flows. The first-time adopter can make assessment regarding embedded derivative on the date when such a reassessment is…

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Impact of impairment requirements on first-time adoption

Impact of impairment requirements on first-time adoption How do the impairment requirements impact on first-time adoption? An entity shall apply the impairment requirement retrospectively.At the date of transition to Ind ASs, an entity shall use reasonable and supportable information that is available without undue cost or effort to determine the credit risk at the date that financial instruments were initially recognised (or for loan commitments and financial guarantee contracts the date that the entity became a party to the irrevocable commitment and compare that to the credit risk at the date of transition to Ind ASs.An entity should seek to…

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Effective rate of interest during the first-time adoption

Effective rate of interest during the first-time adoption How will the effective rate of interest be computed during the first-time adoption? Effective interest rate is a key concept that runs through the entire gamut of Ind AS standards, more so for the financial instruments, as the interest element, be it revenue or expense is computed only based on the effective interest rate and not on the stated rate of interest. It may be impractical for an entity to find out the effective interest rate for a certain instrument due to lack of availability of all details relating to the contractual…

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First-time adoption while classifying a financial instrument

First-time adoption while classifying a financial instrument There are several judgemental decisions which an entity is required to make at the inception of a financial instrument. What should an entity do on first-time adoption to classify and measure such financial instrument? The conditions for classification and measurement of financial assets are based on the facts and circumstances that exist at the date of transition to Ind AS in relation to modified time value of money element and the fair value of pre-payment feature if present in a financial asset. When it becomes impracticable to assess the impact of these features,…

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Treatment when hedge accounting not qualified

Treatment when hedge accounting not qualified An entity follows hedge accounting as per previous GAAP. However, the same does not qualify for hedge accounting as per Ind AS 109. What should the entity do? If a hedging relationship does not qualify for hedge accounting as per Ind AS 109, such hedge accounting should be discontinued on first-time adoption of Ind AS. This happens when a previously designated hedge fails to satisfy the conditions for hedge accounting as per Ind AS 109, irrespective of whatever may be the status as per the previous GAAP. It is also prohibited to retrospectively designate…

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Accounting for a cash flow hedge on first-time adoption

Accounting for a cash flow hedge on first-time adoption How will a cash flow hedge be accounted for on first-time adoption? If the forecast transaction which is not highly probable is expected to occur, the deferred gains or losses are recognised in the cash flow hedge reserve. Such gains or losses that are recognised in the cash flow hedge reserve on first-time adoption of Ind AS 109 continues to remain there until the forecast transaction affects profit or loss or the forecast transaction is not expected to occur. When the forecast transaction is no longer expected to occur, the net…

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Accounting for an undesignated fair value hedge

Accounting for an undesignated fair value hedge When an entity adopts Ind AS for the first time, how will an undesignated fair value hedge be accounted for? At the transition date, it is likely that hedging instruments may not be recognised or valued. So, an entity as on the date of transition should measure the derivatives at fair value. It should also eliminate deferred losses and gains, if any, arising on derivatives as if they were assets or liabilities. In respect of fair value hedge, as per the previous GAAP, it is likely that an entity may not have recognised…

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Hedge accounting be applied only prospectively

Hedge accounting be applied only prospectively Why should hedge accounting be applied only prospectively and not retrospectively? To implement hedge accounting, there should be a complete set of documentation available that fully describes a hedging relationship including designation of hedged item, hedging instrument and several other requirements. On first-time adoption, the entity should ensure that proper hedging document is in place before applying hedge accounting. Hedge accounting cannot be retrospectively applied whatsoever. This is because if it is permitted, then it would amount to allowing an entity to take advantage of hedge accounting provided its beneficial or otherwise not to…

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Derecognise financial assets/financial liabilities retrospectively

Derecognise financial assets/financial liabilities retrospectively Can an entity derecognise financial assets/financial liabilities retrospectively? Financial assets and liabilities that are derecognised as per the previous GAAP requirements should not be recognised as per Ind AS merely because the previous derecognition as per the previous GAAP is not consistent with the Ind AS requirements and, as such, do not qualify for derecognition as per Ind AS. In other words, derecognition of financial instruments should be done only prospectively and not retrospectively. Certain transactions to liquidate the financial assets may not qualify such financial assets to be derecognised till the risk and rewards…

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Difference between mandatory exceptions and optional exemptions

Difference between mandatory exceptions and optional exemptions What is the difference between mandatory exceptions and optional exemptions? Whenever an entity follows an accounting standard as prescribed by Ind AS, then the entity is required to comply with the standard from the inception of the entity and make necessary changes in its financial statements so as to comply with Ind AS. This may sometimes be impractical and even if practical, may cause enormous hardship on the part of the entity resulting in additional cost and effort that may not match the benefits from such implementation. For such cases, Ind AS 101…

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Fair value hierarchy mentioned as per Ind AS 113

Fair value hierarchy mentioned as per Ind AS 113 What is the fair value hierarchy mentioned in Ind AS 113? Ind AS 113 establishes a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). Level 1 inputs Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at…

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Relevance of fair value for non-financial assets

Relevance of fair value for non-financial assets How is fair value concept relevant for non-financial assets? A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. However, an entity’s current use of a non-financial asset is presumed to be its highest and…

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Fair value and how it is defined

Fair value and how it is defined What is the fair value and how it is defined? Fair value is 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. A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date, including the condition and location…

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Objective behind the valuation techniques Ind AS 113

Objective behind the valuation techniques Ind AS 113 What is the objective behind the valuation techniques as per Ind AS 113? The objective is to maximise the use of relevant observable inputs and minimise the use of unobservable inputs. Exchange markets, dealer markets, brokered markets and member-to-member markets are some of the examples of markets where the inputs might be observable for certain assets and liabilities. The inputs in this case refer to the characteristics of an asset or a liability that market participants normally take into account for determining the transaction. The fair value hierarchy gives highest priority to…

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Objective of the fair value as per Ind AS 113

Objective of the fair value as per Ind AS 113 What is the objective of the fair value as per Ind AS 113? Ind AS 113 sets out a framework for measuring fair value including the definition of the fair value and the necessary disclosures about fair value measurements. Fair value is the market-based measurement and not an entity specific measurement. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current conditions.…

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Definition of derivative instruments

Definition of derivative instruments Are derivative instruments specifically defined in the standards and if so, where? A derivative instrument is a subset of financial instrument with mainly three characteristics, viz, its value changes in response to a change in the underlying variable, it requires no or low initial net investment and its settled on a future date. In the definition of financial asset, derivative instrument is covered under (c) (ii), viz, to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity. Purchased call options and put options and derivatives having a…

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Rebalancing and discontinuation of cash flow hedge

Rebalancing and discontinuation of cash flow hedge Briefly explain rebalancing and discontinuation of cash flow hedge. If the hedge effectiveness requirements are not met, the entity should adjust the hedge ratio by a process known as ‘rebalancing’ so long as the hedging relationship continues to meet the risk management objective of undertaking the hedge.When the hedging instrument is liquidated or if the hedge is discontinued otherwise the balance in the cash flow hedge reserve will continue to remain there till the expected cash flows affecting the hedged item affects the profit and loss account. If the hedged expected future cash…

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Accounting for a cash flow hedge

Accounting for a cash flow hedge How would you account for a cash flow hedge? Get the lower of the cumulative fair value changes to the hedging instrument and the fair value of the hedged item, viz, the present value of expected cash flows.The amount calculated in step 1 above is taken to ‘Cash Flow Hedge Reserve’.The difference between the fair value changes to the hedging instrument and the amount taken to Cash Flow Hedge Reserve is taken to the profit and loss account.Where the hedged item ultimately results in a non-financial asset or a non-financial liability, the balance in…

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