Contract meant for own use

Can a written option that results in the delivery of a non-financial item be treated as a financial instrument, as the non-financial item is meant for own use?

If the derivative contract is a purchased call option or a future contract to buy a non-financial item, this may be covered under the own use exemption, as a result of which such contracts may be outside the scope of the financial instruments standards. Some written options like written put option may also result in the physical delivery of a non-financial item.

For example, a written put option contract to deal in say, copper futures may result in taking delivery of copper if the buyer of the put option exercises the put option contract. Such written contracts will not be covered under the own use exemption, as the entity cannot insist on the delivery of the non-financial asset but will be forced to take delivery when the put option is exercised by the buyer of such option. Hence, the general rule is that written options will always be within the scope of the financial instruments standards irrespective of whether such contracts result in physical delivery of the non-financial asset or not. Such a contract cannot be entered into for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements.

Treatment of transaction costs

Treatment of transaction costs How are the transaction costs treated? Transaction costs incurred while acquiring a financial asset or incurring a financial liability is treated differently depending upon the classification of such financial asset or financial liability. Transaction costs include fees and commission paid to agents (including employees acting as selling agents), advisers, …
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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 …
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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 …
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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 …
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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 …
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Bifurcation of compound financial instruments

Bifurcation of compound financial instruments Should the entity monitor a compound financial instrument in bifurcating such instrument into liability and equity component constantly and account for the same on every reporting period? A compound financial instrument should be evaluated for the terms of the financial instrument to determine whether it contains both …
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What is the concept of effective interest method?

What is the concept of effective interest method? Explain the concept of effective interest method? Effective interest method is a new concept that is introduced through the Ind AS standards. Effective interest rate is relevant not merely for financial instruments, but as a concept running through the entire gamut of the Accounting …
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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 …
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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 …
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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 …
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What are Ind AS accounting standards?

What are Ind AS accounting standards? The Ministry of Corporate Affairs (MCA) on 16th February 2015 notified the Companies (Indian Accounting Standards) Rules, 2015 containing 39 Indian Accounting Standards (Ind ASs). Ind ASs are based on International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). The roadmap for …
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What are treasury shares and how are these presented

What are treasury shares and how are these presented What are treasury shares and how are these presented in the financial statements? If an entity acquires its own equity instruments, these instruments are known as ‘treasury shares’ and are deducted from equity. No gain or loss shall be recognised in profit …
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Contractual cash flows & effective interest rate

Contractual cash flows & effective interest rate When contractual cash flows are modified to change in the terms of contract, does the effective interest rate change? When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the de-recognition …
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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 …
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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 …
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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 …
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Roadmap for implementing Ind AS?

Roadmap for implementing Ind AS? The roadmap for implementing Ind AS in a phased manner is given below. All non-financial companies For companies other than banks, NBFC and Insurance companies: Voluntary Phase 1st April 2015 or thereafter: Voluntary Basis for all companies (with comparatives) Phase I 1st April 2016: Mandatory Basis All listed on Stock Exchange in India …
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Measurement categories for financial assets

Measurement categories for financial assets What are the principal measurement categories for financial assets?  Principal measurement categories for financial assets are amortised cost, fair value through other comprehensive income – FVOCI and fair value through profit or loss – FVTPL.  As per the previous version, viz, IAS 39, the financial assets were classified …
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