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Financial Instruments

Ind AS - 109 - Rule - B. Indian Accounting Standards (Ind AS) - Companies Law - Ind AS - 109 - Indian Accounting Standard (Ind AS) 109 (The Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles.) Chapter 1 Objective 1.1 The objective of this Standard is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful inf .....

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es, Ind AS110, Ind AS 27 or Ind AS 28 require or permit an entity to account for an interest in a subsidiary, associate or joint venture in accordance with some or all of the requirements of this Standard. Entities shall also apply this Standard to derivatives on an interest in a subsidiary, associate or joint venture unless the derivative meets the definition of an equity instrument of the entity in Ind AS 32 : Presentation. (b) rights and obligations under leases to which Ind AS 17 Leases appl .....

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the entity that meet the definition of an equity instrument in Ind AS 32 (including options and warrants) or that are required to be classified as an equity instrument in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of Ind AS 32. However, the holder of such equity instruments shall apply this Standard to those instruments, unless they meet the exception in (a). (e) rights and obligations arising under (i) an insurance contract as defined in Ind AS 104 Insurance Contracts, ot .....

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reviously asserted explicitly that it regards such contracts as insurance contracts and has used accounting that is applicable to insurance contracts, the issuer may elect to apply either this Standard or Ind AS104 to such financial guarantee contracts (see paragraphs B2.5-B2.6). The issuer may make that election contract by contract, but the election for each contract is irrevocable. (f) any forward contract between an acquirer and a selling shareholder to buy or sell an acquiree that will resu .....

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scope of this Standard. Also, all loan commitments are subject to the derecognition requirements of this Standard. (h) , contracts and obligations under share-based payment transactions to which Ind AS102 Share-based Payment applies, except for contracts within the scope of paragraphs 2.4-2.7 of this Standard to which this Standard applies. (i) rights to payments to reimburse the entity for expenditure that it is required to make to settle a liability that it recognises as a provision in accorda .....

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d AS 18 specify are accounted for in accordance with this Standard for the purposes of recognising impairment gains or losses.] 2.3 The following loan commitments are within the scope of this Standard: (a) loan commitments that the entity designates as financial liabilities at fair value through profit or loss (see paragraph 4.2.2). An entity that has a past practice of selling the assets resulting from its loan commitments shortly after origination shall apply this Standard to all its loan comm .....

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andard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging , as if the contracts were , with the exception of contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity s expected purchase, sale or usage requirements. However, this Standard shall be applied to those contracts that an entity designates .....

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age requirements. This designation is available only at inception of the contract and only if it eliminates or significantly reduces a recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise from not recognising that contract because it is excluded from the scope of this Standard (see paragraph 2.4). 2.6 There are various ways in which a contract to buy or sell a nonfinancial item can be settled net in cash or another financial instrument or by exc .....

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g the contract before its exercise or lapse); (c) when, for similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery for the purpose of generating a profit from shortterm fluctuations in price or dealer s margin; and (d) when the non-financial item that is the subject of the contract is readily convertible to cash. A contract to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery of t .....

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. 2.7 A written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging , in accordance with paragraph 2.6(a) or 2.6(d) is within the scope of this Standard. Such a contract cannot be entered into for the purpose of the receipt or delivery of the non-financial item in accordance with the entity s expected purchase, sale or usage requirements. Chapter 3 Recognition and derecognition 3.1 Initial recognition 3.1.1 An entity shall .....

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d measure it in accordance with paragraph 5.1.1. Regular way purchase or sale of financial assets 3.1.2 A regular way purchase or sale of financial assets shall be recognised and derecognised, as applicable, using trade date accounting or settlement date accounting (see paragraphs B3.1.3- B3.1.6). 3.2 Derecognition of financial assets 3.2.1 In consolidated financial statements, paragraphs 3.2.2-3.2.9, B3.1.1, B3.1.2 and B3.2.1-B3.2.17 are applied at a consolidated level. Hence, an entity first c .....

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ied to a part of a financial asset (or a part of a group of similar financial assets) if, and only if, the part being considered for derecognition meets one of the following three conditions. (i) The part comprises only specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an interest rate strip whereby the counterparty obtains the right to the interest cash flows, but not the principal cash flows from a debt i .....

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ch counterparty is not required to have a proportionate share of the cash flows provided that the transferring entity has a fully proportionate share. (iii) The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of interest cash flows from a financial asset, paragrap .....

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ghts to the first or the last 90 per cent of cash collections from a financial asset (or a group of financial assets), or (ii) the rights to 90 per cent of the cash flows from a group of receivables, but provides a guarantee to compensate the buyer for any credit losses up to 8 per cent of the principal amount of the receivables, paragraphs 3.2.3-3.2.9 are applied to the financial asset (or a group of similar financial assets) in its entirety. In paragraphs 3.2.3-3.2.12, the term financial asset .....

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dance with paragraph 3.2.6. (See paragraph 3.1.2 for regular way sales of financial assets.) 3.2.4 An entity transfers a financial asset if, and only if, it either: (a) transfers the contractual rights to receive the cash flows of the financial asset, or (b) retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the conditions in paragraph 3.2.5. 3.2.5 When .....

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-term advances by the entity with the right of full recovery of the amount lent plus accrued interest at market rates do not violate this condition. (b) The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows. (c) The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the .....

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wnership of the financial asset. In this case: (a) if the entity transfers substantially all the risks and rewards of ownership of the financial asset, the entity shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer. (b) if the entity retains substantially all the risks and rewards of ownership of the financial asset, the entity shall continue to recognise the financial asset. (c) if the entity neit .....

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tent of its continuing involvement in the financial asset (see paragraph 3.2.16). 3.2.7 The transfer of risks and rewards (see paragraph 3.2.6) is evaluated by comparing the entity s exposure, before and after the transfer, with the variability in the amounts and timing of the net cash flows of the transferred asset. An entity has retained substantially all the risks and rewards of ownership of a financial asset if its exposure to the variability in the present value of the future net cash flows .....

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financial asset (eg because the entity has sold a financial asset subject only to an option to buy it back at its fair value at the time of repurchase or has transferred a fully proportionate share of the cash flows from a larger financial asset in an arrangement, such as a loan sub-participation, that meets the conditions in paragraph 3.2.5). 3.2.8 Often it will be obvious whether the entity has transferred or retained substantially all risks and rewards of ownership and there will be no need .....

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s retained control (see paragraph 3.2.6(c)) of the transferred asset depends on the transferee s ability to sell the asset. If the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer, the entity has not retained control. In all other cases, the entity has retained control. Transfers that qualify for derecognition 3.2.10 If an entit .....

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e than adequate compensation for the servicing, a servicing asset shall be recognised for the servicing right at an amount determined on the basis of an allocation of the carrying amount of the larger financial asset in accordance with paragraph 3.2.13. 3.2.11 If, as a result of a transfer, a financial asset is derecognised in its entirety but the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the entity shall recog .....

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are part of a debt instrument, see paragraph 3.2.2(a)) and the part transferred qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset shall be allocated between the part that continues to be recognised and the part that is derecognised, on the basis of the relative fair values of those parts on the date of the transfer. For this purpose, a retained servicing asset shall be treated as a part that continues to be recognised. The difference between: .....

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eds to be measured. When the entity has a history of selling parts similar to the part that continues to be recognised or other market transactions exist for such parts, recent prices of actual transactions provide the best estimate of its fair value. When there are no price quotes or recent market transactions to support the fair value of the part that continues to be recognised, the best estimate of the fair value is the difference between the fair value of the larger financial asset as a whol .....

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e any income on the transferred asset and any expense incurred on the financial liability. Continuing involvement in transferred assets 3.2.16 If an entity neither transfers nor retains substantially all the risks and rewards of ownership of a transferred asset, and retains control of the transferred asset, the entity continues to recognise the transferred asset to the extent of its continuing involvement. The extent of the entity s continuing involvement in the transferred asset is the extent t .....

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r both) on the transferred asset, the extent of the entity s continuing involvement is the amount of the transferred asset that the entity may repurchase. However, in the case of a written put option on an asset that is measured at fair value, the extent of the entity s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price (see paragraph B3.2.13). (c) When the entity s continuing involvement takes the form of a cash-settled option .....

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cts the rights and obligations that the entity has retained. The associated liability is measured in such a way that the net carrying amount of the transferred asset and the associated liability is: (a) the amortised cost of the rights and obligations retained by the entity, if the transferred asset is measured at amortised cost, or (b) equal to the fair value of the rights and obligations retained by the entity when measured on a stand-alone basis, if the transferred asset is measured at fair v .....

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t is in only a part of a financial asset (eg when an entity retains an option to repurchase part of a transferred asset, or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and the entity retains control), the entity allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair valu .....

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hrough profit or loss is not applicable to the associated liability. All transfers 3.2.22 If a transferred asset continues to be recognised, the asset and the associated liability shall not be offset. Similarly, the entity shall not offset any income arising from the transferred asset with any expense incurred on the associated liability (see paragraph 42 of Ind AS 32). 3.2.23 If a transferor provides non-cash collateral (such as debt or equity instruments) to the transferee, the accounting for .....

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tely from other assets. (b) If the transferee sells collateral pledged to it, it shall recognise the proceeds from the sale and a liability measured at fair value for its obligation to return the collateral. (c) If the transferor defaults under the terms of the contract and is no longer entitled to redeem the collateral, it shall derecognise the collateral, and the transferee shall recognise the collateral as its asset initially measured at fair value or, if it has already sold the collateral, d .....

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.3.2 An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and .....

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continues to be recognised and the part that is derecognised based on the relative fair values of those parts on the date of the repurchase. The difference between (a) the carrying amount allocated to the part derecognised and (b) the consideration paid, including any non-cash assets transferred or liabilities assumed, for the part derecognised shall be recognised in profit or loss. Chapter 4 Classification 4.1 Classification of financial assets 4.1.1 Unless paragraph 4.1.5 applies, an entity s .....

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to hold financial assets in order to collect contractual cash flows and (b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Paragraphs B4.1.1-B4.1.26 provide guidance on how to apply these conditions. 4.1.2A A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met: (a) the financial asset is held wi .....

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sset at initial recognition. Paragraph B4.1.7B provides additional guidance on the meaning of principal. (b) interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. Paragraphs B4.1.7A and B4.1.9A-B4.1.9E provide additional guidance on the meaning of interest, including the meaning of the time value of money. 4.1.4 .....

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ome (see paragraphs 5.7.5-5.7.6). Option to designate a financial asset at fair value through profit or loss 4.1.5 Despite paragraphs 4.1.1-4.1.4, an entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise from measuring assets or liabilities or recognising the .....

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derecognition or when the continuing involvement approach applies. Paragraphs 3.2.15 and 3.2.17 apply to the measurement of such financial liabilities. (c) financial guarantee contracts. After initial recognition, an issuerof such a contract shall (unless paragraph 4.2.1(a) or (b) applies) subsequently measure it at the higher of: (i) the amount of the loss allowance determined in accordance with Section 5.5 and 3[(ii) the amount initially recognised (see paragraph 5.1.1) less, when appropriate .....

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with the principles of Ind AS 18.] (e) contingent consideration recognised by an acquirer in a business combination to which Ind AS103 applies. Such contingent consideration shall subsequently be measured at fair value with changes recognised in profit or loss. Option to designate a financial liability at fair value through profit or loss 4.2.2 An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair value through profit or loss when permitted by pa .....

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e is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity s key management personnel (as defined in Ind AS 24 Related Party Disclosures), for example, the entity s board of directors and chief executive officer (see paragraphs B4.1.33-B4.1.36). 4.3 Embedded derivatives 4.3.1 An embedded derivative is a component of a hybrid contract that also includes a non-deriv .....

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riable is not specific to a party to the contract. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument. Hybrid contracts with financial asset hosts 4.3.2 If a hybrid contract contains a host that is an asset within the scope of this Standard, an entity shall apply the requirements inparagraphs 4.1.1-4.1.5 to the entire hybrid .....

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dded derivative would meet the definition of a derivative; and (c) the hybrid contract is not measured at fair value with changes in fair value recognised in profit or loss (ie a derivative that is embedded in a financial liability at fair value through profit or loss is not separated). 4.3.4 If an embedded derivative is separated, the host contract shall be accounted for in accordance with the appropriate Standards. This Standard does not address whether an embedded derivative shall be presente .....

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nt is first considered that separation of the embedded derivative(s) is prohibited, such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost. 4.3.6 If an entity is required by this Standard to separate an embedded derivative from its host, but is unable to measure the embedded derivative separately either at acquisition or at the end of a subsequent financial reporting period, it shall designate the entire hybrid contract as a .....

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loss. 4.4 Reclassification 4.4.1 When, and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets in accordance with paragraphs 4.1.1-4.1.4. See paragraphs 5.6.1-5.6.7, B4.4.1-B4.4.3 and B5.6.1-B5.6.2 for additional guidance on reclassifying financial assets. 4.4.2 An entity shall not reclassify any financial liability. 4.4.3 The following changes in circumstances are not reclassifications for the purposes of paragraphs 4.4 .....

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lus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.] 5.1.1A However, if the fair value of the financial asset or financial liability at initial recognition differs from the transaction price, an entity shall apply paragraph B5.1.2A. 5.1.2 When an entity uses settlement date accounting for an asset that is subsequen .....

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.5 to financial assets that are measured at amortised cost in accordance with paragraph 4.1.2 and to financial assets that are measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A. 5.2.3 An entity shall apply the hedge accounting requirements in paragraphs 6.5.8-6.5.14 to a financial asset that is designated as a hedged item. 5.3 Subsequent measurement of financial liabilities 5.3.1 After initial recognition, an entity shall measure a financial liability .....

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ncial asset except for: (a) purchased or originated credit-impaired financial assets. For those financial assets, the entity shall apply the credit adjusted effective interest rate to the amortised cost of the financial asset from initial recognition. (b) financial assets that are not purchased or originated credit impaired financial assets but subsequently have become credit-impaired financial assets. For those financial assets, the entity shall apply the effective interest rate to the amortise .....

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dit-impaired and the improvement can be related objectively to an event occurring after the requirements in paragraph 5.4.1(b) were applied (such as an improvement in the borrower s credit rating). Modification of contractual cash flows 5.4.3 When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial asset in accordance with this Standard, an entity shall recalculate the .....

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calculated in accordance with paragraph 6.5.10. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. Write-off 5.4.4 An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off constitutes a derecognition event (see paragraph B3.2.16(r)). 5.5 I .....

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a loss allowance for financial assets that are measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A. However, the loss allowance shall be recognised in other comprehensive income and shall not reduce the carrying amount of the financial asset in the balance sheet. 5.5.3 Subject to paragraphs 5.5.13-5.5.16, at each reporting date, an entity shall measure the loss allowance for a financial instrument at an amount equal to the lifetime expected credit losses .....

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, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses. 5.5.6 For loan commitments and financial guarantee contracts, the date that the entity becomes a party to the irrevocable commitment shall be considered to be the date of initial recognition for the purposes of applying the impairment requirement .....

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(or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised in accordance with this Standard. Determining significant increases in credit risk 5.5.9 At each reporting date, an entity shall assess whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, an entity shall use the change in the risk of a default occurring over the expected life of the fina .....

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on. 5.5.10 An entity may assume that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date (see paragraphs B5.5.22‒B5.5.24). 5.5.11 If reasonable and supportable forward-looking information is available without undue cost or effort, an entity cannot rely solely on past due information when determining whether credit risk has increased significantly since ini .....

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reased significantly since initial recognition when contractual payments are more than 30 days past due. An entity can rebut this presumption if the entity has reasonable and supportable information that is available without undue cost or effort, that demonstrates that the credit risk has not increased significantly since initial recognition even though the contractual payments are more than 30 days past due. When an entity determines that there have been significant increases in credit risk bef .....

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e modified contractual terms); and (b) the risk of a default occurring at initial recognition (based on the original, unmodified contractual terms). Purchased or originated credit-impaired financial assets 5.5.13 Despite paragraphs 5.5.3 and 5.5.5, at the reporting date, an entity shall only recognise the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for purchased or originated credit-impaired financial assets. 5.5.14 At each reporting date, .....

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e paragraphs 5.5.3 and 5.5.5, an entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for: (a) trade receivables or any contractual right to receive cash or another financial asset that result from transactions that are within the scope of Ind AS 11 and Ind AS 18. (b) lease receivables that result from transactions that are within the scope of Ind AS 17, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal .....

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amount that is determined by evaluating a range of possible outcomes; (b) the time value of money; and (c) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. 5.5.18 When measuring expected credit losses, an entity need not necessarily identify every possible scenario. However, it shall consider the risk or probability that a credit loss occurs by reflecting .....

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omponent and the entity s contractual ability to demand repayment and cancel the undrawn commitment does not limit the entity s exposure to credit losses to the contractual notice period. For such , and only those , the entity shall measure expected credit losses over the period that the entity is exposed to credit risk and expected credit losses would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period. 5.6 Reclassification of fi .....

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gh profit or loss measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from a difference between the previous amortised cost of the financial asset and fair value is recognised in profit or loss. 5.6.3 If an entity reclassifies a financial asset out of the fair value through profit or loss measurement category and into the amortised cost measurement category, its fair value at the reclassification date becomes its new gross carrying amount. (See .....

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comprehensive income. The effective interest rate and the measurement of expected credit losses are not adjusted as a result of the reclassification. (See paragraph B5.6.1.) 5.6.5 If an entity reclassifies a financial asset out of the fair value through other comprehensive income measurement category and into the amortised cost measurement category, the financial asset is reclassified at its fair value at the reclassification date. However, the cumulative gain or loss previously recognised in ot .....

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t of expected credit losses are not adjusted as a result of the reclassification. (See paragraph B5.6.1.) 5.6.6 If an entity reclassifies a financial asset out of the fair value through profit or loss measurement category and into the fair value through other comprehensive income measurement category, the financial asset continues to be measured at fair value. (See paragraph B5.6.2 for guidance on determining an effective interest rate and a loss allowance at the reclassification date.) 5.6.7 If .....

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financial asset or financial liability that is measured at fair value shall be recognised in profit or loss unless: (a) it is part of a hedging relationship (see paragraphs 6.5.8- 6.5.14); (b) it is an investment in an equity instrument and the entity has elected to present gains and losses on that investment in other comprehensive income in accordance with paragraph 5.7.5; (c) it is a financial liability designated as at fair value through profit or loss and the entity is required to present th .....

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stablished; (b) it is probable that the economic benefits associated with the dividend will flow to the entity; and (c) the amount of the dividend can be measured reliably. 5.7.2 A gain or loss on a financial asset that is measured at amortised cost and is not part of a hedging relationship (see paragraphs 6.5.8-6.5.14) shall be recognised in profit or loss when the financial asset is derecognised, reclassified in accordance with paragraph 5.6.2, through the amortisation process or in order to r .....

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r losses.) 5.7.3 A gain or loss on financial assets or financial liabilities that are hedged items in a hedging relationship shall be recognised in accordance with paragraphs 6.5.8-6.5.14. 5.7.4 If an entity recognises financial assets using settlement date accounting (see paragraphs 3.1.2, B3.1.3 and B3.1.6), any change in the fair value of the asset to be received during the period between the trade date and the settlement date is not recognised for assets measured at amortised cost. For asset .....

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nvestment in an equity instrument within the scope of this Standard that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which Ind AS103 applies. (See paragraph B5.7.3 for guidance on foreign exchange gains or losses.) 5.7.6 If an entity makes the election in paragraph 5.7.5, it shall recognise in profit or loss dividends from that investment in accordance with paragraph 5.7.1A. Liabilities designated as at fair value through profit .....

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shall be presented in profit or loss unless the treatment of the effects of changes in the liability s credit risk described in (a) would create or enlarge an accounting mismatch in profit or loss (in which case paragraph 5.7.8 applies). Paragraphs B5.7.5-B5.7.7 and B5.7.10-B5.7.12 provide guidance on determining whether an accounting mismatch would be created or enlarged. 5.7.8 If the requirements in paragraph 5.7.7 would create or enlarge an accounting mismatch in profit or loss, an entity sha .....

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fair value through other comprehensive income in accordance with paragraph 4.1.2A shall be recognised in other comprehensive income, except for impairment gains or losses (see Section 5.5) and foreign exchange gains and losses (see paragraphs B5.7.2-B5.7.2A), until the financial asset is derecognised or reclassified. When the financial asset is derecognised the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassif .....

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gh other comprehensive income in accordance with paragraph 4.1.2A, the amounts that are recognised in profit or loss are the same as the amounts that would have been recognised in profit or loss if the financial asset had been measured at amortised cost. Chapter 6 Hedge accounting 6.1 Objective and scope of hedge accounting 6.1.1 The objective of hedge accounting is to represent, in the financial statements, the effect of an entity s risk management activities that use to manage exposures arisin .....

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a hedging instrument and a hedged item in accordance with paragraphs 6.2.1-6.3.7 and B6.2.1-B6.3.25. For hedging relationships that meet the qualifying criteria, an entity shall account for the gain or loss on the hedging instrument and the hedged item in accordance with paragraphs 6.5.1-6.5.14 and B6.5.1-B6.5.28. When the hedged item is a group of items, an entity shall comply with the additional requirements in paragraphs 6.6.1-6.6.6 and B6.6.1-B6.6.16. 6.1.3 [Refer Appendix 1]. 6.2 Hedging in .....

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hat is attributable to changes in the credit risk of that liability is presented in other comprehensive income in accordance with paragraph 5.7.7. For a hedge of foreign currency risk, the foreign currency risk component of a non-derivative financial asset or a non-derivative financial liability may be designated as a hedging instrument provided that it is not an investment in an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in a .....

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hedging instrument only the change in intrinsic value of an option and not the change in its time value (see paragraphs 6.5.15 and B6.5.29-B6.5.33); (b) separating the forward element and the spot element of a forward contract and designating as the hedging instrument only the change in the value of the spot element of a forward contract and not the forward element; similarly, the foreign currency basis spread may be separated and excluded from the designation of a financial instrument as the h .....

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e hedging instrument, any combination of the following (including those circumstances in which the risk or risks arising from some hedging instruments offset those arising from others): (a) derivatives or a proportion of them; and (b) non-derivatives or a proportion of them. 6.2.6 However, a derivative instrument that combines a written option and a purchased option (for example, an interest rate collar) does not qualify as a hedging instrument if it is, in effect, a net written option at the da .....

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net investment in a foreign operation. The hedged item can be: (a) a single item; or (b) a group of items (subject to paragraphs 6.6.1-6.6.6 and B6.6.1-B6.6.16). A hedged item can also be a component of such an item or group of items(see paragraphs 6.3.7 and B6.3.7-B6.3.25). 6.3.2 The hedged item must be reliably measurable. 6.3.3 If a hedged item is a forecast transaction (or a component thereof), that transaction must be highly probable. 6.3.4 An aggregated exposure that is a combination of a .....

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g purposes, only assets, liabilities, firm commitments or highly probable forecast transactions with a party external to the reporting entity can be designated as hedged items. Hedge accounting can be applied to transactions between entities in the same group only in the individual or separate financial statements of those entities and not in the consolidated financial statements of the group, except for the consolidated financial statements of an investment entity, as defined in Ind AS110, wher .....

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lly eliminated on consolidation in accordance with Ind AS 21 The Effects of Changes in Foreign Exchange Rates. In accordance with Ind AS 21, foreign exchange rate gains and losses on intragroup monetary items are not fully eliminated on consolidation when the intragroup monetary item is transacted between two group entities that have different functional currencies. In addition, the foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in consoli .....

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han the entire fair value change or cash flow variability of an item. In that case, an entity may designate only the following types of components (including combinations) as hedged items: (a) only changes in the cash flows or fair value of an item attributable to a specific risk or risks (risk component), provided that, based on an assessment within the context of the particular market structure, the risk component is separately identifiable and reliably measurable (see paragraphs B6.3.8-B6.3.1 .....

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) the hedging relationship consists only of eligible hedging instruments and eligible hedged items. (b) at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity s risk management objective and strategy for undertaking the hedge. That documentation shall include identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess whether the hedging relationship me .....

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and (iii) the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. However, that designation shall not reflect an imbalance between the weightings of the hedged item and the hedging instrument that would create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an a .....

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sed asset or liability or an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk and could affect profit or loss. (b) cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. .....

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e of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a cash flow hedge. 6.5.5 If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio (see paragraph 6.4.1(c)(iii)) but the risk management objective for that designated hedging relationship remains the same, an entity shall adjust the hedge ratio of the hedging relationship so that it meets the qualifying criteria again (this is referred to in this Standa .....

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ing instrument is not an expiration or termination if such a replacement or rollover is part of, and consistent with, the entity s documented risk management objective. Additionally, for this purpose there is not an expiration or termination of the hedging instrument if: (a) as a consequence of laws or regulations or the introduction of laws or regulations, the parties to the hedging instrument agree that one or more clearing counterparties replace their original counterparty to become the new c .....

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erent counterparties the requirement in this subparagraph is met only if each of those parties effects clearing with the same central counterparty. (b) other changes, if any, to the hedging instrument are limited to those that are necessary to effect such a replacement of the counterparty. Such changes are limited to those that are consistent with the terms that would be expected if the hedging instrument were originally cleared with the clearing counterparty. These changes include changes in th .....

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tised cost; and (b) paragraph 6.5.12 when it discontinues hedge accounting for cash flow hedges. Fair value hedges 6.5.8 As long as a fair value hedge meets the qualifying criteria in paragraph 6.4.1, the hedging relationship shall be accounted for as follows: (a) the gain or loss on the hedging instrument shall be recognised in profit or loss (or other comprehensive income, if the hedging instrument hedges an equity instrument for which an entity has elected to present changes in fair value in .....

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n equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5, those amounts shall remain in other comprehensive income. When a hedged item is an unrecognised firm commitment (or a component thereof), the cumulative change in the fair value of the hedged item subsequent to its designation is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss. 6.5.9 When a hedg .....

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component thereof) measured at amortised cost. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for hedging gains and losses. The amortisation is based on a recalculated effective interest rate at the date that amortisation begins. In the case of a financial asset (or a component thereof) that is a hedged item and that is measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A, am .....

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wing (in absolute amounts): (i) the cumulative gain or loss on the hedging instrument from inception of the hedge; and (ii) the cumulative change in fair value (present value) of the hedged item (ie the present value of the cumulative change in the hedged expected future cash flows) from inception of the hedge. (b) the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (ie the portion that is offset by the change in the cash flow hedge reserve calcu .....

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ntly results in the recognition of a non-financial asset or non-financial liability, or a hedged forecast transaction for a nonfinancial asset or a non-financial liability becomes a firm commitment for which fair value hedge accounting is applied, the entity shall remove that amount from the cash flow hedge reserve and include it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment (see Ind AS 1) and hence it does not affe .....

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ects that all or a portion of that loss will not be recovered in one or more future periods, it shall immediately reclassify the amount that is not expected to be recovered into profit or loss as a reclassification adjustment (see Ind AS 1). 6.5.12 When an entity discontinues hedge accounting for a cash flow hedge (see paragraphs 6.5.6 and 6.5.7(b)) it shall account for the amount that has been accumulated in the cash flow hedge reserve in accordance with paragraph 6.5.11(a) as follows: (a) if t .....

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s no longer highly probable to occur may still be expected to occur. Hedges of a net investment in a foreign operation 6.5.13 Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment (see Ind AS 21), shall be accounted for similarly to cash flow hedges: (a) the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge shall be recognised in other comprehensive income (see pa .....

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value of options 6.5.15 When an entity separates the intrinsic value and time value of an option contract and designates as the hedging instrument only the change in intrinsic value of the option (see paragraph 6.2.4(a)), it shall account for the time value of the option as follows (see paragraphs B6.5.29- B6.5.33): (a) an entity shall distinguish the time value of options by the type of hedged item that the option hedges (see paragraph B6.5.29): (i) a transaction related hedged item; or (ii) a .....

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ged item subsequently results in the recognition of a non-financial asset or a non-financial liability, or a firm commitment for a non-financial asset or a non-financial liability for which fair value hedge accounting is applied, the entity shall remove the amount from the separate component of equity and include it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment (see Ind AS 1) and hence does not affect other comprehe .....

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pected to be recovered shall be immediately reclassified into profit or loss as a reclassification adjustment (see Ind AS 1). (c) the change in fair value of the time value of an option that hedges a time-period related hedged item shall be recognised in other comprehensive income to the extent that it relates to the hedged item and shall be accumulated in a separate component of equity. The time value at the date of designation of the option as a hedging instrument, to the extent that it relate .....

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of equity to profit or loss as a reclassification adjustment (see Ind AS 1). However, if hedge accounting is discontinued for the hedging relationship that includes the change in intrinsic value of the option as the hedging instrument, the net amount (ie including cumulative amortisation) that has been accumulated in the separate component of equity shall be immediately reclassified into profit or loss as a reclassification adjustment (see Ind AS 1). Accounting for the forward element of forwar .....

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.5.15 to the forward element of the forward contract or to the foreign currency basis spread in the same manner as it is applied to the time value of an option. In that case, the entity shall apply the application guidance in paragraphs B6.5.34-B6.5.39. 6.6 Hedges of a group of items Eligibility of a group of items as the hedged item 6.6.1 A group of items (including a group of items that constitute a net position; see paragraphs B6.6.1-B6.6.8) is an eligible hedged item only if: (a) it consists .....

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net position specifies the reporting period in which the forecast transactions are expected to affect profit or loss, as well as their nature and volume (see paragraphs B6.6.7-B6.6.8). Designation of a component of a nominal amount 6.6.2 A component that is a proportion of an eligible group of items is an eligible hedged item provided that designation is consistent with the entity s risk management objective. 6.6.3 A layer component of an overall group of items (for example, a bottom layer) is .....

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ment or a recognised asset) an entity can identify and track the overall group of items from which the hedged layer is defined (so that the entity is able to comply with the requirements for the accounting for qualifying hedging relationships); and (e) any items in the group that contain prepayment options meet the requirements for components of a nominal amount (see paragraph B6.3.20). Presentation 6.6.4 For a hedge of a group of items with offsetting risk positions (ie in a hedge of a net posi .....

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the individual assets and liabilities shall be recognised as an adjustment of the carrying amount of the respective individual items comprising the group in accordance with paragraph 6.5.8(b). Nil net positions 6.6.6 When the hedged item is a group that is a nil net position (ie the hedged items among themselves fully offset the risk that is managed on a group basis), an entity is permitted to designate it in a hedging relationship that does not include a hedging instrument, provided that: (a) t .....

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s when the net position is not nil and it is hedged with eligible hedging instruments; and (d) not applying hedge accounting to the nil net position would give rise to inconsistent accounting outcomes, because the accounting would not recognise the offsetting risk positions that would otherwise be recognised in a hedge of a net position. 6.7 Option to designate a credit exposure as measured at fair value through profit or loss Eligibility of credit exposures for designation at fair value through .....

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e credit derivative ( name matching ); and (b) the seniority of the financial instrument matches that of the instruments that can be delivered in accordance with the credit derivative. An entity may make this designation irrespective of whether the financial instrument that is managed for credit risk is within the scope of this Standard (for example, an entity may designate loan commitments that are outside the scope of this Standard). The entity may designate that financial instrument at, or su .....

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mediately be recognised in profit or loss. For financial assets measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A, the cumulative gain or loss previously recognised in other comprehensive income shall immediately be reclassified from equity to profit or loss as a reclassification adjustment (see Ind AS 1). 6.7.3 An entity shall discontinue measuring the financial instrument that gave rise to the credit risk, or a proportion of that financial instrument .....

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ital requirements imposed on an entity; and (b) the financial instrument that gives rise to the credit risk is not otherwise required to be measured at fair value through profit or loss (ie the entity s business model has not changed in the meantime so that a reclassification in accordance with paragraph 4.4.1 was required). 6.7.4 When an entity discontinues measuring the financial instrument that gives rise to the credit risk, or a proportion of that financial instrument, at fair value through .....

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d be recalculated based on its new gross carrying amount on the date of discontinuing measurement at fair value through profit or loss. Appendix A Defined terms This appendix is an integral part of the Standard. 12-month expected credit losses The portion of lifetime expected credit losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date. amortised cost of a financial asset or finan .....

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on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events: (a) significant financial difficulty of the issuer or the borrower; (b) a breach of contract, such as a default or past due event; (c) the lender (s) of the borrower, for economic or Contractual reasons relating to the borrower s financial difficulty, having granted to the borrower a concession (s) that the lender (s) wou .....

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it-impaired. credit loss The difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (ie all cash shortfalls),discounted at the original effective interest rate(or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets). An entity shall estimate cash flows by considering all contractual terms of the financial instrument (for example, prepayment, .....

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e remaining contractual term of the financial instrument. credit-adjusted effective interest rate 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 a purchased or originated credit-impaired financial asset. When calculating the credit-adjusted effective interest rate, an entity shall estimate the expected cash flows by considering all contractual terms of the financial .....

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ible to reliably estimate the cash flows or the remaining life of a financial instrument (or group of ), the entity shall use the contractual cash flows over the full contractual term of the financial instrument (or group of ). De recognition The removal of a previously recognised financial asset or financial liability from an entity s balance sheet. Derivative A financial instrument or other contract within the scope of this Standard with all three of the Following characteristics. (a)its value .....

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uld be expected to have a similar response to changes in market factors. (c) it is settled at a future date. Dividends Distributions of profits to holders of equity instruments in proportion to their holdings of a particular class of capital. effective interest method The rate that exactly discounts estimated future cash Payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a fina .....

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all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of ), the entity shall use the contractual cash flows over the full contractual term of the financial instrument (or group of ). expected credit losses The weighted average of credit losses with the respecti .....

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al recognition it is designated by the entity as at fair value through profit or loss in accordance with paragraph 4.2.2 or 4.3.5. (c) it is designated either upon initial recognition or subsequently as at fair value through profit or loss in accordance with paragraph 6.7.1. firm commitment A binding agreement for the exchange of a specified quantity of resources at a specified price on a specified future date or dates. forecast An uncommitted but anticipated future transaction. transaction gros .....

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the hedging Instrument and the quantity of the hedged item in terms of their relative weighting. A financial asset or financial liability that: held for trading (a) is acquired or incurred principally for the purpose Of selling or repurchasing it in the near term; (b) on initial recognition is part of a portfolio of Identified that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or (c) is a derivative (except for a derivative that is .....

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asured in accordance with paragraph 4.1.2, lease receivables and contract assets, the accumulated impairment amount for financial assets measured in accordance with paragraph 4.1.2A and the provision for expected credit losses on loan commitments and financial guarantee contracts. modification gain or loss The amount arising from adjusting the gross carrying Amount of a financial asset to reflect the renegotiated or modified contractual cash flows. The entity recalculates the gross carrying amou .....

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ash flows of a financial asset, an entity shall consider all contractual terms of the financial asset (for example ,pre -payment, call and similar options) but shall not consider the expected credit losses, unless the financial asset is a purchased or originated credit impaired financial asset, in which case an entity shall also consider the initial expected credit losses that were considered when calculating the original credit adjusted effective interest rate. past due A financial asset is pas .....

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erms require delivery of the asset within the time frame established generally by regulation or convention in the market place concerned. transaction costs Incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability (see paragraph B5.4.8). An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument. 10[The following terms are defined in paragraph .....

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7.7). Appendix B Application guidance This appendix is an integral part of the Standard. Scope (Chapter 2) B2.1 Some contracts require a payment based on climatic, geological or other physical variables. (Those based on climatic variables are sometimes referred to as weather derivatives .) If those contracts are not within the scope of Ind AS 104 Insurance Contracts, they are within the scope of this Standard. 11[B2.2 This Standard does not change the requirements relating to royalty agreements .....

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ng shall be applied to such an investment. B2.4 This Standard applies to the financial assets and financial liabilities of insurers, other than rights and obligations that paragraph 2.1(e) excludes because they arise under contracts within the scope of Ind AS104. B2.5 Financial guarantee contracts may have various legal forms, such as a guarantee, some types of letter of credit, a credit default contract or an insurance contract. Their accounting treatment does not depend on their legal form. Th .....

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04 to such financial guarantee contracts. If this Standard applies, paragraph 5.1.1 requires the issuer to recognise a financial guarantee contract initially at fair value. If the financial guarantee contract was issued to an unrelated party in a stand-alone arm s length transaction, its fair value at inception is likely to equal the premium received, unless there is evidence to the contrary. Subsequently, unless the financial guarantee contract was designated at inception as at fair value throu .....

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s do not, as a precondition for payment, require that the holder is exposed to, and has incurred a loss on, the failure of the debtor to make payments on the guaranteed asset when due. An example of such a guarantee is one that requires payments in response to changes in a specified credit rating or credit index. Such guarantees are not financial guarantee contracts as defined in this Standard, and are not insurance contracts as defined in Ind AS104. Such guarantees are derivatives and the issue .....

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s are often subject to accounting requirements that are distinct from the requirements for other types of transaction, such as contracts issued by banks or commercial companies. In such cases, an issuer s financial statements typically include a statement that the issuer has used those accounting requirements. Recognition and derecognition (Chapter 3) Initial recognition (Section 3.1) B3.1.1 As a consequence of the principle in paragraph 3.1.1, an entity recognises all of its contractual rights .....

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d payables are recognised as assets or liabilities when the entity becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash. (b) Assets to be acquired and liabilities to be incurred as a result of a firm commitment to purchase or sell goods or services are generally not recognised until at least one of the parties has performed under the agreement. For example, an entity that receives a firm order does not generally recognise an asset .....

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commitment is designated as a hedged item in a fair value hedge, any change in the net fair value attributable to the hedged risk is recognised as an asset or a liability after the inception of the hedge (see paragraphs 6.5.8(b) and 6.5.9). (c) A forward contract that is within the scope of this Standard (see paragraph 2.1) is recognised as an asset or a liability on the commitment date, instead of on the date on which settlement takes place. When an entity becomes a party to a forward contract .....

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ecause the entity has not become a party to a contract. Regular way purchase or sale of financial assets B3.1.3 A regular way purchase or sale of financial assets is recognised using either trade date accounting or settlement date accounting as described in paragraphs B3.1.5 and B3.1.6. An entity shall apply the same method consistently for all purchases and sales of financial assets that are classified in the same way in accordance with this Standard. For this purpose assets that are mandatoril .....

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n the trade date and the settlement date. B3.1.5 The trade date is the date that an entity commits itself to purchase or sell an asset. Trade date accounting refers to (a) the recognition of an asset to be received and the liability to pay for it on the trade date, and (b) derecognition of an asset that is sold, recognition of any gain or loss on disposal and the recognition of a receivable from the buyer for payment on the trade date. Generally, interest does not start to accrue on the asset an .....

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e asset to be received during the period between the trade date and the settlement date in the same way as it accounts for the acquired asset. Inother words, the change in value is not recognised for assets measured at amortised cost; it is recognised in profit or loss for assets classified as financial assets measured at fair value through profit or loss; and it is recognised in other comprehensive income for financial assets measured at fair value through other comprehensive income in accordan .....

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.2.4(b)) B3.2.2 The situation described in paragraph 3.2.4(b) (when an entity retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients) occurs ,for example, if the entity is a trust, and issues to investors beneficial interests in the underlying financial assets that it owns and provides servicing of those financial assets. In that case, the financial assets qualify for derecognition if t .....

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) an unconditional sale of a financial asset; (b) a sale of a financial asset together with an option to repurchase the financial asset at its fair value at the time of repurchase; and (c) a sale of a financial asset together with a put or call option that is deeply out of the money (ie an option that is so far out of the money it is highly unlikely to go into the money before expiry). B3.2.5 Examples of when an entity has retained substantially all the risks and rewards of ownership are: (a) a .....

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m receivables in which the entity guarantees to compensate the transferee for credit losses that are likely to occur. B3.2.6 If an entity determines that as a result of the transfer, it has transferred substantially all the risks and rewards of ownership of the transferred asset, it does not recognise the transferred asset again in a future period, unless it reacquires the transferred asset in a new transaction. Evaluation of the transfer of control B3.2.7 An entity has not retained control of a .....

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practical ability to sell a transferred assetif the transferred asset is subject to an option that allows the entity to repurchase it, but the transferee can readily obtain the transferred asset in the market if the option is exercised. A transferee does not have the practical ability to sell the transferred asset if the entity retains such an option and the transferee cannot readily obtain the transferred asset in the market if the entity exercises its option. B3.2.8 The transferee has the prac .....

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ight to dispose of the transferred asset has little practical effect if there is no market for the transferred asset, and (b) an ability to dispose of the transferred asset has little practical effect if it cannot be exercised freely. For that reason: (i) the transferee s ability to dispose of the transferred asset must be independent of the actions of others (ie it must be a unilateral ability), and (ii) the transferee must be able to dispose of the transferred asset without needing to attach r .....

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or example, if a put option or guarantee is sufficiently valuable it constrains the transferee from selling the transferred asset because the transferee would, in practice, not sell the transferred asset to a third party without attaching a similar option or other restrictive conditions. Instead, the transferee would hold the transferred asset so as to obtain payments under the guarantee or put option. Under these circumstances the transferor has retained control of the transferred asset. Transf .....

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e up any interest upon termination or transfer of the servicing contract, the entire interest spread is an interest-only strip receivable. For the purposes of applying paragraph 3.2.13, the fair values of the servicing asset and interest-only strip receivable are used to allocate the carrying amount of the receivable between the part of the asset that is derecognised and the part that continues to be recognised. If there is no servicing fee specified or the fee to be received is not expected to .....

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pplication of the principle outlined in paragraph 3.2.15. If a guarantee provided by the entity for default losses on the transferred asset prevents a transferred asset from being derecognised because the entity has retained substantially all the risks and rewards of ownership of the transferred asset, the transferred asset continues to be recognised in its entirety and the consideration received is recognised as a liability. Continuing involvement in transferred assets B3.2.13 The following are .....

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r that the entity could be required to repay ( the guarantee amount ). The associated liability is initially measured at the guarantee amount plus the fair value of the guarantee (which is normally the consideration received for the guarantee). Subsequently, the initial fair value of the guarantee is recognised in profit or loss on a time proportion basis (see Ind AS 18) and the carrying value of the asset is reduced by any loss allowance.] Assets measured at amortised cost (b) If a put option o .....

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ate of the transfer is ₹ 98 and that the consideration received is ₹ 95. The gross carrying amount of the asset on the option exercise date will be ₹ 100. The initial carrying amount of the associated liability is ₹ 95 and the difference between ₹ 95 and ₹ 100 is recognised in profit or loss using the effective interest method. If the option is exercised, any difference between the carrying amount of the associated liability and the exercise price is recognise .....

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tion is out of the money. The adjustment to the measurement of the associated liability ensures that the net carrying amount of the asset and the associated liability is the fair value of the call option right. For example, if the fair value of the underlying asset is ₹ 80, the option exercise price is ₹ 95 and the time value of the option is ₹ 5, the carrying amount of the associated liability is ₹ 75 (Rs.80 - ₹ 5) and the carrying amount of the transferred asset i .....

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he exercise price of the option. This ensures that the net carrying amount of the asset and the associated liability is the fair value of the put option obligation. For example, if the fair value of the underlying asset is ₹ 120, the option exercise price is ₹ 100 and the time value of the option is ₹ 5, the carrying amount of the associated liability is ₹ 105 (Rs.100 + ₹ 5) and the carrying amount of the asset is ₹ 100 (in this case the option exercise price) .....

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s the time value of the call option if the call option is out of the money. The adjustment to the associated liability ensures that the net carrying amount of the asset and the associated liability is the fair value of the options held and written by the entity. For example, assume an entity transfers a financial asset that is measured at fair value while simultaneously purchasing a call with an exercise price of ₹ 120 and writing a put with an exercise price of ₹ 80. Assume also tha .....

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not qualify for derecognition, the transferor s contractual rights or obligations related to the transfer are not accounted for separately as derivatives if recognising both the derivative and either the transferred asset or the liability arising from the transfer would result in recognising the same rights or obligations twice. For example, a call option retained by the transferor may prevent a transfer of financial assets from being accounted for as a sale. In that case, the call option is not .....

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eree may measure its receivable at amortised cost if it meets the criteria in paragraph 4.1.2. Examples B3.2.16 The following examples illustrate the application of the derecognition principles of this Standard. (a) Repurchase agreements and securities lending. If a financial asset is sold under an agreement to repurchase it at a fixed price or at the sale price plus a lender s return or if it is loaned under an agreement to return it to the transferor, it is not derecognised because the transfe .....

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nder s return or if a financial asset is borrowed or loaned under an agreement to return the same or substantially the same asset to the transferor, it is not derecognised because the transferor retains substantially all the risks and rewards of ownership. (c) Repurchase agreements and securities lending-right of substitution. If are purchase agreement at a fixed repurchase price or a price equal to the sale price plus a lender s return, or a similar securities lending transaction, provides the .....

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the transferee subsequently sells it, the entity derecognises the asset because it has transferred substantially all the risks and rewards of ownership. (e) Wash sale transaction. The repurchase of a financial asset shortly after ithas been sold is sometimes referred to as a wash sale. Such a repurchase does not preclude derecognition provided that the original transaction met the derecognition requirements. However, if an agreement to sell a financial asset is entered into concurrently with an .....

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y the transferee and the put option is deeply in the money, the transfer does not qualify for derecognition because the transferor has retained substantially all the risks and rewards of ownership. (g) Put options and call options that are deeply out of the money. A financial assetthat is transferred subject only to a deep out-of-the-money put option held by the transferee or a deep out-of-the-money call option held by the transferor is derecognised. This is because the transferor has transferre .....

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t retained control. However, if the asset is not readily obtainable in the market, derecognition is precluded to the extent of the amount of the asset that is subject to the call option because the entity has retained control of the asset. (i) A not readily obtainable asset subject to a put option written by an entity that is neither deeply in the money nor deeply out of the money. If an entity transfers a financial asset that is not readily obtainable in the market, and writes a put option that .....

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iently valuable to prevent the transferee from selling the asset, in which case the asset is derecognised. (j) Assets subject to a fair value put or call option or a forward repurchase agreement. A transfer of a financial asset that is subject only to a put or call option or a forward repurchase agreement that has an exercise or repurchase price equal to the fair value of the financial asset at the time of repurchase results in derecognition because of the transfer of substantially all the risks .....

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ferred asset. That the put or the call or the forward repurchase agreement is settled net in cash does not automatically mean that the entity has transferred control (see paragraphs B3.2.9 and (g), (h) and (i) above). (l) Removal of accounts provision. A removal of accounts provision is anunconditional repurchase (call) option that gives an entity the right to reclaim assets transferred subject to some restrictions. Provided that such an option results in the entity neither retaining nor transfe .....

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) Clean-up calls. An entity, which may be a transferor, that services transferred assets may hold a clean-up call to purchase remaining transferred assets when the amount of outstanding assets falls to a specified level at which the cost of servicing those assets becomes burdensome in relation to the benefits of servicing. Provided that such a clean-up call results in the entity neither retaining nor transferring substantially all the risks and rewards of ownership and the transferee cannot sell .....

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tity retains substantially all the risks and rewards of ownership of the transferred asset, the asset continues to be recognised in its entirety. If the entity retains some, but not substantially all, of the risks and rewards of ownership and has retained control, derecognition is precluded to the extent of the amount of cash or other assets that the entity could be required to pay. (o) Total return swaps. An entity may sell a financial asset to a transferee and enter into a total return swap wi .....

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e a fixed interest rate and pay a variable interest rate based on a notional amount that is equal to the principal amount of the transferred financial asset. The interest rate swap does not preclude derecognition of the transferred asset provided the payments on the swap are not conditional on payments being made on the transferred asset. (q) Amortising interest rate swaps. An entity may transfer to a transferee a fixed rate financial asset that is paid off over time, and enter into an amortisin .....

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sset to the extent of its continuing involvement. Conversely, if the amortisation of the notional amount of the swap is not linked to the principal amount outstanding of the transferred asset, such a swap would not result in the entity retaining prepayment risk on the asset. Hence, it would not preclude derecognition of the transferred asset provided the payments on the swap are not conditional on interest payments being made on the transferred asset and the swap does not result in the entity re .....

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ate is 10 per cent and whose principal amount and amortised cost is ₹ 10,000. It enters into a transaction in which, in return for a payment of ₹ 9,115, the transferee obtains the right to ₹ 9,000 of any collections of principal plus interest thereon at 9.5 per cent. The entity retains rights to ₹ 1,000 of any collections of principal plus interest thereon at 10 per cent, plus the excess spread of 0.5 per cent on the remaining ₹ 9,000 of principal. Collections from .....

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s also retained some significant risks and rewards of ownership (because of its subordinated retained interest) and has retained control. It therefore applies the continuing involvement approach. To apply this Standard, the entity analyses the transaction as (a) a retention of a fully proportionate retained interest of ₹ 1,000, plus (b) the subordination of that retained interest to provide credit enhancement to the transferee for credit losses. The entity calculates that ₹ 9,090 (90 .....

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he credit enhancement is ₹ 65 (Rs.25 + ₹ 40). The entity calculates the gain or loss on the sale of the 90 per cent share of cash flows. Assuming that separate fair values of the 90 per cent part transferred and the 10 per cent part retained are not available at the date of the transfer, the entity allocates the carrying amount of the asset in accordance with paragraph 3.2.14 of Ind AS109 as follows: Allocated carrying Fair value Percentage amount Portion transferred 9,090 90% 9,000 .....

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. Accordingly, it recognises an asset of ₹ 1,000 (the maximum amount of the cash flows it would not receive under the subordination), and an associated liability of ₹ 1,065 (which is the maximum amount of the cash flows it would not receive under the subordination, ieRs.1,000 plus the fair value of the subordination of ₹ 65). The entity uses all of the above information to account for the transaction as follows: Debit Credit Original asset 9,000 Asset recognised for subordinati .....

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redit losses (which includes the excess spread of ₹ 40). In subsequent periods, the entity recognises the consideration received for the credit enhancement (Rs.65) on a time proportion basis, accrues interest on the recognised asset using the effective interest method and recognises any impairment losses on the recognised assets. As an example of the latter, assume that in the following year there is an impairment loss on the underlying loans of ₹ 300. The entity reduces its recognis .....

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rges the liability (or part of it) by paying the creditor, normally with cash, other financial assets, goods or services; or (b) is legally released from primary responsibility for the liability (or part of it) either by process of law or by the creditor. (If the debtor has given a guarantee this condition may still be met.) B3.3.2 If an issuer of a debt instrument repurchases that instrument, the debt is extinguished even if the issuer is a market maker in that instrument or intends to resell i .....

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hird party to assume an obligation and obtains a legal release from its creditor, the debtor has extinguished the debt. However, if the debtor agrees to make payments on the debt to the third party or direct to its original creditor, the debtor recognises a new debt obligation to the third party. B3.3.5 Although legal release, whether judicially or by the creditor, results in derecognition of a liability, the entity may recognise a new liability if the derecognition criteria in paragraphs 3.2.1- .....

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rent from the discounted present value of the remaining cash flows of the original financial liability. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified .....

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ility less the fair value of the new financial liability. Classification (Chapter 4) Classification of financial assets (Section 4.1) The entity s business model for managing financial assets B4.1.1 Paragraph 4.1.1(a) requires an entity to classify financial assets on the basis of the entity s business model for managing the financial assets, unless paragraph 4.1.5 applies. An entity assesses whether its financial assets meet the condition in paragraph 4.1.2(a) or the condition in paragraph 4.1. .....

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fication and should be determined on a higher level of aggregation. However, a single entity may have more than one business model for managing its . Consequently, classification need not be determined at the reporting entity level. For example, an entity may hold a portfolio of investments that it manages in order to collect contractual cash flows and another portfolio of investments that it manages in order to trade to realise fair value changes. Similarly, in some circumstances, it may be app .....

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to generate cash flows. That is, the entity s business model determines whether cash flows will result from collecting contractual cash flows, selling financial assets or both. Consequently, this assessment is not performed on the basis of scenarios that the entity does not reasonably expect to occur, such as so called worst case or stress case scenarios. For example, if an entity expects that it will sell a particular portfolio of financial assets only in a stress case scenario, that scenario w .....

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8Accounting Policies, Changes in Accounting Estimates and Errors) nor does it change the classification of the remaining financial assets held in that business model (ie those assets that the entity recognised in prior periods and still holds) as long as the entity considered all relevant information that was available at the time that it made the business model assessment. However, when an entity assesses the business model for newly originated or newly purchased financial assets, it must cons .....

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factor or activity. Instead, the entity must consider all relevant evidence that is available at the date of the assessment. Such relevant evidence includes, but is not limited to: (a) how the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity s key management personnel; (b) the risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the .....

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cting contractual payments over the life of the instrument. That is, the entity manages the assets held within the portfolio to collect those particular contractual cash flows (instead of managing the overall return on the portfolio by both holding and selling assets). In determining whether cash flows are going to be realised by collecting the financial assets contractual cash flows, it is necessary to consider the frequency, value and timing of sales in prior periods, the reasons for those sal .....

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he conditions that existed at that time as compared to current conditions. B4.1.3 Although the objective of an entity s business model may be to hold financial assets in order to collect contractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity s business model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur or are expected to occur in the future. B4.1.3A The business model may be to hold a .....

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t contractual cash flows because the credit quality of financial assets is relevant to the entity s ability to collect contractual cash flows. Credit risk management activities that are aimed at minimising potential credit losses due to credit deterioration are integral to such a business model. Selling a financial asset because it no longer meets the credit criteria specified in the entity s documented investment policy is an example of a sale that has occurred due to an increase in credit risk .....

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ctive is to hold financial assets in order to collect contractual cash flows if those sales are infrequent (even if significant in value) or insignificant in value both individually and in aggregate (even if frequent). If more than an infrequent number of such sales are made out of a portfolio and those sales are more than insignificant in value (either individually or in aggregate), the entity needs to assess whether and how such sales are consistent with an objective of collecting contractual .....

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. In addition, sales may be consistent with the objective of holding financial assets in order to collect contractual cash flows if the sales are made close to the maturity of the financial assets and the proceeds from the sales approximate the collection of the remaining contractual cash flows. B4.1.4 The following are examples of when the objective of an entity s business model may be to hold financial assets to collect the contractual cash flows. This list of examples is not exhaustive. Furth .....

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dit losses. In the past, sales have typically occurred when the financial assets credit risk has increased such that the assets no longer meet the credit criteria specified in the entity s documented investment policy. In addition, infrequent sales have occurred as a result of unanticipated funding needs. Reports to key management personnel focus on the credit quality of the financial assets and the contractual return. The entity also monitors fair values of the financial assets, among other inf .....

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tity s documented investment policy. Infrequent sales resulting from unanticipated funding needs (egin a stress case scenario) also would not contradict that objective, even if such sales are significant in value. Example 2 An entity s business model is to purchase portfolios of financial assets, such as loans. Those portfolios may or may not include financial assets that are credit impaired. If payment on the loans is not made on a timely basis, the entity attempts to realise the contractual ca .....

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ective of the entity s business model is to hold the financial assets in order to collect the contractual cash flows. The same analysis would apply even if the entity does not expect to receive all of the contractual cash flows (eg some of the financial assets are credit impaired at initial recognition). Moreover, the fact that the entity enters into derivatives to modify the cash flows of the portfolio does not in itself change the entity s business model Example 3 An entity has a business mode .....

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et because they are not derecognised by the securitisation vehicle. Analysis The consolidated group originated the loans with the objective of holding them to collect the contractual cash flows. However, the originating entity has an objective of realising cash flows on the loan portfolio by selling the loans to the securitisation vehicle, so for the purposes of its separate financial statements it would not be considered to be managing this portfolio in order to collect the contractual cash flo .....

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the entity also monitors the fair value of the financial assets from a liquidity perspective to ensure That the cash amount that would be realised if the entity needed to sell the assets in a stress case scenario would be sufficient to meet the entity s liquidity needs. Periodically, the entity makes sales that are insignificant in value to demonstrate liquidity. Analysis The objective of the entity s business model is to hold the financial assets to collect contractual cash flows. The analysis .....

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ty s business model is not to hold the financial assets to collect contractual cash flows. Similarly, if the entity is required by its regulator to routinely sell financial assets to demonstrate that the assets are liquid, and the value of the assets sold is significant, the entity s business model is not to hold financial assets to collect contractual cash flows. Whether a third party imposes the requirement to sell the financial assets, or that activity is at the entity s discretion, is not re .....

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jective of the business model. There are various objectives that may be consistent with this type of business model. For example, the objective of the business model may be to manage every day liquidity needs, to maintain a particular interest yield profile or to match the duration of the financial assets to the duration of the liabilities that those assets are funding. To achieve such an objective, the entity will both collect contractual cash flows and sell financial assets. B4.1.4B Compared t .....

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e integral to achieving its objective. B4.1.4C The following are examples of when the objective of the entity s business model may be achieved by both collecting contractual cash flows and selling financial assets. This list of examples is not exhaustive. Furthermore, the examples are not intended to describe all the factors that may be relevant to the assessment of the entity s business model nor specify the relative importance of the factors. Example5 Analysis An entity anticipates capital exp .....

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e portfolio are remunerated based on the overall return generated by the portfolio. The objective of the business model is achieved by both collecting contractual cash flows and selling financial assets. The entity will make decisions on an on going basis about whether collecting contractual cash flows or selling financial assets will maximise the return on the portfolio until the need arises for the invested cash. In contrast, consider an entity that anticipates a cash outflow in five years to .....

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ess model is to hold financial assets to collect contractual cash flows. Example 6 A financial institution holds financial assets to meet its everyday liquidity needs. The entity seeks to minimise the costs of managing those liquidity needs and therefore actively manages the return on the portfolio. That return consists of collecting contractual payments as well as gains and losses from the sale of financial assets. As a result, the entity holds financial assets to collect contractual cash flows .....

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selling financial assets. In other words, both collecting contractual cash flows and selling financial assets are integral to achieving the business model s objective. Example 7 An insurer holds financial assets in order to fund insurance contract liabilities. The insurer uses the proceeds from the contractual cash flows on the financial assets to settle insurance contract liabilities as they come due. To ensure that the contractual cash flows from the financial assets are sufficient to settle .....

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nancial assets are integral to achieving the business model s objective. Other business models B4.1.5 Financial assets are measured at fair value through profit or loss if they are not held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets (but see alsoparagraph 5.7.5). One business model that results in measurement at fair value .....

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eved by both collecting contractual cash flows and selling financial assets. This is because the collection of contractual cash flows is not integral to achieving the business model s objective; instead, it is incidental to it. B4.1.6 A portfolio of financial assets that is managed and whose performance is evaluated on a fair value basis (as described in paragraph 4.2.2(b)) is neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial ass .....

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uch portfolios of financial assets must be measured at fair value through profit or loss. Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding B4.1.7 Paragraph 4.1.1(b) requires an entity to classify a financial asset on the basis of its contractual cash flow characteristics if the financial asset is held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective i .....

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In a basic lending arrangement, consideration for the time value of money (see paragraphs B4.1.9A-B4.1.9E) and credit risk are typically the most significant elements of interest. However, in such an arrangement, interest can also include consideration for other basic lending risks (for example, liquidity risk) and costs (for example, administrative costs) associated with holding the financial asset for a particular period of time. In addition, interest can include a profit margin that is consi .....

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hat is unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices,do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. An originated or a purchased financial asset can be a basic lending arrangement irrespective of whether it is a loan in its legal form. B4.1.7B In accordance with paragraph 4.1.3(a), principal is the fair value of the financial asset at initial recognitio .....

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ult that they do not have the economic characteristics of interest. Stand-alone option, forward and swap contracts are examples of financial assets that include such leverage. Thus, such contracts do not meet the condition in paragraphs 4.1.2(b) and 4.1.2A(b) and cannot be subsequently measured at amortised cost or fair value through other comprehensive income. Consideration for the time value of money B4.1.9A Time value of money is the element of interest that provides consideration for only th .....

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odified (ie imperfect). That would be the case, for example, if a financial asset s interest rate is periodically reset but the frequency of that reset does not match the tenor of the interest rate (for example, the interest rate resets every month to a one-year rate) or if a financial asset s interest rate is periodically reset to an average of particular short- and long-term interest rates. In such cases, an entity must assess the modification to determine whether the contractual cash flows re .....

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unted) cash flows that would arise if the time value of money element was not modified (the benchmark cash flows). For example, if the financial asset under assessment contains a variable interest rate that is reset every month to a one-year interest rate, the entity would compare that financial asset to a financial instrument with identical contractual terms and the identical credit risk except the variable interest rate is reset monthly to aone-month interest rate. If the modified time value o .....

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o the analysis. If it is clear, with little or no analysis, whether the contractual (undiscounted) cash flows on the financial asset under the assessment could (or could not) be significantly different from the (undiscounted) benchmark cash flows, an entity need not perform a detailed assessment. B4.1.9D When assessing a modified time value of money element, an entity must consider factors that could affect future contractual cash flows. For example, if an entity is assessing a bond with a five- .....

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rest rate and the six-month interest rate could change over the life of the instrument such that the contractual (undiscounted) cash flows over the life of the instrument could be significantly different from the (undiscounted) benchmark cash flows. However, an entity must consider only reasonably possible scenarios instead of every possible scenario. If an entity concludes that the contractual (undiscounted) cash flows could be significantly different from the (undiscounted) benchmark cash flow .....

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s, the objective of the time value of money element is not to provide consideration for only the passage of time. However, despite paragraphs B4.1.9A-B4.1.9D, a regulated interest rate shall be considered a proxy for the time value of money element for the purpose of applying the condition in paragraphs 4.1.2(b) and 4.1.2A(b) if that regulated interest rate provides consideration that is broadly consistent with the passage of time and does not provide exposure to risks or volatility in the contr .....

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re solely payments of principal and interest on the principal amount outstanding. To make this determination, the entity must assess the contractual cash flows that could arise both before, and after, the change in contractual cash flows. The entity may also need to assess the nature of any contingent event (ie the trigger) that would change the timing or amount of the contractual cash flows. While the nature of the contingent event in itself is not a determinative factor in assessing whether th .....

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ments of principal and interest on the principal amount outstanding because of the relationship between missed payments and an increase in credit risk. (See also paragraph B4.1.18.) B4.1.11 The following are examples of contractual terms that result in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding: (a) a variable interest rate that consists of consideration for the time value of money, the credit risk associated with the principal a .....

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nterest on the principal amount outstanding, which may include reasonable additional compensation for the early termination of the contract; and (c) a contractual term that permits the issuer or the holder to extend the contractual term of a debt instrument (ie an extension option) and the terms of the extension option result in contractual cash flows during the extension period that are solely payments of principal and interest on the principal amount outstanding, which may include reasonable a .....

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e (subject to meeting the condition in paragraph 4.1.2(a) or the condition in paragraph 4.1.2A(a)) if: (a) the entity acquires or originates the financial asset at a premium or discount to the contractual par amount; (b) the prepayment amount substantially represents the contractual par amount and accrued (but unpaid) contractual interest, which may include reasonable additional compensation for the early termination of the contract; and (c) when the entity initially recognises the financial ass .....

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link is not leveraged and the principal is protected. The contractual cash flows are solely payments of principal and interest on the principal amount outstanding. Linking payments of principal and interest on the principal amount outstanding to an unleveraged inflation index resets the time value of money to a current level. In other words, the interest rate on the instrument reflects real interest. Thus, the interest amounts are consideration for the time value of money on the principal amount .....

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est).That is because the contractual cash flows reflect a return that is inconsistent with a basic lending arrangement (see paragraph B4.1.7A). Instrument B Instrument B is a variable interest rate instrument with a stated maturity date that permits the borrower to choose the market interest rate on an on going basis. For example, at each interest rate reset date, the borrower can choose to pay three-month LIBOR for a three-month term or one-month LIBOR for a one-month term. Analysis The contrac .....

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e borrower is able to choose to pay a one-month interest rate that is reset every three months, the interest rate is reset with a frequency that does not match the tenor of the interest rate. Consequently, the time value of money element is modified. Similarly, if an instrument has a contractual interest rate that is based on a term that can exceed the instrument s remaining life (for example, if an instrument with a five-year maturity pays a variable rate that is reset periodically but always r .....

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utstanding. (But see paragraph B4.1.9E for guidance on regulated interest rates.) For example, in assessing a bond with a five-year term that pays a variable rate that is reset every six months but always reflects a five-year maturity, an entity considers the contractual cash flows on an instrument that resets every six months to a six-month interest rate but is otherwise identical. The same analysis would apply if the borrower is able to choose between the lender s various published interest ra .....

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principal amount outstanding as long as the interest reflects consideration for the time value of money, for the credit risk associated with the instrument during the term of the instrument and for other basic lending risks and costs, as well as a profit margin. (See paragraph B4.1.7A) Consequently, an instrument that is a combination of (a) and (b) (eg a bond with an interest rate cap) can have cash flows that are solely payments of principal and interest on the principal amount outstanding. S .....

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unt outstanding. Instrument E Instrument E is issued by a regulated bank and has a stated maturity date. The instrument pays a fixed interest rate and all contractual cash flows are non-discretionary. However, the issuer is subject to legislation that permits or requires a national resolving authority to impose losses on holders of particular instruments, including Instrument E, in particular circumstances. For example, the national resolving authority has the power to write down the par amount .....

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nding arrangement. That analysis would not consider the payments that arise only as a result of the national resolving authority s power to impose losses on the holders of Instrument E. That is because that power, and the resulting payments, are not contractual terms of the financial instrument. In contrast, the contractual cash flows would not be solely payments of principal and interest on the principal amount outstanding if the contractual terms of the financial instrument permit or require t .....

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nt F Analysis Instrument F is a bond that is convertible into a fixed number of equity instruments of the issuer. The holder would analyse the convertible bond in its entirety. The contractual cash flows are not payments of principal and interest on the principal amount outstanding because they reflect a return that is inconsistent with a basic lending arrangement (see paragraph B4.1.7A);ie the return is linked to the value of the equity of the issuer. Instrument G Instrument G is a loan that pa .....

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rued interest due. Instrument H pays a market interest rate but payment of interest can not be made unless the issuer is able to remain solvent immediately afterwards. Deferred interest does not accrue additional interest. The contractual cash flows are not payments of principal and interest on the principal amount outstanding. That is because the issuer may be required to defer interest payment sand additional interest does not accrue on those deferred interest amounts. As a result, interest am .....

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Such options may result in contractual cash flows that are payments of principal and interest on the principal amount outstanding if interest payments are mandatory and must be paid in perpetuity. Also, the fact that Instrument H is callable does not mean that the contractual cash flows are not payments of principal and interest on the principal amount outstanding unless it is callable at an amount that does not substantially reflect payment of outstanding principal and interest on that princip .....

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l amount outstanding as described in paragraphs 4.1.2(b), 4.1.2A(b) and 4.1.3 of this Standard. B4.1.16 This may be the case if the financial asset represents an investment in particular assets or cash flows and hence the contractual cash flows are not solely payments of principal and interest on the principal amount outstanding. For example, if the contractual terms stipulate that the financial asset s cash flows increase as more automobiles use a particular toll road, those contractual cash fl .....

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.2(b) and 4.1.2A(b). In such situations, the creditor is required to assess ( look through to ) the particular underlying assets or cash flows to determine whether the contractual cash flows of the financial asset being classified are payments of principal and interest on the principal amount outstanding. If the terms of the financial asset give rise to any other cash flows or limit the cash flows in a manner inconsistent with payments representing principal and interest, the financial asset doe .....

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each reporting period and cumulatively over the life of the financial instrument. In addition, if a contractual cash flow characteristic could have an effect on the contractual cash flows that is more than de minimis (either in a single reporting period or cumulatively) but that cash flow characteristic is not genuine, it does not affect the classification of a financial asset. A cash flow characteristic is not genuine if it affects the instrument s contractual cash flows only on the occurrence .....

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f principal and interest on the principal amount outstanding even in the event of the debtor s bankruptcy. For example, a trade receivable that ranks its creditor as a general creditor would qualify as having payments of principal and interest on the principal amount outstanding. This is the case even if the debtor issued loans that are collateralised, which in the event of bankruptcy would give that loan holder priority over the claims of the general creditor in respect of the collateral but do .....

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tuations, the holders of a tranche havethe right to payments of principal and interest on the principal amount outstanding only if the issuer generates sufficient cash flows to satisfy higher-ranking tranches. B4.1.21 In such transactions, a tranche has cash flow characteristics that are payments of principal and interest on the principal amount outstanding only if: (a) the contractual terms of the tranche being assessed for classification (without looking through to the underlying pool of ) giv .....

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eing assessed for classification is equal to or higher than the credit rating that would apply to a single tranche that funded the underlying pool of ). B4.1.22 An entity must look through until it can identify the underlying pool of instruments that are creating (instead of passing through) the cash flows. This is the underlying pool of . B4.1.23 The underlying pool must contain one or more instruments that have contractual cash flows that are solely payments of principal and interest on the pr .....

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the cash flows of the tranches with the cash flows of the pool of underlying instruments in paragraph B4.1.23 to address differences in and only in: (i) whether the interest rate is fixed or floating; (ii) the currency in which the cash flows are denominated, including inflation in that currency; or (iii) the timing of the cash flows. B4.1.25 If any instrument in the pool does not meet the conditions in either paragraph B4.1.23 or paragraph B4.1.24, the condition in paragraph B4.1.21(b) is not m .....

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e tranche must be measured at fair value through profit or loss. If the underlying pool of instruments can change after initial recognition in such a way that the pool may not meet the conditions in paragraphs B4.1.23-B4.1.24, the tranche does not meet the conditions in paragraph B4.1.21 and must be measured at fair value through profit or loss. However, if the underlying pool includes instruments that are collateralised by assets that do not meet the conditions in paragraphs B4.1.23-B4.1.24, th .....

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sets, financial liabilities or both) as at fair value through profit or loss provided that doing so results in more relevant information. B4.1.28 The decision of an entity to designate a financial asset or financial liability as at fair value through profit or loss is similar to an accounting policy choice (although, unlike an accounting policy choice, it is not required to be applied consistently to all similar transactions). When an entity has such a choice, paragraph 14(b) of Ind AS 8 require .....

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in accordance with paragraph 4.2.2, the entity needs to demonstrate that it falls within one (or both) of these two circumstances. Designation eliminates or significantly reduces an accounting mismatch B4.1.29 Measurement of a financial asset or financial liability and classification of recognised changes in its value are determined by the item s classification and whether the item is part of a designated hedging relationship. Those requirements can create a measurement or recognition inconsiste .....

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f both the asset and the liability were measured as at fair value through profit or loss. B4.1.30 The following examples show when this condition could be met. In all cases, an entity may use this condition to designate financial assets or financial liabilities as at fair value through profit or loss only if it meets the principle in paragraph 4.1.5 or 4.2.2(a): (a) an entity has liabilities under insurance contracts whose measurement incorporates current information (as permitted by paragraph 2 .....

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e derivatives, or are classified as held for trading). It may also be the case that the requirements for hedge accounting are not met because, for example, the requirements for hedge effectiveness in paragraph 6.4.1 are not met. (c) an entity has financial assets, financial liabilities or both that share a risk, such as interest rate risk, that gives rise to opposite changes in fair value that tend to offset each other and none of the financial assets or financial liabilities qualifies for desig .....

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s and the bonds at fair value through profit or loss eliminates the inconsistency in the timing of the recognition of the gains and losses that would otherwise result from measuring them both at amortised cost and recognising a gain or loss each time a bond is repurchased. B4.1.31 In cases such as those described in the preceding paragraph, to designate, at initial recognition, the financial assets and financial liabilities not otherwise so measured as at fair value through profit or loss may el .....

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ur. B4.1.32 It would not be acceptable to designate only some of the financial assets and financial liabilities giving rise to the inconsistency as at fair value through profit or loss if to do so would not eliminate or significantly reduce the inconsistency and would therefore not result in more relevant information. However, it would be acceptable to designate only some of a number of similar financial assets or similar financial liabilities if doing so achieves a significant reduction (and po .....

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of ₹ 45) as at fair value through profit or loss. However, because designation as at fair value through profit or loss can be applied only to the whole of a financial instrument, the entity in this example must designate one or more liabilities in their entirety. It could not designate either a component of a liability (eg changes in value attributable to only one risk, such as changes in a benchmark interest rate) or a proportion (ie percentage) of a liability. A group of financial liabi .....

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34 For example, an entity may use this condition to designate financial liabilities as at fair value through profit or loss if it meets the principle in paragraph 4.2.2(b) and the entity has financial assets and financial liabilities that share one or more risks and those risks are managed and evaluated on a fair value basis in accordance with a documented policy of asset and liability management. An example could be an entity that has issued structured products containing multiple embedded deri .....

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that are managed and evaluated together. B4.1.36 Documentation of the entity s strategy need not be extensive but should be sufficient to demonstrate compliance with paragraph 4.2.2(b). Such documentation is not required for each individual item, but may be on a portfolio basis. For example, if the performance management system for adepartment-as approved by the entity s key management personnel-clearly demonstrates that its performance is evaluated on this basis, no further documentation is re .....

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lue through profit or loss. B4.3.2 If a host contract has no stated or predetermined maturity and represents a residual interest in the net assets of an entity, then its economic characteristics and risks are those of an equity instrument, and an embedded derivative would need to possess equity characteristics related to the same entity to be regarded as closely related. If the host contract is not an equity instrument and meets the definition of a financial instrument, then its economic charact .....

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g amount of the host instrument is the residual amount after separating the embedded derivative. B4.3.4 Generally, multiple embedded derivatives in a single hybrid contract are treated as a single compound embedded derivative. However, embedded derivatives that are classified as equity (see Ind AS 32: Presentation) are accounted for separately from those classified as assets or liabilities. In addition, if a hybrid contract has more than one embedded derivative and those derivatives relate to di .....

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nt that enables the holder to require the issuer to reacquire the instrument for an amount of cash or other assets that varies on the basis of the change in an equity or commodity price or index is not closely related to a host debt instrument. (b) An option or automatic provision to extend the remaining term to maturity of a debt instrument is not closely related to the host debt instrument unless there is a concurrent adjustment to the approximate current market rate of interest at the time of .....

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contract-by which the amount of interest or principal is indexed to the value of equity instruments-are not closely related to the host instrument because the risks inherent in the host and the embedded derivative are dissimilar. (d) Commodity-indexed interest or principal payments embedded in a host debt instrument or insurance contract-by which the amount of interest or principal is indexed to the price of a commodity (such as gold)-are not closely related to the host instrument because the ri .....

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roximate present value of lost interest for the remaining term of the host contract. Lost interest is the product of the principal amount prepaid multiplied by the interest rate differential. The interest rate differential is the excess of the effective interest rate of the host contract over the effective interest rate the entity would receive at the prepayment date if it reinvested the principal amount prepaid in a similar contract for the remaining term of the host contract. The assessment of .....

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ntor to assume the credit risk associated with the reference asset without directly owning it. B4.3.6 An example of a hybrid contract is a financial instrument that gives the holder a right to put the financial instrument back to the issuer in exchange for an amount of cash or other financial assets that varies on the basis of the change in an equity or commodity index that may increase or decrease (a puttable instrument ). Unless the issuer on initial recognition designates the puttable instrum .....

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g variable. B4.3.7 In the case of a puttable instrument that can be put back at any time for cash equal to a proportionate share of the net asset value of an entity (such as units of an open-ended mutual fund or some unit-linked investment products), the effect of separating an embedded derivative and accounting for each component is to measure the hybrid contract at the redemption amount that is payable at the end of the reporting period if the holder exercised its right to put the instrument b .....

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earing host debt contract or insurance contract is closely related to the host contract unless the hybrid contract can be settled in such a way that the holder would not recover substantially all of its recognised investment or the embedded derivative could at least double the holder s initial rate of return on the host contract and could result in a rate of return that is at least twice what the market return would be for a contract with the same terms as the host contract. (b) An embedded floo .....

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set are closely related to the host contract if both the cap and floor were out of the money at inception and are not leveraged. (c) An embedded foreign currency derivative that provides a stream of principal or interest payments that are denominated in a foreign currency and is embedded in a host debt instrument (for example, a dual currency bond) is closely related to the host debt instrument. Such a derivative is not separated from the host instrument because Ind AS 21 TheEffects of Changes i .....

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nated in one of the following currencies: (i) the functional currency of any substantial party to that contract; (ii) the currency in which the price of the related good or service that is acquired or delivered is routinely denominated in commercial transactions around the world (such as the US dollar for crude oil transactions); or (iii) a currency that is commonly used in contracts to purchase or sell nonfinancial items in the economic environment in which the transaction takes place (eg a rel .....

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contract. (f) An embedded derivative in a host lease contract is closely related to the host contract if the embedded derivative is (i) an inflation-related index such as an index of lease payments to a consumer price index (provided that the lease is not leveraged and the index relates to inflation in the entity s own economic environment), (ii) contingent rentals based on related sales or (iii) contingent rentals based on variable interest rates. (g) A unit-linking feature embedded in a host f .....

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insurance contract are so interdependent that an entity cannot measure the embedded derivative separately (ie without considering the host contract). Instruments containing embedded derivatives B4.3.9 As noted in paragraph B4.3.1, when an entity becomes a party to a hybrid contract with a host that is not an asset within the scope of this Standard and with one or more embedded derivatives, paragraph 4.3.3 requires the entity to identify any such embedded derivative, assess whether it is require .....

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.3.3 requires the embedded derivatives to be separated from the host contract or prohibits such separation. However, paragraph 4.3.5 would not justify designating the hybrid contract as at fair value through profit or loss in the cases set out in paragraph 4.3.5(a) and (b) because doing so would not reduce complexity or increase reliability. Reassessment of embedded derivatives B4.3.11 In accordance with paragraph 4.3.3, an entity shall assess whether an embedded derivative is required to be sep .....

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h the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flows on the contract. B4.3.12 Paragraph B4.3.11 does not apply to embedded derivatives in contracts acquired in: (a) a business combination (as defined in Ind AS103 Business Combinations); (b) a combination of entities or businesses under common control as described in paragraphs B1-B4 of Ind AS103; or (c) the formation of a joint venture as defined in .....

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ificant to the entity s operations and demonstrable to external parties. Accordingly, a change in an entity s business model will occur only when an entity either begins or ceases to perform an activity that is significant to its operations; for example, when the entity has acquired, disposed of or terminated a business line. Examples of a change in business model include the following: (a) An entity has a portfolio of commercial loans that it holds to sell in the short term. The entity acquires .....

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ting its mortgage loan portfolio for sale. B4.4.2 A change in the objective of the entity s business model must be effected before the reclassification date. For example, if a financial services firm decides on 15 February to shut down its retail mortgage business and hence must reclassify all affected financial assets on 1 April (ie the first day of the entity s next reporting period), the entity must not accept new retail mortgage business or otherwise engage in activities consistent with its .....

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strument at initial recognition is normally the transaction price (ie the fair value of the consideration given or received, see also paragraph B5.1.2A and Ind AS113). However, if part of the consideration given or received is for something other than the financial instrument, an entity shall measure the fair value of the financial instrument. For example, the fair value of a long-term loan or receivable that carries no interest can be measured as the present value of all future cash receipts di .....

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ation, the entity recognises the loan at its fair value, ie net of the fee it receives. B5.1.2A The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price (ie the fair value of the consideration given or received, see also Ind AS113). If an entity determines that the fair value at initial recognition differs from the transaction price as mentioned in paragraph 5.1.1A, the entity shall account for that instrument at that date as follows: .....

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en the fair value at initial recognition and the transaction price. After initial recognition, the entity shall recognise that deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability. Subsequent measurement (Sections 5.2 and 5.3) B5.2.1 If a financial instrument that was previously recognised as a financial asset is measured at fair value through profit .....

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er paragraph 5.7.5 or 4.1.2A. An entity acquires a financial asset for ₹ 100 plus a purchase commission of ₹ 2. Initially, the entity recognises the asset at ₹ 102. The reporting period ends one day later, when the quoted market price of the asset is ₹ 100. If the asset were sold, a commission of ₹ 3 would be paid. On that date, the entity measures the asset at ₹ 100 (without regard to the possible commission on sale) and recognises a loss of ₹ 2 in othe .....

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acts on those investments B5.2.3 All investments in equity instruments and contracts on those instruments must be measured at fair value. However, in limited circumstances, cost may be an appropriate estimate of fair value. That may be the case if insufficient more recent information is available to measure fair value, or if there is a wide range of possible fair value measurements and cost represents the best estimate of fair value within that range. B5.2.4 Indicators that cost might not be rep .....

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e entities, or in the valuations implied by the overall market. (f) internal matters of the investee such as fraud, commercial disputes, litigation, changes in management or strategy. (g) evidence from external transactions in the investee s equity, either by the investee (such as a fresh issue of equity), or by transfers of equity instruments between third parties. B5.2.5 The list in paragraph B5.2.4 is not exhaustive. An entity shall use all information about the performance and operations of .....

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method, an entity identifies fees that are an integral part of the effective interest rate of a financial instrument. The description of fees for financial services may not be indicative of the nature and substance of the services provided. Fees that are an integral part of the effective interest rate of a financial instrument are treated as an adjustment to the effective interest rate, unless the financial instrument is measured at fair value, with the change in fair value being recognised in .....

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rity arrangements, negotiating the terms of the instrument, preparing and processing documents and closing the transaction. These fees are an integral part of generating an involvement with the resulting financial instrument. (b) commitment fees received by the entity to originate a loan when the loan commitment is not measured in accordance with paragraph 4.2.1(a) and it is probable that the entity will enter into a specific lending arrangement. These fees are regarded as compensation for an on .....

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ansaction costs relating to the right to provide services, such as investment management services. 15[B5.4.3 Fees that are not an integral part of the effective interest rate of a financial instrument and are accounted for in accordance with Ind AS 18 include: (a) fees charged for servicing a loan; (b) commitment fees to originate a loan when the loan commitment is not measured in accordance with paragraph 4.2.1(a) and it is unlikely that a specific lending arrangement will be entered into; and .....

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ument. However, a shorter period is used if this is the period to which the fees, points paid or received, transaction costs, premiums or discounts relate. This will be the case when the variable to which the fees, points paid or received, transaction costs, premiums or discounts relate is repriced to market rates before the expected maturity of the financial instrument. In such a case, the appropriate amortisation period is the period to the next such repricing date. For example, if a premium o .....

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t relates (ie interest rates) is reset to the market rates. If, however, the premium or discount results from a change in the credit spread over the floating rate specified in the financial instrument, or other variables that are not reset to the market rates, it is amortised over the expected life of the financial instrument. B5.4.5 For floating-rate financial assets and floating-rate financial liabilities, periodic reestimation of cash flows to reflect the movements in the market rates of inte .....

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ted credit losses), it shall adjust the gross carrying amount of the financial asset or amortised cost of a financial liability (or group of ) to reflect actual and revised estimated contractual cash flows. The entity recalculates the gross carrying amount of the financial asset or amortised cost of the financial liability as the present value of the estimated future contractual cash flows that are discounted at the financial instrument s original effective interest rate (or credit-adjusted effe .....

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cted credit losses in the estimated cash flows when calculating the credit-adjusted effective interest rate for financial assets that are considered to be purchased or originated creditimpaired at initial recognition. However, this does not mean that a credit-adjusted effective interest rate should be applied solely because the financial asset has high credit risk at initial recognition. Transaction costs B5.4.8 Transaction costs include fees and commission paid to agents (including employees ac .....

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al asset from the collateral. If the entity has no reasonable prospects of recovering any further cash flows from the financial asset, it should write off the remaining 70 per cent of the financial asset. Impairment (Section 5.5) Collective and individual assessment basis B5.5.1 In order to meet the objective of recognising lifetime expected credit losses for significant increases in credit risk since initial recognition, it may be necessary to perform the assessment of significant increases in .....

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e recognised before a financial instrument becomes past due. Typically, credit risk increases significantly before a financial instrument becomes past due or other lagging borrower-specific factors (for example, a modification or restructuring) are observed. Consequently when reasonable and supportable information that is more forward-looking than past due information is available without undue cost or effort, it must be used to assess changes in credit risk. B5.5.3 However, depending on the nat .....

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aptured before they become past due, a loss allowance based only on credit information at an individual financial instrument level would not faithfully represent the changes in credit risk since initial recognition. B5.5.4 In some circumstances an entity does not have reasonable and supportable information that is available without undue cost or effort to measure lifetime expected credit losses on an individual instrument basis. In that case, lifetime expected credit losses shall be recognised o .....

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ignificant increases in credit risk and recognising a loss allowance on a collective basis, an entity can group on the basis of shared credit risk characteristics with the objective of facilitating an analysis that is designed to enable significant increases in credit risk to be identified on a timely basis. The entity should not obscure this information by grouping with different risk characteristics. Examples of shared credit risk characteristics may include, but are not limited to, the: (a) i .....

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s been significant increases in credit risk since initial recognition. In order to meet this objective, if an entity is not able to group for which the credit risk is considered to have increased significantly since initial recognition based on shared credit risk characteristics, the entity should recognise lifetime expected credit losses on a portion of the financial assets for which credit risk is deemed to have increased significantly. The aggregation of to assess whether there are changes in .....

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of a financial asset being credit-impaired at the reporting date or an actual default occurring. Generally, there will be a significant increase in credit risk before a financial asset becomes credit-impaired or an actual default occurs. B5.5.8 For loan commitments, an entity considers changes in the risk of a default occurring on the loan to which a loan commitment relates. For financial guarantee contracts, an entity considers the changes in the risk that the specified debtor will default on .....

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isk is higher the longer the expected life of the instrument; for example, the risk of a default occurring on an AAA-rated bond with an expected life of 10 years is higher than that on an AAA-rated bond with an expected life of five years. B5.5.11 Because of the relationship between the expected life and the risk of a default occurring, the change in credit risk cannot be assessed simply by comparing the change in the absolute risk of a default occurring over time. For example, if the risk of a .....

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have significant payment obligations close to the maturity of the financial instrument the risk of a default occurring may not necessarily decrease as time passes. In such a case, an entity should also consider other qualitative factors that would demonstrate whether credit risk has increased significantly since initial recognition. B5.5.12 An entity may apply various approaches when assessing whether the credit risk on a financial instrument has increased significantly since initial recognitio .....

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essment: (a) the change in the risk of a default occurring since initial recognition; (b) the expected life of the financial instrument; and (c) reasonable and supportable information that is available without undue cost or effort that may affect credit risk. B5.5.13 The methods used to determine whether credit risk has increased significantly on a financial instrument since initial recognition should consider the characteristics of the financial instrument (or group of ) and the default pattern .....

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ncreased significantly since initial recognition, unless circumstances indicate that a lifetime assessment is necessary. B5.5.14 However, for some , or in some circumstances, it may not be appropriate to use changes in the risk of a default occurring over the next 12 months to determine whether lifetime expected credit losses should be recognised. For example, the change in the risk of a default occurring in the next 12 months may not be a suitable basis for determining whether credit risk has i .....

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nths. Determining whether credit risk has increased significantly since initial recognition B5.5.15 When determining whether the recognition of lifetime expected credit losses is required, an entity shall consider reasonable and supportable information that is available without undue cost or effort and that may affect the credit risk on a financial instrument in accordance with paragraph 5.5.17(c). An entity need not undertake an exhaustive search for information when determining whether credit .....

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assessed. However, some factors or indicators may not be identifiable on an individual financial instrument level. In such a case, the factors or indicators should be assessed for appropriate portfolios, groups of portfolios or portions of a portfolio of to determine whether the requirement in paragraph 5.5.3 for the recognition of lifetime expected credit losses has been met. B5.5.17 The following non-exhaustive list of information may be relevant in assessing changes in credit risk: (a) signif .....

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ted or issued at the reporting date (such as more stringent covenants, increased amounts of collateral or guarantees, or higher income coverage) because of changes in the credit risk of the financial instrument since initial recognition. (c) significant changes in external market indicators of credit risk for a particular financial instrument or similar with the same expected life. Changes in market indicators of credit risk include, but are not limited to: (i) the credit spread; (ii) the credit .....

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ring used to assess credit risk internally. Internal credit ratings and internal behavioural scoring are more reliable when they are mapped to external ratings or supported by default studies. (f) existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant change in the borrower s ability to meet its debt obligations, such as an actual or expected increase in interest rates or an actual or expected significant increase in unemployme .....

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meet its debt obligations. (h) significant increases in credit risk on other of the same borrower. (i) an actual or expected significant adverse change in the regulatory, economic, or technological environment of the borrower that results in a significant change in the borrower s ability to meet its debt obligations, such as a decline in the demand for the borrower s sales product because of a shift in technology. (j) significant changes in the value of the collateral supporting the obligation .....

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individual s parents) if the shareholder (or parents) have an incentive and financial ability to prevent default by capital or cash infusion. (l) significant changes, such as reductions in financial support from a parent entity or other affiliate or an actual or expected significant change in the quality of credit enhancement, that are expected to reduce the borrower s economic incentive to make scheduled contractual payments. Credit quality enhancements or support include the consideration of .....

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ractual framework of the instrument. (n) significant changes in the expected performance and behaviour of the borrower, including changes in the payment status of borrowers in the group (for example, an increase in the expected number or extent of delayed contractual payments or significant increases in the expected number of credit card borrowers who are expected to approach or exceed their credit limit or who are expected to be paying the minimum monthly amount). (o) changes in the entity s cr .....

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5.11. B5.5.18 In some cases, the qualitative and non-statistical quantitative information available may be sufficient to determine that a financial instrument has met the criterion for the recognition of a loss allowance at an amount equal to lifetime expected credit losses. That is, the information does not need to flow through a statistical model or credit ratings process in order to determine whether there has been a significant increase in the credit risk of the financial instrument. In othe .....

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days past due rebuttable presumption B5.5.19 The rebuttable presumption in paragraph 5.5.11 is not an absolute indicator that lifetime expected credit losses should be recognised, but is presumed to bethe latest point at which lifetime expected credit losses should be recognised even when using forward-looking information (including macroeconomic factors on a portfolio level). B5.5.20 An entity can rebut this presumption. However, it can do so only when it has reasonable and supportable informa .....

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s on which payments are more than 30 days past due, but that evidence does identify such a correlation when payments are more than 60 days past due. B5.5.21 An entity cannot align the timing of significant increases in credit risk and the recognition of lifetime expected credit losses to when a financial asset is regarded as credit-impaired or an entity s internal definition of default. that have low credit risk at the reporting date B5.5.22 The credit risk on a financial instrument is considere .....

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the value of collateral and the financial instrument without that collateral would not be considered low credit risk. are also not considered to have low credit risk simply because they have a lower risk of default than the entity s other or relative to the credit risk of the jurisdiction within which an entity operates. B5.5.23 To determine whether a financial instrument has low credit risk, an entity may use its internal credit risk ratings or other methodologies that are consistent with a glo .....

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al instrument. B5.5.24 Lifetime expected credit losses are not recognised on a financial instrument simply because it was considered to have low credit risk in the previous reporting period and is not considered to have low credit risk at the reporting date. In such a case, an entity shall determine whether there has been a significant increase in credit risk since initial recognition and thus whether lifetime expected credit losses are required to be recognised in accordance with paragraph 5.5. .....

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dingly the date of the modification shall be treated as the date of initial recognition of that financial asset when applying the impairment requirements to the modified financial asset. This typically means measuring the loss allowance at an amount equal to 12-month expected credit losses until the requirements for the recognition of lifetime expected credit losses in paragraph 5.5.3 are met. However, in some unusual circumstances following a modification that results in derecognition of the or .....

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ch is credit-impaired at initial recognition. B5.5.27 If the contractual cash flows on a financial asset have been renegotiated or otherwise modified, but the financial asset is not derecognised, that financial asset is not automatically considered to have lower credit risk. An entity shall assess whether there has been a significant increase in credit risk since initial recognition on the basis of all reasonable and supportable information that is available without undue cost or effort. This in .....

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iour over a period of time before the credit risk is considered to have decreased. For example, a history of missed or incomplete payments would not typically be erased by simply making one payment on time following a modification of the contractual terms. Measurement of expected credit losses Expected credit losses B5.5.28 Expected credit losses are a probability-weighted estimate of credit losses (ie the present value of all cash shortfalls) over the expected life of the financial instrument. .....

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under the contract; and (b) the cash flows that the entity expects to receive. B5.5.30 For undrawn loan commitments, a credit loss is the present value of the difference between: (a) the contractual cash flows that are due to the entity if the holder of the loan commitment draws down the loan; and (b) the cash flows that the entity expects to receive if the loan is drawn down. B5.5.31 An entity s estimate of expected credit losses on loan commitments shall be consistent with its expectations of .....

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e debtor in accordance with the terms of the instrument that is guaranteed. Accordingly, cash shortfalls are the expected payments to reimburse the holder for a credit loss that it incurs less any amounts that the entity expects to receive from the holder, the debtor or any other party. If the asset is fully guaranteed, the estimation of cash shortfalls for a financial guarantee contract would be consistent with the estimations of cash shortfalls for the asset subject to the guarantee. B5.5.33 F .....

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lease receivable, the cash flows used for determining the expected credit losses should be consistent with the cash flows used in measuring the lease receivable in accordance with Ind AS 17 Leases. B5.5.35 An entity may use practical expedients when measuring expected credit losses if they are consistent with the principles in paragraph 5.5.17. An example of a practical expedient is the calculation of the expected credit losses on trade receivables using a provision matrix. The entity would use .....

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an30 days but less than 90 days past due, 20 per cent if 90-180 days past due etc). Depending on the diversity of its customer base, the entity would use appropriate groupings if its historical credit loss experience shows significantly different loss patterns for different customer segments. Examples of criteria that might be used to group assets include geographical region, product type, customer rating, collateral or trade credit insurance and type of customer (such as wholesale or retail). D .....

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ancial instrument and consider qualitative indicators (for example, financial covenants) when appropriate. However, there is a rebuttable presumption that default does not occur later than when a financial asset is 90 days past due unless an entity has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate. The definition of default used for these purposes shall be applied consistently to all unless information becomes available that demon .....

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ion to extend credit. B5.5.39 However, in accordance with paragraph 5.5.20, some include both a loan and an undrawn commitment component and the entity s contractual ability to demand repayment and cancel the undrawn commitment does not limit the entity s exposure to credit losses to the contractual notice period. For example, revolving credit facilities, such as credit cards and overdraft facilities, can be contractually withdrawn by the lender with as little as one day s notice. However, in pr .....

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ucture and usually have a short contractual cancellation period (for example, one day); (b) the contractual ability to cancel the contract is not enforced in the normal day-to-day management of the financial instrument and the contract may only be cancelled when the entity becomes aware of an increase in credit risk at the facility level; and (c) the are managed on a collective basis. B5.5.40 When determining the period over which the entity is expected to be exposed to credit risk, but for whic .....

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nt has increased, such as the reduction or removal of undrawn limits. Probability-weighted outcome B5.5.41 The purpose of estimating expected credit losses is neither to estimate a worst-case scenario nor to estimate the best-case scenario. Instead, an estimate of expected credit losses shall always reflect the possibility that a credit loss occurs and the possibility that no credit loss occurs even if the most likely outcome is no credit loss. B5.5.42 Paragraph 5.5.17(a) requires the estimate o .....

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r situations, the identification of scenarios that specify the amount and timing of the cash flows for particular outcomes and the estimated probability of those outcomes will probably be needed. In those situations, the expected credit losses shall reflect at least two outcomes in accordance with paragraph 5.5.18. B5.5.43 For lifetime expected credit losses, an entity shall estimate the risk of a default occurring on the financial instrument during its expected life. 12-month expected credit lo .....

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he cash shortfalls that are predicted over the next 12 months. Time value of money B5.5.44 Expected credit losses shall be discounted to the reporting date, not to the expected default or some other date, using the effective interest rate determined at initial recognition or an approximation thereof. If a financial instrument has a variable interest rate, expected credit losses shall be discounted using the current effective interest rate determined in accordance with paragraph B5.4.5. B5.5.45 F .....

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hereof, that will be applied when recognising the financial asset resulting from the loan commitment. This is because for the purpose of applying the impairment requirements, a financial asset that is recognised following a draw down on a loan commitment shall be treated as a continuation of that commitment instead of as a new financial instrument. The expected credit losses on the financial asset shall therefore be measured considering the initial credit risk of the loan commitment from the dat .....

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the cash shortfalls being discounted. Reasonable and supportable information B5.5.49 For the purpose of this Standard, reasonable and supportable information is that which is reasonably available at the reporting date without undue cost or effort, including information about past events, current conditions and forecasts of future economic conditions. Information that is available for financial reporting purposes is considered to be available without undue cost or effort. B5.5.50 An entity is no .....

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that are far in the future-for such periods, an entity may extrapolate projections from available, detailed information. B5.5.51 An entity need not undertake an exhaustive search for information but shall consider all reasonable and supportable information that is available without undue cost or effort and that is relevant to the estimate of expected credit losses, including the effect of expected prepayments. The information used shall include factors that are specific to the borrower, general .....

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experience for the comparable financial instrument (or groups of ). B5.5.52 Historical information is an important anchor or base from which to measure expected credit losses. However, an entity shall adjust historical data, such as credit loss experience, on the basis of current observable data to reflect the effects of the current conditions and its forecasts of future conditions that did not affect the period on which the historical data is based, and to remove the effects of the conditions i .....

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ges in related observable data from period to period (such as changes in unemployment rates, property prices, commodity prices, payment status or other factors that are indicative of credit losses on the financial instrument or in the group of and in the magnitude of those changes). An entity shall regularly review the methodology and assumptions used for estimating expected credit losses to reduce any differences between estimates and actual credit loss experience. B5.5.53 When using historical .....

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ervable data that reflects current conditions. B5.5.54 Expected credit losses reflect an entity s own expectations of credit losses. However, when considering all reasonable and supportable information that is available without undue cost or effort in estimating expected credit losses, an entity should also consider observable market information about the credit risk of the particular financial instrument or similar . Collateral B5.5.55 For the purposes of measuring expected credit losses, the e .....

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stimate of expected cash flows considers the probability of a foreclosure and the cash flows that would result from it). Consequently, any cash flows that are expected from the realisation of the collateral beyond the contractual maturity of the contract should be included in this analysis. Any collateral obtained as a result of foreclosure is not recognised as an asset that is separate from the collateralised financial instrument unless it meets the relevant recognition criteria for an asset in .....

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gories also require that the impairment requirements are applied in the same way. Consequently, when an entity reclassifies a financial asset between the amortised cost measurement category and the fair value through other comprehensive income measurement category: (a) the recognition of interest revenue will not change and therefore the entity continues to use the same effective interest rate. (b) the measurement of expected credit losses will not change because both measurement categories appl .....

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tegory, the loss allowance would be derecognised (and thus would no longer be recognised as an adjustment to the gross carrying amount) but instead would be recognised as an accumulated impairment amount (of an equal amount) in other comprehensive income and would be disclosed from the reclassification date. B5.6.2 However, an entity is not required to separately recognise interest revenue or impairment gains or losses for a financial asset measured at fair value through profit or loss. Conseque .....

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ake an irrevocable election to present in other comprehensive income changes in the fair value of an investment in an equity instrument that is not held for trading. This election is made on an instrument-by instrument (ie share-by-share) basis. Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss. However, the entity may transfer the cumulative gain or loss within equity. Dividends on such investments are recognised in profit or loss in accorda .....

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collecting contractual cash flows and selling financial assets. This measurement category recognises information in profit or loss as if the financial asset is measured at amortised cost, while the financial asset is measured in the balance sheet at fair value. Gains or losses, other than those that are recognised in profit or loss in accordance with paragraphs 5.7.10-5.7.11, are recognised in other comprehensive income. When these financial assets are derecognised, cumulative gains or losses p .....

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monetary liabilities to be recognised in profit or loss. An exception is a monetary item that is designated as a hedging instrument in a cash flow hedge (see paragraph 6.5.11), a hedge of a net investment (see paragraph 6.5.13) or a fair value hedge of an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5 (see paragraph 6.5.8). B5.7.2A For the purpose of recognising foreign exchange gains and losses .....

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ble election to present in other comprehensive income subsequent changes in the fair value of particular investments in equity instruments. Such an investment is not a monetary item. Accordingly, the gain or loss that is presented in other comprehensive income in accordance with paragraph 5.7.5 includes any related foreign exchange component. B5.7.4 If there is a hedging relationship between a non-derivative monetary asset and a non-derivative monetary liability, changes in the foreign currency .....

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ity s credit risk in other comprehensive income would result in a greater mismatch in profit or loss than if those amounts were presented in profit or loss. B5.7.6 To make that determination, an entity must assess whether it expects that the effects of changes in the liability s credit risk will be offset in profit or loss by a change in the fair value of another financial instrument measured at fair value through profit or loss. Such an expectation must be based on an economic relationship betw .....

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r presenting in other comprehensive income the effects of changes in the liability s credit risk would create or enlarge an accounting mismatch in profit or loss. However, an entity may use different methodologies when there are different economic relationships between the characteristics of the liabilities designated as at fair value through profit or loss and the characteristics of the other . Ind AS107 requires an entity to provide qualitative disclosures in the notes to the financial stateme .....

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be subsequently transferred to profit or loss. However, the entity may transfer the cumulative gain or loss within equity. B5.7.10 The following example describes a situation in which an accounting mismatch would be created in profit or loss if the effects of changes in the credit risk of the liability were presented in other comprehensive income. A mortgage bank provides loans to customers and funds those loans by selling bonds with matching characteristics (eg amount outstanding, repayment pro .....

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he change in the fair value of the asset reflects the mortgage customer s contractual right to prepay the mortgage loan by buying the underlying bond at fair value (which, in this example, has decreased) and delivering the bond to the mortgage bank. Consequently, the effects of changes in the credit risk of the liability (the bond) will be offset in profit or loss by a corresponding change in the fair value of a financial asset (the loan). If the effects of changes in the liability s credit risk .....

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the mortgage customer s contractual right to prepay the loan by buying the bond at fair value and delivering the bond to the mortgage bank). However, an accounting mismatch may also occur in the absence of a contractual linkage. B5.7.12 For the purposes of applying the requirements in paragraphs 5.7.7 and 5.7.8, an accounting mismatch is not caused solely by the measurement method that an entity uses to determine the effects of changes in a liability s credit risk. An accounting mismatch in pro .....

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e changes in a liability s credit risk from changes in liquidity risk. If the entity presents the combined effect of both factors in other comprehensive income, a mismatch may occur because changes in liquidity risk may be included in the fair value measurement of the entity s financial assets and the entire fair value change of those assets is presented in profit or loss. However, such a mismatch is caused by measurement imprecision, not the offsetting relationship described in paragraph B5.7.6 .....

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ness of the issuer. For example, if an entity issues a collateralised liability and a non-collateralised liability that are otherwise identical, the credit risk of those two liabilities will be different, even though they are issued by the same entity. The credit risk on the collateralised liability will be less than the credit risk of the non-collateralised liability. The credit risk for a collateralised liability may be close to zero. B5.7.14 For the purposes of applying the requirement in par .....

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he basis of the performance of specified assets. The effect of that unit-linking feature on the fair value of the liability is asset-specific performance risk, not credit risk. (b) a liability issued by a structured entity with the following characteristics. The entity is legally isolated so the assets in the entity are ring-fenced solely for the benefit of its investors, even in the event of bankruptcy. The entity enters into no other transactions and the assets in the entity cannot be hypothec .....

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of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability either: (a) as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk (see paragraphs B5.7.17 and B5.7.18); or (b) using an alternative method the entity believes more faithfully represents the amount of change in the liability s fair value that is attributable to changes in its credit risk. B5.7.17 Cha .....

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urn at the start of the period using the fair value of the liability and the liability s contractual cash flows at the start of the period. It deducts from this rate of return the observed (benchmark) interest rate at the start of the period, to arrive at an instrument-specific component of the internal rate of return. (b) Next, the entity calculates the present value of the cash flows associated with the liability using the liability s contractual cash flows at the end of the period and a disco .....

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paragraph 5.7.7(a). B5.7.19 The example in paragraph B5.7.18 assumes that changes in fair value arising from factors other than changes in the instrument s credit risk or changes in observed (benchmark) interest rates are not significant. This method would not be appropriate if changes in fair value arising from other factors are significant. In those cases, an entity is required to use an alternative method that more faithfully measures the effects of changes in the liability s credit risk (see .....

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f relevant observable inputs and minimum use of unobservable inputs. Hedge accounting (Chapter 6) Hedging instruments (Section 6.2) Qualifying instruments B6.2.1 Derivatives that are embedded in hybrid contracts, but that are not separately accounted for, cannot be designated as separate hedging instruments. B6.2.2 An entity s own equity instruments are not financial assets or financial liabilities of the entity and therefore cannot be designated as hedging instruments. B6.2.3 For hedges of fore .....

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is embedded in another financial instrument (for example, a written call option used to hedge a callable liability). Designation of hedging instruments B6.2.5 For hedges other than hedges of foreign currency risk, when an entity designates a non-derivative financial asset or a non-derivative financial liability measured at fair value through profit or loss as a hedging instrument, it may only designate the non-derivative financial instrument in its entirety or a proportion of it. B6.2.6 A single .....

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be specifically identified and measured. Those other risks are general business risks. B6.3.2 An equity method investment cannot be a hedged item in a fair value hedge. This is because the equity method recognises in profit or loss the investor s share of the investee s profit or loss, instead of changes in the investment s fair value. For a similar reason, an investment in a consolidated subsidiary cannot be a hedged item in a fair value hedge. This is because consolidation recognises in profit .....

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regated exposure combines an exposure with a derivative so that it creates a different aggregated exposure that is managed as one exposure for a particular risk (or risks). In that case, the entity may designate the hedged item on the basis of the aggregated exposure. For example: (a) an entity may hedge a given quantity of highly probable coffee purchases in 15 months time against price risk (based on US dollars) using a 15-month futures contract for coffee. The highly probable coffee purchases .....

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ing rate exposure in its functional currency for the remaining term to maturity. At the end of each of the twoyear intervals (ie on a two-year rolling basis) the entity fixes the next two years interest rate exposure (if the interest level is such that the entity wants to fix interest rates). In such a situation an entity may enter into a 10-year fixed-to-floating cross-currency interest rate swap that swaps the fixed-rate foreign currency debt into a variable-rate functional currency exposure. .....

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he items that constitute the aggregated exposure for the purpose of assessing hedge effectiveness and measuring hedge ineffectiveness. However, the items that constitute the aggregated exposure remain accounted for separately. This means that, for example: (a) derivatives that are part of an aggregated exposure are recognised as separate assets or liabilities measured at fair value; and (b) if a hedging relationship is designated between the items that constitute the aggregated exposure, the way .....

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the aggregated exposure. Otherwise, the aggregated exposure shall include a derivative, either in its entirety or a proportion of it. B6.3.5 Paragraph 6.3.6 states that in consolidated financial statements the foreign currency risk of a highly probable forecast intragroup transaction may qualify as a hedged item in a cash flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and that the foreign cur .....

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en the foreign currency risk of a forecast intragroup transactionwill affect consolidated profit or loss, the intragroup transaction can qualify as a hedged item. An example is forecast sales or purchases of inventories between members of the same group if there is an onward sale of the inventory to a party external to the group. Similarly, a forecast intragroup sale of plant and equipment from the group entity that manufactured it to a group entity that will use the plant and equipment in its o .....

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, other comprehensive income in accordance with paragraph 6.5.11. The relevant period or periods during which the foreign currency risk of the hedged transaction affects profit or loss is when it affects consolidated profit or loss. Designation of hedged items B6.3.7 A component is a hedged item that is less than the entire item. Consequently, a component reflects only some of the risks of the item of which it is a part or reflects the risks only to some extent (for example, when designating a p .....

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lar market structure to which the risk or risks relate and in which the hedging activity takes place. Such a determination requires an evaluation of the relevant facts and circumstances, which differ by risk and market. B6.3.10 When designating risk components as hedged items, an entity considers whether the risk components are explicitly specified in a contract (contractually specified risk components) or whether they are implicit in the fair value or the cash flows of an item of which they are .....

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ula that references commodities and other factors (for example, gas oil, fuel oil and other components such as transport charges). Entity A hedges the gas oil component in that supply contract using a gas oil forward contract. Because the gas oil component is specified by the terms and conditions of the supply contract it is a contractually specified risk component. Hence, because of the pricing formula, Entity A concludes that the gas oil price exposure is separately identifiable. At the same t .....

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ivery date approaches). Entity B uses two different types of contracts to manage its coffee price risk: (i) exchange-traded coffee futures contracts; and (ii) coffee supply contracts for Arabica coffee from Colombia delivered to a specific manufacturing site. These contracts price a tonne of coffee based on the exchange-traded coffee futures contract price plus a fixed price differential plus a variable logistics services charge using a pricing formula. The coffee supply contract is an executory .....

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e differential cannot be fixed. Entity B uses exchange-traded coffee futures contracts to hedge the benchmark quality component of its coffee price risk for deliveries that relate to the current harvest as well as the next harvest. Entity B determines that it is exposed to three different risks: coffee price risk reflecting the benchmark quality, coffee price risk reflecting the difference (spread) between the price for the benchmark quality coffee and the particular Arabica coffee from Colombia .....

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vest, Entity B has not yet entered into any coffee supply contracts (ie those deliveries are forecast transactions). Hence, the coffee price risk reflecting the benchmark quality is a non-contractually specified risk component. Entity B s analysis of the market structure takes into account how eventual deliveries of the particular coffee that it receives are priced. Hence, on the basis of this analysis of the market structure, Entity Bconcludes that the forecast transactions also involve the cof .....

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before delivery and increases the volume that it hedges over time. Entity C hedges this exposure using different types of contracts depending on the time horizon of the hedge, which affects the market liquidity of the derivatives. For the longer time horizons (12-24 months) Entity C uses crude oil contracts because only these have sufficient market liquidity. For time horizons of 6-12 months Entity C uses gas oil derivatives because they are sufficiently liquid. For time horizons up to six mont .....

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enerally. This is also reflected in the types of derivative for the crude oil and refined oil products markets of the environment in which Entity C operates, such as: ● the benchmark crude oil futures contract, which is for Brent crude oil; ● the benchmark gas oil futures contract, which is used as the pricing reference for distillates-for example, jet fuel spread derivatives cover the price differential between jet fuel and that benchmark gas oil; and ● the benchmark gas oil c .....

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t crude oil and a gas oil price risk component, even though crude oil and gas oil are not specified in any contractual arrangement. Entity C concludes that these two risk components are separately identifiable and reliably measurable even though they are not contractually specified. Consequently, Entity Cmay designate hedging relationships for forecast jet fuel purchases on a risk components basis (for crude oil or gas oil). This analysis also means that if, for example, Entity C used crude oil .....

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Interest rate swaps are frequently used to manage interest rate risk on the basis of that benchmark rate, irrespective of the spread of debt instruments to that benchmark rate. The price of fixed rate debt instruments varies directly in response to changes in the benchmark rate as they happen. Entity D concludes that the benchmark rate is a component that can be separately identified and reliably measured. Consequently, Entity D may designate hedging relationships for the fixed rate debt instrum .....

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nate only changes in the cash flows or fair value of a hedged item above or below a specified price or other variable (a one-sided risk ). The intrinsic value of a purchased option hedging instrument (assuming that it has the same principal terms as the designated risk), but not its time value, reflects a one-sided risk in a hedged item. For example, an entity can designate the variability of future cash flow outcomes resulting from a price increase of a forecast commodity purchase. In such a si .....

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a financial instrument. However, in limited cases, it is possible to identify a risk component for inflation risk that is separately identifiable and reliably measurable because of the particular circumstances of the inflation environment and the relevant debt market. B6.3.14 For example, an entity issues debt in an environment in which inflation-linked bonds have a volume and term structure that results in a sufficiently liquid market that allows constructing a term structure of zero-coupon re .....

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ately identifiable and reliably measurable. For example, an entity issues only nominal interest rate debt in an environment with a market for inflation-linked bonds that is not sufficiently liquid to allow a term structure of zero-coupon real interest rates to be constructed. In this case the analysis of the market structure and of the facts and circumstances does not support the entity concluding that inflation is a relevant factor that is separately considered by the debt markets. Hence, the e .....

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erms and conditions onto the nominal interest rate debt. B6.3.15 A contractually specified inflation risk component of the cash flows of a recognised inflation-linked bond (assuming that there is no requirement to account for an embedded derivative separately) is separately identifiable and reliably measurable, as long as other cash flows of the instrument are not affected by the inflation risk component. Components of a nominal amount B6.3.16 There are two types of components of nominal amounts .....

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, or from a defined nominal amount. Examples include: (a) part of a monetary transaction volume, for example, the next FC10 cash flows from sales denominated in a foreign currency after the first FC20 in March 201X;3 (b) a part of a physical volume, for example, the bottom layer, measuring 5 million cubic metres, of the natural gas stored in location XYZ; (c) a part of a physical or other transaction volume, for example, the first 100 barrels of the oil purchases in June 201X or the first 100 MW .....

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value hedge, an entity shall specify it from a defined nominal amount. To comply with the requirements for qualifying fair value hedges, an entity shall remeasure the hedged item for fair value changes (ieremeasure the item for fair value changes attributable to the hedged risk). The fair value hedge adjustment must be recognised in profit or loss no later than when the item is derecognised. Consequently, it is necessary to track the item to which the fair value hedge adjustment relates. For a l .....

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cted by changes in the hedged risk, unless the designated layer includes the effect of the related prepayment option when determining the change in the fair value of the hedged item. Relationship between components and the total cash flows of an item B6.3.21 If a component of the cash flows of a financial or a non-financial item is designated as the hedged item, that component must be less than or equal to the total cash flows of the entire item. However, all of the cash flows of the entire item .....

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the case of a fixed-rate financial liability whose effective interest rate is (for example) 100 basis points below LIBOR, an entity can designate as the hedged item the change in the value of that entire liability (ie principal plus interest at LIBOR minus 100 basis points) that is attributable to changes in LIBOR. If a fixed-rate financial instrument is hedged some time after its origination and interest rates have changed in the meantime, the entity can designate a risk component equal to a be .....

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ome time later when LIBOR has increased to 8 per cent and the fair value of the asset has decreased to ₹ 90. The entity calculates that if it had purchased the asset on the date it first designates the related LIBOR interest rate risk as the hedged item, the effective yield of the asset based on its then fair value of ₹ 90 would have been 9.5 per cent. Because LIBOR is less than this effective yield, the entity can designate a LIBOR component of 8 per cent that consists partly of the .....

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s in LIBOR. Hence, as long as the three-month LIBOR forward curve for the remaining life of that liability does not fall below 20 basis points, the hedged item has the same cash flow variability as a liability that bears interest at three-month LIBOR with a zero or positive spread. However, if the three-month LIBOR forward curve for the remaining life of that liability (or a part of it) falls below 20 basis points, the hedged item has a lower cash flow variability than a liability that bears int .....

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the sales contract that is attributable to the change in the benchmark crude oil price. However, the entity cannot designate a component that is equal to the full change in the benchmark crude oil price. Hence, as long as the forward price (for each delivery) does not fall below ₹ 25, the hedged item has the same cash flow variability as a crude oil sale at the benchmark crude oil price (or with a positive spread). However, if the forward price for any delivery falls below ₹ 25, the .....

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of an item is the one that is attributable to the hedged risk). Hedge ineffectiveness is the extent to which the changes in the fair value or the cash flows of the hedging instrument are greater or less than those on the hedged item. B6.4.2 When designating a hedging relationship and on an ongoing basis, an entity shall analyse the sources of hedge ineffectiveness that are expected to affect thehedging relationship during its term. This analysis (including any updates in accordance with paragrap .....

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c relationship between the hedged item and the hedging instrument B6.4.4 The requirement that an economic relationship exists means that the hedging instrument and the hedged item have values that generally move in the opposite direction because of the same risk, which is the hedged risk. Hence, there must be an expectation that the value of the hedging instrument and the value of the hedged item will systematically change in response to movements in either the same underlying or underlyings tha .....

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l consistent with an economic relationship between the hedging instrument and the hedged item if the values of the hedging instrument and the hedged item are still expected to typically move in the opposite direction when the underlyings move. B6.4.6 The assessment of whether an economic relationship exists includes an analysis of the possible behaviour of the hedging relationship during its term to ascertain whether it can be expected to meet the risk management objective. The mere existence of .....

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th the hedging instrument and the hedged item. The effect of credit risk means that even if there is an economic relationship between the hedging instrument and the hedged item, the level of offset might become erratic. This can result from a change in the credit risk of either the hedging instrument or the hedged item that is of such a magnitude that the credit risk dominates the value changes that result from the economic relationship (ie the effect of the changes in the underlyings). A level .....

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s does not create dominance. B6.4.8 An example of credit risk dominating a hedging relationship is when an entity hedges an exposure to commodity price risk using an uncollateralised derivative. If the counterparty to that derivative experiences a severe deterioration in its credit standing, the effect of the changes in the counterparty s credit standing might outweigh the effect of changes in the commodity price on the fair value of the hedging instrument, whereas changes in the value of the he .....

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designate the hedging relationship using a hedge ratio that is the same as that resulting from 85 per cent of the exposure and the quantity of the hedging instrument that the entity actually uses to hedge those 85 per cent. Similarly, if, for example, an entity hedges an exposure using a nominal amount of 40 units of a financial instrument, it shall designate the hedging relationship using a hedge ratio that is the same as that resulting from that quantity of 40 units (ie the entity must not us .....

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uld in turn create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting. Hence, for the purpose of designating a hedging relationship, an entity must adjust the hedge ratio that results from the quantities of the hedged item and the hedging instrument that the entity actually uses if that is needed to avoid such an imbalance. B6.4.11 Examples of relevant considerations in asses .....

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nd the hedging instrument, even though that creates hedge ineffectiveness. For example, an entity enters into and designates a quantity of the hedging instrument that is not the quantity that it determined as the best hedge of the hedged item because the standard volume of the hedging instruments does not allow it to enter into that exact quantity of hedging instrument (a lot size issue ). An example is an entity that hedges 100 tonnes of coffee purchases with standard coffee futures contracts t .....

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sult in an accounting outcome that is inconsistent with the purpose of hedge accounting. Frequency of assessing whether the hedge effectiveness requirements are met B6.4.12 An entity shall assess at the inception of the hedging relationship, and on an ongoing basis, whether a hedging relationship meets the hedge effectiveness requirements. At a minimum, an entity shall perform the ongoing assessment at each reporting date or upon a significant change in the circumstances affecting the hedge effe .....

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ge ineffectiveness. Depending on those factors, the method can be a qualitative or a quantitative assessment. B6.4.14 For example, when the critical terms (such as the nominal amount, maturity and underlying) of the hedging instrument and the hedged item match or are closely aligned, it might be possible for an entity to conclude on the basis of a qualitative assessment of those critical terms that the hedging instrument and the hedged item have values that will generally move in the opposite di .....

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capture. B6.4.16 Conversely, if the critical terms of the hedging instrument and the hedged item are not closely aligned, there is an increased level of uncertainty about the extent of offset. Consequently, the hedge effectiveness during the term of the hedging relationship is more difficult to predict. In such a situation it might only be possible for an entity to conclude on the basis of a quantitative assessment that an economic relationship exists between the hedged item and the hedging ins .....

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ionship meets the hedge effectiveness requirements in order to ensure that the relevant characteristics of the hedging relationship, including the sources of hedge ineffectiveness, are still captured. B6.4.18 An entity s risk management is the main source of information to perform the assessment of whether a hedging relationship meets the hedge effectiveness requirements. This means that the management information (or analysis) used for decision-making purposes can be used as a basis for assessi .....

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n the fair value of a fixed-rate debt instrument arising from changes in interest rates. Such a hedge could be entered into by the issuer or by the holder. B6.5.2 The purpose of a cash flow hedge is to defer the gain or loss on the hedging instrument to a period or periods in which the hedged expected future cash flows affect profit or loss. An example of a cash flow hedge is the use of a swap to change floating rate debt (whether measured at amortised cost or fair value) to fixed-rate debt (ie .....

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offset. For the same reason, a forecast purchase of an equity instrument that, once acquired, will be accounted for at fair value with changes in fair value presented in other comprehensive income also cannot be the hedged item in a cash flow hedge. B6.5.3 A hedge of a firm commitment (for example, a hedge of the change in fuel price relating to an unrecognised contractual commitment by an electric utility to purchase fuel at a fixed price) is a hedge of an exposure to a change in fair value. Ac .....

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s the effect of the time value of money. B6.5.5 To calculate the change in the value of the hedged item for the purpose of measuring hedge ineffectiveness, an entity may use a derivative that would have terms that match the critical terms of the hedged item (this is commonly referred to as a hypothetical derivative ), and, for example for a hedge of a forecast transaction, would be calibrated using the hedged price (or rate) level. For example, if the hedge was for a two-sided risk at the curren .....

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l is above (or, for a hedge of a long position, below) the current market level. Using a hypothetical derivative is one possible way of calculating the change in the value of the hedged item. The hypothetical derivative replicates the hedged item and hence results in the same outcome as if that change in value was determined by a different approach. Hence, using a hypothetical derivative is not a method in its own right but a mathematical expedient that can only be used to calculate the value of .....

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ot simply impute a charge for exchanging different currencies even though actual derivatives under which different currencies are exchanged might include such a charge (for example, cross-currency interest rate swaps). B6.5.6 The change in the value of the hedged item determined using a hypothetical derivative may also be used for the purpose of assessing whether a hedging relationship meets the hedge effectiveness requirements. Rebalancing the hedging relationship and changes to the hedge ratio .....

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ing relationship in accordance with paragraphs B6.5.9-B6.5.21. On rebalancing, the hedge ineffectiveness of the hedging relationship is determined and recognised immediately before adjusting the hedging relationship. B6.5.9 Adjusting the hedge ratio allows an entity to respond to changes in the relationship between the hedging instrument and the hedged item that arise from their underlyings or risk variables. For example, a hedging relationship in which the hedging instrument and the hedged item .....

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using a currency derivative that references Foreign Currency B and Foreign Currencies A and B are pegged (ie their exchange rate is maintained within a band or at an exchange rate set by a central bank or other authority). If the exchange rate between Foreign Currency A and Foreign Currency B were changed (ie a new band or rate was set), rebalancing the hedging relationship to reflect the new exchange rate would ensure that the hedging relationship would continue to meet the hedge effectiveness .....

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ratio. B6.5.11 Not every change in the extent of offset between the changes in the fair value of the hedging instrument and the hedged item s fair value or cash flows constitutes a change in the relationship between the hedging instrument and the hedged item. An entity analyses the sources of hedge ineffectiveness that it expected to affect the hedging relationship during its term and evaluates whether changes in the extent of offset are: (a) fluctuations around the hedge ratio, which remains va .....

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at would create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting. Hence, this evaluation requires judgement. B6.5.12 Fluctuation around a constant hedge ratio (and hence the related hedge ineffectiveness) cannot be reduced by adjusting the hedge ratio in response to each particular outcome. Hence, in such circumstances, the change in the extent of offset is a matter of meas .....

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n such circumstances, an entity must evaluate whether the hedging relationship reflects an imbalance between the weightings of the hedged item and the hedging instrument that would create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting. If the hedge ratio is adjusted, it also affects the measurement and recognition of hedge ineffectiveness because, on rebalancing, the hedg .....

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ments in the quantities of the hedging instrument and the hedged item that it actually uses. However, an entity must adjust the hedge ratio that results from the quantities of the hedged item or the hedging instrument that it actually uses if: (a) the hedge ratio that results from changes to the quantities of the hedging instrument or the hedged item that the entity actually uses would reflect an imbalance that would create hedge ineffectiveness that could result in an accounting outcome that wo .....

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does not apply if the risk management objective for a hedging relationship has changed. Instead, hedge accounting for that hedging relationship shall be discontinued (despite that an entity might designate a newhedging relationship that involves the hedging instrument or hedged item of the previous hedging relationship as described in paragraph B6.5.28). B6.5.16 If a hedging relationship is rebalanced, the adjustment to the hedge ratio can be effected in different ways: (a) the weighting of the .....

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f the hedging relationship. Hence, decreases in volumes do not necessarily mean that the items or transactions no longer exist, or are no longer expected to occur, but that they are not part of the hedging relationship. For example, decreasing the volume of the hedging instrument can result in the entity retaining a derivative, but only part of it might remain a hedging instrument of the hedging relationship. This could occur if the rebalancing could be effected only by reducing the volume of th .....

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nt of the changes in the value of the hedged item related to the previously designated volume also remains unaffected. However, from the date of rebalancing, the changes in the value of the hedged item also include the change in the value of the additional volume of the hedged item. These changes are measured starting from, and by reference to, the date of rebalancing instead of the date on which the hedging relationship was designated. For example, if an entity originally hedged a volume of 100 .....

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easurement of the changes in the fair value of the hedging instrument related to the volume that continues to be designated also remains unaffected. However, from the date of rebalancing, the volume by which the hedging instrument was decreased is no longer part of the hedging relationship. For example, if an entity originally hedged the price risk of a commodity using a derivative volume of 100 tonnes as the hedging instrument and reduces thatvolume by 10 tonnes on rebalancing, a nominal amount .....

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naffected. However, from the date of rebalancing, the changes in the fair value of the hedging instrument also include the changes in the value of the additional volume of the hedging instrument. The changes are measured starting from, and by reference to, the date of rebalancing instead of the date on which the hedging relationship was designated. For example, if an entity originally hedged the price risk of a commodity using a derivative volume of 100 tonnes as the hedging instrument and added .....

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erivatives into hedging relationships after their initial recognition). B6.5.20 Adjusting the hedge ratio by decreasing the volume of the hedged item does not affect how the changes in the fair value of the hedging instrument are measured. The measurement of the changes in the value of the hedged item related to the volume that continues to be designated also remains unaffected. However, from the date of rebalancing, the volume by which the hedged item was decreased is no longer part of the hedg .....

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B6.5.21 When rebalancing a hedging relationship, an entity shall update its analysis of the sources of hedge ineffectiveness that are expected to affect the hedging relationship during its (remaining) term (see paragraph B6.4.2). The documentation of the hedging relationship shall be updated accordingly. Discontinuation of hedge accounting B6.5.22 Discontinuation of hedge accounting applies prospectively from the date on which the qualifying criteria are no longer met. B6.5.23 An entity shall no .....

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ectives. The risk management strategy is established at the highest level at which an entity determines how it manages its risk. Risk management strategies typically identify the risks to which the entity is exposed and set out how the entity responds to them. A risk management strategy is typically in place for a longer period and may include some flexibility to react to changes in circumstances that occur while that strategy is in place (for example, different interest rate or commodity price .....

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management strategy can involve many different hedging relationships whose risk management objectives relate to executing that overall risk management strategy. For example: (a) an entity has a strategy of managing its interest rate exposure on debt funding that sets ranges for the overall entity for the mix between variablerate and fixed-rate funding. The strategy is to maintain between 20 per cent and 40 per cent of the debt at fixed rates. The entity decides from time to time how to execute .....

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ent, which the entity does by issuing a fixed-rate bond. In the light of the low interest rates, the entity decides to set its fixed interest-rate exposure to 40 per cent of the total debt by reducing by ₹ 20 the extent to which it previously hedged its variable-rate exposure, resulting in ₹ 60 of fixed-rate exposure. In this situation the risk management strategy itself remains unchanged. However, in contrast the entity s execution of that strategy has changed and this means that, f .....

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t become part of a trading book. Conversely, if an entity instead swapped a part of its new fixed-rate debt into a variable-rate exposure, hedge accounting would have to be continued for its previously hedged variable-rate exposure. (b) some exposures result from positions that frequently change, for example, the interest rate risk of an open portfolio of debt instruments. The addition of new debt instruments and thederecognition of debt instruments continuously change that exposure (ie it is di .....

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applied to other time buckets or maturity periods. After a short period of time, the entity discontinues all, some or a part of the previously designated hedging relationships for maturity periods and designates new hedging relationships for maturity periods on the basis of their size and the hedging instruments that exist at that time. The discontinuation of hedge accounting in this situation reflects that those hedging relationships are established in such a way that the entity looks at a new .....

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could, for example, affect all or only some hedging relationships of a maturity period, or only part of a hedging relationship. (c) an entity has a risk management strategy whereby it manages the foreign currency risk of forecast sales and the resulting receivables. Within that strategy the entity manages the foreign currency risk as a particular hedging relationship only up to the point of the recognition of the receivable. Thereafter, the entity no longer manages the foreign currency risk on t .....

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tionship is designated for the period up to the payment date, it must be discontinued when the receivable is recognised, because the risk management objective of the original hedging relationship no longer applies. The foreign currency risk is now managed within the same strategy but on a different basis. Conversely, if an entity had a different risk management objective and managed the foreign currency risk as one continuous hedging relationship specifically for that forecast sales amount and t .....

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ip no longer meets the risk management objective on the basis of which it qualified for hedge accounting (ie the entity no longer pursues that risk management objective); (b) the hedging instrument or instruments have been sold or terminated (in relation to the entire volume that was part of the hedging relationship); or (c) there is no longer an economic relationship between the hedged item and the hedging instrument or the effect of credit risk starts to dominate the value changes that result .....

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e volume of the hedged item that is no longer part of the hedging relationship; or (b) when the occurrence of some of the volume of the hedged item that is (or is a component of) a forecast transaction is no longer highly probable, hedge accounting is discontinued only for the volume of the hedged item whose occurrence is no longer highly probable. However, if an entity has a history of having designated hedges of forecast transactions and having subsequently determined that the forecast transac .....

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accounting was (in part or in its entirety) discontinued. This does not constitute a continuation of a hedging relationship but is a restart. For example: (a) a hedging instrument experiences such a severe credit deterioration that the entity replaces it with a new hedging instrument. This means that the original hedging relationship failed to achieve the risk management objective and is hence discontinued in its entirety. The new hedging instrument is designated as the hedge of the same exposu .....

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her hedging relationship (for example, when adjusting the hedge ratio on rebalancing by increasing the volume of the hedging instrument or when designating a whole new hedging relationship). Accounting for the time value of options B6.5.29 An option can be considered as being related to a time period because its time value represents a charge for providing protection for the option holder over a period of time. However, the relevant aspect for the purpose of assessing whether an option hedges a .....

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e time value has the character of costs of that transaction. An example is when the time value of an option relates to a hedged item that results in the recognition of an item whose initial measurement includes transaction costs (for example, an entity hedges a commodity purchase, whether it is a forecast transaction or a firm commitment, against the commodity price risk and includes the transaction costs in the initial measurement of the inventory). As a consequence of including the time value .....

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ates to a time-period related hedged item if the nature of the hedged item is such that the time value has the character of a cost for obtaining protection against a risk over a particular period of time (but the hedged item does not result in a transaction that involves the notion of a transaction cost in accordance with (a)). For example, if commodity inventory is hedged against a fairvalue decrease for six months using a commodity option with a corresponding life, the time value of the option .....

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an option that hedges a time-period related hedged item is amortised, which is consistent with the period over which the option s intrinsic value can affect profit or loss in accordance with hedge accounting. For example, if an interest rate option (a cap) is used to provide protection against increases in the interest expense on a floating rate bond, the time value of that cap is amortised to profit or loss over the same period over which any intrinsic value of the cap would affect profit or lo .....

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n accordance with paragraph 6.5.15 also applies to a combination of a purchased and a written option (one being a put option and one being a call option) that at the date of designation as a hedging instrument has a net nil time value (commonly referred to as a zero-cost collar ). In that case, an entity shall recognise any changes in time value in other comprehensive income, even though the cumulative change in time value over the total period of the hedging relationship is nil. Hence, if the t .....

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edged item (aligned time value). The time value of an option relates to the hedged item if the critical terms of the option (such as the nominal amount, life and underlying) are aligned with the hedged item. Hence, if the critical terms of the option and the hedged item are not fully aligned, an entity shall determine the aligned time value, ie how much of the time value included in the premium (actual time value) relates to the hedged item (and therefore should be treated in accordance with par .....

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i) determine the amount that is accumulated in a separate component of equity on the basis of the aligned time value; and (ii) account for the differences in the fair value changes between the two time values in profit or loss. (b) if, at inception of the hedging relationship, the actual time value is lower than the aligned time value, the entity shall determine the amount that is accumulated in a separate component of equity by reference to the lower of the cumulative change in fair value of: ( .....

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of assessing whether a hedging instrument hedges a transaction or time-period related hedged item are the characteristics of that hedged item, including how and when it affects profit or loss. Hence, an entity shall assess the type of hedged item (see paragraphs 6.5.16 and 6.5.15(a)) on the basis of the nature of the hedged item (regardless of whether the hedging relationship is a cash flow hedge or a fair value hedge): (a) the forward element of a forward contract relates to a transaction relat .....

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nsaction costs in the initial measurement of the inventory). As a consequence of including the forward element in the initial measurement of the particular hedged item, the forward element affects profit or loss at the same time as that hedged item. Similarly, an entity that hedges a sale of a commodity denominated in a foreign currency against foreign currency risk, whether it is a forecast transaction or a firm commitment, would include the forward element as part of the cost that is related t .....

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ordance with (a)). For example, if commodity inventory is hedged against changes in fair value for six months using a commodity forward contract with a corresponding life, the forward element of the forward contract would be allocated to profit or loss (ie amortised on a systematic and rational basis) over that six-month period. Another example is a hedge of a net investment in a foreign operation that is hedged for 18 months using a foreign-exchange forward contract, which would result in alloc .....

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onth period that starts in six months time, the forward element is amortised during the period that spans months seven to nine. B6.5.36 The accounting for the forward element of a forward contract in accordance with paragraph 6.5.16 also applies if, at the date on which the forward contract is designated as a hedging instrument, the forward element is nil. In that case, an entity shall recognise any fair value changes attributable to the forward element in other comprehensive income, even though .....

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related to the forward element is nil. B6.5.37 The accounting for the forward element of forward contracts in accordance with paragraph 6.5.16 applies only to the extent that the forward element relates to the hedged item (aligned forward element). The forward element of a forward contract relates to the hedged item if the critical terms of the forward contract (such as the nominal amount, life and underlying) are aligned with the hedged item. Hence, if the critical terms of the forward contrac .....

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igned forward element differ, an entity shall determine the amount that is accumulated in a separate component of equity in accordance with paragraph 6.5.16 as follows: (a) if, at inception of the hedging relationship, the absolute amount of the actual forward element is higher than that of the aligned forward element the entity shall: (i) determine the amount that is accumulated in a separate component of equity on the basis of the aligned forward element; and (ii) account for the differences i .....

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ent. Any remainder of the change in fair value of the actual forward element shall be recognised in profit or loss. B6.5.39 When an entity separates the foreign currency basis spread from a financial instrument and excludes it from the designation of that financial instrument as the hedging instrument (see paragraph 6.2.4(b)), the application guidance in paragraphs B6.5.34-B6.5.38 applies to the foreign currency basis spread in the same manner as it is applied to the forward element of a forward .....

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flect its risk management approach. Net position hedging must form part of an established risk management strategy. Normally this would be approved by key management personnel as defined in Ind AS 24. B6.6.2 For example, Entity A, whose functional currency is its local currency, has a firm commitment to pay FC150,000 for advertising expenses in nine months time and a firm commitment to sell finished goods for FC150,000 in 15 months time. Entity A enters into a foreign currency derivative that se .....

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tity A did manage foreign currency risk on a net basis and did not enter into the foreign currency derivative (because it increases its foreign currency risk exposure instead of reducing it), then the entity would be in a natural hedged position for nine months. Normally, this hedged position would not be reflected in the financial statements because the transactions are recognised in different reporting periods in the future. The nil net position would be eligible for hedge accounting only if t .....

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ntity cannot designate an abstract amount of a net position up to FC20. Instead, it must designate a gross amount of purchases and a gross amount of sales that together give rise to the hedged net position. An entity shall designate gross positions that give rise to the net position so that the entity is able to comply with the requirements for the accounting for qualifying hedging relationships. Application of the hedge effectiveness requirements to a hedge of a net position B6.6.5 When an enti .....

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currency risk of the net position of FC20 using a forward exchange contract for FC20. When determining whether the hedge effectiveness requirements of paragraph 6.4.1(c) are met, the entity shall consider the relationship between: (a) the fair value change on the forward exchange contract together with the foreign currency risk related changes in the value of the firm sale commitments; and (b) the foreign currency risk related changes in the value of the firm purchase commitments. B6.6.6 Similar .....

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sk positions (ie a net position), the eligibility for hedge accounting depends on the type of hedge. If the hedge is a fair value hedge, then the net position may be eligible as a hedged item. If, however, the hedge is a cash flow hedge, then the net position can only be eligible as a hedged item if it is a hedge of foreign currency risk and the designation of that net position specifies the reporting period in which the forecast transactions are expected to affect profit or loss and also specif .....

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and Raw Material A. The entity also specifies the volumes of the transactions by each nature. The entity documents that the bottom layer of sales (FC100) is made up of a forecast sales volume of the first FC70 of Product A and the first FC30 of Product B. If those sales volumes are expected to affect profit or loss in different reporting periods, the entity would include that in the documentation, for example, the first FC70 from sales of Product A that are expected to affect profit or loss in t .....

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aggregation of the purchase volumes by the reporting periods in which they are expected to affect profit or loss (similarly to how it documents the sales volumes). For example, the forecast transaction would be specified as: (a) the first FC60 of purchases of Machinery Type A that are expected to affect profit or loss from the third reporting period over the next ten reporting periods; (b) the first FC40 of purchases of Machinery Type B that are expected to affect profit or loss from the fourth .....

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ending on how the entity uses those items. For example, if the entity uses items of Machinery Type A in two different production processes that result in straight-line depreciation over ten reporting periods and the units of production method respectively, its documentation of the forecast purchase volume for Machinery Type A would disaggregate that volume by which of those depreciation patterns will apply. B6.6.9 For a cash flow hedge of a net position, the amounts determined in accordance with .....

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of highly probable forecast sales in nine months time for FC100 and a group of highly probable forecast purchases in 18 months time for FC120. It hedges the foreign currency risk of the net position of FC20 using a forward exchange contract for FC20. When determining the amounts that are recognised in the cash flow hedge reserve in accordance with paragraph 6.5.11(a)-6.5.11(b), the entity compares: (a) the fair value change on the forward exchange contract together with the foreign currency risk .....

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foreign exchange rate between the designation of the hedging relationship and the recognition of revenue). B6.6.10 Similarly, if in the example the entity had a nil net position it would compare the foreign currency risk related changes in the value of the highly probable forecast sales with the foreign currency risk related changes in the value of the highly probable forecast purchases. However, those amounts are recognised only once the related forecast transactions are recognised in the fina .....

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the hedging relationship can comprise, in combination, a layer component of the group of assets and a layer component of the group of liabilities. Presentation of hedging instrument gains or losses B6.6.13 If items are hedged together as a group in a cash flow hedge, they might affect different line items in the statement of profit andloss . The presentation of hedging gains or losses in that statement depends on the group of items. B6.6.14 If the group of items does not have any offsetting risk .....

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items does have offsetting risk positions (for example, a group of sales and expenses denominated in a foreign currency hedged together for foreign currency risk) then an entity shall present the hedging gains or losses in a separate line item in the statement of profit and loss.Consider, for example, a hedge of the foreign currency risk of a net position of foreign currency sales of FC100 and foreign currency expenses of FC80 using a forward exchange contract for FC20. The gain or loss on the .....

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f hedging the net position, with a corresponding adjustment to the cash flow hedge reserve. When the hedged expenses affect profit or loss in a later period, the hedging gain or loss previously recognised in the cash flow hedge reserve on the sales is reclassified to profit or loss and presented as a separate line item from those that include the hedged expenses, which are measured at the spot exchange rate in accordance with Ind AS 21. B6.6.16 For some types of fair value hedges, the objective .....

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est rate swap in profit or loss. In the case of a hedge of a net position (for example, a net position of a fixed-rate asset and a fixed-rate liability), this net interest accrual must bepresented in a separate line item in the statement of profit and loss. This is to avoid the grossing up of a single instrument s net gains or losses into offsetting gross amounts and recognising them in different line items (for example, this avoids grossing up a net interest receipt on a single interest rate sw .....

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hat purpose, an entity shall determine whether financial assets meet the definition of held for trading as if the entity had purchased the assets at the date of initial application. Impairment B7.2.2 On transition, an entity should seek to approximate the credit risk on initial recognition by considering all reasonable and supportable information that is available without undue cost or effort. An entity is not required to undertake an exhaustive search for information when determining, at the da .....

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ty shall consider information that is relevant in determining or approximating the credit risk at initial recognition. In order to determine or approximate the initial credit risk, an entity may consider internal and external information, including portfolio information, in accordance with paragraphs B5.5.1-B5.5.6. B7.2.4 An entity with little historical information may use information from internal reports and statistics (that may have been generated when deciding whether to launch a new produc .....

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amount at the inception of the contract. Alternatively, a derivative could require a fixed payment or payment of an amount that can change (but not proportionally with a change in the underlying) as a result of some future event that is unrelated to a notional amount. For example, a contract may require a fixed payment ofRs.1,000 if six-month LIBOR increases by 100 basis points. Such a contract is a derivative even though a notional amount is not specified. BA.2 The definition of a derivative i .....

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se of delivery of a non-financial item in accordance with the entity s expected purchase, sale or usage requirements. However, this Standard applies to such contracts for an entity s expected purchase, sale or usage requirements if the entity makes a designation in accordance with paragraph 2.5 (see paragraphs 2.4-2.7). BA.3 One of the defining characteristics of a derivative is that it has an initial net investment that is smaller than would be required for other types of contracts that would b .....

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n trade date and settlement date that meets the definition of a derivative. However, because of the short duration of the commitment it is not recognised as a derivative financial instrument. Instead, this Standard provides for special accounting for such regular way contracts (see paragraphs 3.1.2 andB3.1.3-B3.1.6). BA.5 The definition of a derivative refers to non-financial variables that are not specific to a party to the contract. These include an index of earthquake losses in a particular r .....

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example, if a guarantee of the residual value of a specific car exposes the guarantor to the risk of changes in the car s physical condition, the change in that residual value is specific to the owner of the car. Financial assets and liabilities held for trading BA.6 Trading generally reflects active and frequent buying and selling, and held for trading generally are used with the objective of generating a profit from short-term fluctuations in price or dealer s margin. BA.7 Financial liabiliti .....

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es that are part of a portfolio of identified that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. BA.8 The fact that a liability is used to fund trading activities does not in itself make that liability one that is held for trading. 2Ind AS103 addresses the acquisition of contracts with embedded derivatives in a business combination. 3In this Standard monetary amounts are denominated in Indian Rupees (Rs.) and foreign currency units (FC). Ap .....

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results and financial position of a foreign operation into a presentation currency, the entity is required to recognise foreign exchange differences in other comprehensive income until it disposes of the foreign operation. 2 Hedge accounting of the foreign currency risk arising from a net investment in a foreign operation will apply only when the net assets of that foreign operation are included in the financial statements.4 The item being hedged with respect to the foreign currency risk arisin .....

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cognised in other comprehensive income and is included with the foreign exchange differences arising on translation of the results and financial position of the foreign operation. 4 An entity with many foreign operations may be exposed to a number of foreign currency risks. This Appendix provides guidance on identifying the foreign currency risks that qualify as a hedged risk in the hedge of a net investment in a foreign operation. 5 Ind AS 109 allows an entity to designate either a derivative o .....

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results and financial position of the foreign operation and the gain or loss on the hedging instrument that is determined to be an effective hedge of the net investment to be reclassified from equity to profit or loss as a reclassification adjustment when the parent disposes of the foreign operation. This Appendix provides guidance on how an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item. Scope 7 This Appen .....

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tion that is a joint venture, an associate or a branch. 8 This Appendix applies only to hedges of net investments in foreign operations; it should not be applied by analogy to other types of hedge accounting. Issues 9 Investments in foreign operations may be held directly by a parent entity or indirectly by its subsidiary or subsidiaries. The issues addressed in this Appendix are: (a) the nature of the hedged risk and the amount of the hedged item for which a hedging relationship may be designat .....

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the foreign operation indirectly, whether the hedged risk may include only the foreign exchange differences arising from differences in functional currencies between the foreign operation and its immediate parent entity, or whether the hedged risk may also include any foreign exchange differences between the functional currency of the foreign operation and any intermediate or ultimate parent entity (ie whether the fact that the net investment in the foreign operation is held through an intermed .....

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cts the assessment of hedge effectiveness. (c) what amounts should be reclassified from equity to profit or loss as reclassification adjustments on disposal of the foreign operation: (i) when a foreign operation that was hedged is disposed of, what amounts from the parent entity s foreign currency translation reserve in respect of the hedging instrument and in respect of that foreign operation should be reclassified from equity to profit or loss in the parent entity s consolidated financial stat .....

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ising from a net investment in a foreign operation, the hedged item can be an amount of net assets equal to or less than the carrying amount of the net assets of the foreign operation in the consolidated financial statements of the parent entity. The carrying amount of the net assets of a foreign operation that may be designated as the hedged item in the consolidated financial statements of a parent depends on whether any lower level parent of the foreign operation has applied hedge accounting f .....

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fect the nature of the economic risk arising from the foreign currency exposure to the ultimate parent entity. 13 An exposure to foreign currency risk arising from a net investment in a foreign operation may qualify for hedge accounting only once in the consolidated financial statements. Therefore, if the same net assets of a foreign operation are hedged by more than one parent entity within the group (for example, both a direct and an indirect parent entity) for the same risk, only one hedging .....

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ent can be held 14 A derivative or a non-derivative instrument (or a combination of derivative and non-derivative instruments) may be designated as a hedging instrument in a hedge of a net investment in a foreign operation. The hedging instrument(s) may be held by any entity or entities within the group, as long as the designation, documentation and effectiveness requirements of Ind AS 109 paragraph 6.4.1 that relate to a net investment hedge are satisfied. In particular, the hedging strategy of .....

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the absence of hedge accounting the total change in value might be recognised in profit or loss, in other comprehensive income, or both. However, the assessment of effectiveness is not affected by whether the change in value of the hedging instrument is recognised in profit or loss or in other comprehensive income. As part of the application of hedge accounting, the total effective portion of the change is included in other comprehensive income. The assessment of effectiveness is not affected b .....

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That amount is the cumulative gain or loss on the hedging instrument that was determined to be an effective hedge. 17 The amount reclassified to profit or loss from the foreign currency translation reserve in the consolidated financial statements of a parent in respect of the net investment in that foreign operation in accordance with Ind AS 21 paragraph 48 is the amount included in that parent s foreign currency translation reserve in respect of that foreign operation. In the ultimate parent s .....

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tion to profit or loss of an amount different from that used to determine hedge effectiveness. This difference may be eliminated by determining the amount relating to that foreign operation that would have arisen if the direct method of consolidation had been used. Making this adjustment is not required by Ind AS 21. However, it is an accounting policy choice that should be followed consistently for all net investments. 4This will be the case for consolidated financial statements, financial stat .....

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of the foreign operation are first translated into the functional currency of any intermediate parent(s) and then translated into the functional currency of the ultimate parent (or the presentation currency if different). Application guidance to Appendix C This application guidance is an integral part of the Appendix C. AG1 This application guidance illustrates the application of the Appendix C using the corporate structure illustrated below. In all cases the hedging relationships described woul .....

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(functional currency US dollars (USD)). In other words, Subsidiary B s net assets other than its investment in Subsidiary C are £341 million. Nature of hedged risk for which a hedging relationship may be designated (paragraphs 10-13) AG2 Parent can hedge its net investment in each of Subsidiaries A, B and C for the foreign exchange risk between their respective functional currencies (Japanese yen (JPY), pounds sterling and US dollars) and euro. In addition, Parent can hedge the USD/GBP fo .....

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forward foreign exchange risk. Amount of hedged item for which a hedging relationship may be designated (paragraphs 10-13) AG3 Parent wishes to hedge the foreign exchange risk from its net investment in Subsidiary C. Assume that Subsidiary A has an external borrowing of US$300 million. The net assets of Subsidiary A at the start of the reporting period are ¥400,000 million including the proceeds of the external borrowing of US$300 million. AG4 The hedged item can be an amount of net assets e .....

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Subsidiary A and the EUR/USD foreign exchange difference on the US$300 million net investment in Subsidiary C are included in the foreign currency translation reserve in Parent s consolidated financial statements after the application of hedge accounting. AG5 In the absence of hedge accounting, the total USD/EUR foreign exchange difference on the US$300 million external borrowing in Subsidiary A would be recognised in Parent s consolidated financial statements as follows: · USD/JPY spot f .....

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rrowing in Subsidiary A would instead be recognised in Parent s consolidated financial statements as follows: · the GBP/USD spot foreign exchange rate change in the foreign currency translation reserve relating to Subsidiary C, · GBP/JPY spot foreign exchange rate change, translated to euro, in profit or loss, and · JPY/EUR spot foreign exchange rate change in other comprehensive income. AG6 Parent cannot designate the US$300 million external borrowing in Subsidiary A as a h .....

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the total change in value in respect of foreign exchange risk of the US$300 million external borrowing in Subsidiary A would be recorded in both profit or loss (USD/JPY spot risk) and other comprehensive income (EUR/JPY spot risk) in Parent s consolidated financial statements in the absence of hedge accounting. Both amounts are included for the purpose of assessing the effectiveness of the hedge designated in paragraph AG4 because the change in value of both the hedging instrument and the hedge .....

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t s consolidated financial statements from its foreign currency translation reserve (FCTR) are: (a) in respect of the US$300 million external borrowing of Subsidiary A, the amount that Ind AS 109 requires to be identified, ie the total change in value in respect of foreign exchange risk that was recognised in other comprehensive income as the effective portion of the hedge; and (b) in respect of the US$300 million net investment in Subsidiary C, the amount determined by the entity s consolidatio .....

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it to or preclude it from determining the amount of FCTR to be reclassified when it disposes of Subsidiary C to be the amount that it would have recognised if it had always used the direct method, depending on its accounting policy. Hedging more than one foreign operation (paragraphs 11, 13 and 15) AG9 The following examples illustrate that in the consolidated financial statements of Parent, the risk that can be hedged is always the risk between its functional currency (euro) and the functional .....

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or Parent to designate US$300 million only for changes in the USD/GBP spot foreign exchange rate or £500 million only for changes in the GBP/EUR spot foreign exchange rate. Parent holds both USD and GBP hedging instruments AG10 Parent may wish to hedge the foreign exchange risk in relation to its net investment in Subsidiary B as well as that in relation to Subsidiary C. Assume that Parent holds suitable hedging instruments denominated in US dollars and pounds sterling that it could design .....

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the net investment in Subsidiary B with the risk being the spot foreign exchange exposure (EUR/GBP) between Parent and Subsidiary B. (b) US$300 million hedging instrument designated as a hedge of the US$300 million of net investment in Subsidiary C with the risk being the spot foreign exchange exposure (GBP/USD) between Subsidiary B and Subsidiary C and up to £500 million hedging instrument designated as a hedge of £500 million of the net investment in Subsidiary B with the risk bei .....

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of its £500 million net investment in Subsidiary B, £159 million of that net investment, representing the GBP equivalent of its USD net investment in Subsidiary C, would be hedged twice for GBP/EUR risk in Parent s consolidated financial statements. AG12 In the case described in paragraph AG10(b), if Parent designates the hedged risk as the spot foreign exchange exposure (GBP/USD) between Subsidiary B and Subsidiary C, only the GBP/USD part of the change in the value of its US$300 m .....

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spot foreign exchange exposure (GBP/EUR) between Parent and Subsidiary B. Subsidiary B holds the USD hedging instrument AG13 Assume that Subsidiary B holds US$300 million of external debt the proceeds of which were transferred to Parent by an inter-company loan denominated in pounds sterling. Because both its assets and liabilities increased by £159 million, Subsidiary B s net assets are unchanged. Subsidiary B could designate the external debt as a hedge of the GBP/USD risk of its net inv .....

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pounds sterling) and the second hedge, designated by Parent, would be assessed by reference to Parent s functional currency (euro). In this case, only the GBP/USD risk from Parent s net investment in Subsidiary C has been hedged in Parent s consolidated financial statements by the USD hedging instrument, not the entire EUR/USD risk. Therefore, the entire EUR/GBP risk from Parent s £500 million net investment in Subsidiary B may be hedged in the consolidated financial statements of Parent. .....

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at net investment would be only £341 million and the amount Parent could designate as the hedged item for GBP/EUR risk would be reduced from £500 million to £341 million accordingly. AG15 If Parent reversed the hedging relationship designated by Subsidiary B, Parent could designate the US$300 million external borrowing held by Subsidiary B as a hedge of its US$300 million net investment in Subsidiary C for the EUR/USD risk and designate the GBP hedging instrument it holds itsel .....

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tatements. Because Parent has already fully hedged the EUR/USD risk from its net investment in Subsidiary C, it can hedge only up to £341 million for the EUR/GBP risk of its net investment in Subsidiary B. Appendix D Extinguishing Financial Liabilities with Equity Instruments (This appendix is an integral part of Ind AS 109) International Financial Background 1 A debtor and creditor might renegotiate the terms of a financial liability with the result that the debtor extinguishes the liabil .....

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ns in situations where: (a) the creditor is also a direct or indirect shareholder and is acting in its capacity as a direct or indirect existing shareholder. (b) the creditor and the entity are controlled by the same party or parties before and after the transaction and the substance of the transaction includes an equity distribution by, or contribution to, the entity. (c) extinguishing the financial liability by issuing equity shares is in accordance with the original terms of the financial lia .....

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the equity instruments issued? Accounting principles 5 The issue of an entity s equity instruments to a creditor to extinguish all or part of a financial liability is consideration paid in accordance with paragraph 3.3.3 of Ind AS 109. An entity shall remove a financial liability (or part of a financial liability) from its balance sheet when, and only when, it is extinguished in accordance with paragraph 3.3.1 of Ind AS 109. 6 When equity instruments issued to a creditor to extinguish all or pa .....

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paragraph 47 of Ind AS 113 is not applied. 8 If only part of the financial liability is extinguished, the entity shall assess whether some of the consideration paid relates to a modification of the terms of the liability that remains outstanding. If part of the consideration paid does relate to a modification of the terms of the remaining part of the liability, the entity shall allocate the consideration paid between the part of the liability extinguished and the part of the liability that rema .....

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iability) is extinguished. 10 When only part of the financial liability is extinguished, consideration shall be allocated in accordance with paragraph 8. The consideration allocated to the remaining liability shall form part of the assessment of whether the terms of that remaining liability have been substantially modified. If the remaining liability has been substantially modified, the entity shall account for the modification as the extinguishment of the original liability and the recognition .....

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s arising from Decommissioning,Restoration and Environmental Rehabilitation contained in Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets. 16[2. Appendix A, Service Concession Arrangements contained in Ind AS 11, Construction Contracts.] 3. Appendix B, Evaluating the Substance of Transactions Involving the Legal Form of Lease contained in Ind AS 17, Leases. Appendix 1 Note: This Appendix is not a part of this Indian Accounting Standard. The purpose of this Appendix is only to .....

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loss is used instead of Statement of Profit and Loss and comprehensive income . 2. Option to apply requirements of IAS 39 for fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities as provided in IFRS 9 has been removed in Ind AS 109. Accordingly, paragraph 6.1.3 has been deleted and following paragraphs have been modified: (i) Paragraph 5.2.3 (ii) Paragraph 5.3.2 (iii) Paragraphs 5.7.1 (iv) Paragraph 5.7.2-5.7.3 17[3. Following paragraphs dea .....

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nue from Contracts with Customers that are , except for those that Ind AS115 specifies are accounted for in accordance with this Standard. 2. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, 2.2 The impairment requirements of this Standard shall be applied to those rights that Ind AS115 specifies are accounted for in accordance with this Standard for the purposes of recognising impairment gains or losses. 3. Substituted vide F. No. 01/01/2009-CL-V(Part) - Da .....

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. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, 5.1.1 Except for trade receivables within the scope of paragraph 5.1.3, at initial recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. 6. Omitted vide F. .....

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-3-2016 before it was read as, 5.5.1 An entity shall recognise a loss allowance for expected credit losses on a financial asset that is measured in accordance with paragraphs 4.1.2 or 4.1.2A, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply in accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d). 8. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, 5.5.15 Despite paragra .....

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h Ind AS115, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lifetime expected credit losses. That accounting policy shall be applied to all such trade receivables or contract assets but may be applied separately to trade receivables and contract assets. (b) lease receivables that result from transactions that are within the scope of Ind AS 17, if the entity chooses as its accounting policy to measure the loss allowance at an amount equal to lif .....

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Part) - Dated 30-3-2016 before it was read as, The following terms are defined in paragraph 11 of Ind AS 32, Appendix A of Ind AS107, Appendix A of Ind AS 113 or Appendix A of Ind AS115 and are used in this Standard with the meanings specified in Ind AS 32, Ind AS107, Ind AS113 or Ind AS115: (a) credit risk;1 (b) equity instrument; (c) fair value; (d) financial asset; (e) financial instrument; (f) financial liability; (g) transaction price. 11. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dat .....

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ph 4.2.1(c)). 13. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, (c) If a financial guarantee contract was issued in connection with the sale of goods, the issuer applies Ind AS115 in determining when it recognises the revenue from the guarantee and from the sale of goods. 14. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, (a) If a guarantee provided by an entity to pay for default losses on a transferred asset preve .....

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