First time adoption – financial instruments

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,…

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…

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…

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…

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…

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…

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…

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…

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…

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…

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…

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…

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…