Introduction by Shri M P Vijayakumar
Almost all business transactions culminate in financial instruments in some form. In the present era of money, money and money, we witness an increasing trend of businesses being done through contractual arrangements which are structured to such an extent that after some time the contracting parties themselves struggle to understand the arrangement – intent vs agreement, substance vs form. Further, with commerce becoming global and developments in any part of the globe affecting us, the movement of financial instruments is the first indicator of direction of impact. The derivatives market is growing, has matured to a large extent, more complex instruments are getting designed, markets’ depth is under test and they do impact valuation of both derivatives and the underlying. Financial reports should reflect the state of business and the business/ economic environment it is operating and hence all Financial Instruments have to be valued at the fair values on a continuous basis. The Financial Instruments standard is quite refined and has a matured approach where fair value is applied consistently, and the gains/loss is recognized in “other comprehensive income” in most cases. The mark to market affects the profit and loss statement only when there is an explicit choice or a conduct reflecting intent, to treat financial instruments as “fair value through profit and loss”. Also, there are many instruments which will continue to be carried at amortised cost (with right usage of effective interest rate) and do not require fair value determination.
The standard on Financial Instruments, has taken significant time to develop and even today there is no consensus on many aspects of the standard and such consensus is unlikely to happen in the near future. A topic such as this, without a deep understanding of the financial markets is difficult to understand.
Kudos to our accounting professionals. We in India, have issued a very complex standard like IFRS 9 (in the form of Ind AS 109), ahead of the rest of the world by a year.
Mr. R. Venkata Subramani (Venkat) authoring a book focused on financial instruments is highly commendable and I thank him for the effort. Venkat has explained the subject and made it look so simple by his hands-on experience on financial instruments as part of his previous assignments. I am a firm believer that if one is able to explain anything in simple terms, it means he knows the subject quite too well and this book is an evidence of Venkat’s expertise on the topic.
I have given a quick reading of the manuscript and compliment Venkat for the comprehensive coverage with practical illustrations. Exhaustive guidance is provided on the new impairment methodology commonly known as ‘expected credit loss model’, which will be very relevant for banks and financial services companies. The book, deals, at length, with the complex topic on hedge accounting with several illustrations including guidance on basic journal entries for recording the same. The topics on fair value hedge and cash flow hedge are illustrated through several examples. The extracts from annual reports incorporated in the penultimate book should serve as ready reference to the professionals who implement Ind AS as it would give the precedence on several topics relating to financial instruments. To sum up, the book is a good teacher of the standards on financial instruments and a good reference book for practical application.
I advise readers of any authored textbook to supplement with a reading of the text of the Ind AS, before applying the principles for professional purpose.
Happy reading. I wish Venkat the best and multiple editions of the book in years to come.
13th Nov 2020
M P Vijay Kumar