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– Interests in subsidiaries, joint ventures and associates accounted for under IFRS 10 or IAS 28 other than• Interest in subsidiaries, associate and joint ventures accounted
for at FVTPL or AFS in SFS• Contingent consideration in a business combination that is a
financial instrument• Forward contract between an acquirer and a selling shareholder
to buy or sell an acquiree resulting in a business combination at a future acquisition date for IAS 32 and IFRS 7 only– Forward contract term should not exceed a reasonable
period normally necessary to obtain any required approvals and to complete the transaction
• Derivatives linked to interest in subsidiaries for IAS 32 only• Potential voting rights accounted under IFRS 10 or IAS 28 for IAS
• All types of Financial Instruments except– Own equity instruments and FI classified as equity in
accordance with para 16A, 16B, 16C and 16D for IAS 39 and IFRS 7
– Loan commitments (Apply Ind AS 37) other than• Those that the entity designates as at FVTPL• Those that the entity has a past practice of selling the
assets resulting from its loan commitments shortly after origination
• Loan commitments that can be settled net in cash or by delivering or issuing another financial instrument
• Commitments to provide a loan at below market rate
• All types of Financial Instruments except– Rights and obligations arising under Insurance
contracts other than Financial Guarantee / Credit Insurance Contracts (FGCs)• Applies to FGCs if the issuer has not explicitly asserted
application of IFRS 4 to such contracts– FGCs that contain discretionary participation feature are
excluded always
• Derivatives embedded in insurance contracts if they require separation in accordance with IAS 39– Derivatives that are themselves an insurance contract are
• All types of Financial Instruments except– Contracts to buy or sell a non-financial item except• That can be settled net in cash• Empirical evidence of settling net in cash• Delivery of the underlying and selling the underlying
within a short period for generating profit from short-term fluctuations in price or dealer’s margin• That are readily convertible into cash
Definitions• Financial Instrument (FI)– Contract– FA of one entity– FL or Equity of another
• Equity Instrument (EI)– Contract evidencing a residual interest
• Fair Value (FV)– Amount for which an asset could be exchanged or a liability
settled, between knowledgeable, willing parties in an arms length transaction
– 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
Definitions• Financial Liability (FL)– Any liability that is a contractual obligation• To deliver cash• To deliver another financial asset to another entity• To exchange financial assets or financial liabilities under
potentially unfavourable conditions• To deliver variable no. of entity’s own equity
instruments for fixed amount of cash• To deliver fixed no. of entity’s own equity instruments
• Insurance Contract– Contract under which one party (the insurer) accepts
significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder
• Financial Guarantee Contract– Contract that requires the issuer to make specified
payments to reimburse the holder for a loss it incurs if a specified debtor fails to make payment when due under a debt instrument’s original or modified terms
• Insurance risk– Any risk other than financial risk
• Financial risk– Risk of a possible future change in one or more of
a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract
Issues• White Ltd. enters into a fixed price forward
contract to purchase one million kilograms of copper in accordance with its expected usage requirements. The contract permits White Ltd. to take physical delivery of the copper at the end of 3 months or to pay or receive a net settlement in cash, based on the change in the fair value of copper. Is the contract within the scope of FI standards?
• White Ltd. enters into a put option with Mr. Black that permits White Ltd. to put the manufacturing facility at Baddi to Mr. Black for `500 lac. The current value of the manufacturing facility is `750 lac. The option expires in 12 months. The option, if exercised, may be settled through physical delivery or net cash, at White Ltd.’s option. Whether the option is an FI?
• Had the contract been forward contract, whether the same will be an FI?
• White Ltd. having functional currency as `, sells products in US denominated in US$. White Ltd. enters into a contract with an investment bank to convert US$ into ` where White Ltd. would sell US$ based on its sales volume in US in exchange for ` on the basis of a formula based on EBITDA. Whether the contract is a derivative contract?
• If White Ltd. sells US$ based on its sales volume in US in exchange for ` at the fixed exchange rate of US$ 1.00:`49.00, whether the contract will be a derivative contract?
Issues• White Bank issues a guarantee contract that compensates the
holder for more than the loss incurred. Whether the contract is an FGC?
• White bank provides compensation to Black Ltd. if the machine sold by Yellow Ltd. fails to produce 1000 tonnes of output per month. Whether the contract is an FGC?
• White bank issues a credit derivative that provides for payment if the credit rating of a debtor falls below the average credit rating of that class of borrowers in the industry. Whether the contract is an FGC? If yes, why? If not, what change will make the contract an FGC?
• White Ltd. enters into a contract with Black Ltd. where White is required to make specified payments to Black Ltd., if the residual value of the lathe machine falls below a particular level at a future date. Whether the contract is a FI? If yes, why? If not, what change will make the contract, FI?
Issues• White Farms Ltd. enters into a contract with Black Bank
where Black bank agrees to pay a fixed sum of Rs.1 crore if White suffers loss due to poor production caused by below average rainfall during the monsoon months. White pays a premium of Rs.5 lac for the contract. Whether the contract is a financial instrument?
• If, in the above case, Black agrees to pay the sum of Rs.1 crore if the average rainfall is below a particular level irrespective of the fact that White has suffered any damage, whether the contract will be a financial instrument?
Issues• White enters into Rs.100 lakh notional amount
five year pay fixed, receive variable interest rate swap. The interest rate of the variable part is reset on a quarterly basis to 3 month LIBOR. The interest rate of the fixed leg of the swap is 10%. At inception of the swap, White pre-pays its fixed obligation of Rs. 50 lakh while retaining the right to receive variable interest payments. Whether the instrument is a derivative?
Issues• White enters into Rs.100 lakh notional amount
five year pay variable, receive fixed interest rate swap. The interest rate of the variable part is reset on a quarterly basis to 3 month LIBOR. The interest rate of the fixed leg of the swap is 10%. At inception of the swap, White pre-pays its variable obligation while retaining the right to receive fixed interest payments. Whether the instrument is a derivative?
• White Ltd. makes a 5 year fixed rate loan to Black Ltd., while Black Ltd. makes a 5 year variable rate loan for the same amount to White Ltd. There are no transfers of principal at inception of the two loans, since White Ltd. and Black Ltd. have a netting arrangement. White Ltd. and Black Ltd. account for the loan as loan receivable and payable. Whether the treatment is proper?
• White Ltd. has guaranteed obligations under pension plans, lease rentals and taxes of its subsidiary Black Ltd. The management of White Ltd. seeks your opinion on whether such guarantees should be accounted as financial instruments?
• White Ltd. having functional currency of ` issues rights to acquire a fixed no. of its equity shares for a fixed amount of Singapore dollars to a select no. of shareholders. Whether the instrument is a liability or equity?
• If, in the above case, White Ltd. offers the rights pro rata to all its shareholders, whether the instrument will be liability or equity?
Issues• White ltd. issues 100 preference shares for `100
each. The preference shares are to be mandatorily redeemed by White Ltd. for `500 each after 10 years. No dividend is payable. White Ltd. has presented the preference shares as part of Share Capital and no dividend is recognised.
• White ltd. issues non-redeemable 100 preference shares for Rs.100 each. Dividends to be paid on preference shares is at the discretion of White Ltd. White Ltd. has presented the preference shares as part of Share Capital and no dividend is recognised.
Issues• The governing bye-laws of White Co-operative Bank Ltd.
allows its members to redeem shares once the loan amount is fully repaid. The bye-laws provide that redemptions are made at the sole discretion of the governing body of White Co-operative Bank Ltd. However, in its history, it has never refused to redeem member’s shares, although the governing board has the right to do so. How should White Co-operative Bank Ltd, classify the shares issued to its members?
• Continuing with the previous example, if governing bye-laws state that approval of a redemption request is automatic unless the bank is unable to make payments without violating RBI regulations regarding liquidity and reserves. How should White Co-operative Bank Ltd. classify the members’ shares?
• White ltd. issues debt instruments requiring it to make annual payments in perpetuity equal to a stated interest rate of 9% applied to a stated par or principal amount of Rs.1000. Whether the debt instrument is liability or equity?
• White Mutual Fund classifies the units issued in its funds to unitholders as part of Share Capital.
Issues• White Ltd. has entered into a contract to deliver as many
of the entity’s own equity shares as are equal in value to the 100 ounces of Gold. How should White Ltd. classify the FI?
• White Ltd. has issued equity shares with an option to the holder to require its buy back by White Ltd. for cash. How should White Ltd. classify the equity shares?
• White Ltd. purchases a call option that gives White Ltd. a right to reacquire a fixed number of its own equity instruments in exchange for delivering a fixed amount of cash. White Ltd. has recognised the call option as a financial asset?
Issues• White Ltd. purchases an oil-linked bond that
gives it the right to receive interest at every quarter and principal of Rs.1 lac at the end of 5 years with an option to exchange the principal amount for a fixed quantity of oil. White Ltd. treats the contract as a contract to buy a non-financial item as it intends to buy oil on maturity rather than take back the principal amount in cash. Whether the treatment is proper?
Issues• White Ltd. issues equity shares to Black Private Equity Pvt.
Ltd. that requires it to transfer its manufacturing facility in Baddi if it fails to make distributions of dividend at an average rate of 15% per annum over a period of 5 years. White Ltd. has classified the instrument as equity share capital. Whether the treatment is proper?
• White Ltd. takes a loan from Black Ltd., its parent entity of Rs.100 crores that requires settlement in cash or through its equity shares on the BSE sensex becoming 100 points. The number of shares will be based on the the fair value of those shares so as to equal Rs.100 crores at the time BSE Sensex touches 100. White Ltd. classifies the loan as a liability. Whether the treatment is proper?
Issues• Same as above except that Black Ltd. is not a group
entity and Yellow Ltd., parent entity of White Ltd. has guaranteed interest payment @5% per annum till the time BSE sensex reaches 100 points. Whether the classification as a loan is proper?
• White Ltd. issues 2000 convertible bonds as on 01/04/08 having a 10 yr. term, face value of Rs.1000/- per bond & int. @6% p.a. each bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion option is 9%. How should the entity recognise the instrument?
– Non-derivative FA– Fixed or determinable payments– Fixed Maturity– The entity has positive intention and ability to hold to maturity– Tainting provisions are not attracted
Recognition – Issues • When should a purchase order raised for
purchase of raw materials be recognised?• When should a forward contract be recognised?• When should an option contract be recognised?• White Ltd. has bought perpetual debt
instrument that provide for interest payment for an indefinite period. White Ltd. has classified the FI as HTM. Comment.
• White Ltd. classified equity investments as HTM.
• Embedded put option in a bond that enable the holder to require the issuer to reacquire the instrument for cash or other asset that varies on the basis of the change in equity or commodity price or index
• A call option embedded in an equity instrument that enables the issuer to reacquire the equity instrument at a specified price from the perspective of the holder.
Debt paying interest quarterly based on an equity index
Debt Instrument
Four forward contracts p.a. on equity index
A two year fixed quantity sale of denim denominated in US$ between a French seller entity and an Indian buyer entity with a predetermined rate of exchange
• White Ltd. is a real estate entity operating in India. It owns several office buildings in Mumbai and Kolkata that are rented to Indian and foreign entities. All lease contracts are denominated in USD, but payments can be made in specified amounts of either USD or INR. However, almost all of the lease payments are settled in INR. Whether there is any embedded derivative? Can White Ltd. designate the lease contract as at FVTPL?
• White Gas Ltd. is engaged in distribution of natural gas for domestic and industrial purposes in India in the ratio of 20:80. It sources gas from Gas exploration companies. Its Gas purchase costs is in USD. All other costs are in INR. All its billings are in INR. However, the entity provides an option to industrial consumers to pay for Gas in USD. Whether there is any embedded derivative?
• White Ltd. owns a bond with a detachable warrant wherein White Ltd. can exercise the warrant to buy shares while keeping the bond intact. Whether there is any embedded derivative?
• White Ltd. issues 1000 zero coupon bonds for `1000 each to be redeemed after five years for a total of `1500000. Show the carrying amount of bonds and the impact on SPL for five years.
• White Ltd. borrows a term loan for ten years from Black Bank Ltd. of `10 lac @ 10% p.a. Black Bank Ltd. charges 2% processing fee and the amount disbursed is 98% of the sanctioned amount. White Ltd. would pay `1 lac plus interest per annum to settle the loan. Show the carrying amount of loan and the impact on Profit and Loss till loan is settled.
Issues• White Ltd. has given interest free loan of `10 lac to its
employee for housing purposes to be repaid in 10 equal yearly installments. Had the employee obtained the loan from a bank / financial institution, the interest rate would be 10% on the loan. Show the amortised cost of the loan for the entire period of the loan.
• White Ltd. has borrowed `10 lac of loan from Black Ltd. The repayment terms of the loan specify 120 EMI of `10000/-. However, White Ltd. expects to repay the loan in annual instalments `100000/-. White Ltd, has sought your opinion on cash flows to be taken for calculating interest.
• White Ltd. manages its loan portfolio on fair value basis. White Ltd. obtained a loan of Rs.10 lac from Black Ltd. requiring a bullet payment of Rs.12 lac after 10 years. The market rate for such a loan for an entity with a similar credit rating of White Ltd. is 8%. After 3 years, the credit risk of White Ltd. increases and hence the comparable interest rate increase to 12%. At what value would the loan be recognised in White Ltd.’s books and what would be effect of decrease in credit rating of White Ltd.
• The hedging relationship must be documented in detail• The hedge should be expected to be highly effective in
the ratio of 80% - 125%• For cash flow hedges, the forecasted transaction must
be highly probable• The effectiveness of the hedge is measureable reliably• The effectiveness of the hedging relationship is
assessed on an ongoing basis, and the relationship must be deemed to be highly effective in the ratio of 80% - 125% throughout the life of the hedging relationship.
• A Ltd. designates HTM as hedged item with respect to interest rate risk. Comment.
• A Ltd. has a forward contract of USD 10 lac. It has foreign currency assets of USD 40 lac and foreign currency liabilities of USD 30 lac. It designates net foreign currrency receivables of USD 10 lac as hedged item. Comment.
Hedging - Issues• White Ltd. has designated an option contract as hedge
instrument only for its intrinsic value. Whether the hedge relationship is proper?
• White Ltd. designates a forward contract as hedging instrument on spot basis. Whether the hedge relationship is proper?
• White Ltd., has given a variable interest loan to its subsidiary Black Ltd. The functional currency of both the entities is `. To hedge the cash flows, White Ltd. enters into an interest rate swap. White Ltd. has designated the interest rate swap as hedging instrument and the loan as the hedge item. Whether designation is proper?
• White Ltd. is anticipating export orders from its US subsidiary Black Inc. To hedge the cash flows, White Ltd. has entered into forward contract with Pink Bank. White Ltd. has designated the forward contract as hedging instrument and the highly probable forecast exports as hedge item. Whether the designation is proper?
• White Ltd. manages its foreign currency risks through forward contracts and PCFC contracts. Against Rs.100 crores of exports, it has Rs.30 crores of imports. Hence, it manages the remaining Rs.70 crores through a combination of forward contracts and PCFC contracts where in some cases forward contracts are cancelled for PCFC contracts. White Ltd. has designated all its forward and PCFC contracts including those that are taken after cancelling forward contracts as hedging instruments. Whether the designation is proper?
Impairment• Assessment at each reporting date • There has to be an objective evidence of impairment (Incurred
Loss Approach)– IFRS 9 advocates Expected Loss Approach
• Objective evidence of impairment include observable data about the following loss events– Significant financial difficulty of the issuer– Breach of contract– Lender granting to the borrower a concession that the lender would not
otherwise consider– Probability of bankruptcy of borrower– Observable data indicating a measureable decrease in the estimated
future cash flows from a group of financial assets, although the decrease cannot be identified with the individual financial assets in the group
– Significant or prolonged decline in FV of investment in equity instrument below its cost
Impairment – Measurement• Impairment of HTM or LR– IL = CA – PV of EFCF– Discounting at Original EIR– IL to be recognised in profit or loss– Reversal not greater than the asset’s amortised cost
without impairment• Impairment of Unquoted Equity Instrument carried at
cost and derivative linked to such Equity Instrument– IL = CA - PV of EFCF– Discounting at current market rate of return– No reversal
• Consolidate all subsidiaries as per IFRS 10• Determine whether the derecognition principles are to be
applied to a part or all of an asset (or a group of similar assets)
• Derecognition principles are applied to a part of a FA (or a group of similar FA) if, and only if,– The part comprises only specifically identified cash flows from an
FA– The part comprises only a fully proportionate (pro rata) share of
the cash flows of the FA– The part comprises only a fully proportionate (pro rata) share of
• Contractual rights to the cash flows from the FA expires; or
• The entity transfers FA that qualifies for derecognition– Transfer of a financial asset• Transfer of all risks and rewards of ownership; or• Transfer of the contractual right to receive cash
flows of the FA; or• Pass through arrangement–Must not retain any obligation or ability to invest
• Assessment of transfer of risks and rewards– Substantially all risks and rewards of ownership
transferred, derecognise the asset– All risks and rewards of ownership not transferred• If control is transferred, derecognise the asset and
recognise separately as assets or liabilities any rights and obligations created or retained in the transfer• If control is not transferred, continue to recognise
• To be derecognised only when the obligation specified in the contract is– Discharged– Cancelled– Expires
• Exchange between existing borrower and lender with substantially different terms or substantial modification of terms of FL– Original FL to be derecognised and new FL to be
• Collateral & other credit enhancements obtained that meet the recognition criteria in other standards– Nature & carrying amt. of the assets obtained– If the assets are not readily convertible into cash,
its policies for disposing off such assets or for using them in its operations
• For assets transferred that do not qualify for derecognition– Nature of the assets– Nature of risks and rewards to which the entity remains
exposed– CA of the assets and the associated liabilities
• If the entity continues to recognise all of the assets
– Total CA of the orig. assets, amt. of assets that the entity continues to recognise and CA of the associated liabilities• If the entity continues to recognise the assets to the extent of
• For entities that have pledged collateral– CA of Financial Assets pledged as collateral for liabilities or
contingent liabilities– Terms and conditions relating to pledge
• Entities that hold collateral and is permitted to sell or repledge the collateral in absence of default by the owner– FV of collateral held– FV of collateral sold or repledged
• Explanation of entity’s obligation to return the collateral
– Terms and conditions associated with its use of the collateral