What does Interest represent?

Interest represents only the consideration for the passage of time. Do you agree?

While interest is predominantly the consideration for time value of money, it also includes consideration for the credit risk associated with the principal amount outstanding during a particular period of time. It also includes consideration for other basic lending risks and costs as well as a profit margin. Contractual cash flows representing solely payment of principal and the interest (SPPI) on the principal amount outstanding are consistent with a basic lending arrangement. The two significant elements of interest are:

  1. Consideration for the time of value of money
  2. Credit risk associated with the principal and interest

In extreme economic circumstances, interest can be negative where the holder of a financial asset pays for the deposit of its money. Where the contractual term gives rise to an exposure to risks or volatility in the contractual cash flows, which is considered to be unrelated to the basic lending arrangement, such contract does not give rise to cash flows that are solely payments of principal and interest.

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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FVOCI (equity instruments) and FVOCI (debt instruments)

FVOCI (equity instruments) and FVOCI (debt instruments) What is the difference FVOCI (equity instruments) and FVOCI (debt instruments) Debt instruments are classified as FVOCI if and only if both the following conditions are satisfied, viz, (a) financial asset is held within the business model whose objective is achieved by both collecting directly …
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SPPI test & business model objective test

SPPI test & business model objective test Which criteria should be applied first – SPPI test or business model test? SPPI test refers to the evaluation of contractual cash flows that analyses if such cash flows represent solely payments of principal and interest on the principal amount outstanding. Business model is in fact …
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Change in contractual cash flows

Change in contractual cash flows When change in the terms is altering the contractual cash flows, should the SPPI test be carried out afresh? A proper assessment should be made afresh whenever there could be contractual term potentially changing the timing or amount of the contractual cash flows. A typical example is …
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Long-term financial liability classified as FVTPL

Long-term financial liability classified as FVTPL Can a long-term financial liability be classified as subsequent measured at fair value through profit or loss? Yes. An entity may, on initial recognition, designate a financial liability as measured at fair value through profit or loss. If an entity exercises this option, then it cannot …
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Measurement categories for financial assets

Measurement categories for financial assets What are the principal measurement categories for financial assets?  Principal measurement categories for financial assets are amortised cost, fair value through other comprehensive income – FVOCI and fair value through profit or loss – FVTPL.  As per the previous version, viz, IAS 39, the financial assets were classified …
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Difference between amortised cost & held-to-maturity

Difference between amortised cost & held-to-maturity What is the difference between amortised cost classification as per Ind AS 109 and held-to-maturity classification as per IAS 39? A financial asset shall be measured at amortised cost if both of the following conditions are met: the financial asset is held within a business model whose …
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Financial asset categorised as FVOCI

Financial asset categorised as FVOCI When will a financial asset be categorised as fair value through other comprehensive income? A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met: the financial asset is held within a business model whose objective is achieved …
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Is there a choice to designate as FVTPL?

Is there a choice to designate as FVTPL? An entity has choice to designate a financial asset as measured at fair value through profit or loss. Explain. The option to designate a financial asset at fair value through profit or loss (FVTPL) is not without restrictions. There are certain conditions to be …
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