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Thread: 20 - Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31) - Financial Instruments: Presentation

  1. #21
    IND-AS
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    Thumbs up Total expected cash flows attributable to the instrument over the life of the instrument of Indian Accounting Standard (Ind AS) 32

    Total expected cash flows attributable to the instrument over the life of the instrument of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation


    Appendix - A


    Total expected cash flows attributable to the instrument over the life of the instrument (paragraph 16A(e))

    AG14E. The total expected cash flows of the instrument over the life of the instrument must be substantially based on the profit or loss, change in the recognised net assets or fair value of the recognised and unrecognised net assets of the entity over the life of the instrument. Profit or loss and the change i n the recognised net assets shall be measured in accordance with relevant Indian Accounting Standards.


  2. #22
    IND-AS
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    Thumbs up Transactions entered into by an instrument holder other than as owner of the entity of Indian Accounting Standard (Ind AS) 32

    Transactions entered into by an instrument holder other than as owner of the entity of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation


    Appendix - A


    Transactions entered into by an instrument holder other than as owner of the entity (paragraphs 16A and 16C)


    AG14F. The holder of a puttable financial instrument or an instrument that imposes on the entity an obligation to deliver to another party a prorata share of the net assets of the entity only on liquidation may enter into transactions with the entity in a role other than that of an owner. For example, an instrument holder may also be an employee of the entity. Only the cash flows and the contractual terms and conditions of the instrument that relate to the instrument holder as an owner of the entity shall be considered when assessing whether the instrument should be classified as equity under paragraph 16A or paragraph 16C.

    AG14G. An example is a limited partnership that has limited and general partners. Some general partners may provide a guarantee to the entity and may be remunerated for providing that guarantee. In such situations, the guarantee and the associated cash flows relate to the instrument holders in their role as guarantors and not in their roles as owners of the entity. Therefore, such a guarantee and the associated cash flows would no t result in the general partners being considered subordinate to the limited partners, and would be disregarded when assessing whether the contractual terms of the limited partnership instruments and the general partnership instruments are identical.

    AG14H. Another example is a profit or loss sharing arrangement that allocates profit or loss to the instrument holders on the basis of services rendered or business generated during the current and previous years. Such arrangements are transactions with instrument holders in their role as non-owners and should not be considered when assessing the features listed in paragraph 16A or paragraph 16C. However, profit or loss sharing arrangements that allocate profit or loss to instrument holders based on the nominal amount of their instruments relative to others in the class represent transactions with the instrument holders in their roles as owners and should be considered when assessing the features listed in paragraph 16A or paragraph 16C.

    AG14I. The cash flows and contractual terms and conditions of a transaction between the instrument holder (in the role as a non -owner) and the issuing entity must be similar to an equivalent transaction that might occur between a non - instrument holder and the issuing entity.


  3. #23
    IND-AS
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    Thumbs up Appendix - A of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31) Financial Instruments: Presentation

    No other financial instrument or contract with total cash flows that substantially fixes or restricts the residual return to the instrument holder of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation

    Appendix - A


    No other financial instrument or contract with total cash flows that substantially fixes or restricts the residual return to the instrument holder (paragraphs 16B and 16D)

    AG14J. A condition for classifying as equity a financial instrument that otherwise meets the criteria in paragraph 16A or paragraph 16C is that the entity has no other financial instrument or contract that has (a) total cash flows based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity and (b) the effect of substantially restricting or fixing the residual return. The following instruments, when entered into on normal commercial terms with unrelated parties, are unlikely to prevent instruments that otherwise meet the criteria in paragraph 16A or paragraph 16C from being classified as equity:

    (a) instruments with total cash flows substantially based on specific assets of the entity.
    (b) instruments with total cash flows based on a percentage of revenue.
    (c) contracts designed to reward individual employees for services rendered to the entity.
    (d) contracts requiring the payment of an insignificant percentage of profit for services rendered or goods provided.


  4. #24
    IND-AS
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    Thumbs up Derivative financial instruments of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31) - Financial Instruments: Presentation

    Derivative financial instruments of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation

    Appendix - A


    Derivative financial instruments

    AG15. 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.

    AG16. 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 1 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.

    AG17. A put or call option to exchange financial assets or financial liabilities (ie 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.

    AG18. 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 Rs1,000,000 cash in exchange for Rs1,000,000 face amount of fixed rate government bonds, and the other party (the seller) promises to deliver Rs1,000,000 face amount of fixed rate government bonds in exchange for Rs1,000,000 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 Rs1,000,000, the conditions will be favourable to the purchaser and unfavourable to the seller; if the market price falls below Rs1,000,000, 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.

    AG19. 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, note issuance facilities 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.



  5. #25
    IND-AS
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    Thumbs up Contracts to buy or sell non-financial items of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31) -

    Contracts to buy or sell non-financial items of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation

    Appendix - A


    Contracts to buy or sell non-financial items (paragraphs 8– 10)

    AG20. 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 (eg 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 8).

    AG21. 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.

    AG22. 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.

    AG23. 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 non -financial 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 oi l 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.

    AG24. [Refer to Appendix 1]


  6. #26
    IND-AS
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    Thumbs up Presentation of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31) - Financial Instruments: Presentation

    Presentation of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation

    Appendix - A

    Presentation

    Liabilities and equity (paragraphs 15–27)

    No contractual obligation to deliver cash or another financial asset (paragraphs 17–20)


    AG25. Preference shares may be issued with various rights. In determining whether a preference share is a financial liability or an equity instrument, an issuer assesses the particular rights attaching to the share to determine whether it exhibits the fundamental characteristic of a financial liability. For example, a preference share that provides for redemption on a specific date or at the option of the holder contains a financial liability because the issuer has an obligation to transfer financial assets to the holder of the share. The potential inability of an issuer to satisfy an obligation to redeem a preference share when contractually required to do so, whether because of a lack of funds , a statutory restriction or insufficient profits or reserves, does not negate the obligation. An option of the issuer to redeem the shares for cash does not satisfy the definition of a financial liability because the issuer does not have a present obligation to transfer financial assets to the shareholders. In this case, redemption of the shares is solely at the discretion of the issuer. An obligation may arise, however, when the issuer of the shares exercises its option, usually by formally notifying the shareholders of an intention to redeem the shares.

    AG26. When preference shares are non-redeemable, the appropriate classification is determined by the other rights that attach to them. Classification is based on an assessment of the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. When distributions to holders of the preference shares, whether cumulative or non -cumulative, are at the discretion of the issuer, the shares are equity instruments. The classification of a preference share as an equity instrument or a financial liability is not affected by, for example:

    (a) a history of making distributions;
    (b) an intention to make distributions in the future;
    (c) a possible negative impact on the pric e of ordinary shares of the issuer if distributions are not made (because of restrictions on paying dividends on the ordinary shares if dividends are not paid on the preference shares);
    (d) the amount of the issuer’s reserves;
    (e) an issuer’s expectation of a profit or loss for a period; or
    (f) an ability or inability of the issuer to influence the amount of its profit or loss for the period.


  7. #27
    IND-AS
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    Thumbs up Settlement in the entity’s own equity instruments of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Settlement in the entity’s own equity instruments of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation

    Appendix - A


    Settlement in the entity’s own equity instruments
    (paragraphs 21–24)


    AG27. The following examples illustrate how to classify different types of contracts on an entity’s own equity instruments:

    (a) A contract that will be settled by the entity receiving or delivering a fixed number of its own shares for no future consideration, or exchanging a fixed number of its own shares f or a fixed amount of cash or another financial asset, is an equity instrument (except as stated in paragraph 22A). Accordingly, any consideration received or paid for such a contract is added directly to or deducted directly from equity. One example is an issued share option that gives the counterparty a right to buy a fixed number of the entity’s shares for a fixed amount of cash. However, if the contract requires the entity to purchase (redeem) its own shares for cash or another financial asset at a fixed or determinable date or on demand, the entity also recognises a financial liability for the present value of the redemption amount (with the exception of instruments that have all the features and meet the conditions in paragraphs 16A and 16B or paragraph s 16C and 16D). One example is an entity’s obligation under a forward contract to repurchase a fixed number of its own shares for a fixed amount of cash.

    (b) An entity’s obligation to purchase its own shares for cash gives rise to a financial liability for the present value of the redemption amount even if the number of shares that the entity is obliged to repurchase is not fixed or if the obligation is conditional on the counterparty exercising a right to redeem (except as stated in paragraphs 16A and 16B or paragraphs 16C and 16D). One example of a conditional obligation is an issued option that requires the entity to repurchase its own shares for cash if the counterparty exercises the option.

    (c) A contract that will be settled in cash or another financial asset is a financial asset or financial liability even if the amount of cash or another financial asset that will be received or delivered is based on changes in the market price of the entity’s own equity (except as stated in paragraphs 16A and 16B or paragraphs 16C and 16D). One example is a net cash -settled share option.

    (d) A contract that will be settled in a variable number of the entity’s own shares whose value equals a fixed amount or an amount based on changes in an underlying variable (eg a commodity price) is a financial asset or a financial liability. An example is a written option to buy gold that, if exercised, is settled net in the entity’s own instruments by the entity delivering as many of those instruments as are equal to the value of the option contract. Such a contract is a financial asset or financial liability even if the underlying variable is the entity’s own share price rather than gold. Similarly, a contract that will be settled in a fixed number of the entity’s own shares, but the rights attaching to those shares will be varied so that the settlement value equals a fixed amount or an amount based on changes in an underlying variable, is a financial asset or a financial liability.


  8. #28
    IND-AS
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    Thumbs up Contingent settlement provisions of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31) - Financial Instruments: Presentation

    Contingent settlement provisions of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation

    Appendix - A


    Contingent settlement provisions ( paragraph 25)

    AG28. Paragraph 25 requires that if a part of a contingent settlement provision that could require settlement in cash or another financial asset (or in another way that would result in the instrument being a financial liability) is not genuine, the settlement provision does not affect the classification of a financial instrument. Thus, a contract that requires settlement in cash or a variable number of the entity’s own shares only on the occurrence of an event that is extremely rare, highly abnormal and very unlikely to occur is an equity instrument. Similarly, settlement in a fixed number of an entity’s own shares may be contractually precluded in circumstances that are outside the control of the entity, but if these circumstances have no genuine possibility of occurring, classification as an equity instrument is appropriate.


  9. #29
    IND-AS
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    Thumbs up Treatment in consolidated financial statements of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Treatment in consolidated financial statements of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation

    Appendix - A


    Treatment in consolidated financial statements


    AG29. In consolidated financial statements, an entity presents non -controlling interests—ie the interests of other parties in the equity and income of its subsidiaries—in accordance with Ind AS 1 and Ind AS 27. When classifying a financial instrument (or a component of it) in consolidated financial statements, an entity considers all terms and conditions agreed between members of the group and the holders of the instrument in determining whether the group as a whole has an obligation to deliver cash or another financial asset in respect of the instrument or to settle it in a manner that results in liability classification. When a subsidiary in a group issues a financial instrument and a parent or other group entity agrees additional terms directly with the holders of the instrument (eg a guarantee), the group may not have discretion over distributions or redemption. Although the subsidiary may appropriately classify the instrument without regard to these additional terms in its individual financial statements, the effect of other agreements between members of the group and the holders of the instrument is considered in order to ensure that consolidated financial statements reflect the contracts and transactions entered into by the group as a whole. To the extent that there is such an obligation or settlement provision, the instrument (or the component of it that is subject to the obligation) i s classified as a financial liability in consolidated financial statements.

    AG29A. Some types of instruments that impose a contractual obligation on the entity are classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. Classification in accordance with those paragraphs is an exception to the principles otherwise applied in this Standard to the classification of an instrument. This exception is not extended to the classification of non-controlling interests in the consolidated financial statements. Therefore, instruments classified as equity instruments in accordance with either paragraphs 16A and 16B or paragraphs 16C and 16D in the separate or individual financial statements that are non-controlling interests are classified as liabilities in the consolidated financial statements of the group.


  10. #30
    IND-AS
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    Thumbs up Compound financial instruments of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31) - Financial Instruments: Presentation

    Compound financial instruments of Indian Accounting Standard (Ind AS) 32 - Earlier Accounting standard - (31)

    Financial Instruments: Presentation

    Appendix - A


    Compound financial instruments (paragraphs 28–32)

    AG30. Paragraph 28 applies only to issuers of non-derivative compound financial instruments. Paragraph 28 does not deal with compound financial instruments from the perspective of holders. Ind AS 39 deals with the separation of embedded derivatives from the perspective of holders of compound financial instruments that contain debt and equity features.

    AG31. A common form of compound financial instrument is a debt instrument with an embedded conversion option, such as a bond convertible into ordinary shares of the issuer, and without any other embedded derivative features. Paragraph 28 requires the issuer of such a financial instrument to present the liability component and the equity component separately in the balance sheet, as follows:

    (a) The issuer’s obligation to make scheduled payments of interest and principal is a financial liability that exists as long as the instrument is not converted. On initial recognition, the fair value of the liability component is the present value of the contractually determined stream of future cash flows discounted at the rate of interest applied at that time by the market to instruments of comparable credit status and providing substantially the same cash flows, on the same terms, but without the conversion option.

    (b) The equity instrument is an embedded option to convert the liability into equity of the issuer. The fair value of the option comprises its time value and its intrinsic value, if any. This option has value on initial recognition even when it is out of the money.

    AG32. On conversion of a convertible instrument at maturity, the entity derecognises the liability component and recognises it as equity. The original equity component remains as equity (although it may be transferred from one line item within equity to another). There is no gain or loss on conversion at maturity.

    AG33. When an entity extinguishes a convertible instrument before maturity through an early redemption or repurchase in which the original conversion privileges are unchanged, the entity allocates the consideration paid and any transaction costs for the repurchase or redemption to the liability and equity components of the instrument at the date of the transaction. The method used in allocating the consideration paid and transaction costs to the separate components is consistent with that used in the original allocation to the separate components of the proceeds received by the entity when the convertible instrument was issued, in accordance with paragraphs 28–32.

    AG34. Once the allocation of the consideration is made, any resulting gain or loss is treated in accordance with accounting principles applicable to the related component, as follows:

    (a) the amount of gain or loss relating to the liability component is recognised in profit or loss; and
    (b) the amount of consideration relating to the equity component is recognised in equity.

    AG35. An entity may amend the terms of a convertible instrument to induce early conversion, for example by offering a more favourable conversion ratio or paying other additional consideration in the event of conversion before a specified date. The difference, at the date the terms are amended, between the fair value of the consideration the holder receives on conversion of the instrument under the revised terms and the fair value of the consideration the holder would have received under the original terms is recognised as a loss i n profit or loss.



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