FAQs

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 and interest on the principal amounts outstanding viz., cash flows that are consistent with a basic lending arrangement. As mentioned above this assessment must be carried out on an instrument by instrument basis.

Principal is defined as the fair value of the financial asset at initial recognition. Interest is defined as the compensation for time value of money. It also includes a compensation for credit risk and other lending risks such as liquidity, administrative costs and a profit margin.

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 applicability of Ind AS mentions that Ind AS will be applicable in a phased manner depending upon the listing status as well as the net worth of the company. The roadmap is applicable to non-financial companies, i.e., companies other than banking, insurance and NBFCs. During these phases, the financial companies, …
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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 or outside having net worth equal to or more than Rs 500 croreUnlisted companies having net worth equal to more than Rs 500 croreParent, Subsidiary, Associate and Joint Venture of above Companies can voluntarily apply Ind AS for accounting periods beginning on or after 1st April 2015. If an entity applies …
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Ind ASs relating to financial instruments

Ind ASs relating to financial instruments What are the Ind ASs relating to financial instruments? Financial instruments are primarily governed by three standards as per Ind AS, viz, Ind AS 32, Ind AS 109 and Ind AS 107. Ind AS 32 defines financial instruments, financial assets, financial liabilities and equity instruments. Ind AS 32 deals with financial instruments from the perspective of an issuer. It primarily addresses the presentation-related issues and provides guidance whether a financial instrument should be considered as a financial asset, a financial liability or an equity instrument. Ind AS 32 also addresses compound instruments that contain both liability and …
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What is the significance of Ind AS 32?

What is the significance of Ind AS 32 Ind AS 32 is the converged Accounting Standard of IAS 32 Ind AS 32 deals with financial instruments from the perspective of an issuer and provides guidance as to how an entity should present a financial instrument either as a financial asset or financial liability or as equity instrument. Ind AS 32 also provides guidance about the bifurcation of compound instruments into liability and equity components. The classification is extremely important because this has a wider import regarding the way the instruments are presented in the balance sheet as well as the manner in which …
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Ind AS for financial instruments replica of IFRS?

Ind AS for financial instruments replica of IFRS? Are the Ind AS relating to financial instruments an exact replica of its counterpart, viz, IFRS? Ind AS 32 is the converged standard of IAS 32. Ind AS 109 is the converged Ind AS of IFRS 9. Ind AS 107 is the converged Ind AS of IFRS 7. As on date, it may be correct to state that the Ind ASs relating to financial instruments are more or less a replica of its IFRS counterpart, even though there is one major carve out in Ind AS 32 and one major exception provided in Ind …
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Scopes of the three standards for financial instruments

Scopes of the three standards for financial instruments Are the scopes of all the three standards viz., Ind AS 32, Ind AS 109 and Ind AS 107 similar? Ind AS 32 is the converged standard of IAS 32. Ind AS 109 is the converged Ind AS of IFRS 9. Ind AS 107 is the converged Ind AS of IFRS 7. While the scope of all the three standards is more or less similar, it should be noted that these are not identical as each one of these standards are subject to different exclusions. The entity, therefore, should be cautious to the extent …
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Contract to deal in non-financial item

Contract to deal in non-financial item Is a contract to buy or sell a non-financial item, a financial instrument? A contract to deal with a non-financial item is not a financial instrument. However, there are certain contracts to buy or sell a non-financial item that may be required to be accounted for as a derivative as per the financial accounting standards, eg, where the contacts to buy or sell a non-financial item that can be settled net in cash or another financial instruments or by exchanging financial instruments, as if the contracts were financial instruments. In other words, even though these contracts …
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Contract meant for own use

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 …
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Difference between forward contract & futures contract

Difference between forward contract & futures contract What is the difference between a forward contract and a futures contract? A forward contract is a derivative instrument between two parties to buy or to sell an asset at a specified future time at a price agreed upon today. A forward contract is non-standardised. The party agreeing to buy the underlying asset in the future at the delivery price assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. On the other hand, a futures contract is a derivative contract which is a standardised forward …
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Difference between futures contract & options contract

Difference between futures contract & options contract What is the basic difference between a futures contract and an options contract? Both futures contract and options contract are known as derivative contracts. In a futures contract, there is an underlying, the notional amount and an expiry date. In the case of an options contract, apart from the above, there is also a strike price. The fair value of a futures contract is determined by the cost of carry and corporate actions of the underlying, if any. However, the fair value of an options contract is determined based on the implied volatility of the …
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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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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 applicability of Ind AS mentions that Ind AS will be applicable in a phased manner depending upon the listing status as well as the net worth of the company. The roadmap is applicable to non-financial companies, i.e., companies other than banking, insurance and NBFCs. During these phases, the financial companies, i.e., banking, insurance and NBFCs, will not be required to apply Ind AS for preparation of their financial statements either voluntarily or mandatorily.

Net worth is the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium amounts after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off as per the audited balance sheet. This does not include reserves created out of the revaluation of assets, write-back of depreciation and amalgamation. Net worth is calculated as per the standalone financial statements of the company as on 31st March 2014 or the first audited balance sheet for accounting period which ends after that date for the purpose of first-time adoption Ind AS.

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 …
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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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Ind ASs relating to financial instruments

Ind ASs relating to financial instruments What are the Ind ASs relating to financial instruments? Financial instruments are primarily governed by three standards as per Ind AS, viz, Ind AS 32, Ind AS 109 and Ind AS 107. Ind AS 32 defines financial instruments, financial assets, financial liabilities and equity instruments. Ind AS …
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What is the significance of Ind AS 32?

What is the significance of Ind AS 32 Ind AS 32 is the converged Accounting Standard of IAS 32 Ind AS 32 deals with financial instruments from the perspective of an issuer and provides guidance as to how an entity should present a financial instrument either as a financial asset or financial …
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Contract to deal in non-financial item

Contract to deal in non-financial item Is a contract to buy or sell a non-financial item, a financial instrument? A contract to deal with a non-financial item is not a financial instrument. However, there are certain contracts to buy or sell a non-financial item that may be required to be accounted for …
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Contract meant for own use

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 …
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Difference between forward contract & futures contract

Difference between forward contract & futures contract What is the difference between a forward contract and a futures contract? A forward contract is a derivative instrument between two parties to buy or to sell an asset at a specified future time at a price agreed upon today. A forward contract is non-standardised. …
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Difference between futures contract & options contract

Difference between futures contract & options contract What is the basic difference between a futures contract and an options contract? Both futures contract and options contract are known as derivative contracts. In a futures contract, there is an underlying, the notional amount and an expiry date. In the case of an options …
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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 …
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Classification of Foreign Currency Convertible Bond (FCCB)

Classification of Foreign Currency Convertible Bond (FCCB)

An entity has issued a foreign currency convertible bond (FCCB). The Bond is denominated in foreign currency and would be converted into a fixed number of equity shares. Will this be treated as equity instrument or as a financial liability?

Contracts that will be settled by an entity delivering a fixed number of its own equity instruments in exchange for a fixed amount of foreign currency are treated as a liability as per IFRS 9. Accordingly, contracts which include a conversion option in a foreign currency denominated convertible bond are liabilities. A derivative contract which involves an entity delivering a fixed number of its own equity instruments in exchange for a fixed amount of foreign currency fails the ‘fixed for fixed test’ and be classified as liability. However, as per the carveout mentioned in Ind AS 32, an exception is provided to the definition of ‘financial liability’. Accordingly, equity conversion option embedded in a convertible bond denominated in foreign currency to acquire a fixed number of entity’s own equity instruments is considered as equity instrument if the exercise price is fixed in any currency. A convertible bond denominated in foreign currency to acquire a fixed number of entity’s own equity instruments may result in issuing a variable number of its own equity instrument depending upon the exchange rate at the time of conversion. In spite of this, such FCCB would be considered as equity instrument pursuant to the carveout provided as mentioned above. The liability and equity component will be split accordingly.

Own use exemption as per the Accounting Standard

Own use exemption as per the Accounting Standard What is meant by own use exemption as per the Accounting Standard? Contracts that are entered into for the purpose of the receipt or delivery of a non-financial item for the entity’s own use is excluded from the scope of Accounting Standards for financial …
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Consequences of treating equity vs liability

Consequences of treating equity vs liability What are the consequences of treating a contract as equity and how its treatment is different if treated as liability? The consequences of treating particular contract as equity are as follows: Treatment when the financial instrument is equity: Any consideration received (such as the premium received for a …
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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 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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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, brokers and dealers, levies by regulatory agencies and security exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs.

For financial assets not measured at fair value through profit or loss, transaction costs are added to the fair value at initial recognition. For financial liabilities, transaction costs are deducted from the fair value at initial recognition. For financial instruments that are measured at amortised cost, transaction costs are subsequently included in the calculation of amortised cost using the effective interest method and, in effect, amortised through profit or loss over the life of the instrument.

For financial instruments that are measured at fair value through other comprehensive income transaction costs are recognised in other comprehensive income as part of a change in fair value at the next re-measurement. If the financial asset is measured, those transaction costs are amortised to profit or loss using the effective interest method and, in effect, amortised through profit or loss over the life of the instrument.

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 …
Read More

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 …
Read More

Classification of Foreign Currency Convertible Bond (FCCB)

Classification of Foreign Currency Convertible Bond (FCCB) An entity has issued a foreign currency convertible bond (FCCB). The Bond is denominated in foreign currency and would be converted into a fixed number of equity shares. Will this be treated as equity instrument or as a financial liability? Contracts that will be settled …
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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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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 now prohibited. The effect of this is that the profit and loss account cannot be debited with an amount in excess of the impairment loss allowance to be provided based on the requirements of Ind AS 109. The corollary of this is that the carrying amount of the financial assets cannot be reduced by more than the loss allowance determined as per the impairment requirements.

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 …
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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 …
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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 …
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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 …
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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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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 …
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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 …
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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 …
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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 the economic relationship of hedging meets the risk management objective of the enterprise and fulfils other qualifying criteria.

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 …
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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 …
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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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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 …
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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 …
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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 …
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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 …
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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 …
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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 …
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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 …
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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 …
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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 …
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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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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 …
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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 …
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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 …
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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 …
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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 its functional currency to its presentation currency.
  • Does not apply to hedge accounting for foreign currency items, including the hedging of a net investment in a foreign operation. Ind AS 109 applies to hedge accounting.
  • Does not apply to the presentation in a statement of cash flows of the cash flows arising from transactions in a foreign currency, or to the translation of cash flows of a foreign operation.
  • Does not also apply to long-term foreign currency monetary items for which an entity has opted for the exemption given in paragraph D13AA of Appendix D to Ind AS 101. Such an entity may continue to apply the accounting policy so opted for such long-term foreign currency monetary items.

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 …
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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 …
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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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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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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 …
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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 …
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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 …
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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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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 …
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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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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 …
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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 not applicable for such entities and hence it is not covered here. It should be noted that the effective interest rate occupies a very significant position in the valuation of assets and liabilities which are classified as ‘measured at amortised cost’.

Let us assume that an entity enters into a fair value hedge, to hedge an existing fixed rate liability by entering into an interest rate swap. This effectively converts the fixed rate liability to a variable rate liability. When there is a proper hedge accounting in place then the valuation of the fixed rate liability would be changed from amortised cost to fair value so long as the hedge accounting and hedging relationship subsists. When the hedging relationship ceases to exist (ie, the hedge accounting is discontinued) either on account of the hedge not being effective or not conforming to the risk management strategy of the enterprise or due to the liquidation of the hedging instrument, the valuation of the fixed rate liability would revert back to fair value measurement. The difference between the carrying value at that point of time and the maturity value of the fixed rate liability would be amrotised to the profit and loss account as interest expense/income over the remaining life of the liability. When the amortisation of liability over the life of the asset happens, the impact of this will be adjusted as part of the interest expense only.

However, in the case of fair value hedge accounting as per this Guidance Note when the hedge is effective and the hedging relationship subsists, the hedged item will be measured at fair value and the hedging instrument will also be measured at fair value, the fair value changes of both being taken to the profit and loss account. However, when the hedge accounting is discontinued (for whatever may be the reason) the fair value of the hedged item becomes the cost (not amortised cost) of the liability. There is no amortisation here. When the liability is redeemed on maturity, the difference between the carrying value of the liability and the maturity value will be taken to the profit and loss account as gains/losses on maturity. This will not be adjusted against interest expense.

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, …
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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 …
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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 …
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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 …
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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 …
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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 or outside having net worth equal to or more than Rs 500 crore
  • Unlisted companies having net worth equal to more than Rs 500 crore
  • Parent, Subsidiary, Associate and Joint Venture of above

Companies can voluntarily apply Ind AS for accounting periods beginning on or after 1st April 2015. If an entity applies Ind AS voluntarily for any year, it shall be irrevocable, which means it should continue to apply Ind AS for all the subsequent years mandatorily.

Phase II

1st April 2017 – Mandatory Basis

  • All companies which are listed/or in the process of listing inside or outside India on Stock Exchanges, not covered in Phase 1 (other than companies listed on SME Exchanges)
  • Unlisted companies having net worth equal to or more than Rs 250 crore up to Rs 500 crore
  • Parent, Subsidiary, Associate and Joint Venture of above

Note: Companies listed on SME Exchanges not required to apply IND AS. Once IND AS are applicable, an entity should be required to follow IND AS for all the subsequent financial statements. Companies not covered by the above shall continue to apply existing Accounting standards notified in Companies (Accounting Standards) Rules, 2006.

 

Scheduled commercial banks (excluding RRB)

As per the Notification dated 22nd March 2019 from Reserve Bank of India, the legislative amendments recommended by the Reserve Bank are under consideration of the Government of India. Accordingly, it has been decided to defer the implementation of Ind AS till further notice.

Non-Banking Financial Companies (NBFCs)

Phase 1:

From 1st April 2018 (with Comparatives)

  • NBFC (whether listed or unlisted) having net worth of Rs. 500 crores or more
  • Holding, Subsidiary, Joint Venture or Associate companies of the above NBFC other than those already covered under the corporate roadmap shall also apply from the said date

Phase 2

From 1st April 2019 (with Comparatives)

  • NBFCs whose equity or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth of less than Rs. 500 crores
  • NBFCs that are unlisted and having net worth Rs. 250 crores or more but less than Rs. 500 crores
  • Holding, Subsidiary, Associate and Joint Venture companies of the above NBFC other than those already covered under the corporate roadmap shall also apply from the said date
  • Applicable for the preparation of both individual and consolidated financial statements
  • Adoption of Ind AS is allowed only when required as per roadmap. Voluntary adoption of Ind AS is not allowed
  • NBFC having net worth below Rs. 250 crores need not apply Ind AS

Insurers/Insurance companies

From 1st April 2020 onwards with comparatives

  • Holding, Subsidiary, Joint venture and Associate companies of the above Insurers/Insurance companies other than those already covered under the corporate roadmap shall also apply from the said date
  • Applicable for both consolidated and individual financial statements
  • Urban Co-operative Banks (UCB) and Rural Regional Banks (RRB) are not required to apply IND AS

Notification by RBI

Deferment of Indian Accounting Standards (Ind AS) implementation issued on 5th April 2018

Scheduled Commercial Banks (SCBs), excluding Regional Rural Banks (RRBs), were required to implement Indian Accounting Standards (Ind AS) from 1st April 2018 vide Circular dated 11th February 2016. However, necessary legislative amendments – to make the format of financial statements, prescribed in the Third Schedule to Banking Regulation Act 1949, compatible with accounts under Ind AS – are under consideration of the Government. In view of this, as also the level of preparedness of many banks, it has been decided to defer implementation of Ind AS by one year when the necessary legislative changes are expected.

However, pursuant to another Notification by RBI dated 22nd March 2019, the legislative amendments recommended by the Reserve Bank are under consideration of the Government of India. Accordingly, it has been decided to defer the implementation of Ind AS till further notice.

Ind AS 116Lease Accounting

Ind AS 37Provisions, contingent liabilities and contingent assets 

Ind AS 109 – Financial Instruments

Ind AS 23 – Borrowing Costs

Ind AS 12 – Income Taxes

Ind AS 21 – Treatment of exchange differences

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 …
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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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Ind ASs relating to financial instruments

Ind ASs relating to financial instruments What are the Ind ASs relating to financial instruments? Financial instruments are primarily governed by three standards as per Ind AS, viz, Ind AS 32, Ind AS 109 and Ind AS 107. Ind AS 32 defines financial instruments, financial assets, financial liabilities and equity instruments. Ind AS …
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What is the significance of Ind AS 32?

What is the significance of Ind AS 32 Ind AS 32 is the converged Accounting Standard of IAS 32 Ind AS 32 deals with financial instruments from the perspective of an issuer and provides guidance as to how an entity should present a financial instrument either as a financial asset or financial …
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Contract to deal in non-financial item

Contract to deal in non-financial item Is a contract to buy or sell a non-financial item, a financial instrument? A contract to deal with a non-financial item is not a financial instrument. However, there are certain contracts to buy or sell a non-financial item that may be required to be accounted for …
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Contract meant for own use

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 …
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Difference between forward contract & futures contract

Difference between forward contract & futures contract What is the difference between a forward contract and a futures contract? A forward contract is a derivative instrument between two parties to buy or to sell an asset at a specified future time at a price agreed upon today. A forward contract is non-standardised. …
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Difference between futures contract & options contract

Difference between futures contract & options contract What is the basic difference between a futures contract and an options contract? Both futures contract and options contract are known as derivative contracts. In a futures contract, there is an underlying, the notional amount and an expiry date. In the case of an options …
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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 …
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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 a liability and an equity component. Each component should be classified separately as financial liabilities, financial assets or equity instruments.

An entity should recognise separately the components of a financial instrument that:

  1. creates a financial liability of the entity; and
  2. grants an option to the holder of the instrument to convert it into an equity instrument of the entity.

Classification of the liability and equity components of a convertible instrument is not revised as a result of a change in the likelihood that a conversion option will be exercised, even when exercise of the option may appear to have become economically advantageous to some holders.

Own use exemption as per the Accounting Standard

Own use exemption as per the Accounting Standard What is meant by own use exemption as per the Accounting Standard? Contracts that are entered into for the purpose of the receipt or delivery of a non-financial item for the entity’s own use is excluded from the scope of Accounting Standards for financial …
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Consequences of treating equity vs liability

Consequences of treating equity vs liability What are the consequences of treating a contract as equity and how its treatment is different if treated as liability? The consequences of treating particular contract as equity are as follows: Treatment when the financial instrument is equity: Any consideration received (such as the premium received for a …
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Classification of Foreign Currency Convertible Bond (FCCB)

Classification of Foreign Currency Convertible Bond (FCCB) An entity has issued a foreign currency convertible bond (FCCB). The Bond is denominated in foreign currency and would be converted into a fixed number of equity shares. Will this be treated as equity instrument or as a financial liability? Contracts that will be settled …
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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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