1. Broad Overview of Accounting Standard (AS) 30 Financial Instruments : Recognition & Measurement

2. Prepared by – Navin Jain Nidhi Sapra Suyog Desarda

3. Contents Impact Scope Objective Definitions Financial Assets Hedging Financial Liabilities Gains and Losses Impairment

4. Impact Withdrawal of –AS 4 – contingencies –AS 11 – forward exchange contracts –AS 13 – except investment properties

5. Scope Excludes items which are covered –By existing standards As 14 As 15 As 19 As 21, 23 & 27 As 29

6. Objective Establish principles for recognising & measuring –Financial assets –Financial liabilities –Some contracts for non-financial items

7. Definition Financial instrument is a CONTRACT giving rise to Financial asset Financial liability or Equity instrument

8. Definition Equity instrument –Contract evidencing residual interest in the assets of an entity after deducting all its liabilities Preference shares under section 80 will be ‘financial liability’

9. Examples of Financial Assets & Financial Liabilities Financial assets –Investments –Debtors –Cash & bank –Loans & advances (except prepaid exps) Financial liabilities –Creditors –Provisions (except income tax) –Borrowings (including sales tax deferrals)

10. Definition Derivative instrument –Financial instrument / contract Value changes in response to change in specified interest rate, financial instrument price, commodity price, foreign exchange rate, credit rating or credit index OR non-financial variable which is not specific to a party to the contract No initial net investment / smaller investment Settled at a future date

11. Examples of Derivative Financial options Forwards and futures Interest rate swaps

12. Financial Assets - Categories Fair value through profit or loss (FVTPL) Held to maturity (HTM) Loans & receivables (L&R) Available for sale (AFS)

13. Fair Value Concept Valuation techniques –Recent arm’s length market transactions –Reference to current fair value of another instrument –Discounted cash flow analysis –Option pricing model

14. Financial Assets - FVTPL Held for trading Reduces accounting mismatch Documented risk management / investment strategy

15. Financial Assets - FVTPL Held for trading –Acquired for purpose of selling –Evidence of recent actual pattern of short term profit taking –Derivative (except hedging instrument)

16. Financial Assets - FVTPL Reduces accounting mismatch. –An instrument is said to reduce accounting mismatch when it eliminates or significantly reduces a measurement inconsistency. Documented risk management / investment strategy. –A part of group of financial assets managed and evaluated on fair value basis according to risk management or investment strategy of entity.

17. Embedded Derivative When a non-derivative (host) contract contains derivative (embedded) contract, it should be accounted separately, only if –Economic characteristics & risks are not closely related to the host contract –Separate instrument with same terms would meet the definition of derivative –Hybrid instrument is not measured at fair value through profit or loss

18. Financial Assets - FVTPL Initial measurement –At fair value on the date of acquisition Reclassification –Not allowed, in OR out Subsequent measurement –At fair value

19. Financial Assets - HTM Non-derivatives with fixed or determinable payments and fixed maturity Entity has positive intention and ability to hold to maturity

20. Financial Assets - HTM Initial measurement –At fair value +/- Transaction cost Reclassification –In case of change in intention / ability –Sale of more than insignificant amount Reclassify as available for sale for current year Banned from using the category for next 2 financial years

21. Financial Assets - HTM Subsequent measurement –At amortised cost using effective interest method

22. Examples of HTM Debt instruments Redeemable preference shares

23. Financial Assets - L&R Non-derivatives with fixed or determinable payments and not quoted in an active market –Not allowed in case of doubt on recoverability of substantially all of its initial investment (in which case classified as AFS)

24. Financial Assets - L&R Initial measurement –Long term At fair value +/- Transaction cost –Short term At invoice amount Subsequent measurement Long term Amortised cost using effective interest method Short term At invoice amount

25. Financial Assets - AFS None of the three earlier classifications

26. Financial Assets - AFS Initial measurement –At fair value +/- Transaction cost Subsequent measurement –At fair value

27. Financial Assets - AFS Investments in equity instruments with no quoted market price in active market & fair value cannot be reliably measured –Initial measurement At cost –Subsequent measurement At cost

28. Financial Assets Derecognition – entirely if –Contractual right to cash flows expire –Transfer of contractual right to cash flows –Assume contractual obligation to pay cash flows Payment of equivalent amount of collection Selling / pledging of original asset prohibited Remit collection without delay, interest earned, if any, to be passed on

29. Financial Assets Derecognition – partly, only if transfer of –Specifically identified cash flows –Fully proportionate share of cash flows –Fully proportionate share of specifically identified cash flows

30. Summary of Classification – Financial Assets CategoryDescription FVTPLAcquired for the purpose of trading / profit from short term fluctuations HTMFixed maturity investments with intention and ability to hold to maturity L&RCreated by providing money, goods or services AFSEquity investments - with quoted price or - unquoted but able to estimate fair value Equity investments with no quoted price and entity is not able to estimate FV

31. Hedging Expected to be highly effective Reliable measurement of effectiveness Effective throughout the period of designation Forecast transaction should be highly probable (cash flow hedge)

32. Hedging Fair value hedge Cash flow hedge Net investment in non-integral foreign operation

33. Examples Fair value hedge –A company purchases bond with a fixed interest rate. In order to offset the risk of decline in fair value of bond, the company enters into an variable interest rate swap Cash flow hedge –A company expects to purchase a fixed asset in a years time for X euros. In order to offset the risk of increase in euro rate, the company enters into a forward contract to purchase X euros for a fixed amount

34. Hedging – Derecognition Fair value hedge –Hedge instrument expires Cash flow hedge –Forecast transaction not expected to occur Net investment in non-integral foreign operation –On disposal

35. Summing up – Financial Assets

36. Financial Liabilities – Categories Fair value through profit or loss (FVTPL). –Held for trading. Derivative liabilities not accounted for hedging instruments. Obligations to deliver securities or other financial assets by short seller. Financial liabilities incurred with the intention to repurchase them. –Designated. Designated on initial recognition. Irrevocable. Others (O).

37. Financial Liabilities – FVTPL Initial measurement –At fair value on the date of issue Reclassification –Not allowed – in OR out Subsequent measurement –At fair value

38. Financial Liabilities – FVTPL (Exception) Derivative liability required to be settled by delivery of an equity instrument with no quoted market price in active market & fair value cannot be reliably measured –Initial measurement At cost –Subsequent measurement At cost

39. Financial Liabilities – Others Initial measurement –At fair value +/- Transaction cost Subsequent measurement, higher of –Amount determined as per AS 29 –Amount initially recognised less cumulative amortisation recognised, if any

40. Financial Liabilities – Others Recognition criteria under AS 29 –Present obligation as a result of past event –Probable outflow of resources –Reliable estimate of obligation

41. Financial Liabilities Derecognition –Obligation is discharged / cancelled / expired (partly / entirely) –Substantial modifications in terms of the contract of the existing liability

42. Remeasure If a reliable measure becomes available subsequently where it was required, then the financial instrument should be remeasured

43. Gains & Losses Fair value through profit or loss –To be taken to P&L Available for sale –Recognised in appropriate equity account (except impairment impact + foreign exchange impact) until de- recognition, at which time cumulatively will be taken to P&L –Interest under effective interest method & dividend from investments are taken to P&L

44. Gains & Losses If it becomes appropriate to carry at cost / amortised cost what was being carried at fair value –In case of fixed maturity The gain / loss as well as the difference between maturity amount and new amortised cost should be amortised using effective interest method over the remaining life of held to maturity investment –In case of no fixed maturity The gain / loss should remain in equity account until derecognised –In both the cases if subsequently impaired, any previous gain / loss recognised in equity account is taken to P&L

45. Gains & Losses Amortised cost –Taken to P&L when derecognised / impaired

46. Hedging – Gains & Losses Fair value hedge –P&L Cash flow hedge –Equity Net investment in non-integral foreign operation –Equity

47. Impairment Assess at each balance sheet date objective evidence –Observable data Significant financial difficulty of the issuer Breach of contract Active market no longer exists

48. Impairment Amortised cost –Difference between carrying amount & present value of estimated future cash flows discounted at original effective interest rate Original invoice amount –Difference between carrying amount & undiscounted estimated future cash flows Subsequent reversal should not exceed the value before impairment in both cases

49. Impairment Cost –Difference between carrying amount & present value of estimated future cash flows discounted at current market rate of return for similar assets –Subsequent reversal not permitted (since initial measurement at cost was an exception)

50. Impairment Available for sale –Difference between cost & current fair value should be removed from equity account and taken to P&L –Subsequent reversal allowed equal to the amount taken to P&L. However, no reversal permitted on equity instruments

51. Summing up Category Measurement FVTPL HTM assets Receivables / Payables * AFS * InitialFair Value FV +/- TC FV +/- TC FV +/- TC SubsequentFair value Amortised cost Amortised cost Fair value Gains / LossesP&L Equity Impairment / Derecognition P&L Reclassification Not permitted AFS Not applicable HTM * Short term receivables / payables & unquoted equity instruments for which fair value is not ascertainable, measurement should be at cost

52. Transitional Provision At the time of implementing for the first time the resultant impact, net of tax, should be taken to reserves & surplus account, except –Where the standard requires the impact to be taken to equity account

53. Thank You Navin Jain Nidhi Sapra Suyog Desarda