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Thread: 31 Accounting Standard 31 Financial Instruments: Presentation - AS 31

  1. #1
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    Default 31 Accounting Standard 31 Financial Instruments: Presentation - AS 31


    Accounting Standard (AS) 31
    Financial Instruments: Presentation
    (This Accounting Standard includes paragraphs set in
    bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards 1.)


    Accounting Standard (AS) 31,
    Financial Instruments: Presentation, issued by the

    Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. This Accounting Standard will become mandatory2 in respect of accounting periods commencing on or after 1-4-2011 for all commercial, industrial and business
    entities except to a Small and Medium-sized Entity, as defined

  2. #2
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    Default Accounting Standard (AS) 31 Financial Instruments: Presentation

    Accounting Standard (AS) 31 Financial Instruments: Presentation

    (This Accounting Standard includes paragraphs set in bold italic type and plain type, which have
    equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards 1.)

    Accounting Standard (AS) 31, Financial Instruments: Presentation, issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. This Accounting Standard will become mandatory in respect of accounting periods commencing on or after 1-4-2011 for all commercial, industrial and business entities except to a Small and Medium-sized Entity, as defined below:


    (i) Whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India;

    (ii) which is not a bank (including co-operative bank), financial institution or any entity carrying on insurance business;

    (iii) whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year;

    (iv) which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and

    (v) which is not a holding or subsidiary entity of an entity which is not a small and medium-sized entity.

    For the above purpose, an entity would qualify as a Small and Medium-sized Entity, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period.

    Where, in respect of an entity there is a statutory requirement for presenting any financial instrument in a particular manner as liability or equity and/ or for presenting interest, dividend, losses and gains relating to a financial instrument in a particular manner as income/ expense or as distribution of profits, the entity should present that instrument and/ or interest, dividend, losses and gains relating to the instrument in accordance with the requirements of the statute governing the entity. Untill the relevant statute is amended, the entity presenting that instrument and/ or interest, dividend, losses and gains relating to the instrument in accordance with the requirements thereof will be considered to be complying with this Accounting Standard, in view of paragraph 4.1 of the Preface to the Statements of Accounting Standards which recognises that where a requirement of an Accounting Standard is different from the applicable law, the law prevails.


    The following is the text of the Accounting Standard.

  3. #3
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    Default Objective of Accounting Standard (AS 31) – Financial Instruments: Presentation

    Objective of Accounting Standard (AS 31) – Financial Instruments: Presentation



    1. The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset.

    2. The principles in this Standard complement the principles for recognising and measuring financial assets and financial liabilities in Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement and for disclosing information about them in Accounting Standard (AS) 32, Financial Instruments: Disclosures.

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    Default Scope of Accounting Standard (AS 31) – Financial Instruments: Presentation

    Scope of Accounting Standard (AS 31) – Financial Instruments: Presentation



    3. This Standard should be applied by all entities to all types of financial instruments except:

    (a) those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with AS 21, Consolidated Financial Statements and Accounting for Investments in Subsidiaries in Separate Financial Statements, AS 23, Accounting for Investments in Associates, or AS 27, Financial Reporting of Interests in Joint Ventures. However, in some cases, AS 21, AS 23
    or AS 27 permits or requires an entity to account for an interest in a subsidiary, associate or joint venture using Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement5; in those cases, entities should apply the disclosure requirements in AS 21, AS 23 or AS 27 in addition to those in this Standard. Entities should also apply this Standard to all derivatives linked to interests in subsidiaries, associates or joint ventures.

    (b) employers’ rights and obligations under employee benefit plans, to which AS 15, Employee Benefits, applies.

    (c) contracts for contingent consideration in a business combination6. This exemption applies only to the acquirer.

    (d) insurance contracts as defined in the Accounting Standard on Insurance Contracts. However, this Standard applies to derivatives that are embedded in insurance contracts if Accounting Standard (AS) 30, Financial Instruments:

    Recognition and Measurement requires the entity to account for them separately. Moreover, an issuer should apply this Standard to financial guarantee contracts if the issuer applies AS 30 in recognising and measuring the contracts, but should apply the Accounting Standard on Insurance
    Contracts if the issuer elects, in accordance with the Accounting Standard on Insurance Contracts, to apply that Standard in recognising and measuring them.

  5. #5
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    Default Accounting Standard (AS 31) – Financial Instruments: Presentation

    Accounting Standard (AS 31) – Financial Instruments: Presentation


    (e) financial instruments that are within the scope of the Accounting Standard on Insurance Contracts8 because they contain a discretionary participation feature. The issuer of these instruments is exempt from applying to these features paragraphs 32-67 of this Standard regarding the distinction between financial liabilities and equity instruments. However, these instruments are
    subject to all other requirements of this Standard. Furthermore, this Standard applies to derivatives that are embedded in these instruments (see Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement).


    (f) financial instruments, contracts and obligations under share-based payment transactions9 except for

    (i) contracts within the scope of paragraphs 4-6 of this Standard, to which this Standard applies.
    (ii) paragraphs 68, 69 and 70 of this Standard, which should be applied to treasury shares, purchased, sold, issued or cancelled in connection with employee share option plans, employees share purchase plans, and all other share-based payment arrangements.


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

    5. 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 another financial instrument or by exchanging financial instruments;

    (b) when the ability to settle net in cash or another financial instrument, or by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or another financial instrument, or by exchanging financial instruments (whether with the counterparty, by entering into offsetting contracts or by selling the contract before its exercise or lapse);

    (c) when, for similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery for the purpose of generating a profit from 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 the entity’s expected purchase, sale or usage requirements, and, accordingly, is within the scope of this Standard. Other contracts to which paragraph 4 applies are evaluated to determine whether they were entered into and continue to be held for the purpose of the receipt or delivery of the nonfinancial item in accordance with the entity’s expected purchase, sale or usage requirement, and accordingly, whether they are within the scope of this Standard.

    6. A written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, in accordance with paragraph 5(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.

  6. #6
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    Default Definitions of Accounting Standard (AS 31) – Financial Instruments: Presentation

    Definitions of Accounting Standard (AS 31) – Financial Instruments: Presentation

    7. The following terms are used in this Standard with the meanings specified:

    7.1 A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

    7.2 A financial asset is any asset that is:

    (a) cash;
    (b) an equity instrument of another entity;
    (c) a contractual right:
    (i) to receive cash or another financial asset from another entity; or
    (ii) to exchange financial assets or financial liabilities with another entity


    under conditions that are potentially favourable to the entity; or

    (d) 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 instruments that are themselves contracts for
    the future receipt or delivery of the entity’s own equity instruments.

    7.3 A financial liability is any liability that is:

    (a) a 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 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 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 instruments that are themselves contracts for
    the future receipt or delivery of the entity’s own equity instruments.

    7.4 An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

    7.5 Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction



    8. The following terms are defined in paragraph 8 of Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement and are used in this Standard with the meaning specified in AS 30.

     amortised cost of a financial asset or financial liability
     available-for-sale financial assets
     derecognition
     derivative
     effective interest method
     financial asset or financial liability at fair value through profit or loss
     financial guarantee contract
     firm commitment
     forecast transaction
     hedge effectiveness
     hedged item
     hedging instrument
     held-to-maturity investments
     loans and receivables
     regular way purchase or sale
     transaction costs.


    9. 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.


    10. In this Standard, ‘entity’ includes individuals, partnerships, incorporated bodies, trusts and government agencies.

  7. #7
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    Default Financial Assets and Financial Liabilities of Accounting Standard (AS 31) – Financial Instruments Presentation

    Financial Assets and Financial Liabilities of Accounting Standard (AS 31) – Financial Instruments: Presentation


    11. 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 recognised in financial statements.
    A deposit of cash with a bank or similar financial institution is a financial asset because it represents the contractual right of the depositor to obtain cash from the institution or to draw a cheque or similar instrument against the balance in favour of a creditor in payment of a financial liability.


    12. Common examples of financial assets representing a contractual right to receive cash in the future and corresponding financial liabilities representing a contractual obligation to deliver cash in the future are:

    (a) trade accounts receivable and payable;
    (b) bills receivable and payable;
    (c) loans receivable and payable;
    (d) bonds receivable and payable; and
    (e) deposits and advances.

    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).

    13. Another type of financial instrument is one for which the economic benefit to be received or given up is a financial asset other than cash. For example, a promissory note payable in government bonds gives the holder the contractual right to receive and the issuer the contractual obligation to deliver government bonds, not cash. The bonds are financial assets because they represent obligations of the issuing government to pay cash. The promissory note is, therefore, a financial asset of the promissory note holder and a financial liability of the promissory note issuer.

    14. ‘Perpetual’ debt instruments normally 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 Rs. 1,000. Assuming 8 per cent to be the market rate of interest for the instrument when issued, the issuer assumes a contractual obligation to make a stream of future interest payments having a fair value (present value) of Rs. 1,000 on initial recognition. The holder and issuer of the instrument have a financial asset and a financial liability, respectively.


    15. A contractual right or contractual obligation to receive, deliver or exchange financial instruments is itself a financial instrument. 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.

    16. 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 from the guarantor, and a corresponding contractual obligation of the guarantor to pay the lender, if the borrower defaults. The contractual right and obligation exist because of a past transaction or event (assumption of the guarantee), even though the lender’s ability to exercise its right and the requirement for the guarantor to perform under its obligation are both contingent on a future act of default by the borrower. A contingent right and obligation meet the definition of a financial asset and a financial liability, even though such assets and liabilities are not always recognised in the financial statements. Some of the contingents rights and obligations may be insurance contracts within the scope of the Accounting Standard on Insurance Contracts.


    17. Under AS 19, 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 agreement. The lessor accounts
    for its investment in the amount receivable under the lease contract rather than the leased asset
    itself. An operating lease, on the other hand, is regarded as primarily an uncompleted contract committing the lessor to provide the use of an asset in future periods in exchange for consideration similar to a fee for a service. The lessor continues to account for the leased asset itself rather than any amount receivable in the future under the contract. Accordingly, a finance 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).

    18. 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 rise to a present right to receive cash or another financial
    asset.


    19. Assets (such as prepaid expenses) for which the future economic benefit is the receipt of goods or services, rather than the right to receive cash or another financial asset, are not financial assets. Similarly, items such as deferred revenue and most warranty obligations are not financial liabilities because the outflow of economic benefits associated with them is the delivery of goods and services rather than a contractual obligation to pay cash or another financial asset.


    20. 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 AS 22, Accounting for Taxes on Income.

  8. #8
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    Default Equity Instruments of Accounting Standard (AS 31) – Financial Instruments Presentation

    Equity Instruments of Accounting Standard (AS 31) – Financial Instruments: Presentation


    21. Examples of equity instruments include non-puttable equity shares, some types of preference shares (see paragraphs 38 and 39) and warrants or written call options that allow the holder to subscribe for or purchase a fixed number of non-puttable equity shares in the issuing entity in exchange for a fixed amount of cash or another financial asset. An obligation of an entity 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. However, if such a contract contains an obligation for the entity to pay cash or another financial asset, it also gives rise to a liability for the present value of the redemption amount (see paragraph 52(a)). An issuer of non-puttable equity shares assumes a liability when it formally acts to make a distribution and becomes legally obligated to the shareholders to do so. This may be the case following the declaration of a dividend or when the entity is being wound up and any assets remaining after the satisfaction of liabilities become distributable to shareholders.

    22. 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. Instead, any consideration paid for such a contract is deducted from equity.

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    Default Derivative Financial Instruments of Accounting Standard (AS 31) – Financial Instruments Presentation

    Derivative Financial Instruments of Accounting Standard (AS 31) – Financial Instruments Presentation


    23. 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.

    24. Derivative financial instruments create rights and obligations that have the effect of transferring between the parties to the instrument one or more of the financial risks inherent in an underlying primary financial instrument. On inception, derivative financial instruments give one party a contractual right to exchange financial assets or financial liabilities with another party under conditions that are potentially favourable, or a contractual obligation to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable. However, they generally 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 unfavourable.


    25. A put or call option to exchange financial assets or financial liabilities (i.e. financial instruments other than an entity’s own equity instruments) gives the holder a right to obtain potential future economic benefits associated with changes in the fair value of the financial instrument underlying the contract. Conversely, the writer of an option assumes an obligation to forgo potential future economic benefits or bear potential losses of economic benefits associated with changes in the 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 constitute a financial asset of the holder if the option were exercised. The option-holder’s right to exchange the financial asset under potentially favourable conditions and the writer’s obligation to exchange the financial asset under potentially unfavourable conditions are distinct from the underlying financial asset to be exchanged upon exercise of the option. The nature of the holder’s right and of the writer’s obligation are not affected by the likelihood that the option will be exercised.


    26. 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 Rs. 1,000,000 cash in exchange for Rs. 1,000,000 face amount of fixed rate government bonds, and the other party (the seller) promises to deliver Rs. 1,000,000 face amount of fixed rate government bonds in exchange for Rs. 1,000,000 cash. During the six months, both parties have a contractual right and a contractual obligation to exchange financial instruments. If the market price of the government bonds rises above Rs. 1,000,000, the conditions will be favourable to the purchaser and unfavourable to the seller; if the market price falls below Rs. 1,000,000, the effect will be the opposite. The purchaser has a contractual right (a financial asset) similar to the right under a call option held and a contractual obligation (a financial liability) similar to the obligation under a put option written; 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 agreed time, whereas performance under an option contract occurs only if and when the holder of the option chooses to exercise it.

    27. Many other types of derivative instruments embody a right or obligation to make a future exchange, including interest rate and currency swaps, interest rate caps, collars and floors, loan
    commitments, and letters of credit. An interest rate swap contract may be viewed as a variation
    of a forward contract in which the parties agree to make a series 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.

  10. #10
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    Default Contracts to Buy or Sell Non-Financial Items of Accounting Standard (AS 31) – Financial Instruments Presentation

    Contracts to Buy or Sell Non-Financial Items of Accounting Standard (AS 31) – Financial Instruments: Presentation


    28. Contracts to buy or sell non-financial items do not meet the definition of a financial instrument because the contractual right of one party to receive a non-financial asset or service and the corresponding obligation of the other party do not establish a present right or obligation of either party to receive, deliver or exchange a financial asset. For example, contracts that provide for settlement only by the receipt or delivery of a non-financial item (e.g. 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 underlying commodity. The ability to buy or sell a commodity contract for cash, the ease with which it may be bought or sold and the possibility of negotiating a cash settlement of the obligation to receive or deliver the commodity do not alter the fundamental character of the contract in a way that creates a financial instrument. Nevertheless, some contracts to buy or sell non-financial items that can be settled net or by exchanging financial instruments, or in which the non-financial item is readily convertible to cash, are within the scope of the Standard as if they were financial instruments (see paragraph 4).


    29. 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.


    30. Some contracts are commodity-linked, but do not involve settlement through the physical receipt or delivery of a commodity. They specify settlement through cash payments that are determined according to a formula in the contract, rather than through payment of fixed amounts.
    For example, the principal amount of a bond may be calculated by applying the market price of
    oil prevailing at the maturity of the bond to a fixed quantity of oil. The principal is indexed by
    reference to a commodity price, but is settled only in cash. Such a contract constitutes a financial
    instrument.


    31. 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 nonfinancial
    asset. For example, an oil-linked bond may give the holder the right to receive a stream of fixed periodic interest payments and a fixed amount of cash on maturity, with the option to exchange the principal amount for a fixed quantity of oil. The desirability of exercising this option will vary from time to time depending on the fair value of oil relative to the exchange ratio of cash for oil (the exchange price) inherent in the bond. The intentions of the bondholder concerning the exercise of the option do not affect the substance of the component assets. The financial asset of the holder and the financial liability of the issuer make the bond a financial instrument, regardless of the other types of assets and liabilities also created.

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