accounting standards 30, 31 and 32
DESCRIPTION
I presented on AS 30,31,32 in Students Regional Conference conducted by WIRC-ICAI at Nashik on 9th August,2013. It covers more about Accounting Standard 30, that is, Financial Instrument: Recognition and Measurement.TRANSCRIPT
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Accounting Standard (AS)Principles that govern current accounting practices
In India Accounting Standards are issued by ICAI
Central Government notifies AS u/s 211(3C) of Companies Act,1956
Purpose is to –RecognizeMeasurePresentDisclose
Enables Comparability, Consistency, Transparency, Uniformity
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Need for AS on Financial Instrument
Globalization of Indian Economy
Increasing sophistication of financial products and markets
No comprehensive standard before
Diverse practice has made comparability of performance difficult
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•AS 30 - Financial Instruments: Recognition and Measurement
•AS 31 - Financial Instruments: Presentation
•AS 32 - Financial Instruments: Disclosures
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Deals with accounting of Financial instruments
Issued by ICAI in 2007
Not yet notified by Central Government
Framed in accordance with global standards
Recommendatory in nature for initial 2 years
Mandatory from 1st April,2011 to all entities except to Small and Medium-sized Entity
Salient features of AS 30,31 and 32
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Objective
To establish principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items
To present and classify financial assets and financial liabilities
To provide disclosures in financial statements so that users can evaluate –
The significance of financial instruments for the entity’s financial position and performance andThe nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks
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Financial Instruments
A legal document entered between 2 parties
Enforcement to receive Financial Asset and to pay Financial Liability
Right for one party to receive money or liquid asset & Obligation for other party to pay money or liquid asset
To be recognized when the parties entered into contract
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Financial AssetsCash;Equity instrument of another entity;A contractual right to receive cash or financial asset;Exchange of financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity;Contract which will or may be settled in entities own equity instruments that is–A non-derivative instrument where the entity is obliged to receive variable number of entity’s own equity instruments; orA derivative instrument that will or may be settled other than by exchange of a fixed amount of cash or financial asset for a fixed number of entity’s own equity instruments
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Financial Liabilities A contractual obligation to deliver cash or another financial asset to
another entity; Exchange of financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the entity; A contract that will or may be settled in entity’s own equity
instruments and is a non-derivative instrument. Also the entity is oblige to issue variable number of equity instruments of the entity;
A derivative instrument that will be settled other than by exchange of fixed amount of cash or financial asset against fixed number of entity’s own equity instrument.
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Classification1. Financial Assets
Fair value through Profit or Loss [FVTPL]
Held to maturity [HTM]
Loans and Receivables [LR]
Available for sale [AFS]
2. Financial Liabilities
Fair value through Profit or Loss [FVTPL]
Financial liabilities at amortized cost [FLAC]
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Re-Classification of Financial Asstes
From FVTPL to any category
From HTM to AFS
From LR to FVTPL
From AFS to FVTPL
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Measurement of Financial AssetsCategory Initial Measurement Subsequent Measurement
1. Fair value through Profit or Loss [FVTLP]
Record at fair value on acquisition date and transaction cost is to be debited to P & L A/c
Change in fair value between two reporting date, whether gain or loss, is be recognized in P & L A/c
2. Held to maturity [HTM] Record at fair value on acquisition date and transaction cost is to be included in the same
By applying Amortized cost method-Effective Interest Rate (i.e. IRR/YTM)
3. Loans & Receivables [LR]
(a) Short term loan (not more than 1 year):
At original invoice value
(b) All other :
Fair value + Transaction cost
(a) Short term loan (not more than 1 year):
Continue to be recorded at original invoice value
(b) All other :
By applying Amortized cost method-Effective Interest Rate (IRR/YTM)
4. Available for sale [AFR]
Record at fair value on acquisition date and transaction cost is to be included in the same
Change in Fair value between reporting date, whether gain or loss, shall be transferred to investment revaluation reserve or fair value reserve
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Measurement of Financial Liabilities
Category Initial Measurement Subsequent Measurement
1. Fair value through Profit or Loss
Record at fair value on acquisition date and transaction cost is to be debited to P & L A/c
Change in fair value between two reporting date, whether gain or loss, is be recognized in P & L A/c
2. Financial liabilities at amortized cost
(a) Short term loan (not more than 1 year):
At original invoice value
(b) All other :
Fair value + Transaction cost
(a) Short term loan (not more than 1 year):
Continue to be recorded at original invoice value
(b) All other :
By applying Amortized cost method-Effective Interest Rate (IRR/YTM)
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Derivatives
If all 3 conditions are satisfied then the instrument can be called as Derivative –
Underlying itemsNo or small initial investmentSettlement at Future date
E.g. :- Forwards, Swaps, Futures, Options
Derivatives are always recorded at Marked to Market value
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Embedded DerivativesA component of hybrid instrument
Non-derivative contract with derivative element included
The contract in which they are embedded is known as Host contract
E.g. :- ABC ltd. holds convertible debentures of XYZ ltd.
Host contract = DebentureEmbedded derivative = Conversion option
Derivative once separate out is compulsory is classified as FVTPL
After Separation Host contract shall be classified as HTM/ LR / AFS on the basis of its independently features
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HedgingThe risk management tool aiming to reduce the impact of future potential loss
Classification of Hedge Accounting :Fair value hedge
Cash flow hedge
Hedges of a net investment in an overseas operation
Recognition & Measurement depend on classification of hedged instrument
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Following are the indicators for Impairment –
Significant Financial Difficulties of their issuer;
Default on interest or principal;
Loss of active market;
High probability of bankruptcy of issuer or debtors;
Granting of concession to a borrowed which would not be offer under business conditions
Impairment of Financial Assets
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Continued….Category Formula
1. Fair value through Profit or Loss Impairment loss provision is not required
2. Held to maturity Amortized cost on date of Impairment
Less: PV of future expected benefits * Discounted rate issued is effective interest rate (IRR) used for amortized cost schedule
3. Loans & Receivables (a) Short term loan (not more than 1 year) –
Carrying Amount - Undiscounted future Excepted Cash flow
(a) All other –
Amortized cost on date of Impairment
Less: PV of future expected benefits * Discounted rate issued is effective interest rate (IRR) used for amortized cost schedule
4. Available for sale FV on Preceding Reporting date
Less: FV on date of Impairment
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De-recognition Financial Assets –
Contractual rights to receive cash flows have expired; or Financial assets have been transferred
Financial Liabilities –
Obligation specified in the contract is expired
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