New User   Login      
Tax Management India .com TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

Financial Instruments Presentation

Ind AS - 032 - B. Indian Accounting Standards (Ind AS) - Companies Law - Ind AS - 032 - Indian Accounting Standard (Ind AS) 32 (This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles.) Objective 1 [Refer Appendix 1] 2 The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial l .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uments, and for disclosing information about them in Ind AS 107, Financial Instruments: Disclosures. Scope 4 This Standard shall be applied by all entities to all types of financial instruments except: (a) those interests in subsidiaries, associates or joint ventures that are accounted for in accordance with Ind AS 110, Consolidated Financial Statements, Ind AS 27, Separate Financial Statements, or Ind AS 28, Investments in Associates and joint ventures. However, in some cases, Ind AS 110, Ind A .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

fined in Ind AS 104, Insurance Contracts. However, this Standard applies to derivatives that are embedded in insurance contracts if Ind AS 109 requires the entity to account for them separately. Moreover, an issuer shall apply this Standard to financial guarantee contracts if the issuer applies Ind AS 109 in recognising and measuring the contracts, but shall apply Ind AS 104 if the issuer elects, in accordance with paragraph 4(d) of Ind AS 104, to apply Ind AS 104 in recognising and measuring th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ents (see Ind AS 109). (f) financial instruments, contracts and obligations under share-based payment transactions to which Ind AS 102, Share-based Payment, applies, except for (i) contracts within the scope of paragraphs 8-10 of this Standard, to which this Standard applies, (ii) paragraphs 33 and 34 of this Standard, which shall be applied to treasury shares purchased, sold, issued or cancelled in connection with employee share option plans, employee share purchase plans, and all other share-b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e requirements. However, this Standard shall be applied to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 2.5 of Ind AS 109, Financial Instruments. 9 There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include: (a) when the terms of the contract permit either party to settle it net in cash or a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

; (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 short-term 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 the non-financial item in accordance with th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nancial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, in accordance with paragraph 9(a) or (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. Definitions (see also paragraphs AG3-AG23) 11 The following terms are used in this Standard with the meanings specif .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

a contract that will or may be settled in the entity s own equity instruments and is: (i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity s own equity instruments; or (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity s own equity instruments. For this purpose the entity s own equity instruments do not include puttable financial instru .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

: (i) to deliver cash or another financial asset to another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or (b) a contract that will or may be settled in the entity s own equity instruments and is: (i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity s own equity instruments; or (ii) a derivative that will or may be settled other tha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on option embedded in a convertible bond denominated in foreign currency to acquire a fixed number of the entity s own equity instruments is an equity instrument if the exercise price is fixed in any currency. Also, for these purposes the entity s own equity instruments do not include puttable financial instruments that are classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Ind AS 113, Fair Value Measurement.) A puttable instrument is a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automaticall .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ffectiveness hedged item hedging instrument held for trading regular way purchase or sale transaction costs. 13 In this Standard, contract and contractual refer to an agreement between two or more parties that has clear economic consequences that the parties have little, if any, discretion to avoid, usually because the agreement is enforceable by law. Contracts, and thus financial instruments, may take a variety of forms and need not be in writing. 14 In this Standard, entity includes individual .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n an issuer applies the definitions in paragraph 11 to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument is an equity instrument if, and only if, both conditions (a) and (b) below are met. (a) The instrument includes no contractual obligation: (i) to deliver cash or another financial asset to another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfav .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e entity s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. Apart from the aforesaid, the equity conversion option embedded in a convertible bond denominated in foreign currency to acquire a fixed number of the entity s own equity instruments is an equity instrument if the exercise price is fixed in any currenc .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

but does not meet conditions (a) and (b) above, is not an equity instrument. As an exception, an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the features and meets the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D. Puttable instruments 16A A puttable financial instrument includes a contractual obligation for the issuer to repurchase or redeem that instrument for cash or another financial asset on exercise of t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

units of equal amount; and (ii) multiplying that amount by the number of the units held by the financial instrument holder. (b) The instrument is in the class of instruments that is subordinate to all other classes of instruments. To be in such a class the instrument: (i) has no priority over other claims to the assets of the entity on liquidation, and (ii) does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity, and it is not a contract that will or may be settled in the entity s own equity instruments as set out in subparagraph (b) of the definition of a financial liability. (e) The total expected cash flows attributable to the instrument over the life of the instrument are based substa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity (excluding any effects of such instrument or contract) and (b) the effect of substantially restricting or fixing the residual return to the puttable instrument holders. For the purposes of applying this condition, the entity shall not consider nonfinancial contracts with a holder of an instrument described in paragraph 16A that have contractual terms and conditions .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

lude a contractual obligation for the issuing entity to deliver to another entity a pro rata share of its net assets only on liquidation. The obligation arises because liquidation either is certain to occur and outside the control of the entity (for example, a limited life entity) or is uncertain to occur but is at the option of the instrument holder. As an exception to the definition of a financial liability, an instrument that includes such an obligation is classified as an equity instrument i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the class of instruments that is subordinate to all other classes of instruments. To be in such a class the instrument: (i) has no priority over other claims to the assets of the entity on liquidation, and (ii) does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of instruments. (c) All financial instruments in the class of instruments that is subordinate to all other classes of instruments must have an identical .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

y (excluding any effects of such instrument or contract) and (b) the effect of substantially restricting or fixing the residual return to the instrument holders. For the purposes of applying this condition, the entity shall not consider nonfinancial contracts with a holder of an instrument described in paragraph 16C that have contractual terms and conditions that are similar to the contractual terms and conditions of an equivalent contract that might occur between a non-instrument holder and the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nstrument has all the features and meets the conditions set out in those paragraphs. An entity shall reclassify a financial instrument from the date when the instrument ceases to have all the features or meet all the conditions set out in those paragraphs. For example, if an entity redeems all its issued non-puttable instruments and any puttable instruments that remain outstanding have all the features and meet all the conditions in paragraphs 16A and 16B, the entity shall reclassify the puttabl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he date of reclassification. The entity shall recognise in equity any difference between the carrying value of the equity instrument and the fair value of the financial liability at the date of reclassification. (b) It shall reclassify a financial liability as equity from the date when the instrument has all the features and meets the conditions set out in paragraphs 16A and 16B or paragraphs 16C and 16D. An equity instrument shall be measured at the carrying value of the financial liability at .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ange financial assets or financial liabilities with the holder under conditions that are potentially unfavourable to the issuer. Although the holder of an equity instrument may be entitled to receive a pro rata share of any dividends or other distributions of equity, the issuer does not have a contractual obligation to make such distributions because it cannot be required to deliver cash or another financial asset to another party. 18 The substance of a financial instrument, rather than its lega .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ate, or gives the holder the right to require the issuer to redeem the instrument at or after a particular date for a fixed or determinable amount, is a financial liability. (b) a financial instrument that gives the holder the right to put it back to the issuer for cash or another financial asset (a puttable instrument ) is a financial liability, except for those instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. The financial instru .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

aphs 16C and 16D. For example, open-ended mutual funds, unit trusts, partnerships and some co-operative entities may provide their unitholders or members with a right to redeem their interests in the issuer at any time for cash, which results in the unitholders or members interests being classified as financial liabilities, except for those instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. However, classification as a financial liab .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ght to avoid delivering cash or another financial asset to settle a contractual obligation, the obligation meets the definition of a financial liability, except for those instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. For example: (a) a restriction on the ability of an entity to satisfy a contractual obligation, such as lack of access to foreign currency or the need to obtain approval for payment from a regulatory authority, does .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ectly through its terms and conditions. For example: (a) a financial instrument may contain a non-financial obligation that must be settled if, and only if, the entity fails to make distributions or to redeem the instrument. If the entity can avoid a transfer of cash or another financial asset only by settling the non-financial obligation, the financial instrument is a financial liability. (b) a financial instrument is a financial liability if it provides that on settlement the entity will deliv .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tion (see paragraph 21). Settlement in the entity s own equity instruments (paragraph 16(b)) 21 A contract is not an equity instrument solely because it may result in the receipt or delivery of the entity s own equity instruments. An entity may have a contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so that the fair value of the entity s own equity instruments to be received or delivered equals the amount of the contractual .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uity instruments as are equal in value to the value of 100 ounces of gold. Such a contract is a financial liability of the entity even though the entity must or can settle it by delivering its own equity instruments. It is not an equity instrument because the entity uses a variable number of its own equity instruments as a means to settle the contract. Accordingly, the contract does not evidence a residual interest in the entity s assets after deducting all of its liabilities. 22 Except as state .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s in market interest rates that do not affect the amount of cash or other financial assets to be paid or received, or the number of equity instruments to be received or delivered, on settlement of the contract do not preclude the contract from being an equity instrument. Any consideration received (such as the premium received for a written option or warrant on the entity s own shares) is added directly to equity. Any consideration paid (such as the premium paid for a purchased option) is deduct .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

liquidation with all the features and meeting the conditions described in paragraphs 16C and 16D, the contract is a financial asset or a financial liability. This includes a contract that will be settled by the entity receiving or delivering a fixed number of such instruments in exchange for a fixed amount of cash or another financial asset. 23 With the exception of the circumstances described in paragraphs 16A and 16B or paragraphs 16C and 16D, a contract that contains an obligation for an ent .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d initially at the present value of the redemption amount, and is reclassified from equity. Subsequently, the financial liability is measured in accordance with Ind AS 109. If the contract expires without delivery, the carrying amount of the financial liability is reclassified to equity. An entity s contractual obligation to purchase its own equity instruments gives rise to a financial liability for the present value of the redemption amount even if the obligation to purchase is conditional on t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s in return for an amount of cash calculated to equal the value of 100 ounces of gold. Contingent settlement provisions 25 A financial instrument may require the entity to deliver cash or another financial asset, or otherwise to settle it in such a way that it would be a financial liability, in the event of the occurrence or non-occurrence of uncertain future events (or on the outcome of uncertain circumstances) that are beyond the control of both the issuer and the holder of the instrument, suc .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

equire settlement in cash or another financial asset (or otherwise in such a way that it would be a financial liability) is not genuine; (b) the issuer can be required to settle the obligation in cash or another financial asset (or otherwise to settle it in such a way that it would be a financial liability) only in the event of liquidation of the issuer; or (c) the instrument has all the features and meets the conditions in paragraphs 16A and 16B. Settlement options 26 When a derivative financia .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s for cash. Similarly, some contracts to buy or sell a non-financial item in exchange for the entity s own equity instruments are within the scope of this Standard because they can be settled either by delivery of the non-financial item or net in cash or another financial instrument (see paragraphs 8-10). Such contracts are financial assets or financial liabilities and not equity instruments. Compound financial instruments (see also paragraphs AG30- AG35) 28 The issuer of a non-derivative financ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ty instrument of the entity. For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is a compound financial instrument. From the perspective of the entity, such an instrument comprises two components: a financial liability (a contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is not revised as a result of a change in the likelihood that a conversion option will be exercised, even when exercise of the option may appear to have become economically advantageous to some holders. Holders may not always act in the way that might be expected because, for example, the tax consequences resulting from conversion may differ among holders. Furthermore, the likelihood of conversion will change from time to time. The entity s contractual obligation to make future payments remains .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. The value of any derivative features (such as a call option) embedded in the compound financial instrument other than the equity component (such as an equity conversion option) is included in the liability component. The sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the fair value .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

equity instrument represented by the option to convert the instrument into ordinary shares is then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole. Treasury shares (see also paragraph AG36) 33 If an entity reacquires its own equity instruments, those instruments ( treasury shares ) shall be deducted from equity. No gain or loss shall be recognised in profit or loss on the purchase, sale, issue or cancellation .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

es its own equity instruments from related parties. Interest, dividends, losses and gains (see also paragraph AG37) 35 Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be recognised as income or expense in profit or loss. Distributions to holders of an equity instrument shall be recognised by the entity directly in equity. Transaction costs of an equity transaction shall be accounted for as a deduction from equity. 35A In .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nised as expenses in the same way as interest on a bond. Similarly, gains and losses associated with redemptions or refinancings of financial liabilities are recognised in profit or loss, whereas redemptions or refinancings of equity instruments are recognised as changes in equity. Changes in the fair value of an equity instrument are not recognised in the financial statements. 37 An entity typically incurs various costs in issuing or acquiring its own equity instruments. Those costs might inclu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

mpound financial instrument are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds. Transaction costs that relate jointly to more than one transaction (for example, costs of a concurrent offering of some shares and a stock exchange listing of other shares) are allocated to those transactions using a basis of allocation that is rational and consistent with similar transactions. 39 The amount of transaction costs accounted for as a deduct .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

x deductibility, it is desirable to disclose them separately in the statement of profit and loss. Disclosures of the tax effects are made in accordance with Ind AS 12. 41 Gains and losses related to changes in the carrying amount of a financial liability are recognised as income or expense in profit or loss even when they relate to an instrument that includes a right to the residual interest in the assets of the entity in exchange for cash or another financial asset (see paragraph 18(b)). Under .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ff the recognised amounts; and (b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity shall not offset the transferred asset and the associated liability (see Ind AS 109, paragraph 3.2.22). 43 This Standard requires the presentation of financial assets and financial liabilities on a net basis when doing so reflects an entity s expected futur .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nd AS 107 for recognised financial instruments that are within the scope of paragraph 13A of Ind AS 107. 44 Offsetting a recognised financial asset and a recognised financial liability and presenting the net amount differs from the derecognition of a financial asset or a financial liability. Although offsetting does not give rise to recognition of a gain or loss, the derecognition of a financial instrument not only results in the removal of the previously recognised item from the balance sheet b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e debtor s right of set-off. Because the right of set-off is a legal right, the conditions supporting the right may vary from one legal jurisdiction to another and the laws applicable to the relationships between the parties need to be considered. 46 The existence of an enforceable right to set off a financial asset and a financial liability affects the rights and obligations associated with a financial asset and a financial liability and may affect an entity s exposure to credit and liquidity r .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cash flows are exposed. An intention by one or both parties to settle on a net basis without the legal right to do so is not sufficient to justify offsetting because the rights and obligations associated with the individual financial asset and financial liability remain unaltered. 47 An entity s intentions with respect to settlement of particular assets and liabilities may be influenced by its normal business practices, the requirements of the financial markets and other circumstances that may .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e. In these circumstances the cash flows are, in effect, equivalent to a single net amount and there is no exposure to credit or liquidity risk. In other circumstances, an entity may settle two instruments by receiving and paying separate amounts, becoming exposed to credit risk for the full amount of the asset or liquidity risk for the full amount of the liability. Such risk exposures may be significant even though relatively brief. Accordingly, realisation of a financial asset and settlement o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

liabilities within a portfolio of forward contracts or other derivative instruments) but involve different counterparties; (c) financial or other assets are pledged as collateral for non-recourse financial liabilities; (d) financial assets are set aside in trust by a debtor for the purpose of discharging an obligation without those assets having been accepted by the creditor in settlement of the obligation (for example, a sinking fund arrangement); or (e) obligations incurred as a result of eve .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

only used by financial institutions to provide protection against loss in the event of bankruptcy or other circumstances that result in a counterparty being unable to meet its obligations. A master netting arrangement commonly creates a right of set-off that becomes enforceable and affects the realisation or settlement of individual financial assets and financial liabilities only following a specified event of default or in other circumstances not expected to arise in the normal course of busine .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

pplication of particular aspects of the Standard. AG2 The Standard does not deal with the recognition or measurement of financial instruments. Requirements about the recognition and measurement of financial assets and financial liabilities are set out in Ind AS 109. Definitions (paragraphs 11-14) Financial assets and financial liabilities AG3 Currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and rec .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

actual obligation to deliver cash in the future are: (a) trade accounts receivable and payable; (b) notes receivable and payable; (c) loans receivable and payable; and (d) bonds receivable and payable. In each case, one party s contractual right to receive (or obligation to pay) cash is matched by the other party s corresponding obligation to pay (or right to receive). AG5 Another type of financial instrument is one for which the economic benefit to be received or given up is a financial asset o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ly provide the holder with the contractual right to receive payments on account of interest at fixed dates extending into the indefinite future, either with no right to receive a return of principal or a right to a return of principal under terms that make it very unlikely or very far in the future. For example, an entity may issue a financial instrument requiring it to make annual payments in perpetuity equal to a stated interest rate of 8 per cent applied to a stated par or principal amount of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

strument. A chain of contractual rights or contractual obligations meets the definition of a financial instrument if it will ultimately lead to the receipt or payment of cash or to the acquisition or issue of an equity instrument. AG8 The ability to exercise a contractual right or the requirement to satisfy a contractual obligation may be absolute, or it may be contingent on the occurrence of a future event. For example, a financial guarantee is a contractual right of the lender to receive cash .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t and a financial liability, even though such assets and liabilities are not always recognised in the financial statements. Some of these contingent rights and obligations may be insurance contracts within the scope of Ind AS 104. AG9 Under Ind AS 17, Leases, a finance lease is regarded as primarily an entitlement of the lessor to receive, and an obligation of the lessee to pay, a stream of payments that are substantially the same as blended payments of principal and interest under a loan agreem .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ce lease is regarded as a financial instrument and an operating lease is not regarded as a financial instrument (except as regards individual payments currently due and payable). AG10 Physical assets (such as inventories, property, plant and equipment), leased assets and intangible assets (such as patents and trademarks) are not financial assets. Control of such physical and intangible assets creates an opportunity to generate an inflow of cash or another financial asset, but it does not give ri .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

obligation to pay cash or another financial asset. AG12 Liabilities or assets that are not contractual (such as income taxes that are created as a result of statutory requirements imposed by governments) are not financial liabilities or financial assets. Accounting for income taxes is dealt with in Ind AS 12. Similarly, constructive obligations, as defined in Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, do not arise from contracts and are not financial liabilities. Equity .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

-puttable ordinary shares in the issuing entity in exchange for a fixed amount of cash or another financial asset. An entity s obligation to issue or purchase a fixed number of its own equity instruments in exchange for a fixed amount of cash or another financial asset is an equity instrument of the entity (except as stated in paragraph 22A). However, if such a contract contains an obligation for the entity to pay cash or another financial asset (other than a contract classified as equity in acc .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

me distributable to shareholders. AG14 A purchased call option or other similar contract acquired by an entity that gives it the right to reacquire a fixed number of its own equity instruments in exchange for delivering a fixed amount of cash or another financial asset is not a financial asset of the entity (except as stated in paragraph 22A). Instead, any consideration paid for such a contract is deducted from equity. The class of instruments that is subordinate to all other classes (paragraphs .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ty issues or redeems another financial instrument, this may affect whether the instrument in question is in the class of instruments that is subordinate to all other classes. AG14C An instrument that has a preferential right on liquidation of the entity is not an instrument with an entitlement to a pro rata share of the net assets of the entity. For example, an instrument has a preferential right on liquidation if it entitles the holder to a fixed dividend on liquidation, in addition to a share .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of the instrument must be substantially based on the profit or loss, change in the recognised net assets or fair value of the recognised and unrecognised net assets of the entity over the life of the instrument. Profit or loss and the change in the recognised net assets shall be measured in accordance with relevant Ind ASs. Transactions entered into by an instrument holder other than as owner of the entity (paragraphs 16A and 16C) AG14F The holder of a puttable financial instrument or an instrum .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ould be classified as equity under paragraph 16A or paragraph 16C. AG14G An example is a limited partnership that has limited and general partners. Some general partners may provide a guarantee to the entity and may be remunerated for providing that guarantee. In such situations, the guarantee and the associated cash flows relate to the instrument holders in their role as guarantors and not in their roles as owners of the entity. Therefore, such a guarantee and the associated cash flows would no .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ith instrument holders in their role as non-owners and should not be considered when assessing the features listed in paragraph 16A or paragraph 16C. However, profit or loss sharing arrangements that allocate profit or loss to instrument holders based on the nominal amount of their instruments relative to others in the class represent transactions with the instrument holders in their roles as owners and should be considered when assessing the features listed in paragraph 16A or paragraph 16C. AG .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

instrument that otherwise meets the criteria in paragraph 16A or paragraph 16C is that the entity has no other financial instrument or contract that has (a) total cash flows based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity and (b) the effect of substantially restricting or fixing the residual return. The following instruments, when entered into on normal commercial terms .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

vices rendered or goods provided. Derivative financial instruments AG15 Financial instruments include primary instruments (such as receivables, payables and equity instruments) and derivative financial instruments (such as financial options, futures and forwards, interest rate swaps and currency swaps). Derivative financial instruments meet the definition of a financial instrument and, accordingly, are within the scope of this Standard. AG16 Derivative financial instruments create rights and obl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

at are potentially unfavourable. However, they generally1 do not result in a transfer of the underlying primary financial instrument on inception of the contract, nor does such a transfer necessarily take place on maturity of the contract. Some instruments embody both a right and an obligation to make an exchange. Because the terms of the exchange are determined on inception of the derivative instrument, as prices in financial markets change those terms may become either favourable or unfavourab .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

fair value of the underlying financial instrument. The contractual right of the holder and obligation of the writer meet the definition of a financial asset and a financial liability, respectively. The financial instrument underlying an option contract may be any financial asset, including shares in other entities and interest bearing instruments. An option may require the writer to issue a debt instrument, rather than transfer a financial asset, but the instrument underlying the option would c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

AG18 Another example of a derivative financial instrument is a forward contract to be settled in six months time in which one party (the purchaser) promises to deliver ₹ 1,000,000 cash in exchange for ₹ 1,000,000 face amount of fixed rate government bonds, and the other party (the seller) promises to deliver ₹ 1,000,000 face amount of fixed rate government bonds in exchange for ₹ 1,000,000 cash. During the six months, both parties have a contractual right and a contractua .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the seller has a contractual right (a financial asset) similar to the right under a put option held and a contractual obligation (a financial liability) similar to the obligation under a call option written. As with options, these contractual rights and obligations constitute financial assets and financial liabilities separate and distinct from the underlying financial instruments (the bonds and cash to be exchanged). Both parties to a forward contract have an obligation to perform at the agree .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

eries of future exchanges of cash amounts, one amount calculated with reference to a floating interest rate and the other with reference to a fixed interest rate. Futures contracts are another variation of forward contracts, differing primarily in that the contracts are standardised and traded on an exchange. 1 This is true of most, but not all derivatives, eg in some cross-currency interest rate swaps principal is exchanged on inception (and re-exchanged on maturity). Contracts to buy or sell n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

(eg an option, futures or forward contract on silver) are not financial instruments. Many commodity contracts are of this type. Some are standardised in form and traded on organised markets in much the same fashion as some derivative financial instruments. For example, a commodity futures contract may be bought and sold readily for cash because it is listed for trading on an exchange and may change hands many times. However, the parties buying and selling the contract are, in effect, trading the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

readily convertible to cash, are within the scope of the Standard as if they were financial instruments (see paragraph 8). 1[ AG21 A contract that involves the receipt or delivery of physical assets does not give rise to a financial asset of one party and a financial liability of the other party unless any corresponding payment is deferred past the date on which the physical assets are transferred. Such is the case with the purchase or sale of goods on trade credit. ] AG22 Some contracts are com .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n cash. Such a contract constitutes a financial instrument. AG23 The definition of a financial instrument also encompasses a contract that gives rise to a non-financial asset or non-financial liability in addition to a financial asset or financial liability. Such financial instruments often give one party an option to exchange a financial asset for a non-financial asset. For example, an oillinked bond may give the holder the right to receive a stream of fixed periodic interest payments and a fix .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

suer make the bond a financial instrument, regardless of the other types of assets and liabilities also created. AG24 [Refer Appendix 1] Presentation Liabilities and equity (paragraphs 15-27) No contractual obligation to deliver cash or another financial asset (paragraphs 17-20) AG25 Preference shares may be issued with various rights. In determining whether a preference share is a financial liability or an equity instrument, an issuer assesses the particular rights attaching to the share to det .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

triction or insufficient profits or reserves, does not negate the obligation. An option of the issuer to redeem the shares for cash does not satisfy the definition of a financial liability because the issuer does not have a present obligation to transfer financial assets to the shareholders. In this case, redemption of the shares is solely at the discretion of the issuer. An obligation may arise, however, when the issuer of the shares exercises its option, usually by formally notifying the share .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ments. The classification of a preference share as an equity instrument or a financial liability is not affected by, for example: (a) a history of making distributions; (b) an intention to make distributions in the future; (c) a possible negative impact on the price of ordinary shares of the issuer if distributions are not made (because of restrictions on paying dividends on the ordinary shares if dividends are not paid on the preference shares); (d) the amount of the issuer s reserves; (e) an i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng a fixed number of its own shares for a fixed amount of cash or another financial asset, is an equity instrument (except as stated in paragraph 22A). Accordingly, any consideration received or paid for such a contract is added directly to or deducted directly from equity. One example is an issued share option that gives the counterparty a right to buy a fixed number of the entity s shares for a fixed amount of cash. However, if the contract requires the entity to purchase (redeem) its own shar .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s own shares for cash gives rise to a financial liability for the present value of the redemption amount even if the number of shares that the entity is obliged to repurchase is not fixed or if the obligation is conditional on the counterparty exercising a right to redeem (except as stated in paragraphs 16A and 16B or paragraphs 16C and 16D). One example of a conditional obligation is an issued option that requires the entity to repurchase its own shares for cash if the counterparty exercises th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

als a fixed amount or an amount based on changes in an underlying variable (eg a commodity price) is a financial asset or a financial liability. An example is a written option to buy gold that, if exercised, is settled net in the entity s own instruments by the entity delivering as many of those instruments as are equal to the value of the option contract. Such a contract is a financial asset or financial liability even if the underlying variable is the entity s own share price rather than gold. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

another way that would result in the instrument being a financial liability) is not genuine, the settlement provision does not affect the classification of a financial instrument. Thus, a contract that requires settlement in cash or a variable number of the entity s own shares only on the occurrence of an event that is extremely rare, highly abnormal and very unlikely to occur is an equity instrument. Similarly, settlement in a fixed number of an entity s own shares may be contractually preclude .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t of it) in consolidated financial statements, an entity considers all terms and conditions agreed between members of the group and the holders of the instrument in determining whether the group as a whole has an obligation to deliver cash or another financial asset in respect of the instrument or to settle it in a manner that results in liability classification. When a subsidiary in a group issues a financial instrument and a parent or other group entity agrees additional terms directly with th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

le. To the extent that there is such an obligation or settlement provision, the instrument (or the component of it that is subject to the obligation) is classified as a financial liability in consolidated financial statements. AG29A Some types of instruments that impose a contractual obligation on the entity are classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. Classification in accordance with those paragraphs is an exception to the principles .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Compound financial instruments (paragraphs 28-32) AG30 Paragraph 28 applies only to issuers of non-derivative compound financial instruments. Paragraph 28 does not deal with compound financial instruments from the perspective of holders. Ind AS 109 deals with the classification and measurement of financial assets that are compound financial instruments from the holder s perspective. AG31 A common form of compound financial instrument is a debt instrument with an embedded conversion option, such .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

mponent is the present value of the contractually determined stream of future cash flows discounted at the rate of interest applied at that time by the market to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion option. (b) The equity instrument is an embedded option to convert the liability into equity of the issuer. This option has value on initial recognition even when it is out of the money. AG32 On conversi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

onsideration paid and any transaction costs for the repurchase or redemption to the liability and equity components of the instrument at the date of the transaction. The method used in allocating the consideration paid and transaction costs to the separate components is consistent with that used in the original allocation to the separate components of the proceeds received by the entity when the convertible instrument was issued, in accordance with paragraphs 28-32. AG34 Once the allocation of t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

paying other additional consideration in the event of conversion before a specified date. The difference, at the date the terms are amended, between the fair value of the consideration the holder receives on conversion of the instrument under the revised terms and the fair value of the consideration the holder would have received under the original terms is recognised as a loss in profit or loss. Treasury shares (paragraphs 33 and 34) AG36 An entity s own equity instruments are not recognised a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

5-41) AG37 The following example illustrates the application of paragraph 35 to a compound financial instrument. Assume that a non-cumulative preference share is mandatorily redeemable for cash in five years, but that dividends are payable at the discretion of the entity before the redemption date. Such an instrument is a compound financial instrument, with the liability component being the present value of the redemption amount. The unwinding of the discount on this component is recognised in p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

added to the redemption amount, the entire instrument is a liability. In such a case, any dividends are classified as interest expense. Offsetting a financial asset and a financial liability (paragraphs 42-50) AG38 [Refer Appendix 1] Criterion that an entity currently has a legally enforceable right to set-off the recognised amounts (paragraph 42(a)) AG38A A right of set-off may be currently available or it may be contingent on a future event (for example, the right may be triggered or exercisa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

that the right of set-off: (a) must not be contingent on a future event; and (b) must be legally enforceable in all of the following circumstances: (i) the normal course of business; (ii) the event of default; and (iii) the event of insolvency or bankruptcy of the entity and all of the counterparties. AG38C The nature and extent of the right of set-off, including any conditions attached to its exercise and whether it would remain in the event of default or insolvency or bankruptcy, may vary from .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

olvency or bankruptcy laws applicable to the parties) need to be considered to ascertain whether the right of set-off is enforceable in the normal course of business, in an event of default, and in the event of insolvency or bankruptcy, of the entity and all of the counterparties (as specified in paragraph AG38B (b)). Criterion that an entity intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously (paragraph 42(b)) AG38E To meet the criterion in p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nism has features that eliminate or result in insignificant credit and liquidity risk, and that will process receivables and payables in a single settlement process or cycle. For example, a gross settlement system that has all of the following characteristics would meet the net settlement criterion in paragraph 42(b): (a) financial assets and financial liabilities eligible for set-off are submitted at the same point in time for processing; (b) once the financial assets and financial liabilities .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sing of the related receivable or payable for which the securities are collateral will also fail (and vice versa); (e) any transactions that fail, as outlined in (d), will be re-entered for processing until they are settled; (f) settlement is carried out through the same settlement institution (for example, a settlement bank, a central bank or a central securities depository); and (g) an intraday credit facility is in place that will provide sufficient overdraft amounts to enable the processing .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g fixed payments synthesises a fixed rate long-term debt. Each of the individual financial instruments that together constitute a synthetic instrument represents a contractual right or obligation with its own terms and conditions and each may be transferred or settled separately. Each financial instrument is exposed to risks that may differ from the risks to which other financial instruments are exposed. Accordingly, when one financial instrument in a synthetic instrument is an asset and another .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

racts. ] 2. Appendix D, Extinguishing Financial Liabilities with Equity Instruments, contained in Ind AS 109, Financial Instruments Appendix 1 Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the major differences, if any, between Indian Accounting Standard (Ind AS) 32 and the corresponding International Accounting Standard (IAS) 32, Financial Instruments; Presentation, issued by the International Accounting Standards Board. C .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ansitional provisions related to Ind ASs, wherever considered appropriate have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards. 3. Different terminology is used, as used in existing laws e.g.,the term balance sheet is used instead of Statement of financial position and Statement of profit and loss is used instead of Statement of comprehensive income . 4. Requirements regard .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version