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 instruments. However, contracts that an entity designates as measured at fair value through profit or loss are not excluded even when such contracts are meant for own use.

A contract to buy or sell a non-financial item that is settled net in cash or by exchanging another financial instrument is within the scope of the standard relating to financial instruments. For example, where a contract is normally settled by an entity net in cash, even though the terms of the contract are not explicit or where an entity has established a practice of taking delivery with the intention of selling it within a short period so as to generate profit from short term fluctuations in price are not regarded as contracts entered into for the purpose of receipt or delivery of such non-financial item. As such, these contracts are within the scope.

Similarly, a written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument is within the scope; hence, such a contract cannot be entered into for the purpose of the receipt or delivery of a non-financial item.

In other words, if an entity deals with a non-financial item for its own use, then the derivative in the form of say futures or bought options that ultimately results in delivery are outside the scope of financial instruments standards. The implications of this is that such contracts need not be treated as a derivative and the entity need not fair value such contracts on a periodical basis. The accounting standard Ind AS 109, however, permits the entity to designate such contracts as measured at FVTPL provided the same is done at the inception of the contract and is also expected to reduce accounting mismatch. Written option contracts should be treated as derivative and as such, the entity is required to classify it as FVTPL in spite of the fact that such option contracts may result in delivery or receipt of a non-financial item. The logic for such treatment is that the entity has no right of not accepting such delivery or receipt as the entity has only obligation to either deliver or receive the non-financial item.

Ind AS Accounting Standards

Effective Rate of Interest – EIR

What is SPPI test?

Are RBI circulars relevant for ECL computation as per Ind AS 109?

What is a Financial instrument?

Is there a choice to designate as FVTPL?

What are treasury shares and how are these presented

Contract to deal in non-financial item

Can a corporate entity still follow settlement date accounting?

What does Interest represent?

Gains and losses on assets measured at FVOCI

Separately accounting for an embedded derivative

Derecognition of a financial asset

Foreign currency risk in a firm commitment as a fair value hedge

Treatment of transaction costs

Derecognise financial assets/financial liabilities retrospectively

Modification of contractual cash flows

Difference between amortised cost & held-to-maturity

Accounting treatment for FVOCI Instruments

What is the concept of effective interest method?

What is a hybrid contract?

First-time adoption while classifying a financial instrument

SPPI test & business model objective test

Current standards for financial instruments as per AS?

Effective interest Rate

Contract is settled through the entity’s own equity instrument

Financial asset categorised as FVOCI

What is an embedded derivative?

Impairment model for different categories of financial assets

Ind ASs relating to financial instruments

FVOCI (equity instruments) and FVOCI (debt instruments)

Classification of derivative instruments

Contract meant for own use

Reclassification of a financial asset

Debt instrument measured at FVOCI

Change in contractual cash flows

Loss allowance as per Ind AS 109

Ind AS for financial instruments replica of IFRS?

Contractual cash flows & effective interest rate

Long-term financial liability classified as FVTPL

Credit adjusted effective interest rate

Effective rate of interest during the first-time adoption

Consequence of not de-recognising an asset after the sale

Designation of contracts deal a non-financial item on first time adoption

Recognition of financial instruments on first-time adoption

Gains and losses on a financial instrument

Gains and losses from liabilities designated as FVTPL

Measurement categories for financial assets

Difference between time value of money and modified time value of money