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.

Is there a choice to designate as FVTPL?

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What is an embedded derivative?

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Is hedge accounting mandatory?

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Cash flow hedge Vs fair value hedge

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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 …
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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 …
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Classification of derivative instruments

Classification of derivative instruments How are derivative instruments classified? Derivative instruments are a subset of financial instruments. In the definition of financial asset, we have the following phrase, viz, “to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity” and in the definition …
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Separately accounting for an embedded derivative

Separately accounting for an embedded derivative Should an embedded derivative contained in a financial liability be separated and accounted for? When a hybrid contract contains a host contract and it is not a financial asset, the embedded derivatives portion should be separated from the host and accounted for as a derivative if …
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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 …
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Accounting for a cash flow hedge

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Exchange differences on monetary items

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First-time adoption while classifying a financial instrument

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Contract to deal in non-financial item

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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 …
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Difference between hedging and speculation

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Rebalancing and discontinuation of cash flow hedge

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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 …
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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 …
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