CA R. Venkata Subramani

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 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 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 such modification. This would result in amortising an additional …
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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 such modification. This would result in amortising an additional amount and the …
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Lease accounting Journal Entries for Modification

Lease accounting Journal entries for Modification Details for lease accounting with modification 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 modification: Lease Modification effective date: 1-Apr-2020 Lease payments: Rs. 3,25,000 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. Right-of-use Recognition …
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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
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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 is calculated as follows:
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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 time usually …
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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 which line …
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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 renegotiations and changes …
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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 is located or …
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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 consider all …
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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 are goods or services …
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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 changed Where Lessee …
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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 the help …
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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 from …
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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 company has …
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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: (i) the contract involves …
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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 to be a new …
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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 for …
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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 is a financial asset …
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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 or may be settled in …
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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 protection vehicle for catastrophic episodes. Taleb states the …
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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, the risk management strategy is …
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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 biological assets within the scope 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 leases, the entire process mentioned in …
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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 end date in the formula: 3. For the subsequent lines, 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 shown as ‘New’. A csv file …
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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., all the login ids created …
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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 is also …
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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 respective derivative …
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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 index futures, traded 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, Ind AS …
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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 not …
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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 profit and …
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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 instruments. The …
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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 translation and …
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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 to be recognised in other …
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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 period is determined …
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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 of …
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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 functional currency …
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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 entries to …
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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 objective …
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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 no …
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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 derivatives from …
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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 meet these …
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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 on all forward …
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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 mentioned …
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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 requirements …
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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 on that …
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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 required.
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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 approximate the …
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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 cash …
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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, the …
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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 the hedging …
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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 cumulative …
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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 the fair …
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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 implement …
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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 as well …
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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 comes to …
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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 the measurement date.A quoted …
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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 best use …
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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 of …
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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 quoted …
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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. An entity …
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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 positive fair …
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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 flows are not …
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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 the cash …
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Cash flow hedge Vs fair value hedge

Cash flow hedge Vs fair value hedge What is a cash flow hedge and how is it different from a fair value 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 a 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. However, a fair value hedge is a hedge of the exposure to changes in fair value of a …
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Voluntary discontinuation of hedge accounting

Voluntary discontinuation of hedge accounting Can a hedge accounting be voluntarily discontinued and why? 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. When hedge accounting is discontinued, the hedged item would once again be valued at …
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Rebalancing to achieve hedge effectiveness

Rebalancing to achieve hedge effectiveness What do you mean by rebalancing and how does it help achieve hedge effectiveness? 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. Adjusting the hedge ratio enables an entity to respond to changes in the relationship between the hedging instrument and the hedged item that arise from their underlyings. Rebalancing allows the continuation of a …
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Time value of forward points in hedge accounting

Time value of forward points in hedge accounting How is the time value of forward points in a derivative contract treated in hedge accounting? 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 …
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Accounting for a fair value hedge

Accounting for a fair value hedge How do you account for a fair value hedge? A fair value hedge is accounted for as follows: The gain or loss on the hedging instrument is recognised in profit or loss. If the hedging instrument hedges an equity instrument classified as FVOCI, then it is recognised in other comprehensive income.The hedging gain or loss on the hedged item is adjusted against the carrying amount of the hedged item and be recognised in profit or loss. If the hedged item is a financial asset measured at FVOCI the hedging gain or loss on the hedged item is …
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Foreign currency risk in a firm commitment as a fair value hedge

Foreign currency risk in a firm commitment as a fair value hedge Foreign currency risk associated with a firm commitment can be designated as a fair value hedge only. Explain. No. A hedge of the foreign currency risk associated with such firm commitments may be designated as a cash flow hedge or as a fair value hedge. The reason is that as far as the foreign exchange risk is concerned, it affects both the fair value of the hedged item as well as the cash flows associated with the same. A hedge of foreign currency risk associated with a highly probable forecasted …
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Existing asset or liability as a hedged item

Existing asset or liability as a hedged item Only an existing asset or liability can be designated as a hedged item in a fair value hedge. Do you agree? This statement is not correct, as the hedged item in a fair value hedge can be in addition to the above an unrecognised firm commitment or an identified portion of an asset, liability or firm commitment that is attributable to a particular risk and could affect the income statement. The hedge of a firm commitment to buy or sell a financial or non-financial asset is accounted for as a fair value hedge provided …
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Hedge ratio in hedge accounting requirements

Hedge ratio in hedge accounting requirements What is meant by hedge ratio and how it is helpful in meeting the hedge accounting requirements? Hedge ratio refers to the number of units that are used as hedging instrument for the purpose of hedging a hedged item. Usually, the ratio is 1:1 for most of the financial instruments. For example, if the entity wants to hedge a fixed rate debt instrument of say Rs 10 crore, then if the hedging instrument happens to be an interest rate swap, then the notional amount of the interest rate swap would also be Rs 10 crore. This …
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Interest rate swap as a hedging instrument

Interest rate swap as a hedging instrument An interest rate swap is usually designated as a hedging instrument in spite of the fact that the fair value of an interest rate swap oscillates between positive and negative fair values. Explain the anomaly. At the outset, it may seem rather strange that an interest rate swap which has the potential of having a fair value that oscillates between positive and negative values is permitted to be designated as a hedging instrument while a written option which has a negative fair value at all times is prohibited from being designated as a hedging instrument. …
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Written options as a hedging instrument

Written options as a hedging instrument Why a written option cannot be used as a hedging instrument? The objective of hedging is to minimise the risk and/or to protect the unrealised profits. A hedging instrument should typically restrict the exposure to loses while at the same time provide scope for unlimited profits. The bought option exactly achieves these two requirements. A bought call option has a maximum risk to the extent of the premium paid while leaves open a potential to make unlimited gains. A written call option on the other hand pegs the maximum profit which is the premium received, …
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Can hedging instrument be a non-derivative

Can hedging instrument be a non-derivative A hedging instrument should necessarily be a derivative. Do you agree? Hedging instrument need not necessarily be a derivative instrument even though mostly derivative instruments are used as hedging instruments. The key feature of a derivative instrument should be that it should help minimise the risk which it seeks to hedge. The hedging instrument should not result in taking additional risks or exposures. In other words, it should have a limited risk while having a potential to make significant gains. Normally, the hedging instrument is a purchased option based derivative contract which has a very limited …
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Risk management objective & risk management strategy

Risk management objective & risk management strategy Explain the relationship between risk management objective and risk management strategy of an entity. The risk management strategy of an entity should be distinguished from its risk management objective. The risk management strategy is established at the highest level at which an entity determines how it manages its risk. The risk management strategy is normally in place for a longer period of time. However, it may include some flexibility to react to changes in circumstances even while the strategy is in place. The risk management strategy is usually documented at the highest level with guidance …
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Link between hedge accounting & risk management objective

Link between hedge accounting & risk management objective What is the link between hedge accounting and the risk management objective of an entity? The objective of hedge accounting is to manage the risk that an entity faces. In the context of hedge accounting, the entity manages effectively the risk by using the appropriate financial instruments thereby moderating or reducing the impact of the same in the profit and loss account. In order to comply with hedge accounting, the basic criterion is that the hedging activity should conform to the risk management strategy of the enterprise. The risk management strategy of an enterprise …
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Difference between speculation and gambling

Difference between speculation and gambling Is there any difference between speculation and gambling? Both speculation and gambling involves taking a position in the derivative segment without having any corresponding underlying. In the case of speculation, the open interest does not exceed the sum total of the underlying outstanding. However, in the case of gambling, the open interest exceeds the outstanding underlying at a macro level. Gambling is possible in the OTC segment, especially in credit derivatives. Gambling is not possible in an exchanged traded environment where the regulatory authorities ensure that the open interest never exceeds the sum total of the …
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Difference between hedging and speculation

Difference between hedging and speculation What is the basic difference between hedging and speculation? If an investor takes a derivative position by holding the corresponding underlying, it is called hedging. The derivative position should be in the opposite direction of the underlying position, eg, if a person holds 100 shares of Infosys and if the investor buys a put option which is equivalent to obtaining the right to sell the shares at the stipulated strike price, then the derivative position is known as hedging. If an investor gets into a derivative contract without holding any corresponding underlying, then such a derivative …
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Reasons for revamping hedge accounting by IASB

Reasons for revamping hedge accounting by IASB What prompted the hedge accounting standard to be revamped by IASB? The main reason for revamping the accounting standards relating to financial instruments by the IASB is the direct outcome of the shock that sent shivers through the spine of several conglomerates as a fall out of the financial crisis during the year 2008. It is perceived that the accounting standards issued by the IASB are more principle based as opposed to the accounting standards issued by the Financial Accounting Standards Board (FASB) which is considered to be rule based. Nevertheless it was widely …
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Is hedge accounting mandatory?

Is hedge accounting mandatory? Is hedge accounting mandatory or optional? Hedge accounting is not mandatory. However, considering the benefits of complying with hedge accounting, entities would want to follow hedge accounting when they are in a position to comply with the requirements for hedge accounting. The biggest benefit of hedge accounting is that it reduces the volatility in the profit and loss accounts. Volatility in the profit and loss account is caused due to certain accounting mismatches arising on account of classification of a hedged item and the hedging instrument for the purpose of hedging. For example, an entity may enter …
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Credit adjusted effective interest rate

Credit adjusted effective interest rate What is meant by credit adjusted effective interest rate? The credit adjusted effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial asset to the amortised cost of a financial asset that is a purchased or originated credit-impaired financial asset. When calculating the credit-adjusted effective interest rate, an entity shall estimate the expected cash flows by considering all contractual terms of the financial asset (for example, prepayment, extension, call and similar options) and expected credit losses. The calculation includes all fees and points …
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Recognition of interest revenue during all three stages

Recognition of interest revenue during all three stages How is interest revenue recognised for a financial asset during all the three stages? Interest revenue is always recognised based on the effective interest rate. The effective interest rate is applied on the opening carrying value of a financial asset. Impairment loss, if any, at this stage will not be reduced from the carrying value while computing the interest revenue in the second stage when the credit risk increases significantly. Interest revenue again is recognised on the opening carrying value of the financial asset before adjusting the impairment loss allowance. However, when the …
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Treatment of collateral value for expected credit losses

Treatment of collateral value for expected credit losses How should the value of collateral be treated while measuring expected credit losses? For the purpose of measuring expected credit losses, the estimate of expected cash shortfalls shall reflect the cash flows expected from collateral and other credit enhancements that are part of the contractual terms and are not recognised separately by the entity. The estimate of expected cash shortfalls on a collateralised financial instrument reflects the amount and timing of cash flows that are expected from foreclosure on the collateral less the costs of obtaining and selling the collateral, irrespective of whether …
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Presentation of impairment loss for debt instruments at FVOCI

Presentation of impairment loss for debt instruments at FVOCI How is impairment loss presented in the balance sheet and profit and loss account in respect of debt instruments measured at FVOCI? For financial assets that are debt instruments measured at FVOCI, both the amortised cost and the fair value of the instrument are relevant. The reason for this is the objective of categorising a debt instrument as FVOCI is that both the contractual cash flows characteristic and the fair value of the instrument are relevant as the asset is held to receive contractual cash flows as well as to buy or sell …
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Impairment loss allowance on performing assets

Impairment loss allowance on performing assets Should impairment loss allowance be provided on performing assets or standard assets at the time of recognition of such assets? The expected credit loss is required to be applied on day one for all types of financing assets. The expected credit losses are the present value of all cash short falls over the expected life of the financial instrument. The credit loss is the difference between all contractual cash flows that are due to an entity as per the contract and all the cash flows that the entity expects to receive, discounted at the original …
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Loss allowance as per Ind AS 109

Loss allowance as per Ind AS 109 Can an entity provide a loss allowance greater than the impairment loss allowance as per Ind AS 109? Previously entities used to provide for losses on certain financial assets on an ad hoc basis that means several practices which are now prohibited expressly as per the new impairment requirements of Ind AS 109. Now it is not possible to provide for impairment loss based on a pre-defined percentage of accounts receivable recognised on an ad hoc basis. The absolute value or pre-defined percentage of expected cash short fall on a non performing asset is also …
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Impairment for debt instruments classified as FVOCI

Impairment for debt instruments classified as FVOCI Is impairment testing necessary for debt instruments classified as fair value through other comprehensive income? Debt instruments that are classified as fair value through other comprehensive income are also subjected to impairment test. This is because while the financial asset classified as FVOCI is shown in the balance sheet at fair value, the changes in the fair value of such instruments are taken to the other comprehensive income. Fair valuing a debt instrument does not consider the impairment of the instrument. Fair value of a debt instrument is arrived at by discounting of the …
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Impairment model for different categories of financial assets

Impairment model for different categories of financial assets Is the impairment model different for different categories of financial assets? No. Ind AS 109 has a single impairment model that applies to all financial instruments within its scope. As per the previous version of IFRS 9, viz, IAS 39, there were different models for assets classified as held-to-maturity, available-for-sale debt instruments and available for sale equity instruments and equity instruments measured at fair value through profit or loss. Impairment on account of loan commitments and financial guarantee contracts were accounted for under IAS 37. However, the impairment loss now is aligned with the credit …
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What are the three stages of impairment loss

What are the three stages of impairment loss What are the three stages during which the impairment loss should be provided? At the first stage, a portion of the expected credit loss is recognised on day one for all financial assets. This is calculated as the present value of cash short falls occurring over the entire life of the asset with the weighted probability of the default happening over the next 12 months. The cash short falls represent the difference between the expected contractual cash flows as reduced by the expected cash flows. During this stage, the interest revenue is recognised based …
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New impairment methodology

New impairment methodology What is the new impairment methodology? Is this concept entirely new? Yes. The new impairment methodology is completely new and this is the one instance where the accounting bodies on both sides of the Atlantic agreed to disagree. The bone of contention as far as the US GAAP is concerned, is relating to the reversal of impairment loss. The new impairment methodology is expected to act more like a whistle blower so as to caution the entity of the impending loss that could arise on account of a financial asset over the life of such asset. The earlier model …
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Gains and losses on assets measured at FVOCI

Gains and losses on assets measured at FVOCI How are gains and losses on assets measured at fair value through other comprehensive income recognised? A gain or loss on a financial asset measured at fair value through other comprehensive income shall be recognised in other comprehensive income, except for impairment gains or losses and foreign exchange gains and losses, until the financial asset is derecognised or reclassified. When the financial asset is derecognised the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. If the financial asset is reclassified out …
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Gains and losses from liabilities designated as FVTPL

Gains and losses from liabilities designated as FVTPL How are the gains and losses from liabilities designated as at fair value through profit or loss account recognised? An entity shall present a gain or loss on a financial liability that is designated as at fair value through profit or loss as follows: The amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability shall be presented in other comprehensive income; andThe remaining amount of change in the fair value of the liability shall be presented in profit or loss unless …
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Gains and losses on a financial instrument

Gains and losses on a financial instrument How are gains and losses on a financial instrument be measured? A gain or loss on a financial asset or financial liability that is measured at fair value should be recognised in profit or loss account. For an investment in equity instrument, which the entity has elected to present gain or loss on that investment in other comprehensive income, then gains or loss on such investments should be recognised in other comprehensive income. Dividends are recognised in profit or loss account when the entity’s right to receive payment of dividend is established and it is …
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Reclassification of a financial asset

Reclassification of a financial asset When should a financial asset be reclassified? When, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets to reflect the appropriate category. An entity should reclassify financial assets if the entity changes its business model for managing those financial assets. Such changes are expected to be very infrequent. Such changes are determined by the entity’s senior management as a result of external or internal changes and must be significant to the entity’s operations and demonstrable to external parties. Accordingly, a change in an entity’s business model will …
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