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Thread: 30 Accounting Standard 30 - Financial Instruments: Recognition and Measurment - AS 30

  1. #1
    Accounting Standards
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    Default 30 Accounting Standard 30 - Financial Instruments: Recognition and Measurment - AS 30

    Accounting Standard (AS) 30
    Financial Instruments: Recognition and Measurement


    (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 (revised 2004)

    Accounting Standard (AS) 30,

    Financial Instruments: Recognition and Measurement, 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
    Last edited by Accounting Standards; 09-08-2010 at 11:32 AM.

  2. #2
    Accounting Standards
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    Default Announcement - Accounting for Derivatives

    Announcement - Accounting for Derivatives

    Certain issues have been raised with regard to the foreign currency derivative exposures of various corporates that are not being fully accounted for. These exposures may translate into heavy losses due to fluctuations in the foreign exchange rates. The matter was considered by the Council of the ICAI at its meeting held on March 27-29, 2008. The Council decided to clarify the best practice treatment to be followed for all derivatives, which is contained in the following paragraphs.


    It may be noted that although the ICAI has issued AS 30, Financial Instruments: Recognition and Measurement, which contains accounting for derivatives, it becomes recommendatory from 1.04.2009 and mandatory from 1.04.2011. In this scenario, the Council expressed the view that since the aforesaid Standard contains appropriate accounting for derivatives, the same can be followed by the entities, as the earlier adoption of a standard is always encouraged.


    In case an entity does not follow AS 30, keeping in view the principle of prudence as enunciated in AS 1, Disclosure of Accounting Policies, the entity is required to provide for losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market.
    The entity needs to disclose the policy followed with regard to accounting for derivatives in its financial statements.


    In case AS 30 is followed by the entity, a disclosure of the amounts recognised in the financial statements should be made.
    In case AS 30 is not followed, the losses provided for as suggested in paragraph 3 above should be separately disclosed by the entity.


    The auditors should consider making appropriate disclosures in their reports if the aforesaid accounting treatment and disclosures are not made.


    In case of forward contracts to which AS 11, 'The Effects of Changes in Foreign Exchange Rates', applies, the entity needs to fully comply with the requirements of AS 11. Accordingly, this Announcement does not apply to such contracts.


    This clarificatory Announcement applies to financial statements for the period ending March 31, 2008, or thereafter.

  3. #3
    Accounting Standards
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    Default Accounting Standard (AS) 30 Financial Instruments Recognition and Measurement

    Accounting Standard (AS) 30 Financial Instruments: Recognition and Measurement



    (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 (revised 2004)


    Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement, 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 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.

    From the date of this Standard becoming mandatory for the concerned entities, the following stand withdrawn:


    (i) Accounting Standard (AS) 4,
    Contingencies and Events Occurring After the Balance Sheet Date, to the extent it deals with contingencies3.

    (ii) Accounting Standard (AS) 11 (revised 2003),
    The Effects of Changes in Foreign Exchange Rates4, to the extent it deals with the ‘forward exchange contracts’.

    (iii) Accounting Standard (AS) 13,
    Accounting for Investments, except to the extent it relates to accounting for investment properties.

    From the date this Accounting Standard becomes recommendatory in nature, the following Guidance Notes issued by the Institute of Chartered Accountants of India, stand withdrawn:


    (i) Guidance Note on Guarantees & Counter Guarantees Given by the Companies.

    (ii) Guidance Note on Accounting for Investments in the Financial Statements of Mutual Funds.

    (iii) Guidance Note on Accounting for Securitisation.

    (iv) Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options.

    The following is the text of the Accounting Standard.

    Last edited by Accounting Standards; 09-08-2010 at 11:05 AM.

  4. #4
    Accounting Standards
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    Default Objective Accounting Standard (AS) 30 Financial Instruments: Presentation

    Objective Accounting Standard (AS) 30 Financial Instruments Presentation


    1. The objective of this Standard is to establish principles for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.


    Requirements for presenting information about financial instruments are in Accounting Standard (AS) 31, Financial Instruments: Presentation. Requirements for disclosing information about financial instruments are in Accounting Standard (AS) 32, Financial Instruments: Disclosures.

    (d) financial instruments issued by the entity that meet the definition of an equity instrument in AS 31, Financial Instruments: Presentation (including options and warrants). However, the holder of such equity instruments should apply this Standard to those instruments, unless they meet the exception in (a) above.

    (e) (i) rights and obligations arising under an insurance contract as defined in the Accounting Standard on Insurance Contracts
    7, other than an issuer’s rights and obligations arising under an insurance contract that meets the definition of
    a financial guarantee contract in paragraph 8.6, or (ii) a contract that is within the scope of Accounting Standard on Insurance Contracts
    8 because it contains a discretionary participation feature. However, this Standard applies to a derivative that is embedded in a contract within the scope of Accounting

    Standard on Insurance Contracts
    9if the derivative is not itself a contract within the scope of that Standard (see paragraphs 913 and Appendix A paragraphs A47A53). Moreover, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may choose to apply either this Standard or Accounting Standard on Insurance Contracts10to such financial guarantee contracts (see Appendix A paragraphs A5 and A6). The issuer may make that choice contract by contract, but the
    choice made for each contract is irrevocable.

    (f) contracts for contingent consideration in a business combination
    11. This exemption applies only to the acquirer.

    (g) contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date.

    (h) loan commitments other than those loan commitments described in paragraph

    3. An issuer of loan commitments should apply AS 29, Provision, Contingent Liabilities and Contingent Assets, to loan commitments that are not within the scope of this Standard. However, all loan commitments are subject to the
    derecognition provisions of this Standard (see paragraphs 15
    46 and Appendix A paragraphs A59A82).
    (i) financial instruments, contracts and obligations under share-based payment transactions
    12, except for contracts within the scope of paragraphs 4-6 of this Standard, to which this Standard applies.


    (j) rights to receive payments as reimbursement of expenditure, the entity is required to make, to settle a liability that it recognises as a provision in accordance with AS 29, Provisions, Contingent Liabilities and Contingent Assets, or for which, in an earlier period, it recognised a provision in accordance with AS 29.


    3. The following loan commitments are within the scope of this Standard (see Appendix A paragraphs A7
    A12):


    (a) loan commitments
    13 that the entity designates as financial liabilities at fair value through profit or loss. An entity that has a past practice of selling the assets resulting from its loan commitments shortly after origination should apply this Standard to all its loan commitments in the same class.


    (b) loan commitments that can be settled net in cash or by delivering or issuing another financial instrument. These loan commitments are derivatives. A loan commitment is not regarded as settled net merely because the loan is paid out in
    instalments (for example, a mortgage construction loan that is paid out in instalments in line with the progress of construction).


    (c) commitments to provide a loan at a below-market interest rate. Paragraph 52(e) specifies the subsequent measurement of liabilities arising from these loan commitments.


    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 requirements 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.
    Last edited by Accounting Standards; 09-08-2010 at 11:14 AM.

  5. #5
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    Default Definitions of Accounting Standard (AS) 30 Financial Instruments: Recognition and Measurment

    Definitions of Accounting Standard (AS) 30 Financial Instruments: Recognition and Measurment


    7. The terms defined in AS 31, Financial Instruments: Presentation are used in this Standard with the meanings specified in paragraph 7 of AS 31. AS 31 defines the following terms:

     financial instrument
     financial asset
     financial liability
     equity instrument

    and provides guidance on applying those definitions.

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

    Definition of a Derivative

    8.1 A derivative is a financial instrument or other contract within the scope of this Standard (see paragraphs 2-6) with all three of the following characteristics:

    (a) its value changes in response to the change in 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 (sometimes called the ‘underlying’);

    (b) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and

    (c) it is settled at a future date.

    Definitions of Four Categories of Financial Instruments

    8.2 A financial asset or financial liability at fair value through profit or loss is a financial asset or financial liability that meets either of the following conditions.

    (a) It is classified as held for trading. A financial asset or financial liability is classified as held for trading if it is:

    (i) acquired or incurred principally for the purpose of selling or repurchasing it in the near term; or

    (ii) part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or

    (iii) a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).

    (b) Upon initial recognition it is designated by the entity as at fair value through profit or loss. An entity may use this designation only when permitted by paragraph 11, or when doing so results in more relevant information, because either

    (i) it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as ‘an accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (see Appendix A paragraphs A15-A18); or

    (ii) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the entity’s key
    management personnel (as defined in AS 18, Related Party Disclosures), its board of directors or similar governing body and its chief executive officer. This would normally be relevant in case of a venture capital organisation, mutual fund, unit trust or similar entity whose business is investing in financial assets with a view to profiting from their total return in the form of interest or dividends and changes in fair value (see also Appendix A paragraphs A19-A22).

    Accounting Standard (AS) 32, Financial Instruments: Disclosures14, requires the entity to provide disclosures about financial assets and financial liabilities it has designated as at fair value through profit or loss, including how it has satisfied these conditions. For instruments qualifying in accordance with (ii) above, that disclosure includes a narrative description of how designation as at
    fair value through profit or loss is consistent with the entity’s documented risk management or investment strategy.

    Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured (see paragraph 51(c) and Appendix A paragraphs A100 and A101), should not be designated as at fair value through profit or loss.

    It should be noted that paragraphs 53, 54, 55 and Appendix A paragraphs A88- A102, which set out requirements for determining a reliable measure of the fair value of a financial asset or financial liability, apply equally to all items that are measured at fair value, whether by designation or otherwise, or whose fair value is disclosed.

    8.3 Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity (see Appendix A paragraphs A36-A45) other than:

    (a) those that the entity upon initial recognition designates as at fair value through profit or loss;

    (b) those that meet the definition of loans and receivables; and

    (c) those that the entity designates as available for sale.

    An entity should not classify any financial assets as held to maturity if the entity has, during the current financial year or during the two preceding financial years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity (more than insignificant in relation to the total amount of held-tomaturity investments) other than sales or reclassifications that:

    (i) are so close to maturity or the financial asset's call date (for example, less than three months before maturity) that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value; or

    (ii) occur after the entity has collected substantially all of the financial asset's original principal through scheduled payments or prepayments; or

    (iii) are attributable to an isolated event that is beyond the entity’s control, is non-recurring and could not have been reasonably anticipated by the entity.


    8.4 Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

    (a) those that the entity intends to sell immediately or in the near term, which should be classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss;

    (b) those that the entity upon initial recognition designates as available for sale; or

    (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, which should be classified as available for sale.

    An interest acquired in a pool of assets that are not loans or receivables (for example, an interest in a mutual fund or a similar fund) is not a loan or receivable.


    8.5 Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables,

    (b) held-to-maturity investments, or (c) financial assets at fair value through profit or loss.


    Definition of a financial guarantee contract

    8.6 A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.


    Definitions Relating to Recognition and Measurement


    8.7 The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.


    8.8 The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.

    8.9 The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability (see Appendix A paragraphs A23-A27).


    8.10 Derecognition is the removal of a previously recognised financial asset or financial liability from an entity’s balance sheet.

    8.11 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.


    8.12 A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.

    8.13 Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability (see Appendix A paragraph A33). An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.

    Definitions Relating to Hedge Accounting

    8.14 A firm commitment is a binding agreement for the exchange of a specified quantity of resources at a specified price on a specified future date or dates.

    8.15 A forecast transaction is an uncommitted but anticipated future transaction.

    8.16 Functional currency is the currency of the primary economic environment in which the entity operates.

    8.17 A hedging instrument is (a) a designated derivative or (b) for a hedge of the risk of changes in foreign currency exchange rates only, a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item (paragraphs 81-86 and Appendix A paragraphs A114-A117 elaborate on the definition of a hedging instrument).


    8.18 A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that (a) exposes the entity to risk of changes in fair value or future cash flows and (b) is designated as being hedged (paragraphs 87-94 and Appendix A paragraphs A118-A125 elaborate on the definition of hedged items).


    8.19 Hedge effectiveness is the degree to which changes in the fair value or cash flows of the hedged item that are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument (see Appendix A paragraphs A129-A138).

  6. #6
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    Default Embedded Derivatives Accounting Standard (AS) 30 Financial Instruments: Recognition and Measurment

    Embedded Derivatives Accounting Standard (AS) 30 Financial Instruments: Recognition and Measurment


    9. An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract—with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to 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. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument.


    10. An embedded derivative should be separated from the host contract and accounted for as a derivative under this Standard if, and only if:

    (a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract (see Appendix A paragraphs A50 and A53);

    (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

    (c) the hybrid (combined) instrument is not measured at fair value with changes in fair value recognised in the statement of profit and loss (i.e., a derivative that is embedded in a financial asset or financial liability at fair value through profit or loss is not separated).


    If an embedded derivative is separated, the host contract should be accounted for under this Standard if it is a financial instrument, and in accordance with other appropriate Standards if it is not a financial instrument. This Standard does not address whether an embedded derivative should be presented separately on the face of the financial statements.


    11. Notwithstanding paragraph 10, if a contract contains one or more embedded derivatives, an entity may designate the entire hybrid (combined) contract as a financial asset or financial liability at fair value through profit or loss unless:

    (a) the embedded derivative(s) does not significantly modify the cash flows that otherwise would be required by the contract; or

    (b) it is clear with little or no analysis when a similar hybrid (combined) instrument is first considered that separation of the embedded derivative(s) is prohibited, such as a prepayment option embedded in a loan that permits the holder to prepay the loan for approximately its amortised cost.


    12. If an entity is required by this Standard to separate an embedded derivative from its host contract, but is unable to measure embedded derivative separately either at acquisition or at a subsequent financial reporting date, it should designate the entire hybrid (combined) contract as at fair value through profit or loss.


    13. If an entity is unable to determine reliably the fair value of an embedded derivative on the basis of its terms and conditions (for example, because the embedded derivative is based on an unquoted equity instrument), the fair value of the embedded derivative is the difference between the fair value of the hybrid (combined) instrument and the fair value of the host contract, if those can be determined under this Standard. If the entity is unable to determine the fair value of the embedded derivative using this method, paragraph 12 applies and the hybrid (combined) instrument is designated as at fair value through profit or loss.

  7. #7
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    Default Recognition and Derecognition of Initial Recognition

    Recognition and Derecognition of Initial Recognition


    14. An entity should recognise a financial asset or a financial liability on its balance sheet when, and only when, the entity becomes a party to the contractual provisions of the instrument. (See paragraphs 38-42 with respect to regular way purchases of financial assets.)

  8. #8
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    Default Derecognition of a Financial Asset Accounting Standard (AS) 30 Financial Instruments: Recognition and Measurment

    Derecognition of a Financial Asset Accounting Standard (AS) 30 Financial Instruments Recognition and Measurment


    15. Before evaluating whether, and to what extent, derecognition is appropriate under paragraphs 16-22, an entity determines whether those paragraphs should be applied to a part of a financial asset (or a part of a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety, as follows.


    (a) Paragraphs 16-22 are applied to a part of a financial asset (or a part of a group of similar financial assets) if, and only if, the part being considered for derecognition meets one of the following three conditions.

    (i) The part comprises only specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an interest rate strip whereby the counterparty obtains the right to the interest cash flows, but not the principal cash flows from a debt instrument, paragraphs 16-22 are applied to the interest cash flows.


    (ii) The part comprises only a fully proportionate (pro rata) share of the cash flows from a financial asset (or a group of similar financial assets).

    For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of all cash flows of a debt instrument, paragraphs 16-22 are applied to 90 per cent of those cash flows. If there is more than one counterparty, each counterparty is
    not required to have a proportionate share of the cash flows provided that the transferring entity has a fully proportionate share.

    (iii) The part comprises only a fully proportionate (pro rata) share of specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an arrangement whereby the counterparty obtains the rights to a 90 per cent share of interest cash flows from a financial asset, paragraphs 16- 22 are applied to 90 per cent of those interest cash flows. If there is more than one counterparty, each counterparty is not required to have a
    proportionate share of the specifically identified cash flows provided that the transferring entity has a fully proportionate share.


    (b) In all other cases, paragraphs 16-22 are applied to the financial asset in its entirety (or to the group of similar financial assets in their entirety). For example, when an entity transfers (i) the rights to the first or the last 90 per cent of cash collections from a financial asset (or a group of financial assets), or (ii) the rights to 90 per cent of the cash flows from a group of receivables, but
    provides a guarantee to compensate the buyer for any credit losses up to 8 per cent of the principal amount of the receivables, paragraphs 16-22 are applied to the financial asset (or a group of similar financial assets) in its entirety.

    In paragraphs 16-26, the term ‘financial asset’ refers to either a part of a financial asset (or a part of a group of similar financial assets) as identified in (a) above or, otherwise, a financial asset (or a group of similar financial assets) in its entirety.

    16. An entity should derecognise a financial asset when, and only when:

    (a) the contractual rights to the cash flows from the financial asset expire; or

    (b) it transfers the financial asset as set out in paragraphs 17 and 18 and the transfer qualifies for derecognition in accordance with paragraph 19. (See paragraphs 38-42 for regular way sales of financial assets.)


    17. An entity transfers a financial asset if, and only if, it either:

    (a) transfers the contractual rights to receive the cash flows of the financial asset; or

    (b) retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the conditions in paragraph 18.

    18. When an entity retains the contractual rights to receive the cash flows of a financial asset (the ‘original asset’), but assumes a contractual obligation to pay those cash flows to one or more entities (the ‘eventual recipients’), the entity treats the transaction as a transfer of a financial asset if, and only if, all of the following three conditions are met.

    (a) The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset. Short-term advances by the entity to the eventual recipients with the right of full recovery of the amount lent plus accrued interest at market rates do not violate this condition.

    (b) The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows.

    (c) The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the entity is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents (as defined in AS 3, Cash Flow Statements) during the short settlement period from the collection date to the date of required remittance to the eventual recipients, and interest earned on such investments is passed to the eventual recipients.

    19. When an entity transfers a financial asset (see paragraph 17), it should evaluate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case:

    (a) if the entity transfers substantially all the risks and rewards of ownership of the financial asset, the entity should derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.

    (b) if the entity retains substantially all the risks and rewards of ownership of the financial asset, the entity should continue to recognise the financial asset.

    (c) if the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the entity should determine whether it has retained control of the financial asset. In this case:

    (i) if the entity has not retained control, it should derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer.

    (ii) if the entity has retained control, it should continue to recognise the financial asset to the extent of its continuing involvement in the financial asset (see paragraph 30).

    20. The transfer of risks and rewards (see paragraph 19) is evaluated by comparing the entity’s exposure, before and after the transfer, with the variability in the amounts and timing of the net cash flows of the transferred asset. An entity has retained substantially all the risks and rewards of ownership of a financial asset if its exposure to the variability in the present value of the future net cash flows from the financial asset does not change significantly as a result of the transfer (e.g., because the entity has sold a financial asset subject to an agreement to buy it back at a fixed price or the sale price plus a lender's return). An entity has transferred substantially all the risks and rewards of ownership of a financial asset if its exposure to such variability is no longer significant in relation to the total variability in the present value of the future net cash flows associated with the financial asset (e.g., because the entity has sold a financial asset subject only to an option to buy it back at its fair value at the time of repurchase or has transferred a fully proportionate share of the cash flows from a larger financial asset in an arrangement, such as a loan sub-participation, that meets the conditions in paragraph 18).

    21. Often it will be obvious whether the entity has transferred or retained substantially all risks and rewards of ownership and there will be no need to perform any computations. In other cases, it will be necessary to compute and compare the entity's exposure to the variability in the present value of the future net cash flows before and after the transfer. The computation and comparison is made using as the discount rate an appropriate current market interest rate. All reasonably possible variability in net cash flows is considered, with greater weight being given to those outcomes that are more likely to occur.

    22. Whether the entity has retained control (see paragraph 19(c)) of the transferred asset depends on the transferee’s ability to sell the asset. If the transferee has the practical ability to sell the asset in its entirety to an unrelated party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer, the entity has not retained control. In all other cases, the entity has retained control.

    23. In consolidated financial statements, paragraphs 15-22 and Appendix A paragraphs A57- A75 are applied at a consolidated level. Hence, an entity first consolidates all subsidiaries in accordance with AS 21 and then applies paragraphs 15-22 and Appendix A paragraphs A57-A75 to the resulting group.

  9. #9
    Accounting Standards
    Guest

    Default Transfers that Qualify for Derecognition of Accounting Standard (AS) 30 Financial Instruments: Recognition and Measurment

    Transfers that Qualify for Derecognition (see paragraph 19(a) and (c)(i))


    24. If an entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety and retains the right to service the financial asset for a fee, it should recognise either a servicing asset or a servicing liability for that servicing contract. If the fee to be received is not expected to compensate the entity adequately for performing the servicing, a servicing liability for the servicing obligation should be recognised at its fair value. If the fee to be received is expected to be more than adequate compensation for the servicing, a servicing asset should be recognised for the servicing right at an amount determined on the basis of an allocation of the carrying amount of the larger financial asset in accordance with paragraph 27.


    25. If, as a result of a transfer, a financial asset is derecognised in its entirety but the transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the entity should recognise the new financial asset, financial liability or servicing liability at fair value.


    26. On derecognition of a financial asset in its entirety, the difference between:

    (a) the carrying amount and
    (b) the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised directly in an equity account, say, Investment Revaluation Reserve Account (see paragraph 61(b)) should be recognised in the statement of profit and loss.

    27. If the transferred asset is part of a larger financial asset (e.g., when an entity transfers interest cash flows that are part of a debt instrument, see paragraph 15(a)) and the part transferred qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset should be allocated between the part that continues to be recognised and the part that is derecognised, based on the relative fair values of those parts on the date of the transfer. For this purpose, a retained servicing asset should be treated as a part that continues to be recognised. The difference between:

    (a) the carrying amount allocated to the part derecognised and

    (b) the sum of (i) the consideration received for the part derecognised (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss allocated to it that had been recognised directly in the equity account (see paragraph 61(b)) should be recognised in the statement of profit and loss. A cumulative gain or loss that had been recognised in the equity account is allocated between the part that continues to be recognised and the part that is derecognised, based on the relative fair values of those parts.


    28. When an entity allocates the previous carrying amount of a larger financial asset between the part that continues to be recognised and the part that is derecognised, the fair value of the part that continues to be recognised needs to be determined. When the entity has a history of selling
    parts similar to the part that continues to be recognised or other market transactions exist for such
    parts, recent prices of actual transactions provide the best estimate of its fair value. When there
    are no price quotes or recent market transactions to support the fair value of the part that continues to be recognised, the best estimate of the fair value is the difference between the fair
    value of the larger financial asset as a whole and the consideration received from the transferee
    for the part that is derecognised.

  10. #10
    Accounting Standards
    Guest

    Default Transfers that Do Not Qualify for Derecognition Accounting Standard (AS) 30 Financial Instruments Recognition and Measurment

    Transfers that Do Not Qualify for Derecognition (see paragraph 19(b))


    29. If a transfer does not result in derecognition because the entity has retained substantially all the risks and rewards of ownership of the transferred asset, the entity should continue to recognise the transferred asset in its entirety and should recognise a financial liability for the consideration received. In subsequent periods, the entity should recognise any income on the transferred asset and any expense incurred on the financial liability.

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