The Industrial Disputes (Amendment) Bill, 2010
The Industrial Dispute Act, 1947
is considered as one among the foundation legislations related to workplace relations in India. While a section hails the act for the protection it provides, other talk about the Industrial Dispute Act as a road block in the way of progress. The act has been amended many times. The latest amendment i.e. the Industrial Disputes (Amendment) Bill, 2010 has been passed by the Rajya Sabha on August 3, 2010. It has been already approved by the Lok Sabha. Few modifications that were proposed by the Parliamentary Standing Committee on Labour were included. The initial bill was referred to the Standing Committee on February 26, 2009. The suggestions of the committee were considered by government and some of the recommendations we included for the amendments proposed in the Bill. The amendment proposals were finalized mainly on the issues on which consensus were arrived at. The salient features are as follows:
1. Amplification of the definition of the Appropriate Government
The Bill has proposed the amplification of the definition of “appropriate government” under Section 2(a) of the Act. The Central Government is the appropriate Government as per the categories listed in Section 2 (a)(i) of the Industrial Dispute Act, 1947. Adding up to this, it is further clarified that “Central Government would be appropriate government for any company in which more than 51 percent of the paid up share is held by the Central Government, or any corporation, established by or under any law laid by the Parliament, or the Central Public Sector Undertaking, subsidiary companies set up by the principal undertaking and autonomous bodies owned or controlled by the Central Government. State Government is also covered under the definition of appropriate Government in relation to any other industrial dispute, which includes the State Public Sector Undertaking, subsidiary companies set up by the principal undertaking and autonomous bodies owned or controlled by the State Government.” (Section, of bill)
The Bill also has incorporated the recommendation of the Standing Committee, to amplify the definition of “appropriate government”, in order to eliminate all the ambiguities in interpretation of the definition. Henceforth, the industrial disputes between a contractor and contract labour employed in any industry is also brought under the purview of “appropriate government” i.e. Central or State Government, as the case will be.
2. Enhancement of wage ceiling in the definition of workers
The wage ceiling limit in the definition of workmen under Section 2(s) (iv) of ID Act 1947 has been enhanced from Rs. 1600 per month to Rs. 10000 per month. This ceiling limit enhancement is done to bring the in wages of industrial workers in parity with different labour laws.
3. Industrial Tribunals will be connected to disputes relating to Termination/Dismissal/Retrenchment/Discharge
As per the amendment in Section 2A of Industrial Dispute Act, 1947 pertaining to retrenchment, discharge, dismissal or dismissal or termination of services etc workman can now directly approach the Labour Court or Tribunal. Within 45 days of approaching to these conciliation machinery the disputes has to be resolved. Earlier only appropriate government could approach Tribunal and Labour Court disputes under Section 2A.
4. A new chapter will be substituted for Chapter IIB titled as Grievance Redressal Machinery
With the amendment, every establishment having 20 or more workmen will have to constitute Grievance Redressal Machinery (GRM) within their organization. This GRM will help workman and employers to resolve disputes on an individual level, at the lowest level itself. In the formation of Grievance Redressal Committee the number of members should not exceed more than six. And as far as practicable, if the committee has two members out of which one member should be a woman, and incase of increase in number of members, the participation of women members may be increase appropriately.
5. Eligibility of qualification of Presiding Officers
The scope of qualifications of Presiding Officers of Central Government Industrial Tribunal cum Labour Court has been expanded. Now the Deputy Chief Labour Commissioner (Central) or State Joint Labour Commissioner or Grade III officers of the Indian Legal Service will be eligible for the appointment for the post of Presiding Officers.
6. Changes in salaries and other terms and conditions of Presiding Officer
As per the amendment in Section 38 (2)(c) proposed there will be a specific provision in the Act, according to which the Government will frame rules to decide and review salaries, allowance and other terms and conditions for the appointment of Presiding Officers.
7. Enforcement of Orders by Labour Courts or Tribunal
As per the proposition by the Bill the awards, orders of settlements executed by the Labour Court or Tribunal will be considered as a decree of Civil Court. This is to check the better enforcement of the awards passed by the Labour Courts or Tribunal and to empower them.
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What is in store for Indian Industrial relations (IR) with the amendments?
The amendments will serve to address some (not all) of the issues that has been pressing all stake holders. One significant contribution will be the introduction of permanent grievance machinery. In our opinion, it will help employees, trade unions and employers settle issues at the work place itself, instead of dragging it through long and laborious process. Enhancing the salary levels for consideration under the act, will not only bring harmony between legislations, but also enhance the coverage and protection for workers. This may not be welcomed by a section of stake holders. Another area of change will be on labour administration front, where by changing the definitions of qualification and reviewing remuneration of Presiding offices, efficiency of the system can be improved.
Thursday, December 30, 2010
Wednesday, December 29, 2010
Police Corruption
Police Corruption
Police corruption is a nationwide problem that has been going on for many years. Not only is corruption a problem on our own Indian soil, but police practices of corruption go as far east as Europe and Asia. Many studies, polls and examinations were taken to find out how exactly what the general publics’ opinions of the police are. Officers receive a lot of scrutiny over this issue, but for good reason.
In the 1980’s legal tension involving police searches was a direct result of the war on drugs campaign. Officers were encouraged to stop and seize or search suspicious vehicles to put a halt on drug trafficking (Harns, 1998). But placing this aggressive approach into effect had many negative outcomes. One problem was that it put police on a thin line with the constitutional laws. To no surprise, pretty much no data estimating how often police searches fall outside constitutional laws exist. Only cases that catch the courts attention are logged into the record books. A case study held in “Middleberg” on suspect searches reports that 70 of the 86 searches didn’t result in arrest; citations weren’t presented nor were any charges filed. Just about all of the unconstitutional searches, 31 out of 34, weren’t reported to the courts, nor were they intended to be reported.
Race has played a big role is these searches as well. Out of the 114 police stops, an astounding 96 were African-American citizens, and 30% of those 96 stops were more than likely to be unconstitutional, compared to 22% of whites that were stopped. Brutality has also been an issue linked with these unconstitutional traffic stops. It’s so common between cops that there’s a tendency for repeated abuse of power and it’s basically turned into the “norm”. This isn’t good because with cops thinking like that it gives them somewhat of a necessity to break the law. They basically feel that in order for them to enforce the law they have to break some. Cops practice this unwritten rule everywhere, especially Los Angeles’ CRASH unit. Corruption was so common in the CRASH unit that they had standard procedures to cover it up if something went wrong. Overall, the LAPD didn’t have the strong support it needed from the community. Officers were distrustful of management, had low morale, engaged in racial profiling, and did
Not see their communities as partners in crime solving, but as enemies.
Perjury is also a huge problem associated with corruption. Officers in question follow the unwritten tradition of gathering evidence illegally and then lying about it on the
stand. They basically decide to “forget” evidence altogether. Framing
suspects, or even the framing of innocent people, became almost common. According to a study done by Rafael Perez, an officer involved with the Rampart Scandal, “officers appear to have had complete disregard for rules about use of force, and concentrated their efforts on busily covering their tracks when the force resulted in injury or even death”. These elements were used in the event of what has become known as the Rampart scandal. It was a discovery in March of 1998 of six to eight pounds of cocaine missing from the evidence room of the Rampart Division of the Los Angeles Police Department. It turns out that officer Perez stole it, resold it and replaced the bags with pancake batter. He was later arrested for his actions. These cases are not uncommon place at all, not only was this a problem in Los Angeles, in 1979, for instance, the federal prosecutor indicted an entire police department in the city of Philadelphia.
In conclusion, police practice many forms of corruption whether it be perjury, brutality, or drug trafficking. This problem is well known but precincts don’t want any dirt on their departments so they find ways to clean their dirty laundry. They even practice ways to escape prosecution if ever suspected of breaking a law. Overall there are some good cops out there but unfortunately the corruption in inner cities give all cops a bad name.
FIGURES AND DATA MAY NOT BE CORRECT OR RELEVANT
Police corruption is a nationwide problem that has been going on for many years. Not only is corruption a problem on our own Indian soil, but police practices of corruption go as far east as Europe and Asia. Many studies, polls and examinations were taken to find out how exactly what the general publics’ opinions of the police are. Officers receive a lot of scrutiny over this issue, but for good reason.
In the 1980’s legal tension involving police searches was a direct result of the war on drugs campaign. Officers were encouraged to stop and seize or search suspicious vehicles to put a halt on drug trafficking (Harns, 1998). But placing this aggressive approach into effect had many negative outcomes. One problem was that it put police on a thin line with the constitutional laws. To no surprise, pretty much no data estimating how often police searches fall outside constitutional laws exist. Only cases that catch the courts attention are logged into the record books. A case study held in “Middleberg” on suspect searches reports that 70 of the 86 searches didn’t result in arrest; citations weren’t presented nor were any charges filed. Just about all of the unconstitutional searches, 31 out of 34, weren’t reported to the courts, nor were they intended to be reported.
Race has played a big role is these searches as well. Out of the 114 police stops, an astounding 96 were African-American citizens, and 30% of those 96 stops were more than likely to be unconstitutional, compared to 22% of whites that were stopped. Brutality has also been an issue linked with these unconstitutional traffic stops. It’s so common between cops that there’s a tendency for repeated abuse of power and it’s basically turned into the “norm”. This isn’t good because with cops thinking like that it gives them somewhat of a necessity to break the law. They basically feel that in order for them to enforce the law they have to break some. Cops practice this unwritten rule everywhere, especially Los Angeles’ CRASH unit. Corruption was so common in the CRASH unit that they had standard procedures to cover it up if something went wrong. Overall, the LAPD didn’t have the strong support it needed from the community. Officers were distrustful of management, had low morale, engaged in racial profiling, and did
Not see their communities as partners in crime solving, but as enemies.
Perjury is also a huge problem associated with corruption. Officers in question follow the unwritten tradition of gathering evidence illegally and then lying about it on the
stand. They basically decide to “forget” evidence altogether. Framing
suspects, or even the framing of innocent people, became almost common. According to a study done by Rafael Perez, an officer involved with the Rampart Scandal, “officers appear to have had complete disregard for rules about use of force, and concentrated their efforts on busily covering their tracks when the force resulted in injury or even death”. These elements were used in the event of what has become known as the Rampart scandal. It was a discovery in March of 1998 of six to eight pounds of cocaine missing from the evidence room of the Rampart Division of the Los Angeles Police Department. It turns out that officer Perez stole it, resold it and replaced the bags with pancake batter. He was later arrested for his actions. These cases are not uncommon place at all, not only was this a problem in Los Angeles, in 1979, for instance, the federal prosecutor indicted an entire police department in the city of Philadelphia.
In conclusion, police practice many forms of corruption whether it be perjury, brutality, or drug trafficking. This problem is well known but precincts don’t want any dirt on their departments so they find ways to clean their dirty laundry. They even practice ways to escape prosecution if ever suspected of breaking a law. Overall there are some good cops out there but unfortunately the corruption in inner cities give all cops a bad name.
FIGURES AND DATA MAY NOT BE CORRECT OR RELEVANT
Friday, December 24, 2010
RESULT OF BATCH XXII CERTIFICATE COURSE ON RTI Act 2005
Batch XXII RESULTS
SL.NO Name State / UT Marks Grade
1 Mr. SUBASH KAPOOR Delhi (UT) 80.0 A
2 Mr. MD ADNAN West Bengal 60.0 B
3 Mr. IBRAHIM SHAIKH Maharashtra 15.0 NOT QUALIFIED
4 Mr. VIKAS KUMAR Bihar 70.0 B
5 Mr. NARENDRA KUMAR Delhi (UT) 55.0 C
6 Mr. RAJIV KUMAR Gujarat 50.0 C
7 Mr. UMESH KUMAR LIMBU Punjab 55.0 C
8 Mr. RAJ KUMAR MISHRA Uttar Pradesh 35.0 NOT QUALIFIED
9 Mr. MANISH KUMAR PANDEY Bihar 75.0 B
10 Mr. SANJIT KUMAR MAHATO West Bengal 30.0 NOT QUALIFIED
11 Mr. ANIRBAN SAHU West Bengal 55.0 C
12 Mrs. PRIYANKA DAS West Bengal 90.0 A
13 Mr. SATYAJEET DHAL West Bengal 50.0 C
14 Mr. C V VIJAY RAJ Kerala 100.0 A
15 Mr. NANDA KUMAR K R Karnataka 65.0 B
16 Mr. VIKAS KUMAR CHOUDHARY Rajasthan 90.0 A
17 Mr. HITESH RAJPAL Others 90.0 A
18 Ms. KARISHMA ABROL Haryana 20.0 NOT QUALIFIED
19 Mr. GULAB CHAND Delhi (UT) 10.0 NOT QUALIFIED
20 Mr. AJAY GARG Uttar Pradesh 95.0 A
21 Mr. MAJID ALI Uttar Pradesh 35.0 NOT QUALIFIED
22 Mr. HARISH KM Kerala 90.0 A
23 Mr. NAVAL KISHORE Uttar Pradesh 70.0 B
24 Mr. RAMACHANDRAN VALLINAYAGAM Tamil Nadu 95.0 A
25 Ms. TILOTMA SINGH Bihar 95.0 A
26 Mr. ARINDAM BANERJEE Uttar Pradesh 70.0 B
27 Mr. UMANG DAWN Gujarat 65.0 B
28 Mr. RANJAN HAZARIKA Assam 70.0 B
29 Mrs. SUNITA SHIVATARE Maharashtra 85.0 A
30 Ms. MONICA DHINGRA Delhi (UT) 75.0 B
31 Mr. MANISH YADAV Madhya Pradesh 45.0 NOT QUALIFIED
32 Mrs. DIPTI PATRA West Bengal 55.0 C
33 Mr. SALMAN AKHTAR Madhya Pradesh 40.0 NOT QUALIFIED
34 Mr. GAURAV KAUSHISH Gujarat 70.0 B
35 Mr. ANUJ VERMA Uttar Pradesh 15.0 NOT QUALIFIED
36 Mr. TUSHAR GARG Uttar Pradesh 95.0 A
37 Mr. DEEPAK BANSAL Uttar Pradesh 45.0 NOT QUALIFIED
38 Ms. DEEPA DARJEE Sikkim 50.0 C
39 Mrs. UPASNA GARG Uttar Pradesh 50.0 C
40 Ms. NAGMA KAUSAR Uttar Pradesh 30.0 NOT QUALIFIED
41 Mr. AMOGHAVARSHA T H Tamil Nadu 70.0 B
42 Mr. AMRESH KUMAR Haryana 65.0 B
43 Ms. SHEFALI BANSAL Uttar Pradesh 75.0 B
44 Mr. VAIBHAV JAIN Haryana 80.0 A
45 Mr. SUNDEEP KUMAR Haryana 55.0 C
46 Ms. HARLEEN KAUR CHADHA Punjab 75.0 B
47 Mr. YADRAM SINGH Rajasthan 55.0 C
48 Mrs. RADHA VERMA Delhi (UT) 55.0 C
49 Mr. SHASHANK UPADHYAY Uttar Pradesh 40.0 NOT QUALIFIED
50 Dr. OM PRAKASH UPADHYAY Uttar Pradesh 50.0 C
51 Mr. BATTI LAL MEENA Rajasthan 55.0 C
52 Mr. AMIT KESHWANI Gujarat 90.0 A
53 Mr. NINGAPPA PUJAR Karnataka 45.0 NOT QUALIFIED
54 Mr. ADITYA SINGH Uttar Pradesh 50.0 C
55 Professor. SHAILENDRA SINGH Uttar Pradesh 100.0 A
56 Dr. KUMUD SINGH Uttar Pradesh 65.0 B
57 Mr. PRAVEER YS RAAJ Delhi (UT) 55.0 C
58 Mr. VISHAL CHOPRA Delhi (UT) 80.0 A
59 Mr. RAJIV SHAH Uttar Pradesh 60.0 B
60 Mr. KRISHAN SINGH Delhi (UT) 65.0 B
61 Mr. DIBAKAR PANDA Orissa 40.0 NOT QUALIFIED
62 Mr. BUCHIBABU PITTA Andhra Pradesh 80.0 A
63 Mr. SANTHOSH KUMAR D Andhra Pradesh 60.0 B
64 Mr. ANAY DAS West Bengal 20.0 NOT QUALIFIED
65 Mr. KUMAR ABHISHEK KISHORE Bihar 90.0 A
66 Mr. PRATEEK PANDEY Uttar Pradesh 75.0 B
67 Mr. UMESH KUMAR Uttar Pradesh 80.0 A
68 Mr. JITEN DEDHIA Maharashtra 85.0 A
69 Mr. AMAN BHARDWAJ Haryana 5.0 NOT QUALIFIED
70 Mr. VISHAL KULSHRESHTHA Rajasthan 10.0 NOT QUALIFIED
71 Mr. H PARWANI Delhi (UT) 30.0 NOT QUALIFIED
72 Mr. RAVINDRA KUMAR Delhi (UT) 95.0 A
73 Mr. AJAY KUMAR SINGLA Haryana 65.0 B
74 Ms. MANISHA KASHYAP Haryana 10.0 NOT QUALIFIED
75 Mr. GURDEV SINGH BEDI Delhi (UT) 70.0 B
76 Mr. AMIT GOYAL Haryana 50.0 C
77 Mr. RAMESH KUMAR Delhi (UT) 70.0 B
78 Mr. PAWAN KUMAR Delhi (UT) 55.0 C
79 Mr. SAMEER CHAUDHARY Jammu and Kashmir 70.0 B
80 Ms. VANITHA K Tamil Nadu 95.0 A
81 Mr. SUBRAMANIAN PC Karnataka 85.0 A
82 Mrs. PUJA CHADHA Punjab 85.0 A
83 Mrs. NIDHI JAISWAL Jharkhand 50.0 C
84 Mr. DEVENDRA KUMAR VISHWAKARMA Uttar Pradesh 75.0 B
SL.NO Name State / UT Marks Grade
1 Mr. SUBASH KAPOOR Delhi (UT) 80.0 A
2 Mr. MD ADNAN West Bengal 60.0 B
3 Mr. IBRAHIM SHAIKH Maharashtra 15.0 NOT QUALIFIED
4 Mr. VIKAS KUMAR Bihar 70.0 B
5 Mr. NARENDRA KUMAR Delhi (UT) 55.0 C
6 Mr. RAJIV KUMAR Gujarat 50.0 C
7 Mr. UMESH KUMAR LIMBU Punjab 55.0 C
8 Mr. RAJ KUMAR MISHRA Uttar Pradesh 35.0 NOT QUALIFIED
9 Mr. MANISH KUMAR PANDEY Bihar 75.0 B
10 Mr. SANJIT KUMAR MAHATO West Bengal 30.0 NOT QUALIFIED
11 Mr. ANIRBAN SAHU West Bengal 55.0 C
12 Mrs. PRIYANKA DAS West Bengal 90.0 A
13 Mr. SATYAJEET DHAL West Bengal 50.0 C
14 Mr. C V VIJAY RAJ Kerala 100.0 A
15 Mr. NANDA KUMAR K R Karnataka 65.0 B
16 Mr. VIKAS KUMAR CHOUDHARY Rajasthan 90.0 A
17 Mr. HITESH RAJPAL Others 90.0 A
18 Ms. KARISHMA ABROL Haryana 20.0 NOT QUALIFIED
19 Mr. GULAB CHAND Delhi (UT) 10.0 NOT QUALIFIED
20 Mr. AJAY GARG Uttar Pradesh 95.0 A
21 Mr. MAJID ALI Uttar Pradesh 35.0 NOT QUALIFIED
22 Mr. HARISH KM Kerala 90.0 A
23 Mr. NAVAL KISHORE Uttar Pradesh 70.0 B
24 Mr. RAMACHANDRAN VALLINAYAGAM Tamil Nadu 95.0 A
25 Ms. TILOTMA SINGH Bihar 95.0 A
26 Mr. ARINDAM BANERJEE Uttar Pradesh 70.0 B
27 Mr. UMANG DAWN Gujarat 65.0 B
28 Mr. RANJAN HAZARIKA Assam 70.0 B
29 Mrs. SUNITA SHIVATARE Maharashtra 85.0 A
30 Ms. MONICA DHINGRA Delhi (UT) 75.0 B
31 Mr. MANISH YADAV Madhya Pradesh 45.0 NOT QUALIFIED
32 Mrs. DIPTI PATRA West Bengal 55.0 C
33 Mr. SALMAN AKHTAR Madhya Pradesh 40.0 NOT QUALIFIED
34 Mr. GAURAV KAUSHISH Gujarat 70.0 B
35 Mr. ANUJ VERMA Uttar Pradesh 15.0 NOT QUALIFIED
36 Mr. TUSHAR GARG Uttar Pradesh 95.0 A
37 Mr. DEEPAK BANSAL Uttar Pradesh 45.0 NOT QUALIFIED
38 Ms. DEEPA DARJEE Sikkim 50.0 C
39 Mrs. UPASNA GARG Uttar Pradesh 50.0 C
40 Ms. NAGMA KAUSAR Uttar Pradesh 30.0 NOT QUALIFIED
41 Mr. AMOGHAVARSHA T H Tamil Nadu 70.0 B
42 Mr. AMRESH KUMAR Haryana 65.0 B
43 Ms. SHEFALI BANSAL Uttar Pradesh 75.0 B
44 Mr. VAIBHAV JAIN Haryana 80.0 A
45 Mr. SUNDEEP KUMAR Haryana 55.0 C
46 Ms. HARLEEN KAUR CHADHA Punjab 75.0 B
47 Mr. YADRAM SINGH Rajasthan 55.0 C
48 Mrs. RADHA VERMA Delhi (UT) 55.0 C
49 Mr. SHASHANK UPADHYAY Uttar Pradesh 40.0 NOT QUALIFIED
50 Dr. OM PRAKASH UPADHYAY Uttar Pradesh 50.0 C
51 Mr. BATTI LAL MEENA Rajasthan 55.0 C
52 Mr. AMIT KESHWANI Gujarat 90.0 A
53 Mr. NINGAPPA PUJAR Karnataka 45.0 NOT QUALIFIED
54 Mr. ADITYA SINGH Uttar Pradesh 50.0 C
55 Professor. SHAILENDRA SINGH Uttar Pradesh 100.0 A
56 Dr. KUMUD SINGH Uttar Pradesh 65.0 B
57 Mr. PRAVEER YS RAAJ Delhi (UT) 55.0 C
58 Mr. VISHAL CHOPRA Delhi (UT) 80.0 A
59 Mr. RAJIV SHAH Uttar Pradesh 60.0 B
60 Mr. KRISHAN SINGH Delhi (UT) 65.0 B
61 Mr. DIBAKAR PANDA Orissa 40.0 NOT QUALIFIED
62 Mr. BUCHIBABU PITTA Andhra Pradesh 80.0 A
63 Mr. SANTHOSH KUMAR D Andhra Pradesh 60.0 B
64 Mr. ANAY DAS West Bengal 20.0 NOT QUALIFIED
65 Mr. KUMAR ABHISHEK KISHORE Bihar 90.0 A
66 Mr. PRATEEK PANDEY Uttar Pradesh 75.0 B
67 Mr. UMESH KUMAR Uttar Pradesh 80.0 A
68 Mr. JITEN DEDHIA Maharashtra 85.0 A
69 Mr. AMAN BHARDWAJ Haryana 5.0 NOT QUALIFIED
70 Mr. VISHAL KULSHRESHTHA Rajasthan 10.0 NOT QUALIFIED
71 Mr. H PARWANI Delhi (UT) 30.0 NOT QUALIFIED
72 Mr. RAVINDRA KUMAR Delhi (UT) 95.0 A
73 Mr. AJAY KUMAR SINGLA Haryana 65.0 B
74 Ms. MANISHA KASHYAP Haryana 10.0 NOT QUALIFIED
75 Mr. GURDEV SINGH BEDI Delhi (UT) 70.0 B
76 Mr. AMIT GOYAL Haryana 50.0 C
77 Mr. RAMESH KUMAR Delhi (UT) 70.0 B
78 Mr. PAWAN KUMAR Delhi (UT) 55.0 C
79 Mr. SAMEER CHAUDHARY Jammu and Kashmir 70.0 B
80 Ms. VANITHA K Tamil Nadu 95.0 A
81 Mr. SUBRAMANIAN PC Karnataka 85.0 A
82 Mrs. PUJA CHADHA Punjab 85.0 A
83 Mrs. NIDHI JAISWAL Jharkhand 50.0 C
84 Mr. DEVENDRA KUMAR VISHWAKARMA Uttar Pradesh 75.0 B
RESULT OF BATCH XXVI CERTIFICATE COURSE ON RTI Act 2005
Batch XXVI RESULTS
SL.NO Name State / UT Marks Grade
1 Mr. SURJEET SINGH TANEJA Rajasthan 50.0 C
2 Mrs. MAMTA SALDI Chandigarh (UT) 70.0 B
3 Mr. SAURAV KUMAR SINGH Bihar 45.0 NOT QUALIFIED
4 Mr. DEVANG KANTER Gujarat 27.0 NOT QUALIFIED
5 Mr. SNEHAL BHAVSAR Gujarat 90.0 A
6 Mr. NAGARJUNA CHOUDARY Andhra Pradesh 35.0 NOT QUALIFIED
7 Mr. MANSUKHLAL RUPARELIA Maharashtra 60.0 B
8 Dr. KAUSHAL GAUTAM Uttar Pradesh 35.0 NOT QUALIFIED
9 Mr. SACHIN GADE Maharashtra 20.0 NOT QUALIFIED
10 Mr. BHANU BISHT Uttaranchal 30.0 NOT QUALIFIED
11 Mr. MOHIT KUMAR TALNIYA Uttar Pradesh 75.0 B
12 Mr. KARTHIKEYAN P Tamil Nadu 10.0 NOT QUALIFIED
13 Mrs. NIDHI JAIN Uttar Pradesh 90.0 A
14 Dr. ARUN KUMAR JAIN Uttar Pradesh 80.0 A
15 Mr. SHEIKH AAMIR AHSAN Jammu and Kashmir 65.0 B
16 Mr. PRAVEER RAAJ Bihar 65.0 B
17 Mr. GAURAV GOYAL Uttaranchal 100.0 A
18 Mrs. AYUSHI SINGH West Bengal 95.0 A
19 Ms. ANJELA KUJUR Jharkhand 15.0 NOT QUALIFIED
20 Mr. DAMANJEET GHAI Punjab 15.0 NOT QUALIFIED
21 Mr. HARISH PARWANI Delhi (UT) 85.0 A
22 Mr. SUDALAIMUTHU VENKATESWARAN Tamil Nadu 100.0 A
23 Mr. ABHISHEK SHARMA Madhya Pradesh 75.0 B
24 Mr. RANANJAY SINGH Uttar Pradesh 40.0 NOT QUALIFIED
25 Mr. PRADEEP KUMAR JAISWAL Uttar Pradesh 5.0 NOT QUALIFIED
26 Mr. MUNIM BILAH Jammu and Kashmir 60.0 B
27 Mr. MAYUR AGRAWAL Madhya Pradesh 10.0 NOT QUALIFIED
28 Mr. SHARAD AGGARWAL Delhi (UT) 65.0 B
29 Mr. ARVIND ABRAHAM Kerala 45.0 NOT QUALIFIED
30 Mr. AJAYAKUMAR B Kerala 15.0 NOT QUALIFIED
31 Ms. KADAMBARI JAIN Rajasthan 55.0 C
32 Ms. GEETA RAJPUT Delhi (UT) 80.0 A
33 Mr. SUNIL MADHUKAR JOSHI Maharashtra 45.0 NOT QUALIFIED
34 Mr. ABHIMANYU KUMAR Bihar 75.0 B
35 Ms. NEHA RAJ Uttar Pradesh 90.0 A
36 Ms. RAMYA SATYAM POTHIREDDI Andhra Pradesh 80.0 A
37 Mr. RANBIR SINGH Himachal Pradesh 80.0 A
38 Mr. AJOY SAHA West Bengal 40.0 NOT QUALIFIED
39 Mr. NEMI CHAND DADARWAL Rajasthan 55.0 C
40 Dr. SAROJ THAKUR Himachal Pradesh 95.0 A
41 Mr. PUNEET KUMAR RAI Uttar Pradesh 35.0 NOT QUALIFIED
42 Mr. SURESH BABU S Tamil Nadu 30.0 NOT QUALIFIED
43 Ms. NIDHI JAIN Delhi (UT) 75.0 B
44 Mr. C V SUBRAMANIAN Uttar Pradesh 95.0 A
45 Mr. KHAJA MOENUDDIN SHAIK Andhra Pradesh 90.0 A
46 Mr. VIJAYA BHASKAR THONDAMALLU Andhra Pradesh 30.0 NOT QUALIFIED
47 Mr. VARUN KANNORE Kerala 65.0 B
48 Ms. POOJA NAGPAL Delhi (UT) 100.0 A
49 Mr. ABHAY NAGARIA Madhya Pradesh 35.0 NOT QUALIFIED
50 Mr. MURALI NANA VENKATRAMAN Tamil Nadu 85.0 A
51 Dr. SANJEEV MALHOTRA Punjab 90.0 A
52 Mr. ABHISHEK PANDEY Uttar Pradesh 60.0 B
53 Ms. PRANITI MAINI Delhi (UT) 100.0 A
54 Mr. VIKAS SAINI Haryana 70.0 B
55 Mr. CHIRANJEEVI KANTHETI Andhra Pradesh 75.0 B
56 Ms. NEHA CHAUHAN Delhi (UT) 35.0 NOT QUALIFIED
57 Dr. LIJA S Kerala 40.0 NOT QUALIFIED
58 Mr. KANIPAKAM GIRIBABU Andhra Pradesh 0.0 NOT QUALIFIED
59 Mr. R K GARG Delhi (UT) 60.0 B
60 Mr. VIVEK GUPTA Uttar Pradesh 80.0 A
61 Mr. PIYUSH GADE Maharashtra 20.0 NOT QUALIFIED
62 Mr. VINAY ARYA Delhi (UT) 30.0 NOT QUALIFIED
63 Mr. JABOY MATHEW Kerala 10.0 NOT QUALIFIED
64 Mr. MOINAK DUTTA Jharkhand 70.0 B
65 Mr. YATISH JAIN Madhya Pradesh 75.0 B
66 Dr. VIJAI KUMAR GUPTA Uttar Pradesh 95.0 A
67 Mr. BUDDHADEB DAS West Bengal 50.0 C
68 Mr. ABHAYA MOHANTY Orissa 80.0 A
69 Mr. KALYAN CHAKRAVARTHY KANURU Maharashtra 95.0 A
70 Mr. ARADADA SUNEEL Andhra Pradesh 100.0 A
71 Professor. JYOTI JAIN Madhya Pradesh 70.0 B
72 Mr. ASHOK KUMAR Maharashtra 35.0 NOT QUALIFIED
73 Mr. GUNDA NAVEEN Andhra Pradesh 45.0 NOT QUALIFIED
74 Mr. SHANKAR AMBATI Andhra Pradesh 75.0 B
75 Mr. SANJEEVA REDDY NALLA Andhra Pradesh 65.0 B
76 Ms. RITU SHARMA Madhya Pradesh 100.0 A
77 Mr. RAM ANEK KUMAR Punjab 95.0 A
78 Mr. SANJAY KUMAR PATNI Uttaranchal 25.0 NOT QUALIFIED
79 Mr. NASEEM M Kerala 75.0 B
80 Mr. MAHESH BASAVARAJAIAH Karnataka 90.0 A
81 Dr. YOGENDRA PRATAP SINGH Madhya Pradesh 30.0 NOT QUALIFIED
82 Mr. DEBASHIS NANDA Orissa 80.0 A
83 Mrs. CYBIL DEVAMANI Karnataka 80.0 A
84 Ms. ARUNIMA MAZUMDAR Delhi (UT) 65.0 B
SL.NO Name State / UT Marks Grade
1 Mr. SURJEET SINGH TANEJA Rajasthan 50.0 C
2 Mrs. MAMTA SALDI Chandigarh (UT) 70.0 B
3 Mr. SAURAV KUMAR SINGH Bihar 45.0 NOT QUALIFIED
4 Mr. DEVANG KANTER Gujarat 27.0 NOT QUALIFIED
5 Mr. SNEHAL BHAVSAR Gujarat 90.0 A
6 Mr. NAGARJUNA CHOUDARY Andhra Pradesh 35.0 NOT QUALIFIED
7 Mr. MANSUKHLAL RUPARELIA Maharashtra 60.0 B
8 Dr. KAUSHAL GAUTAM Uttar Pradesh 35.0 NOT QUALIFIED
9 Mr. SACHIN GADE Maharashtra 20.0 NOT QUALIFIED
10 Mr. BHANU BISHT Uttaranchal 30.0 NOT QUALIFIED
11 Mr. MOHIT KUMAR TALNIYA Uttar Pradesh 75.0 B
12 Mr. KARTHIKEYAN P Tamil Nadu 10.0 NOT QUALIFIED
13 Mrs. NIDHI JAIN Uttar Pradesh 90.0 A
14 Dr. ARUN KUMAR JAIN Uttar Pradesh 80.0 A
15 Mr. SHEIKH AAMIR AHSAN Jammu and Kashmir 65.0 B
16 Mr. PRAVEER RAAJ Bihar 65.0 B
17 Mr. GAURAV GOYAL Uttaranchal 100.0 A
18 Mrs. AYUSHI SINGH West Bengal 95.0 A
19 Ms. ANJELA KUJUR Jharkhand 15.0 NOT QUALIFIED
20 Mr. DAMANJEET GHAI Punjab 15.0 NOT QUALIFIED
21 Mr. HARISH PARWANI Delhi (UT) 85.0 A
22 Mr. SUDALAIMUTHU VENKATESWARAN Tamil Nadu 100.0 A
23 Mr. ABHISHEK SHARMA Madhya Pradesh 75.0 B
24 Mr. RANANJAY SINGH Uttar Pradesh 40.0 NOT QUALIFIED
25 Mr. PRADEEP KUMAR JAISWAL Uttar Pradesh 5.0 NOT QUALIFIED
26 Mr. MUNIM BILAH Jammu and Kashmir 60.0 B
27 Mr. MAYUR AGRAWAL Madhya Pradesh 10.0 NOT QUALIFIED
28 Mr. SHARAD AGGARWAL Delhi (UT) 65.0 B
29 Mr. ARVIND ABRAHAM Kerala 45.0 NOT QUALIFIED
30 Mr. AJAYAKUMAR B Kerala 15.0 NOT QUALIFIED
31 Ms. KADAMBARI JAIN Rajasthan 55.0 C
32 Ms. GEETA RAJPUT Delhi (UT) 80.0 A
33 Mr. SUNIL MADHUKAR JOSHI Maharashtra 45.0 NOT QUALIFIED
34 Mr. ABHIMANYU KUMAR Bihar 75.0 B
35 Ms. NEHA RAJ Uttar Pradesh 90.0 A
36 Ms. RAMYA SATYAM POTHIREDDI Andhra Pradesh 80.0 A
37 Mr. RANBIR SINGH Himachal Pradesh 80.0 A
38 Mr. AJOY SAHA West Bengal 40.0 NOT QUALIFIED
39 Mr. NEMI CHAND DADARWAL Rajasthan 55.0 C
40 Dr. SAROJ THAKUR Himachal Pradesh 95.0 A
41 Mr. PUNEET KUMAR RAI Uttar Pradesh 35.0 NOT QUALIFIED
42 Mr. SURESH BABU S Tamil Nadu 30.0 NOT QUALIFIED
43 Ms. NIDHI JAIN Delhi (UT) 75.0 B
44 Mr. C V SUBRAMANIAN Uttar Pradesh 95.0 A
45 Mr. KHAJA MOENUDDIN SHAIK Andhra Pradesh 90.0 A
46 Mr. VIJAYA BHASKAR THONDAMALLU Andhra Pradesh 30.0 NOT QUALIFIED
47 Mr. VARUN KANNORE Kerala 65.0 B
48 Ms. POOJA NAGPAL Delhi (UT) 100.0 A
49 Mr. ABHAY NAGARIA Madhya Pradesh 35.0 NOT QUALIFIED
50 Mr. MURALI NANA VENKATRAMAN Tamil Nadu 85.0 A
51 Dr. SANJEEV MALHOTRA Punjab 90.0 A
52 Mr. ABHISHEK PANDEY Uttar Pradesh 60.0 B
53 Ms. PRANITI MAINI Delhi (UT) 100.0 A
54 Mr. VIKAS SAINI Haryana 70.0 B
55 Mr. CHIRANJEEVI KANTHETI Andhra Pradesh 75.0 B
56 Ms. NEHA CHAUHAN Delhi (UT) 35.0 NOT QUALIFIED
57 Dr. LIJA S Kerala 40.0 NOT QUALIFIED
58 Mr. KANIPAKAM GIRIBABU Andhra Pradesh 0.0 NOT QUALIFIED
59 Mr. R K GARG Delhi (UT) 60.0 B
60 Mr. VIVEK GUPTA Uttar Pradesh 80.0 A
61 Mr. PIYUSH GADE Maharashtra 20.0 NOT QUALIFIED
62 Mr. VINAY ARYA Delhi (UT) 30.0 NOT QUALIFIED
63 Mr. JABOY MATHEW Kerala 10.0 NOT QUALIFIED
64 Mr. MOINAK DUTTA Jharkhand 70.0 B
65 Mr. YATISH JAIN Madhya Pradesh 75.0 B
66 Dr. VIJAI KUMAR GUPTA Uttar Pradesh 95.0 A
67 Mr. BUDDHADEB DAS West Bengal 50.0 C
68 Mr. ABHAYA MOHANTY Orissa 80.0 A
69 Mr. KALYAN CHAKRAVARTHY KANURU Maharashtra 95.0 A
70 Mr. ARADADA SUNEEL Andhra Pradesh 100.0 A
71 Professor. JYOTI JAIN Madhya Pradesh 70.0 B
72 Mr. ASHOK KUMAR Maharashtra 35.0 NOT QUALIFIED
73 Mr. GUNDA NAVEEN Andhra Pradesh 45.0 NOT QUALIFIED
74 Mr. SHANKAR AMBATI Andhra Pradesh 75.0 B
75 Mr. SANJEEVA REDDY NALLA Andhra Pradesh 65.0 B
76 Ms. RITU SHARMA Madhya Pradesh 100.0 A
77 Mr. RAM ANEK KUMAR Punjab 95.0 A
78 Mr. SANJAY KUMAR PATNI Uttaranchal 25.0 NOT QUALIFIED
79 Mr. NASEEM M Kerala 75.0 B
80 Mr. MAHESH BASAVARAJAIAH Karnataka 90.0 A
81 Dr. YOGENDRA PRATAP SINGH Madhya Pradesh 30.0 NOT QUALIFIED
82 Mr. DEBASHIS NANDA Orissa 80.0 A
83 Mrs. CYBIL DEVAMANI Karnataka 80.0 A
84 Ms. ARUNIMA MAZUMDAR Delhi (UT) 65.0 B
Roman Numerals 1-100
Roman Numerals 1-100
1= I
2 = II
3 = III
4 = IV
5 = V
6 = VI
7 = VII
8 = VIII
9 = IX
10 = X
11 = XI
12 = XII
13 = XIII
14 = XIV
15 = XV
16 = XVI
17 = XVII
18 = XVIII
19 = XIX
20 = XX
21 = XXI
22 = XXII
23 = XXIII
24 = XXIV
25 = XXV
26 = XXVI
27 = XXVII
28 = XXVIII
29 = XXIX
30 = XXX
31 = XXXI
32 = XXXII
33 = XXXIII
34 = XXXIV
35 = XXXV
36 = XXXVI
37 = XXXVII
38 = XXXVIII
39 = XXXIX
40 = XL
41 = XLI
42 = XLII
43 = XLIII
44 = XLIV
45 = XLV
46 = XLVI
47 = XLVII
48 = XLVIII
49 = XLIX
50 = L
51 = LI
52 = LII
53 = LIII
54 = LIV
55 = LV
56 = LVI
57 = LVII
58 = LVIII
59 = LIX
60 = LX
61 = LXI
62 = LXII
63 = LXIII
64 = LXIV
65 = LXV
66 = LXVI
67 = LXVII
68 = LXVIII
69 = LXIX
70 = LXX
71 = LXXI
72 = LXXII
73 = LXXIII
74 = LXXIV
75 = LXXV
76 = LXXVI
77 = LXXVII
78 = LXXVIII
79 = LXXIX
80 = LXXX
81 = LXXXI
82 = LXXXII
83 = LXXXIII
84 = LXXXIV
85 = LXXXV
86 = LXXXVI
87 = LXXXVII
88 = LXXXVIII
89 = LXXXIX
90 = XC
91 = XCI
92 = XCII
93 = XCIII
94 = XCIV
95 = XCV
96 = XCVI
97 = XCVII
98 = XCVIII
99 = XCIX
100 =C
1= I
2 = II
3 = III
4 = IV
5 = V
6 = VI
7 = VII
8 = VIII
9 = IX
10 = X
11 = XI
12 = XII
13 = XIII
14 = XIV
15 = XV
16 = XVI
17 = XVII
18 = XVIII
19 = XIX
20 = XX
21 = XXI
22 = XXII
23 = XXIII
24 = XXIV
25 = XXV
26 = XXVI
27 = XXVII
28 = XXVIII
29 = XXIX
30 = XXX
31 = XXXI
32 = XXXII
33 = XXXIII
34 = XXXIV
35 = XXXV
36 = XXXVI
37 = XXXVII
38 = XXXVIII
39 = XXXIX
40 = XL
41 = XLI
42 = XLII
43 = XLIII
44 = XLIV
45 = XLV
46 = XLVI
47 = XLVII
48 = XLVIII
49 = XLIX
50 = L
51 = LI
52 = LII
53 = LIII
54 = LIV
55 = LV
56 = LVI
57 = LVII
58 = LVIII
59 = LIX
60 = LX
61 = LXI
62 = LXII
63 = LXIII
64 = LXIV
65 = LXV
66 = LXVI
67 = LXVII
68 = LXVIII
69 = LXIX
70 = LXX
71 = LXXI
72 = LXXII
73 = LXXIII
74 = LXXIV
75 = LXXV
76 = LXXVI
77 = LXXVII
78 = LXXVIII
79 = LXXIX
80 = LXXX
81 = LXXXI
82 = LXXXII
83 = LXXXIII
84 = LXXXIV
85 = LXXXV
86 = LXXXVI
87 = LXXXVII
88 = LXXXVIII
89 = LXXXIX
90 = XC
91 = XCI
92 = XCII
93 = XCIII
94 = XCIV
95 = XCV
96 = XCVI
97 = XCVII
98 = XCVIII
99 = XCIX
100 =C
Wednesday, December 22, 2010
IAS 32
Accounting Standard (AS) 32
Financial Instruments: Disclosures
Issued by
The Institute of Chartered Accountants of India
New Delhi
2
3
Accounting Standard (AS) 32
Financial Instruments: Disclosures
Contents Paragraphs
OBJECTIVE 1-2
SCOPE 3–5
CLASSES OF FINANCIAL INSTRUMENTS AND
LEVEL OF DISCLOSURE
6
SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR
FINANCIAL POSITION AND PERFORMANCE
7-30
Balance sheet 8-19
Categories of financial assets and financial liabilities 8
Financial assets or financial liabilities at fair value
through profit or loss
9-11
Reclassification 12
Derecognition 13
Collateral 14-15
Allowance account for credit losses 16
Compound financial instruments with multiple
embedded derivatives
17
Defaults and breaches 18-19
Statement of profit and loss and equity 20
Items of income, expense, gains or losses 20
4
Other disclosures 21-30
Accounting Policies 21
Hedge Accounting 22-24
Fair Value 25-30
NATURE AND EXTENT OF RISKS ARISING FROM
FINANCIAL INSTRUMENTS
31-42
Qualitative disclosures 33
Quantitative disclosures 34-42
Credit risk 36-38
Financial assets that are either past due or impaired 37
Collateral and other credit enhancements obtained 38
Liquidity risk 39
Market risk 40-42
Sensitivity analysis 40-41
Other market risk disclosures 42
APPENDICES
A DEFINED TERMS
B APPLICATION GUIDANCE
C COMPARISON WITH IFRS 7, FINANCIAL
INSTRUMENTS: DISCLOSURES
D IMPLEMENTATION GUIDANCE
CONSEQUENTIAL LIMITED REVISION TO AS 19,
LEASES
5
August 2005 IFRS 7
Accounting Standard (AS) 32
Financial Instruments: Disclosures
(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 Standards1.)
Accounting Standard (AS) 32, Financial Instruments: Disclosures, 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 a 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.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards
are intended to apply only to items which are material.
2 This implies that, while discharging their attest function, it will be the duty of the members of the Institute
to examine whether this Accounting Standard is complied with in the presentation of financial statements
covered by their audit. In the event of any deviation from this Accounting Standard, it will be their duty to
make adequate disclosures in their audit reports so that the users of financial statements may be aware of
such deviations.
6
Where in respect of an entity there is a statutory requirement for disclosing any
financial instrument in a particular manner as asset, liability or equity and/or for
disclosing income, expenses, gains or losses relating to a financial instrument in a
particular manner as income/expense or as distribution of profits, the entity should
disclose that instrument and/or income, expenses, gains or losses relating to the
instrument in accordance with the requirements of the statute governing the entity. Until
the relevant statute is amended, the entity disclosing that instrument and/ or income,
expenses, gains or losses 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.
Objective
1. The objective of this Standard is to require entities to provide disclosures in their
financial statements that enable users to evaluate:
(a) the significance of financial instruments for the entity’s financial position
and performance; and
(b) the nature and extent of risks arising from financial instruments to which
the entity is exposed during the period and at the reporting date, and how
the entity manages those risks.
2. The principles in this Accounting Standard complement the principles for recognising,
measuring and presenting financial assets and financial liabilities in Accounting Standard
(AS) 30, Financial Instruments: Recognition and Measurement and Accounting Standard
(AS) 31, Financial Instruments: Presentation.
Scope
3. This Accounting 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 Investment in Subsidiaries in Separate Financial Statements,
AS 23, Accounting for Investments in Associates3, or AS 27, Financial
3 The titles of AS 21 and AS 23 have been changed by making Limited Revisions thereto pursuant to the
issuance of AS 30, Financial Instruments: Recognition and Measurement.
7
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 Measurement; in those cases, entities
should apply the disclosure requirements in AS 21, AS 23 or AS 27 in
addition to those in this Accounting Standard. Entities should also apply this
Accounting Standard to all derivatives linked to interests in subsidiaries,
associates or joint ventures unless the derivative meets the definition of an
equity instrument in AS 31.
(b) employers’ rights and obligations arising from employee benefit plans, to
which AS 15, Employee Benefits, applies.
(c) contracts for contingent consideration in a business combination4. This
exemption applies only to the acquirer.
(d) insurance contracts as defined in Accounting Standard on Insurance
Contracts5. However, this Accounting 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 Accounting 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 Accounting Standard in
recognising and measuring them.
(e) financial instruments, contracts and obligations under share-based payment
transactions6 except that this Accounting Standard applies to contracts within
the scope of paragraphs 4 to 6 of AS 30.
4. This Accounting Standard applies to recognised and unrecognised financial
instruments. Recognised financial instruments include financial assets and financial
liabilities that are within the scope of AS 30. Unrecognised financial instruments include
some financial instruments that, although outside the scope of AS 30, are within the
scope of this Accounting Standard (such as some loan commitments).
4 ‘Business combination’ is the bringing together of separate entities or businesses into one reporting entity.
At present, Accounting Standard (AS) 14, Accounting for Amalgamations, deals with accounting for
contingent consideration in an amalgamation, which is a form of business combination.
5 A separate Accounting Standard on Insurance Contracts, which is being formulated, will specify the
requirements relating to insurance contracts.
6 Employee share based payment, which is one of the share-based payment transactions, is accounted for as
per the Guidance Note on Accounting for Employee Share-based Payments, issued by the ICAI. Further,
some other pronouncements of the ICAI deal with other share-based payments, e.g., AS 10, Accounting for
Fixed Assets.
8
5. This Accounting Standard applies to contracts to buy or sell a non-financial item that
are within the scope of AS 30 (see paragraphs 4-6 of AS 30).
Classes of financial instruments and level of disclosure
6. When this Accounting Standard requires disclosures by class of financial instrument,
an entity should group financial instruments into classes that are appropriate to the nature
of the information disclosed and that take into account the characteristics of those
financial instruments. An entity should provide sufficient information to permit
reconciliation to the line items presented in the balance sheet.
Significance of financial instruments for financial position and
performance
7. An entity should disclose information that enables users of its financial statements to
evaluate the significance of financial instruments for its financial position and
performance.
Balance sheet
Categories of financial assets and financial liabilities
8. The carrying amounts of each of the following categories, as defined in AS 30, should
be disclosed either on the face of the balance sheet or in the notes:
(a) financial assets at fair value through profit or loss, showing separately (i)
those designated as such upon initial recognition and (ii) those classified as
held for trading in accordance with AS 30;
(b) held-to-maturity investments;
(c) loans and receivables;
(d) available-for-sale financial assets;
(e) financial liabilities at fair value through profit or loss, showing separately (i)
those designated as such upon initial recognition and (ii) those classified as
held for trading in accordance with AS 30; and
(f) financial liabilities measured at amortised cost.
Financial assets or financial liabilities at fair value through profit or loss
9
9. If the entity has designated a loan or receivable (or group of loans or receivables) as at
fair value through profit or loss, it should disclose:
(a) the maximum exposure to credit risk (see paragraph 36(a)) of the loan or
receivable (or group of loans or receivables) at the reporting date.
(b) the amount by which any related credit derivatives or similar instruments mitigate
that maximum exposure to credit risk.
(c) the amount of change, during the period and cumulatively, in the fair value of the
loan or receivable (or group of loans or receivables) that is attributable to changes
in the credit risk of the financial asset determined either:
(i) as the amount of change in its fair value that is not attributable to changes in
market conditions that give rise to market risk; or
(ii) using an alternative method the entity believes more faithfully represents the
amount of change in its fair value that is attributable to changes in the credit
risk of the asset.
Changes in market conditions that give rise to market risk include changes in an
observed (benchmark) interest rate, commodity price, foreign exchange rate or
index of prices or rates.
(d) the amount of the change in the fair value of any related credit derivatives or
similar instruments that has occurred during the period and cumulatively since the
loan or receivable was designated.
10. If the entity has designated a financial liability as at fair value through profit or loss in
accordance with paragraph 8.2 of AS 30, it should disclose:
(a) the amount of change, during the period and cumulatively, in the fair value of
the financial liability that is attributable to changes in the credit risk of that
liability determined either:
(i) as the amount of change in its fair value that is not attributable to
changes in market conditions that give rise to market risk (See
Appendix B, paragraph B4); or
(ii) using an alternative method the entity believes more faithfully
represents the amount of change in its fair value that is attributable
to changes in the credit risk of the liability.
Changes in market conditions that give rise to market risk include changes
in a benchmark interest rate, the price of another entity’s financial
instrument, a commodity price, a foreign exchange rate or an index of
10
prices or rates. For contracts that include a unit-linking feature, changes in
market conditions include changes in the performance of the related
internal or external investment fund.
(b) the difference between the financial liability’s carrying amount and the
amount the entity would be contractually required to pay at maturity to the
holder of the obligation.
11. The entity should disclose:
(a) the methods used to comply with the requirements in paragraphs 9(c) and
10(a).
(b) if the entity believes that the disclosure it has given to comply with the
requirements in paragraph 9(c) or 10(a) does not faithfully represent the
change in the fair value of the financial asset or financial liability attributable
to changes in its credit risk, the reasons for reaching this conclusion and the
factors it believes are relevant.
Reclassification
12. If the entity has reclassified a financial asset as one measured:
(a) at cost or amortised cost, rather than at fair value; or
(b) at fair value, rather than at cost or amortised cost,
it should disclose the amount reclassified into and out of each category and the reason for
that reclassification (see paragraphs 57-60 of AS 30).
Derecognition
13. An entity may have transferred financial assets in such a way that part or all of the
financial assets do not qualify for derecognition (see paragraphs 15-37 of AS 30). The
entity should disclose for each class of such financial assets:
(a) the nature of the assets;
(b) the nature of the risks and rewards of ownership to which the entity remains
exposed;
(c) when the entity continues to recognise all of the assets, the carrying amounts
of the assets and of the associated liabilities; and
11
(d) when the entity continues to recognise the assets to the extent of its continuing
involvement, the total carrying amount of the original assets, the amount of
the assets that the entity continues to recognise, and the carrying amount of
the associated liabilities.
Collateral
14. An entity should disclose:
(a) the carrying amount of financial assets it has pledged as collateral for
liabilities or contingent liabilities, including amounts that have been
reclassified in accordance with paragraphs 37(a) of AS 30; and
(b) the terms and conditions relating to its pledge.
15. When an entity holds collateral (of financial or non-financial assets) and is permitted
to sell or repledge the collateral in the absence of default by the owner of the collateral, it
should disclose:
(a) the fair value of the collateral held;
(b) the fair value of any such collateral sold or repledged, and whether the entity
has an obligation to return it; and
(c) the terms and conditions associated with its use of the collateral.
Allowance account for credit losses
16. When financial assets are impaired by credit losses and the entity records the
impairment in a separate account (eg an allowance account used to record individual
impairments or a similar account used to record a collective impairment of assets) rather
than directly reducing the carrying amount of the asset, it should disclose a reconciliation
of changes in that account during the period for each class of financial assets.
Compound financial instruments with multiple embedded derivatives
17. If an entity has issued an instrument that contains both a liability and an equity
component (see paragraph 58 of AS 31) and the instrument has multiple embedded
derivatives whose values are interdependent (such as a callable convertible debt
instrument), it should disclose the existence of those features.
Defaults and breaches
18. For loans payable recognised at the reporting date, an entity should disclose:
12
(a) details of any defaults during the period of principal, interest, sinking fund, or
redemption terms of those loans payable;
(b) the carrying amount of the loans payable in default at the reporting date; and
(c) whether the default was remedied, or the terms of the loans payable were
renegotiated, before the financial statements were authorised for issue.
19. If, during the period, there were breaches of loan agreement terms other than those
described in paragraph 18, an entity should disclose the same information as required by
paragraph 18 if those breaches permitted the lender to demand accelerated repayment
(unless the breaches were remedied, or the terms of the loan were renegotiated, on or
before the reporting date).
Statement of profit and loss and equity
Items of income, expense, gains or losses
20. An entity should disclose the following items of income, expense, gains or losses
either on the face of the financial statements or in the notes:
(a) net gains or net losses on:
(i) financial assets or financial liabilities at fair value through profit or
loss, showing separately those on financial assets or financial liabilities
designated as such upon initial recognition, and those on financial
assets or financial liabilities that are classified as held for trading in
accordance with AS 30;
(ii) available-for-sale financial assets, showing separately the amount of
gain or loss recognised directly in equity during the period and the
amount removed from equity and recognised in the statement of profit
and loss for the period;
(iii) held-to-maturity investments;
(iv) loans and receivables; and
(v) financial liabilities measured at amortised cost.
(b) total interest income and total interest expense (calculated using the effective
interest method) for financial assets or financial liabilities that are not at fair
value through profit or loss;
13
(c) fee income and expense (other than amounts included in determining the
effective interest rate) arising from:
(i) financial assets or financial liabilities that are not at fair value through
profit or loss; and
(ii) trust and other fiduciary activities that result in the holding or investing
of assets on behalf of individuals, trusts, retirement benefit plans, and
other institutions;
(d) interest income on impaired financial assets accrued in accordance with
paragraph A113 of AS 30; and
(e) the amount of any impairment loss for each class of financial asset.
Other disclosures
Accounting policies
21. In accordance with AS 1, Presentation of Financial Statements7, an entity discloses,
in the summary of significant accounting policies, the measurement basis (or bases) used
in preparing the financial statements and the other accounting policies used that are
relevant to an understanding of the financial statements.
Hedge accounting
22. An entity should disclose the following separately for each type of hedge described in
AS 30 (i.e. fair value hedges, cash flow hedges, and hedges of net investments in foreign
operations):
(a) a description of each type of hedge;
(b) a description of the financial instruments designated as hedging instruments
and their fair values at the reporting date; and
(c) the nature of the risks being hedged.
23. For cash flow hedges, an entity should disclose:
(a) the periods when the cash flows are expected to occur and when they are
expected to affect profit or loss;
7 Revised AS 1 is under preparation.
14
(b) a description of any forecast transaction for which hedge accounting had
previously been used, but which is no longer expected to occur;
(c) the amount that was recognised in the appropriate equity account (Hedging
Reserve Account) during the period;
(d) the amount that was removed from the appropriate equity account (Hedging
Reserve Account) and included in the statement of profit and loss for the
period, showing the amount included in each line item in the statement; and
(e) the amount that was removed from appropriate equity account (Hedging
Reserve Account) during the period and included in the initial cost or other
carrying amount of a non-financial asset or non-financial liability whose
acquisition or incurrence was a hedged highly probable forecast transaction.
24. An entity should disclose separately:
(a) in fair value hedges, gains or losses:
(i) on the hedging instrument; and
(ii) on the hedged item attributable to the hedged risk.
(b) the ineffectiveness recognised in the statement of profit and loss that arises
from cash flow hedges; and
(c) the ineffectiveness recognised in the statement of profit and loss that arises
from hedges of net investments in foreign operations.
Fair value
25. Except as set out in paragraph 29, for each class of financial assets and financial
liabilities (see paragraph 6), an entity should disclose the fair value of that class of assets
and liabilities in a way that permits it to be compared with its carrying amount.
26. In disclosing fair values, an entity should group financial assets and financial
liabilities into classes, but should offset them only to the extent that their carrying
amounts are offset in the balance sheet.
27. An entity should disclose:
(a) the methods and, when a valuation technique is used, the assumptions applied
in determining fair values of each class of financial assets or financial
liabilities. For example, if applicable, an entity discloses information about the
assumptions relating to prepayment rates, rates of estimated credit losses, and
interest rates or discount rates.
15
(b) whether fair values are determined, in whole or in part, directly by reference
to published price quotations in an active market or are estimated using a
valuation technique (see paragraphs A90 –A99 of AS 30).
(c) whether the fair values recognised or disclosed in the financial statements are
determined in whole or in part using a valuation technique based on
assumptions that are not supported by prices from observable current market
transactions in the same instrument (i.e. without modification or repackaging)
and not based on available observable market data. For fair values that are
recognised in the financial statements, if changing one or more of those
assumptions to reasonably possible alternative assumptions would change fair
value significantly, the entity should state this fact and disclose the effect of
those changes. For this purpose, significance should be judged with respect to
profit or loss, and total assets or total liabilities, or, when changes in fair value
are recognised in equity, total equity.
(d) if (c) applies, the total amount of the change in fair value estimated using such
a valuation technique that was recognised in the statement of profit and loss
during the period.
28. If the market for a financial instrument is not active, an entity establishes its fair value
using a valuation technique (see paragraphs A93-A99 of AS 30). Nevertheless, the best
evidence of fair value at initial recognition is the transaction price (i.e. the fair value of
the consideration given or received), unless conditions described in paragraph A95 of AS
30 are met. It follows that there could be a difference between the fair value at initial
recognition and the amount that would be determined at that date using the valuation
technique. If such a difference exists, an entity should disclose, by class of financial
instrument:
(a) its accounting policy for recognising that difference in the statement of profit
and loss to reflect a change in factors (including time) that market participants
would consider in setting a price (see paragraph A96 of AS 30); and
(b) the aggregate difference yet to be recognised in the statement of profit and
loss at the beginning and end of the period and a reconciliation of changes in
the balance of this difference.
29. Disclosures of fair value are not required:
(a) when the carrying amount is a reasonable approximation of fair value, for
example, for financial instruments such as short-term trade receivables and
payables;
(b) for an investment in equity instruments that do not have a quoted market
price in an active market, or derivatives linked to such equity instruments, that
16
is measured at cost in accordance with AS 30 because its fair value cannot be
measured reliably; or
(c) for a contract containing a discretionary participation feature (as described in
the Accounting Standard on Insurance Contracts8) if the fair value of that
feature cannot be measured reliably.
30. In the cases described in paragraph 29(b) and (c), an entity should disclose
information to help users of the financial statements make their own judgments about the
extent of possible differences between the carrying amount of those financial assets or
financial liabilities and their fair value, including:
(a) the fact that fair value information has not been disclosed for these
instruments because their fair value cannot be measured reliably;
(b) a description of the financial instruments, their carrying amount, and an
explanation of why fair value cannot be measured reliably;
(c) information about the market for the instruments;
(d) information about whether and how the entity intends to dispose of the
financial instruments; and
(e) if financial instruments whose fair value previously could not be reliably
measured are derecognised, that fact, their carrying amount at the time of
derecognition, and the amount of gain or loss recognised.
Nature and extent of risks arising from financial instruments
31. An entity should disclose information that enables users of its financial statements
to evaluate the nature and extent of risks arising from financial instruments to which
the entity is exposed at the reporting date.
32. The disclosures required by paragraphs 33–42 focus on the risks that arise from
financial instruments and how they have been managed. These risks typically include, but
are not limited to, credit risk, liquidity risk and market risk.
Qualitative disclosures
33. For each type of risk arising from financial instruments, an entity should disclose:
(a) the exposures to risk and how they arise;
8 See footnote 5.
17
(b) its objectives, policies and processes for managing the risk and the methods
used to measure the risk; and
(c) any changes in (a) or (b) from the previous period.
Quantitative disclosures
34. For each type of risk arising from financial instruments, an entity should disclose:
(a) summary quantitative data about its exposure to that risk at the reporting date.
This disclosure should be based on the information provided internally to key
management personnel of the entity (as defined in AS 18 Related Party
Disclosures), for example the entity’s board of directors or chief executive
officer.
(b) the disclosures required by paragraphs 36–42, to the extent not provided in
(a), unless the risk is not material (see AS 1 (Revised)9 for a discussion of
materiality).
(c) Concentrations of risk if not apparent from (a) and (b).
35. If the quantitative data disclosed as at the reporting date are unrepresentative of an
entity’s exposure to risk during the period, an entity should provide further information
that is representative.
Credit risk
36. An entity should disclose by class of financial instrument:
(a) the amount that best represents its maximum exposure to credit risk at the
reporting date without taking account of any collateral held or other credit
enhancements (eg netting agreements that do not qualify for offset in
accordance with AS 31);
(b) in respect of the amount disclosed in (a), a description of collateral held as
security and other credit enhancement;
(c) information about the credit quality of financial assets that are neither past due
nor impaired; and
(d) the carrying amount of financial assets that would otherwise be past due or
impaired whose terms have been renegotiated.
9 See footnote 7.
18
Financial assets that are either past due or impaired
37. An entity should disclose by class of financial asset:
(a) an analysis of the age of financial assets that are past due as at the reporting
date but not impaired;
(b) an analysis of financial assets that are individually determined to be impaired
as at the reporting date, including the factors the entity considered in
determining that they are impaired; and
(c) for the amounts disclosed in (a) and (b), a description of collateral held by the
entity as security and other credit enhancements and, unless impracticable, an
estimate of their fair value.
Collateral and other credit enhancements obtained
38. When an entity obtains financial or non-financial assets during the period by taking
possession of collateral it holds as security or calling on other credit enhancements (eg
guarantees), and such assets meet the recognition criteria in other Standards, an entity
should disclose:
(a) the nature and carrying amount of the assets obtained; and
(b) when the assets are not readily convertible into cash, its policies for disposing
of such assets or for using them in its operations.
Liquidity risk
39. An entity should disclose:
(a) a maturity analysis for financial liabilities that shows the remaining
contractual maturities; and
(b) a description of how it manages the liquidity risk inherent in (a).
Market risk
Sensitivity analysis
40. Unless an entity complies with paragraph 41, it should disclose:
(a) a sensitivity analysis for each type of market risk to which the entity is
exposed at the reporting date, showing how profit or loss and equity would
have been affected by changes in the relevant risk variable that were
19
reasonably possible at that date;
(b) the methods and assumptions used in preparing the sensitivity analysis; and
(c) changes from the previous period in the methods and assumptions used, and
the reasons for such changes.
41. If an entity prepares a sensitivity analysis, such as value-at-risk, that reflects
interdependencies between risk variables (eg interest rates and exchange rates) and uses it
to manage financial risks, it may use that sensitivity analysis in place of the analysis
specified in paragraph 40. The entity should also disclose:
(a) an explanation of the method used in preparing such a sensitivity analysis, and
of the main parameters and assumptions underlying the data provided; and
(b) an explanation of the objective of the method used and of limitations that may
result in the information not fully reflecting the fair value of the assets and
liabilities involved.
Other market risk disclosures
42. When the sensitivity analyses disclosed in accordance with paragraph 40 or 41 are
unrepresentative of a risk inherent in a financial instrument (for example because the
year-end exposure does not reflect the exposure during the year), the entity should
disclose that fact and the reason it believes the sensitivity analyses are unrepresentative.
20
Appendix A
Defined terms
This appendix is an integral part of AS 32, Financial Instruments: Disclosures.
credit risk
The risk that one party to a financial instrument will cause a financial loss
for the other party by failing to discharge an obligation.
currency risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in foreign exchange rates.
interest rate risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market interest rates.
liquidity risk
The risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities.
loans payable
Loans payable are financial liabilities, other than short-term trade payables
on normal credit terms.
market risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices. Market risk comprises
three types of risk: currency risk, interest rate risk and other price risk.
other price risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices (other than those arising
from interest rate risk or currency risk), whether those changes are
caused by factors specific to the individual financial instrument or its
issuer, or factors affecting all similar financial instruments traded in the
market.
21
past due
A financial asset is past due when a counterparty has failed to make a payment when
contractually due.
The following terms are defined in paragraph 8 of AS 30, Financial Instruments:
Recognition and Measurement, or paragraph 7 of AS 31, Financial Instruments:
Presentation, and are used in this Standard with the meaning specified in AS 30 and
AS 31.
amortised cost of a financial asset or financial liability
available-for-sale financial assets
derecognition
derivative
effective interest method
equity instrument
fair value
financial asset
financial instrument
financial liability
financial asset or financial liability at fair value through profit or loss
financial guarantee contract
financial asset or financial liability held for trading
forecast transaction
hedging instrument
held-to-maturity investments
loans and receivables
regular way purchase or sale
22
Appendix B
Application guidance
This appendix is an integral part of AS 32, Financial Instruments: Disclosures
Classes of financial instruments and level of disclosure
(paragraph 6)
B1 Paragraph 6 requires an entity to group financial instruments into classes that are
appropriate to the nature of the information disclosed and that take into account the
characteristics of those financial instruments. The classes described in paragraph 6 are
determined by the entity and are, thus, distinct from the categories of financial
instruments specified in AS 30 (which determine how financial instruments are measured
and where changes in fair value are recognised).
B2 In determining classes of financial instrument, an entity should, at a minimum:
(a) distinguish instruments measured at amortised cost from those measured
at fair value.
(b) treat as a separate class or classes those financial instruments outside the
scope of this AS.
B3 An entity decides, in the light of its circumstances, how much detail it provides to
satisfy the requirements of this AS, how much emphasis it places on different aspects of
the requirements and how it aggregates information to display the overall picture without
combining information with different characteristics. It is necessary to strike a balance
between overburdening financial statements with excessive detail that may not assist
users of financial statements and obscuring important information as a result of too much
aggregation. For example, an entity should not obscure important information by
including it among a large amount of insignificant detail. Similarly, an entity should not
disclose information that is so aggregated that it obscures important differences between
individual transactions or associated risks.
Significance of financial instruments for financial position and
performance
Financial liabilities at fair value through profit or loss (paragraphs 10
and 11)
B4 If an entity designates a financial liability as at fair value through profit or loss,
paragraph 10(a) requires it to disclose the amount of change in the fair value of the
23
financial liability that is attributable to changes in the liability’s credit risk. Paragraph
10(a)(i) permits an entity to determine this amount as the amount of change in the
liability’s fair value that is not attributable to changes in market conditions that give rise
to market risk. If the only relevant changes in market conditions for a liability are
changes in an observed (benchmark) interest rate, this amount can be estimated as
follows:
(a) First, the entity computes the liability’s internal rate of return at the start of the
period using the observed market price of the liability and the liability’s
contractual cash flows at the start of the period. It deducts from this rate of return
the observed (benchmark) interest rate at the start of the period, to arrive at an
instrument-specific component of the internal rate of return.
(b) Next, the entity calculates the present value of the cash flows associated with the
liability using the liability’s contractual cash flows at the end of the period and a
discount rate equal to the sum of (i) the observed (benchmark) interest rate at the
end of the period and (ii) the instrument-specific component of the internal rate of
return as determined in (a).
(c) The difference between the observed market price of the liability at the end of the
period and the amount determined in (b) is the change in fair value that is not
attributable to changes in the observed (benchmark) interest rate. This is the
amount to be disclosed.
This example assumes that changes in fair value arising from factors other than changes
in the instrument’s credit risk or changes in interest rates are not significant. If the
instrument in the example contains an embedded derivative, the change in fair value of
the embedded derivative is excluded in determining the amount to be disclosed in
accordance with paragraph 10(a).
Other disclosure – accounting policies (paragraph 21)
B5 Paragraph 21 requires disclosure of the measurement basis (or bases) used in
preparing the financial statements and the other accounting policies used that are relevant
to an understanding of the financial statements. For financial instruments, such disclosure
may include:
(a) for financial assets or financial liabilities designated as at fair value
through profit or loss:
(i) the nature of the financial assets or financial liabilities the entity
has designated as at fair value through profit or loss;
(ii) the criteria for so designating such financial assets or financial
liabilities on initial recognition; and
24
(iii) how the entity has satisfied the conditions in paragraphs 8, 11 or
12 of AS 30 for such designation. For instruments designated in
accordance with paragraph 8.2 (b)(i) of the definition of a financial
asset or financial liability at fair value through profit or loss in AS
30, that disclosure includes a narrative description of the
circumstances underlying the measurement or recognition
inconsistency that would otherwise arise. For instruments
designated in accordance with paragraph 8.2 (b)(ii) of the
definition of a financial asset or financial liability at fair value
through profit or loss in AS 30, that disclosure includes a narrative
description of how designation at fair value through profit or loss
is consistent with the entity’s documented risk management or
investment strategy.
(b) the criteria for designating financial assets as available for sale.
(c) whether regular way purchases and sales of financial assets are accounted
for at trade date or at settlement date (see paragraph 38 of AS 30).
(d) when an allowance account is used to reduce the carrying amount of
financial assets impaired by credit losses:
(i) the criteria for determining when the carrying amount of impaired
financial assets is reduced directly (or, in the case of a reversal of a
write-down, increased directly) and when the allowance account is
used; and
(ii) the criteria for writing off amounts charged to the allowance
account against the carrying amount of impaired financial assets
(see paragraph 16).
(e) how net gains or net losses on each category of financial instrument are
determined (see paragraph 20(a)), for example, whether the net gains or
net losses on items at fair value through profit or loss include interest or
dividend income.
(f) the criteria the entity uses to determine that there is objective evidence that
an impairment loss has occurred (see paragraph 20(e)).
(g) when the terms of financial assets that would otherwise be past due or
impaired have been renegotiated, the accounting policy for financial assets
that are the subject of renegotiated terms (see paragraph 36(d)).
AS 1 (Revised)10, also requires entities to disclose, in the summary of significant
accounting policies or other notes, the judgments, apart from those involving estimations,
10 See footnote 7.
25
that management has made in the process of applying the entity’s accounting policies and
that have the most significant effect on the amounts recognised in the financial
statements.
Nature and extent of risks arising from financial instruments
(paragraphs 31–42)
B6 The disclosures required by paragraphs 31–42 should be either given in the
financial statements or incorporated by cross-reference from the financial statements to
some other statement, such as a management commentary or risk report, that is available
to users of the financial statements on the same terms as the financial statements and at
the same time. Without the information incorporated by cross-reference, the financial
statements are incomplete.
Quantitative disclosures (paragraph 34)
B7 Paragraph 34(a) requires disclosures of summary quantitative data about an
entity’s exposure to risks based on the information provided internally to key
management personnel of the entity. When an entity uses several methods to manage a
risk exposure, the entity should disclose information using the method or methods that
provide the most relevant and reliable information. AS 5, Accounting Policies, Changes
in Accounting Estimates and Errors,11 discusses relevance and reliability.
B8 Paragraph 34(c) requires disclosures about concentrations of risk. Concentrations
of risk arise from financial instruments that have similar characteristics and are affected
similarly by changes in economic or other conditions. The identification of
concentrations of risk requires judgement taking into account the circumstances of the
entity. Disclosure of concentrations of risk should include:
(a) a description of how management determines concentrations;
(b) a description of the shared characteristic that identifies each concentration
(eg counterparty, geographical area, currency or market); and
(c) the amount of the risk exposure associated with all financial instruments
sharing that characteristic.
Maximum credit risk exposure (paragraph 36(a))
B9 Paragraph 36(a) requires disclosure of the amount that best represents the entity’s
maximum exposure to credit risk. For a financial asset, this is typically the gross carrying
amount, net of:
(a) any amounts offset in accordance with AS 31; and
11 The revised Standard is under preparation.
26
(b) any impairment losses recognised in accordance with AS 30.
B10 Activities that give rise to credit risk and the associated maximum exposure to
credit risk include, but are not limited to:
(a) granting loans and receivables to customers and placing deposits with
other entities. In these cases, the maximum exposure to credit risk is the
carrying amount of the related financial assets.
(b) entering into derivative contracts, eg foreign exchange contracts, interest
rate swaps and credit derivatives. When the resulting asset is measured at
fair value, the maximum exposure to credit risk at the reporting date will
equal the carrying amount.
(c) granting financial guarantees. In this case, the maximum exposure to
credit risk is the maximum amount the entity could have to pay if the
guarantee is called on, which may be significantly greater than the amount
recognised as a liability.
(d) making a loan commitment that is irrevocable over the life of the facility
or is revocable only in response to a material adverse change. If the issuer
cannot settle the loan commitment net in cash or another financial
instrument, the maximum credit exposure is the full amount of the
commitment. This is because it is uncertain whether the amount of any
undrawn portion may be drawn upon in the future. This may be
significantly greater than the amount recognised as a liability.
Contractual maturity analysis (paragraph 39(a))
B11 In preparing the contractual maturity analysis for financial liabilities required by
paragraph 39(a), an entity uses its judgement to determine an appropriate number of time
bands. For example, an entity might determine that the following time bands are
appropriate:
(a) not later than one month;
(b) later than one month and not later than three months;
(c) later than three months and not later than one year; and
(d) later than one year and not later than five years.
B12 When a counterparty has a choice of when an amount is paid, the liability is
included on the basis of the earliest date on which the entity can be required to pay. For
27
example, financial liabilities that an entity can be required to repay on demand (eg
demand deposits) are included in the earliest time band.
B13 When an entity is committed to make amounts available in instalments, each
instalment is allocated to the earliest period in which the entity can be required to pay.
For example, an undrawn loan commitment is included in the time band containing the
earliest date it can be drawn down.
B14 The amounts disclosed in the maturity analysis are the contractual undiscounted
cash flows, for example:
(a) gross finance lease obligations (before deducting finance charges);
(b) prices specified in forward agreements to purchase financial assets for
cash;
(c) net amounts for pay-floating/receive-fixed interest rate swaps for which
net cash flows are exchanged;
(d) contractual amounts to be exchanged in a derivative financial instrument
(eg a currency swap) for which gross cash flows are exchanged; and
(e) gross loan commitments.
Such undiscounted cash flows differ from the amount included in the balance sheet
because the balance sheet amount is based on discounted cash flows.
B15 If appropriate, an entity should disclose the analysis of derivative financial
instruments separately from that of non-derivative financial instruments in the contractual
maturity analysis for financial liabilities required by paragraph 39(a). For example, it
would be appropriate to distinguish cash flows from derivative financial instruments and
non-derivative financial instruments if the cash flows arising from the derivative financial
instruments are settled gross. This is because the gross cash outflow may be accompanied
by a related inflow.
B16 When the amount payable is not fixed, the amount disclosed is determined by
reference to the conditions existing at the reporting date. For example, when the amount
payable varies with changes in an index, the amount disclosed may be based on the level
of the index at the reporting date.
Market risk – sensitivity analysis (paragraphs 40 and 41)
B17 Paragraph 40(a) requires a sensitivity analysis for each type of market risk to
which the entity is exposed. In accordance with paragraph B3, an entity decides how it
aggregates information to display the overall picture without combining information with
28
different characteristics about exposures to risks from significantly different economic
environments. For example:
(a) an entity that trades financial instruments might disclose this information
separately for financial instruments held for trading and those not held for trading.
(b) an entity would not aggregate its exposure to market risks from areas of
hyperinflation with its exposure to the same market risks from areas of very low
inflation.
If an entity has exposure to only one type of market risk in only one economic
environment, it would not show disaggregated information.
B18 Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or
loss and equity of reasonably possible changes in the relevant risk variable (eg prevailing
market interest rates, currency rates, equity prices or commodity prices). For this
purpose:
(a) entities are not required to determine what the profit or loss for the period would
have been if relevant risk variables had been different. Instead, entities disclose
the effect on profit or loss and equity at the balance sheet date assuming that a
reasonably possible change in the relevant risk variable had occurred at the
balance sheet date and had been applied to the risk exposures in existence at that
date. For example, if an entity has a floating rate liability at the end of the year,
the entity would disclose the effect on profit or loss (i.e. interest expense) for the
current year if interest rates had varied by reasonably possible amounts.
(b) entities are not required to disclose the effect on profit or loss and equity for each
change within a range of reasonably possible changes of the relevant risk variable.
Disclosure of the effects of the changes at the limits of the reasonably possible
range would be sufficient.
B19 In determining what a reasonably possible change in the relevant risk variable is,
an entity should consider:
(a) the economic environments in which it operates. A reasonably possible change
should not include remote or ‘worst case’ scenarios or ‘stress tests’. Moreover, if
the rate of change in the underlying risk variable is stable, the entity need not alter
the chosen reasonably possible change in the risk variable. For example, assume
that interest rates are 5 per cent and an entity determines that a fluctuation in
interest rates of ±50 basis points is reasonably possible. It would disclose the
effect on profit or loss and equity if interest rates were to change to 4.5 per cent or
5.5 per cent. In the next period, interest rates have increased to 5.5 per cent. The
entity continues to believe that interest rates may fluctuate by ±50 basis points
(i.e. that the rate of change in interest rates is stable). The entity would disclose
the effect on profit or loss and equity if interest rates were to change to 5 per cent
29
or 6 per cent. The entity would not be required to revise its assessment that
interest rates might reasonably fluctuate by ±50 basis points, unless there is
evidence that interest rates have become significantly more volatile.
(b) the time frame over which it is making the assessment. The sensitivity analysis
should show the effects of changes that are considered to be reasonably possible
over the period until the entity will next present these disclosures, which is
usually its next annual reporting period.
B20 Paragraph 41 permits an entity to use a sensitivity analysis that reflects
interdependencies between risk variables, such as a value-at-risk methodology, if it uses
this analysis to manage its exposure to financial risks. This applies even if such a
methodology measures only the potential for loss and does not measure the potential for
gain. Such an entity might comply with paragraph 41(a) by disclosing the type of valueat-
risk model used (eg whether the model relies on Monte Carlo simulations), an
explanation about how the model works and the main assumptions (eg the holding period
and confidence level). Entities might also disclose the historical observation period and
weightings applied to observations within that period, an explanation of how options are
dealt with in the calculations, and which volatilities and correlations (or, alternatively,
Monte Carlo probability distribution simulations) are used.
B21 An entity should provide sensitivity analyses for the whole of its business, but
may provide different types of sensitivity analysis for different classes of financial
instruments.
Interest rate risk
B22 Interest rate risk arises on interest-bearing financial instruments recognised in the
balance sheet (eg loans and receivables and debt instruments issued) and on some
financial instruments not recognised in the balance sheet (eg some loan commitments).
Currency risk
B23 Currency risk (or foreign exchange risk) arises on financial instruments that are
denominated in a foreign currency, i.e. in a currency other than the functional currency12
in which they are measured. For the purpose of this Standard, currency risk does not arise
from financial instruments that are non-monetary items or from financial instruments
denominated in the functional currency.
B24 A sensitivity analysis is disclosed for each currency to which an entity has
significant exposure.
12 See paragraph 8.16 of AS 30 for definition of ‘Functional Currency’.
30
Other price risk
B25 Other price risk arises on financial instruments because of changes in, for
example, commodity prices or equity prices. To comply with paragraph 40, an entity
might disclose the effect of a decrease in a specified stock market index, commodity
price, or other risk variable. For example, if an entity gives residual value guarantees that
are financial instruments, the entity discloses an increase or decrease in the value of the
assets to which the guarantee applies.
B26 Two examples of financial instruments that give rise to equity price risk are a
holding of equities in another entity, and an investment in a trust, which in turn holds
investments in equity instruments. Other examples include forward contracts and options
to buy or sell specified quantities of an equity instrument and swaps that are indexed to
equity prices. The fair values of such financial instruments are affected by changes in the
market price of the underlying equity instruments.
B27 In accordance with paragraph 40(a), the sensitivity of profit or loss (that arises,
for example, from instruments classified as at fair value through profit or loss and
impairments of available-for-sale financial assets) is disclosed separately from the
sensitivity of equity (that arises, for example, from instruments classified as available for
sale).
B28 Financial instruments that an entity classifies as equity instruments are not
remeasured. Neither profit or loss nor equity will be affected by the equity price risk of
those instruments. Accordingly, no sensitivity analysis is required.
31
Appendix C
Comparison with IFRS 7, Financial Instruments: Disclosures
Note: This Appendix is not a part of the Accounting Standard (AS) 32. The purpose of
this appendix is only to bring out the differences between Accounting Standard (AS) 32
and the corresponding International Financial Reporting Standard (IFRS) 7.
Comparison with IFRS 7, Financial Instruments: Disclosures
This Accounting Standard is based on International Financial Reporting Standard (IFRS)
7, Financial Instruments: Disclosures issued by the International Accounting Standards
Board (IASB). There is no material difference between AS 32 and IFRS 7.
__________
Financial Instruments: Disclosures
Issued by
The Institute of Chartered Accountants of India
New Delhi
2
3
Accounting Standard (AS) 32
Financial Instruments: Disclosures
Contents Paragraphs
OBJECTIVE 1-2
SCOPE 3–5
CLASSES OF FINANCIAL INSTRUMENTS AND
LEVEL OF DISCLOSURE
6
SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR
FINANCIAL POSITION AND PERFORMANCE
7-30
Balance sheet 8-19
Categories of financial assets and financial liabilities 8
Financial assets or financial liabilities at fair value
through profit or loss
9-11
Reclassification 12
Derecognition 13
Collateral 14-15
Allowance account for credit losses 16
Compound financial instruments with multiple
embedded derivatives
17
Defaults and breaches 18-19
Statement of profit and loss and equity 20
Items of income, expense, gains or losses 20
4
Other disclosures 21-30
Accounting Policies 21
Hedge Accounting 22-24
Fair Value 25-30
NATURE AND EXTENT OF RISKS ARISING FROM
FINANCIAL INSTRUMENTS
31-42
Qualitative disclosures 33
Quantitative disclosures 34-42
Credit risk 36-38
Financial assets that are either past due or impaired 37
Collateral and other credit enhancements obtained 38
Liquidity risk 39
Market risk 40-42
Sensitivity analysis 40-41
Other market risk disclosures 42
APPENDICES
A DEFINED TERMS
B APPLICATION GUIDANCE
C COMPARISON WITH IFRS 7, FINANCIAL
INSTRUMENTS: DISCLOSURES
D IMPLEMENTATION GUIDANCE
CONSEQUENTIAL LIMITED REVISION TO AS 19,
LEASES
5
August 2005 IFRS 7
Accounting Standard (AS) 32
Financial Instruments: Disclosures
(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 Standards1.)
Accounting Standard (AS) 32, Financial Instruments: Disclosures, 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 a 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.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards
are intended to apply only to items which are material.
2 This implies that, while discharging their attest function, it will be the duty of the members of the Institute
to examine whether this Accounting Standard is complied with in the presentation of financial statements
covered by their audit. In the event of any deviation from this Accounting Standard, it will be their duty to
make adequate disclosures in their audit reports so that the users of financial statements may be aware of
such deviations.
6
Where in respect of an entity there is a statutory requirement for disclosing any
financial instrument in a particular manner as asset, liability or equity and/or for
disclosing income, expenses, gains or losses relating to a financial instrument in a
particular manner as income/expense or as distribution of profits, the entity should
disclose that instrument and/or income, expenses, gains or losses relating to the
instrument in accordance with the requirements of the statute governing the entity. Until
the relevant statute is amended, the entity disclosing that instrument and/ or income,
expenses, gains or losses 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.
Objective
1. The objective of this Standard is to require entities to provide disclosures in their
financial statements that enable users to evaluate:
(a) the significance of financial instruments for the entity’s financial position
and performance; and
(b) the nature and extent of risks arising from financial instruments to which
the entity is exposed during the period and at the reporting date, and how
the entity manages those risks.
2. The principles in this Accounting Standard complement the principles for recognising,
measuring and presenting financial assets and financial liabilities in Accounting Standard
(AS) 30, Financial Instruments: Recognition and Measurement and Accounting Standard
(AS) 31, Financial Instruments: Presentation.
Scope
3. This Accounting 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 Investment in Subsidiaries in Separate Financial Statements,
AS 23, Accounting for Investments in Associates3, or AS 27, Financial
3 The titles of AS 21 and AS 23 have been changed by making Limited Revisions thereto pursuant to the
issuance of AS 30, Financial Instruments: Recognition and Measurement.
7
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 Measurement; in those cases, entities
should apply the disclosure requirements in AS 21, AS 23 or AS 27 in
addition to those in this Accounting Standard. Entities should also apply this
Accounting Standard to all derivatives linked to interests in subsidiaries,
associates or joint ventures unless the derivative meets the definition of an
equity instrument in AS 31.
(b) employers’ rights and obligations arising from employee benefit plans, to
which AS 15, Employee Benefits, applies.
(c) contracts for contingent consideration in a business combination4. This
exemption applies only to the acquirer.
(d) insurance contracts as defined in Accounting Standard on Insurance
Contracts5. However, this Accounting 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 Accounting 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 Accounting Standard in
recognising and measuring them.
(e) financial instruments, contracts and obligations under share-based payment
transactions6 except that this Accounting Standard applies to contracts within
the scope of paragraphs 4 to 6 of AS 30.
4. This Accounting Standard applies to recognised and unrecognised financial
instruments. Recognised financial instruments include financial assets and financial
liabilities that are within the scope of AS 30. Unrecognised financial instruments include
some financial instruments that, although outside the scope of AS 30, are within the
scope of this Accounting Standard (such as some loan commitments).
4 ‘Business combination’ is the bringing together of separate entities or businesses into one reporting entity.
At present, Accounting Standard (AS) 14, Accounting for Amalgamations, deals with accounting for
contingent consideration in an amalgamation, which is a form of business combination.
5 A separate Accounting Standard on Insurance Contracts, which is being formulated, will specify the
requirements relating to insurance contracts.
6 Employee share based payment, which is one of the share-based payment transactions, is accounted for as
per the Guidance Note on Accounting for Employee Share-based Payments, issued by the ICAI. Further,
some other pronouncements of the ICAI deal with other share-based payments, e.g., AS 10, Accounting for
Fixed Assets.
8
5. This Accounting Standard applies to contracts to buy or sell a non-financial item that
are within the scope of AS 30 (see paragraphs 4-6 of AS 30).
Classes of financial instruments and level of disclosure
6. When this Accounting Standard requires disclosures by class of financial instrument,
an entity should group financial instruments into classes that are appropriate to the nature
of the information disclosed and that take into account the characteristics of those
financial instruments. An entity should provide sufficient information to permit
reconciliation to the line items presented in the balance sheet.
Significance of financial instruments for financial position and
performance
7. An entity should disclose information that enables users of its financial statements to
evaluate the significance of financial instruments for its financial position and
performance.
Balance sheet
Categories of financial assets and financial liabilities
8. The carrying amounts of each of the following categories, as defined in AS 30, should
be disclosed either on the face of the balance sheet or in the notes:
(a) financial assets at fair value through profit or loss, showing separately (i)
those designated as such upon initial recognition and (ii) those classified as
held for trading in accordance with AS 30;
(b) held-to-maturity investments;
(c) loans and receivables;
(d) available-for-sale financial assets;
(e) financial liabilities at fair value through profit or loss, showing separately (i)
those designated as such upon initial recognition and (ii) those classified as
held for trading in accordance with AS 30; and
(f) financial liabilities measured at amortised cost.
Financial assets or financial liabilities at fair value through profit or loss
9
9. If the entity has designated a loan or receivable (or group of loans or receivables) as at
fair value through profit or loss, it should disclose:
(a) the maximum exposure to credit risk (see paragraph 36(a)) of the loan or
receivable (or group of loans or receivables) at the reporting date.
(b) the amount by which any related credit derivatives or similar instruments mitigate
that maximum exposure to credit risk.
(c) the amount of change, during the period and cumulatively, in the fair value of the
loan or receivable (or group of loans or receivables) that is attributable to changes
in the credit risk of the financial asset determined either:
(i) as the amount of change in its fair value that is not attributable to changes in
market conditions that give rise to market risk; or
(ii) using an alternative method the entity believes more faithfully represents the
amount of change in its fair value that is attributable to changes in the credit
risk of the asset.
Changes in market conditions that give rise to market risk include changes in an
observed (benchmark) interest rate, commodity price, foreign exchange rate or
index of prices or rates.
(d) the amount of the change in the fair value of any related credit derivatives or
similar instruments that has occurred during the period and cumulatively since the
loan or receivable was designated.
10. If the entity has designated a financial liability as at fair value through profit or loss in
accordance with paragraph 8.2 of AS 30, it should disclose:
(a) the amount of change, during the period and cumulatively, in the fair value of
the financial liability that is attributable to changes in the credit risk of that
liability determined either:
(i) as the amount of change in its fair value that is not attributable to
changes in market conditions that give rise to market risk (See
Appendix B, paragraph B4); or
(ii) using an alternative method the entity believes more faithfully
represents the amount of change in its fair value that is attributable
to changes in the credit risk of the liability.
Changes in market conditions that give rise to market risk include changes
in a benchmark interest rate, the price of another entity’s financial
instrument, a commodity price, a foreign exchange rate or an index of
10
prices or rates. For contracts that include a unit-linking feature, changes in
market conditions include changes in the performance of the related
internal or external investment fund.
(b) the difference between the financial liability’s carrying amount and the
amount the entity would be contractually required to pay at maturity to the
holder of the obligation.
11. The entity should disclose:
(a) the methods used to comply with the requirements in paragraphs 9(c) and
10(a).
(b) if the entity believes that the disclosure it has given to comply with the
requirements in paragraph 9(c) or 10(a) does not faithfully represent the
change in the fair value of the financial asset or financial liability attributable
to changes in its credit risk, the reasons for reaching this conclusion and the
factors it believes are relevant.
Reclassification
12. If the entity has reclassified a financial asset as one measured:
(a) at cost or amortised cost, rather than at fair value; or
(b) at fair value, rather than at cost or amortised cost,
it should disclose the amount reclassified into and out of each category and the reason for
that reclassification (see paragraphs 57-60 of AS 30).
Derecognition
13. An entity may have transferred financial assets in such a way that part or all of the
financial assets do not qualify for derecognition (see paragraphs 15-37 of AS 30). The
entity should disclose for each class of such financial assets:
(a) the nature of the assets;
(b) the nature of the risks and rewards of ownership to which the entity remains
exposed;
(c) when the entity continues to recognise all of the assets, the carrying amounts
of the assets and of the associated liabilities; and
11
(d) when the entity continues to recognise the assets to the extent of its continuing
involvement, the total carrying amount of the original assets, the amount of
the assets that the entity continues to recognise, and the carrying amount of
the associated liabilities.
Collateral
14. An entity should disclose:
(a) the carrying amount of financial assets it has pledged as collateral for
liabilities or contingent liabilities, including amounts that have been
reclassified in accordance with paragraphs 37(a) of AS 30; and
(b) the terms and conditions relating to its pledge.
15. When an entity holds collateral (of financial or non-financial assets) and is permitted
to sell or repledge the collateral in the absence of default by the owner of the collateral, it
should disclose:
(a) the fair value of the collateral held;
(b) the fair value of any such collateral sold or repledged, and whether the entity
has an obligation to return it; and
(c) the terms and conditions associated with its use of the collateral.
Allowance account for credit losses
16. When financial assets are impaired by credit losses and the entity records the
impairment in a separate account (eg an allowance account used to record individual
impairments or a similar account used to record a collective impairment of assets) rather
than directly reducing the carrying amount of the asset, it should disclose a reconciliation
of changes in that account during the period for each class of financial assets.
Compound financial instruments with multiple embedded derivatives
17. If an entity has issued an instrument that contains both a liability and an equity
component (see paragraph 58 of AS 31) and the instrument has multiple embedded
derivatives whose values are interdependent (such as a callable convertible debt
instrument), it should disclose the existence of those features.
Defaults and breaches
18. For loans payable recognised at the reporting date, an entity should disclose:
12
(a) details of any defaults during the period of principal, interest, sinking fund, or
redemption terms of those loans payable;
(b) the carrying amount of the loans payable in default at the reporting date; and
(c) whether the default was remedied, or the terms of the loans payable were
renegotiated, before the financial statements were authorised for issue.
19. If, during the period, there were breaches of loan agreement terms other than those
described in paragraph 18, an entity should disclose the same information as required by
paragraph 18 if those breaches permitted the lender to demand accelerated repayment
(unless the breaches were remedied, or the terms of the loan were renegotiated, on or
before the reporting date).
Statement of profit and loss and equity
Items of income, expense, gains or losses
20. An entity should disclose the following items of income, expense, gains or losses
either on the face of the financial statements or in the notes:
(a) net gains or net losses on:
(i) financial assets or financial liabilities at fair value through profit or
loss, showing separately those on financial assets or financial liabilities
designated as such upon initial recognition, and those on financial
assets or financial liabilities that are classified as held for trading in
accordance with AS 30;
(ii) available-for-sale financial assets, showing separately the amount of
gain or loss recognised directly in equity during the period and the
amount removed from equity and recognised in the statement of profit
and loss for the period;
(iii) held-to-maturity investments;
(iv) loans and receivables; and
(v) financial liabilities measured at amortised cost.
(b) total interest income and total interest expense (calculated using the effective
interest method) for financial assets or financial liabilities that are not at fair
value through profit or loss;
13
(c) fee income and expense (other than amounts included in determining the
effective interest rate) arising from:
(i) financial assets or financial liabilities that are not at fair value through
profit or loss; and
(ii) trust and other fiduciary activities that result in the holding or investing
of assets on behalf of individuals, trusts, retirement benefit plans, and
other institutions;
(d) interest income on impaired financial assets accrued in accordance with
paragraph A113 of AS 30; and
(e) the amount of any impairment loss for each class of financial asset.
Other disclosures
Accounting policies
21. In accordance with AS 1, Presentation of Financial Statements7, an entity discloses,
in the summary of significant accounting policies, the measurement basis (or bases) used
in preparing the financial statements and the other accounting policies used that are
relevant to an understanding of the financial statements.
Hedge accounting
22. An entity should disclose the following separately for each type of hedge described in
AS 30 (i.e. fair value hedges, cash flow hedges, and hedges of net investments in foreign
operations):
(a) a description of each type of hedge;
(b) a description of the financial instruments designated as hedging instruments
and their fair values at the reporting date; and
(c) the nature of the risks being hedged.
23. For cash flow hedges, an entity should disclose:
(a) the periods when the cash flows are expected to occur and when they are
expected to affect profit or loss;
7 Revised AS 1 is under preparation.
14
(b) a description of any forecast transaction for which hedge accounting had
previously been used, but which is no longer expected to occur;
(c) the amount that was recognised in the appropriate equity account (Hedging
Reserve Account) during the period;
(d) the amount that was removed from the appropriate equity account (Hedging
Reserve Account) and included in the statement of profit and loss for the
period, showing the amount included in each line item in the statement; and
(e) the amount that was removed from appropriate equity account (Hedging
Reserve Account) during the period and included in the initial cost or other
carrying amount of a non-financial asset or non-financial liability whose
acquisition or incurrence was a hedged highly probable forecast transaction.
24. An entity should disclose separately:
(a) in fair value hedges, gains or losses:
(i) on the hedging instrument; and
(ii) on the hedged item attributable to the hedged risk.
(b) the ineffectiveness recognised in the statement of profit and loss that arises
from cash flow hedges; and
(c) the ineffectiveness recognised in the statement of profit and loss that arises
from hedges of net investments in foreign operations.
Fair value
25. Except as set out in paragraph 29, for each class of financial assets and financial
liabilities (see paragraph 6), an entity should disclose the fair value of that class of assets
and liabilities in a way that permits it to be compared with its carrying amount.
26. In disclosing fair values, an entity should group financial assets and financial
liabilities into classes, but should offset them only to the extent that their carrying
amounts are offset in the balance sheet.
27. An entity should disclose:
(a) the methods and, when a valuation technique is used, the assumptions applied
in determining fair values of each class of financial assets or financial
liabilities. For example, if applicable, an entity discloses information about the
assumptions relating to prepayment rates, rates of estimated credit losses, and
interest rates or discount rates.
15
(b) whether fair values are determined, in whole or in part, directly by reference
to published price quotations in an active market or are estimated using a
valuation technique (see paragraphs A90 –A99 of AS 30).
(c) whether the fair values recognised or disclosed in the financial statements are
determined in whole or in part using a valuation technique based on
assumptions that are not supported by prices from observable current market
transactions in the same instrument (i.e. without modification or repackaging)
and not based on available observable market data. For fair values that are
recognised in the financial statements, if changing one or more of those
assumptions to reasonably possible alternative assumptions would change fair
value significantly, the entity should state this fact and disclose the effect of
those changes. For this purpose, significance should be judged with respect to
profit or loss, and total assets or total liabilities, or, when changes in fair value
are recognised in equity, total equity.
(d) if (c) applies, the total amount of the change in fair value estimated using such
a valuation technique that was recognised in the statement of profit and loss
during the period.
28. If the market for a financial instrument is not active, an entity establishes its fair value
using a valuation technique (see paragraphs A93-A99 of AS 30). Nevertheless, the best
evidence of fair value at initial recognition is the transaction price (i.e. the fair value of
the consideration given or received), unless conditions described in paragraph A95 of AS
30 are met. It follows that there could be a difference between the fair value at initial
recognition and the amount that would be determined at that date using the valuation
technique. If such a difference exists, an entity should disclose, by class of financial
instrument:
(a) its accounting policy for recognising that difference in the statement of profit
and loss to reflect a change in factors (including time) that market participants
would consider in setting a price (see paragraph A96 of AS 30); and
(b) the aggregate difference yet to be recognised in the statement of profit and
loss at the beginning and end of the period and a reconciliation of changes in
the balance of this difference.
29. Disclosures of fair value are not required:
(a) when the carrying amount is a reasonable approximation of fair value, for
example, for financial instruments such as short-term trade receivables and
payables;
(b) for an investment in equity instruments that do not have a quoted market
price in an active market, or derivatives linked to such equity instruments, that
16
is measured at cost in accordance with AS 30 because its fair value cannot be
measured reliably; or
(c) for a contract containing a discretionary participation feature (as described in
the Accounting Standard on Insurance Contracts8) if the fair value of that
feature cannot be measured reliably.
30. In the cases described in paragraph 29(b) and (c), an entity should disclose
information to help users of the financial statements make their own judgments about the
extent of possible differences between the carrying amount of those financial assets or
financial liabilities and their fair value, including:
(a) the fact that fair value information has not been disclosed for these
instruments because their fair value cannot be measured reliably;
(b) a description of the financial instruments, their carrying amount, and an
explanation of why fair value cannot be measured reliably;
(c) information about the market for the instruments;
(d) information about whether and how the entity intends to dispose of the
financial instruments; and
(e) if financial instruments whose fair value previously could not be reliably
measured are derecognised, that fact, their carrying amount at the time of
derecognition, and the amount of gain or loss recognised.
Nature and extent of risks arising from financial instruments
31. An entity should disclose information that enables users of its financial statements
to evaluate the nature and extent of risks arising from financial instruments to which
the entity is exposed at the reporting date.
32. The disclosures required by paragraphs 33–42 focus on the risks that arise from
financial instruments and how they have been managed. These risks typically include, but
are not limited to, credit risk, liquidity risk and market risk.
Qualitative disclosures
33. For each type of risk arising from financial instruments, an entity should disclose:
(a) the exposures to risk and how they arise;
8 See footnote 5.
17
(b) its objectives, policies and processes for managing the risk and the methods
used to measure the risk; and
(c) any changes in (a) or (b) from the previous period.
Quantitative disclosures
34. For each type of risk arising from financial instruments, an entity should disclose:
(a) summary quantitative data about its exposure to that risk at the reporting date.
This disclosure should be based on the information provided internally to key
management personnel of the entity (as defined in AS 18 Related Party
Disclosures), for example the entity’s board of directors or chief executive
officer.
(b) the disclosures required by paragraphs 36–42, to the extent not provided in
(a), unless the risk is not material (see AS 1 (Revised)9 for a discussion of
materiality).
(c) Concentrations of risk if not apparent from (a) and (b).
35. If the quantitative data disclosed as at the reporting date are unrepresentative of an
entity’s exposure to risk during the period, an entity should provide further information
that is representative.
Credit risk
36. An entity should disclose by class of financial instrument:
(a) the amount that best represents its maximum exposure to credit risk at the
reporting date without taking account of any collateral held or other credit
enhancements (eg netting agreements that do not qualify for offset in
accordance with AS 31);
(b) in respect of the amount disclosed in (a), a description of collateral held as
security and other credit enhancement;
(c) information about the credit quality of financial assets that are neither past due
nor impaired; and
(d) the carrying amount of financial assets that would otherwise be past due or
impaired whose terms have been renegotiated.
9 See footnote 7.
18
Financial assets that are either past due or impaired
37. An entity should disclose by class of financial asset:
(a) an analysis of the age of financial assets that are past due as at the reporting
date but not impaired;
(b) an analysis of financial assets that are individually determined to be impaired
as at the reporting date, including the factors the entity considered in
determining that they are impaired; and
(c) for the amounts disclosed in (a) and (b), a description of collateral held by the
entity as security and other credit enhancements and, unless impracticable, an
estimate of their fair value.
Collateral and other credit enhancements obtained
38. When an entity obtains financial or non-financial assets during the period by taking
possession of collateral it holds as security or calling on other credit enhancements (eg
guarantees), and such assets meet the recognition criteria in other Standards, an entity
should disclose:
(a) the nature and carrying amount of the assets obtained; and
(b) when the assets are not readily convertible into cash, its policies for disposing
of such assets or for using them in its operations.
Liquidity risk
39. An entity should disclose:
(a) a maturity analysis for financial liabilities that shows the remaining
contractual maturities; and
(b) a description of how it manages the liquidity risk inherent in (a).
Market risk
Sensitivity analysis
40. Unless an entity complies with paragraph 41, it should disclose:
(a) a sensitivity analysis for each type of market risk to which the entity is
exposed at the reporting date, showing how profit or loss and equity would
have been affected by changes in the relevant risk variable that were
19
reasonably possible at that date;
(b) the methods and assumptions used in preparing the sensitivity analysis; and
(c) changes from the previous period in the methods and assumptions used, and
the reasons for such changes.
41. If an entity prepares a sensitivity analysis, such as value-at-risk, that reflects
interdependencies between risk variables (eg interest rates and exchange rates) and uses it
to manage financial risks, it may use that sensitivity analysis in place of the analysis
specified in paragraph 40. The entity should also disclose:
(a) an explanation of the method used in preparing such a sensitivity analysis, and
of the main parameters and assumptions underlying the data provided; and
(b) an explanation of the objective of the method used and of limitations that may
result in the information not fully reflecting the fair value of the assets and
liabilities involved.
Other market risk disclosures
42. When the sensitivity analyses disclosed in accordance with paragraph 40 or 41 are
unrepresentative of a risk inherent in a financial instrument (for example because the
year-end exposure does not reflect the exposure during the year), the entity should
disclose that fact and the reason it believes the sensitivity analyses are unrepresentative.
20
Appendix A
Defined terms
This appendix is an integral part of AS 32, Financial Instruments: Disclosures.
credit risk
The risk that one party to a financial instrument will cause a financial loss
for the other party by failing to discharge an obligation.
currency risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in foreign exchange rates.
interest rate risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market interest rates.
liquidity risk
The risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities.
loans payable
Loans payable are financial liabilities, other than short-term trade payables
on normal credit terms.
market risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices. Market risk comprises
three types of risk: currency risk, interest rate risk and other price risk.
other price risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices (other than those arising
from interest rate risk or currency risk), whether those changes are
caused by factors specific to the individual financial instrument or its
issuer, or factors affecting all similar financial instruments traded in the
market.
21
past due
A financial asset is past due when a counterparty has failed to make a payment when
contractually due.
The following terms are defined in paragraph 8 of AS 30, Financial Instruments:
Recognition and Measurement, or paragraph 7 of AS 31, Financial Instruments:
Presentation, and are used in this Standard with the meaning specified in AS 30 and
AS 31.
amortised cost of a financial asset or financial liability
available-for-sale financial assets
derecognition
derivative
effective interest method
equity instrument
fair value
financial asset
financial instrument
financial liability
financial asset or financial liability at fair value through profit or loss
financial guarantee contract
financial asset or financial liability held for trading
forecast transaction
hedging instrument
held-to-maturity investments
loans and receivables
regular way purchase or sale
22
Appendix B
Application guidance
This appendix is an integral part of AS 32, Financial Instruments: Disclosures
Classes of financial instruments and level of disclosure
(paragraph 6)
B1 Paragraph 6 requires an entity to group financial instruments into classes that are
appropriate to the nature of the information disclosed and that take into account the
characteristics of those financial instruments. The classes described in paragraph 6 are
determined by the entity and are, thus, distinct from the categories of financial
instruments specified in AS 30 (which determine how financial instruments are measured
and where changes in fair value are recognised).
B2 In determining classes of financial instrument, an entity should, at a minimum:
(a) distinguish instruments measured at amortised cost from those measured
at fair value.
(b) treat as a separate class or classes those financial instruments outside the
scope of this AS.
B3 An entity decides, in the light of its circumstances, how much detail it provides to
satisfy the requirements of this AS, how much emphasis it places on different aspects of
the requirements and how it aggregates information to display the overall picture without
combining information with different characteristics. It is necessary to strike a balance
between overburdening financial statements with excessive detail that may not assist
users of financial statements and obscuring important information as a result of too much
aggregation. For example, an entity should not obscure important information by
including it among a large amount of insignificant detail. Similarly, an entity should not
disclose information that is so aggregated that it obscures important differences between
individual transactions or associated risks.
Significance of financial instruments for financial position and
performance
Financial liabilities at fair value through profit or loss (paragraphs 10
and 11)
B4 If an entity designates a financial liability as at fair value through profit or loss,
paragraph 10(a) requires it to disclose the amount of change in the fair value of the
23
financial liability that is attributable to changes in the liability’s credit risk. Paragraph
10(a)(i) permits an entity to determine this amount as the amount of change in the
liability’s fair value that is not attributable to changes in market conditions that give rise
to market risk. If the only relevant changes in market conditions for a liability are
changes in an observed (benchmark) interest rate, this amount can be estimated as
follows:
(a) First, the entity computes the liability’s internal rate of return at the start of the
period using the observed market price of the liability and the liability’s
contractual cash flows at the start of the period. It deducts from this rate of return
the observed (benchmark) interest rate at the start of the period, to arrive at an
instrument-specific component of the internal rate of return.
(b) Next, the entity calculates the present value of the cash flows associated with the
liability using the liability’s contractual cash flows at the end of the period and a
discount rate equal to the sum of (i) the observed (benchmark) interest rate at the
end of the period and (ii) the instrument-specific component of the internal rate of
return as determined in (a).
(c) The difference between the observed market price of the liability at the end of the
period and the amount determined in (b) is the change in fair value that is not
attributable to changes in the observed (benchmark) interest rate. This is the
amount to be disclosed.
This example assumes that changes in fair value arising from factors other than changes
in the instrument’s credit risk or changes in interest rates are not significant. If the
instrument in the example contains an embedded derivative, the change in fair value of
the embedded derivative is excluded in determining the amount to be disclosed in
accordance with paragraph 10(a).
Other disclosure – accounting policies (paragraph 21)
B5 Paragraph 21 requires disclosure of the measurement basis (or bases) used in
preparing the financial statements and the other accounting policies used that are relevant
to an understanding of the financial statements. For financial instruments, such disclosure
may include:
(a) for financial assets or financial liabilities designated as at fair value
through profit or loss:
(i) the nature of the financial assets or financial liabilities the entity
has designated as at fair value through profit or loss;
(ii) the criteria for so designating such financial assets or financial
liabilities on initial recognition; and
24
(iii) how the entity has satisfied the conditions in paragraphs 8, 11 or
12 of AS 30 for such designation. For instruments designated in
accordance with paragraph 8.2 (b)(i) of the definition of a financial
asset or financial liability at fair value through profit or loss in AS
30, that disclosure includes a narrative description of the
circumstances underlying the measurement or recognition
inconsistency that would otherwise arise. For instruments
designated in accordance with paragraph 8.2 (b)(ii) of the
definition of a financial asset or financial liability at fair value
through profit or loss in AS 30, that disclosure includes a narrative
description of how designation at fair value through profit or loss
is consistent with the entity’s documented risk management or
investment strategy.
(b) the criteria for designating financial assets as available for sale.
(c) whether regular way purchases and sales of financial assets are accounted
for at trade date or at settlement date (see paragraph 38 of AS 30).
(d) when an allowance account is used to reduce the carrying amount of
financial assets impaired by credit losses:
(i) the criteria for determining when the carrying amount of impaired
financial assets is reduced directly (or, in the case of a reversal of a
write-down, increased directly) and when the allowance account is
used; and
(ii) the criteria for writing off amounts charged to the allowance
account against the carrying amount of impaired financial assets
(see paragraph 16).
(e) how net gains or net losses on each category of financial instrument are
determined (see paragraph 20(a)), for example, whether the net gains or
net losses on items at fair value through profit or loss include interest or
dividend income.
(f) the criteria the entity uses to determine that there is objective evidence that
an impairment loss has occurred (see paragraph 20(e)).
(g) when the terms of financial assets that would otherwise be past due or
impaired have been renegotiated, the accounting policy for financial assets
that are the subject of renegotiated terms (see paragraph 36(d)).
AS 1 (Revised)10, also requires entities to disclose, in the summary of significant
accounting policies or other notes, the judgments, apart from those involving estimations,
10 See footnote 7.
25
that management has made in the process of applying the entity’s accounting policies and
that have the most significant effect on the amounts recognised in the financial
statements.
Nature and extent of risks arising from financial instruments
(paragraphs 31–42)
B6 The disclosures required by paragraphs 31–42 should be either given in the
financial statements or incorporated by cross-reference from the financial statements to
some other statement, such as a management commentary or risk report, that is available
to users of the financial statements on the same terms as the financial statements and at
the same time. Without the information incorporated by cross-reference, the financial
statements are incomplete.
Quantitative disclosures (paragraph 34)
B7 Paragraph 34(a) requires disclosures of summary quantitative data about an
entity’s exposure to risks based on the information provided internally to key
management personnel of the entity. When an entity uses several methods to manage a
risk exposure, the entity should disclose information using the method or methods that
provide the most relevant and reliable information. AS 5, Accounting Policies, Changes
in Accounting Estimates and Errors,11 discusses relevance and reliability.
B8 Paragraph 34(c) requires disclosures about concentrations of risk. Concentrations
of risk arise from financial instruments that have similar characteristics and are affected
similarly by changes in economic or other conditions. The identification of
concentrations of risk requires judgement taking into account the circumstances of the
entity. Disclosure of concentrations of risk should include:
(a) a description of how management determines concentrations;
(b) a description of the shared characteristic that identifies each concentration
(eg counterparty, geographical area, currency or market); and
(c) the amount of the risk exposure associated with all financial instruments
sharing that characteristic.
Maximum credit risk exposure (paragraph 36(a))
B9 Paragraph 36(a) requires disclosure of the amount that best represents the entity’s
maximum exposure to credit risk. For a financial asset, this is typically the gross carrying
amount, net of:
(a) any amounts offset in accordance with AS 31; and
11 The revised Standard is under preparation.
26
(b) any impairment losses recognised in accordance with AS 30.
B10 Activities that give rise to credit risk and the associated maximum exposure to
credit risk include, but are not limited to:
(a) granting loans and receivables to customers and placing deposits with
other entities. In these cases, the maximum exposure to credit risk is the
carrying amount of the related financial assets.
(b) entering into derivative contracts, eg foreign exchange contracts, interest
rate swaps and credit derivatives. When the resulting asset is measured at
fair value, the maximum exposure to credit risk at the reporting date will
equal the carrying amount.
(c) granting financial guarantees. In this case, the maximum exposure to
credit risk is the maximum amount the entity could have to pay if the
guarantee is called on, which may be significantly greater than the amount
recognised as a liability.
(d) making a loan commitment that is irrevocable over the life of the facility
or is revocable only in response to a material adverse change. If the issuer
cannot settle the loan commitment net in cash or another financial
instrument, the maximum credit exposure is the full amount of the
commitment. This is because it is uncertain whether the amount of any
undrawn portion may be drawn upon in the future. This may be
significantly greater than the amount recognised as a liability.
Contractual maturity analysis (paragraph 39(a))
B11 In preparing the contractual maturity analysis for financial liabilities required by
paragraph 39(a), an entity uses its judgement to determine an appropriate number of time
bands. For example, an entity might determine that the following time bands are
appropriate:
(a) not later than one month;
(b) later than one month and not later than three months;
(c) later than three months and not later than one year; and
(d) later than one year and not later than five years.
B12 When a counterparty has a choice of when an amount is paid, the liability is
included on the basis of the earliest date on which the entity can be required to pay. For
27
example, financial liabilities that an entity can be required to repay on demand (eg
demand deposits) are included in the earliest time band.
B13 When an entity is committed to make amounts available in instalments, each
instalment is allocated to the earliest period in which the entity can be required to pay.
For example, an undrawn loan commitment is included in the time band containing the
earliest date it can be drawn down.
B14 The amounts disclosed in the maturity analysis are the contractual undiscounted
cash flows, for example:
(a) gross finance lease obligations (before deducting finance charges);
(b) prices specified in forward agreements to purchase financial assets for
cash;
(c) net amounts for pay-floating/receive-fixed interest rate swaps for which
net cash flows are exchanged;
(d) contractual amounts to be exchanged in a derivative financial instrument
(eg a currency swap) for which gross cash flows are exchanged; and
(e) gross loan commitments.
Such undiscounted cash flows differ from the amount included in the balance sheet
because the balance sheet amount is based on discounted cash flows.
B15 If appropriate, an entity should disclose the analysis of derivative financial
instruments separately from that of non-derivative financial instruments in the contractual
maturity analysis for financial liabilities required by paragraph 39(a). For example, it
would be appropriate to distinguish cash flows from derivative financial instruments and
non-derivative financial instruments if the cash flows arising from the derivative financial
instruments are settled gross. This is because the gross cash outflow may be accompanied
by a related inflow.
B16 When the amount payable is not fixed, the amount disclosed is determined by
reference to the conditions existing at the reporting date. For example, when the amount
payable varies with changes in an index, the amount disclosed may be based on the level
of the index at the reporting date.
Market risk – sensitivity analysis (paragraphs 40 and 41)
B17 Paragraph 40(a) requires a sensitivity analysis for each type of market risk to
which the entity is exposed. In accordance with paragraph B3, an entity decides how it
aggregates information to display the overall picture without combining information with
28
different characteristics about exposures to risks from significantly different economic
environments. For example:
(a) an entity that trades financial instruments might disclose this information
separately for financial instruments held for trading and those not held for trading.
(b) an entity would not aggregate its exposure to market risks from areas of
hyperinflation with its exposure to the same market risks from areas of very low
inflation.
If an entity has exposure to only one type of market risk in only one economic
environment, it would not show disaggregated information.
B18 Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or
loss and equity of reasonably possible changes in the relevant risk variable (eg prevailing
market interest rates, currency rates, equity prices or commodity prices). For this
purpose:
(a) entities are not required to determine what the profit or loss for the period would
have been if relevant risk variables had been different. Instead, entities disclose
the effect on profit or loss and equity at the balance sheet date assuming that a
reasonably possible change in the relevant risk variable had occurred at the
balance sheet date and had been applied to the risk exposures in existence at that
date. For example, if an entity has a floating rate liability at the end of the year,
the entity would disclose the effect on profit or loss (i.e. interest expense) for the
current year if interest rates had varied by reasonably possible amounts.
(b) entities are not required to disclose the effect on profit or loss and equity for each
change within a range of reasonably possible changes of the relevant risk variable.
Disclosure of the effects of the changes at the limits of the reasonably possible
range would be sufficient.
B19 In determining what a reasonably possible change in the relevant risk variable is,
an entity should consider:
(a) the economic environments in which it operates. A reasonably possible change
should not include remote or ‘worst case’ scenarios or ‘stress tests’. Moreover, if
the rate of change in the underlying risk variable is stable, the entity need not alter
the chosen reasonably possible change in the risk variable. For example, assume
that interest rates are 5 per cent and an entity determines that a fluctuation in
interest rates of ±50 basis points is reasonably possible. It would disclose the
effect on profit or loss and equity if interest rates were to change to 4.5 per cent or
5.5 per cent. In the next period, interest rates have increased to 5.5 per cent. The
entity continues to believe that interest rates may fluctuate by ±50 basis points
(i.e. that the rate of change in interest rates is stable). The entity would disclose
the effect on profit or loss and equity if interest rates were to change to 5 per cent
29
or 6 per cent. The entity would not be required to revise its assessment that
interest rates might reasonably fluctuate by ±50 basis points, unless there is
evidence that interest rates have become significantly more volatile.
(b) the time frame over which it is making the assessment. The sensitivity analysis
should show the effects of changes that are considered to be reasonably possible
over the period until the entity will next present these disclosures, which is
usually its next annual reporting period.
B20 Paragraph 41 permits an entity to use a sensitivity analysis that reflects
interdependencies between risk variables, such as a value-at-risk methodology, if it uses
this analysis to manage its exposure to financial risks. This applies even if such a
methodology measures only the potential for loss and does not measure the potential for
gain. Such an entity might comply with paragraph 41(a) by disclosing the type of valueat-
risk model used (eg whether the model relies on Monte Carlo simulations), an
explanation about how the model works and the main assumptions (eg the holding period
and confidence level). Entities might also disclose the historical observation period and
weightings applied to observations within that period, an explanation of how options are
dealt with in the calculations, and which volatilities and correlations (or, alternatively,
Monte Carlo probability distribution simulations) are used.
B21 An entity should provide sensitivity analyses for the whole of its business, but
may provide different types of sensitivity analysis for different classes of financial
instruments.
Interest rate risk
B22 Interest rate risk arises on interest-bearing financial instruments recognised in the
balance sheet (eg loans and receivables and debt instruments issued) and on some
financial instruments not recognised in the balance sheet (eg some loan commitments).
Currency risk
B23 Currency risk (or foreign exchange risk) arises on financial instruments that are
denominated in a foreign currency, i.e. in a currency other than the functional currency12
in which they are measured. For the purpose of this Standard, currency risk does not arise
from financial instruments that are non-monetary items or from financial instruments
denominated in the functional currency.
B24 A sensitivity analysis is disclosed for each currency to which an entity has
significant exposure.
12 See paragraph 8.16 of AS 30 for definition of ‘Functional Currency’.
30
Other price risk
B25 Other price risk arises on financial instruments because of changes in, for
example, commodity prices or equity prices. To comply with paragraph 40, an entity
might disclose the effect of a decrease in a specified stock market index, commodity
price, or other risk variable. For example, if an entity gives residual value guarantees that
are financial instruments, the entity discloses an increase or decrease in the value of the
assets to which the guarantee applies.
B26 Two examples of financial instruments that give rise to equity price risk are a
holding of equities in another entity, and an investment in a trust, which in turn holds
investments in equity instruments. Other examples include forward contracts and options
to buy or sell specified quantities of an equity instrument and swaps that are indexed to
equity prices. The fair values of such financial instruments are affected by changes in the
market price of the underlying equity instruments.
B27 In accordance with paragraph 40(a), the sensitivity of profit or loss (that arises,
for example, from instruments classified as at fair value through profit or loss and
impairments of available-for-sale financial assets) is disclosed separately from the
sensitivity of equity (that arises, for example, from instruments classified as available for
sale).
B28 Financial instruments that an entity classifies as equity instruments are not
remeasured. Neither profit or loss nor equity will be affected by the equity price risk of
those instruments. Accordingly, no sensitivity analysis is required.
31
Appendix C
Comparison with IFRS 7, Financial Instruments: Disclosures
Note: This Appendix is not a part of the Accounting Standard (AS) 32. The purpose of
this appendix is only to bring out the differences between Accounting Standard (AS) 32
and the corresponding International Financial Reporting Standard (IFRS) 7.
Comparison with IFRS 7, Financial Instruments: Disclosures
This Accounting Standard is based on International Financial Reporting Standard (IFRS)
7, Financial Instruments: Disclosures issued by the International Accounting Standards
Board (IASB). There is no material difference between AS 32 and IFRS 7.
__________
IAS 31
Accounting Standard (AS) 31
Financial Instruments: Presentation
Issued by
The Institute of Chartered Accountants of India
New Delhi
Page 2
Page 3
Contents
Accounting Standard (AS) 31
Financial Instruments: Presentation
OBJECTIVE Paragraphs 1-2
SCOPE 3-6
DEFINITIONS 7-31
Financial Assets and Financial Liabilities 11-20
Equity Instruments 21-22
Derivative Financial Instruments 23-27
Contracts to Buy or Sell Non-Financial Items 28-31
PRESENTATION 32-88
Liabilities and Equity 32-57
No Contractual Obligation to Deliver Cash or Another
Financial Asset
34-47
Settlement in the Entity’s Own Equity Instruments 48-52
Contingent Settlement Provisions 53-54
Settlement Options 55-56
Treatment in Consolidated Financial Statements 57
Compound Financial Instruments 58-67
Treasury shares 68-70
Interest, Dividends, Losses and Gains 71-78
Offsetting a Financial Asset and a Financial Liability 79-88
Appendix A: Illustrative Examples
Page 4
ENTITIES SUCH AS MUTUAL FUNDS AND COOPERATIVES
WHOSE SHARE CAPITAL IS NOT EQUITY
AS DEFINED IN AS 31
A1-A2
Example 1: Entities with no equity A1
Example 2: Entities with some equity A2
ACCOUNTING FOR COMPOUND FINANCIAL
INSTRUMENTS
A3-A18
Example 3: Separation of a compound financial instrument
on initial recognition
A3-A5
Example 4: Separation of a compound financial instrument
with multiple embedded derivative features
A6-A7
Example 5: Repurchase of a convertible instrument A8-A14
Example 6: Amendment of the terms of a convertible
instrument to induce early conversion
A15-A18
Appendix B: Examples of Application of Paragraphs 40 – 46
UNCONDITIONAL RIGHT TO REFUSE REDEMPTION
(PARAGRAPH 42)
B2-B5
Example 1 B2-B3
Example 2 B4-B5
PROHIBITIONS AGAINST REDEMPTION (PARAGRAPHS
43 AND 44)
B6-19
Example 3 B6-B10
Example 4 B11-B13
Example 5 B14-B15
Example 6 B16-B17
Example 7 B18-B19
Appendix C: Comparison with IAS 32, Financial Instruments:
Presentation
Page 5
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 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.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which accounting standards are
intended to apply only to items which are material.
2 This implies that, while discharging their attest function, it will be the duty of the members of the Institute to
examine whether this Accounting Standard is complied with in the presentation of financial statements covered by
their audit. In the event of any deviation from this Accounting Standard, it will be their duty to make adequate
disclosures in their audit reports so that the users of financial statements may be aware of such deviations.
Page 6
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
prevails3.
The following is the text of the Accounting Standard.
Objective
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: Disclosures4.
3 To illustrate, as per paragraph 35(a) of the Standard, a preference share that provides for mandatory redemption by
the issuer for a fixed or determinable amount at a fixed or determinable future date, or gives the holder the right to
require the issuer to redeem the instrument at or after a particular date for a fixed or determinable amount, is a
financial liability. However, at present, Schedule VI to the Companies Act, 1956, inter alia, requires that all
preference shares should be disclosed as a part of the ‘Share Capital’. Untill Schedule VI is amended, a company
classifying the preference shares as share capital will be considered to be complying with this Accounting Standard
even in a case where as per this Standard the preference shares are to be shown as a liability. In the latter case, as a
corollary to this, dividend on such preference shares treated as a distribution to holders thereof and not as an expense
will also be considered as a compliance with this Accounting Standard. Similarly, in case of a co-operative entity
those requirements of paragraphs 40 to 47 and Appendix B to the Standard would not apply which are contrary to
the law governing such an entity.
4A separate Accounting Standard (AS) 32 on Financial Instruments: Disclosures is being formulated.
Page 7
Scope
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
Contracts7. 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 It may be noted that AS 21, AS 23 and AS 27, at present, make reference to Accounting Standard (AS) 13,
Accounting for Investments, with regard to the accounting for an investment in a subsidiary, associate and joint
venture, respectively. On Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement,
becoming mandatory, AS 13 would stand withdrawn except to the extent it relates to accounting for investment
properties. In other words, accounting for investments in a subsidiary, associate and joint venture would no longer
be covered by AS 13. Keeping this in view, with the issuance of the proposed AS 30, Limited Revisions have been
made to AS 21, AS 23 and AS 27 to replace the references to AS 13 with those to AS 30. Pursuant to these Limited
Revisions, the titles of AS 21 and AS 23 are also modified.
6 ‘Business combination’ is the bringing together of separate entities or businesses into one reporting entity.
At present, Accounting Standard (AS) 14, Accounting for Amalgamations, deals with accounting for contingent
consideration in an amalgamation, which is a form of business combination.
7 A separate Accounting Standard on Insurance Contracts will specify the requirements relating to insurance
contracts.
Page 8
(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
8 See footnote 7.
9 Employee share based payment, which is one of the share-based payment transactions, is accounted for as per the
Guidance Note on Employee Share-based Payment, issued by the ICAI. Further, some other pronouncements of the
ICAI deal with other share-based payments, e.g., AS 10, Accounting for Fixed Assets.
Page 9
(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.
Definitions
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.
Page10
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
Page11
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.
Financial Assets and Financial Liabilities
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
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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 Contracts10.
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
10 See footnote 7.
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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.
Equity Instruments
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.
Derivative Financial Instruments
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 generally11 do not result in a transfer of the underlying primary
11 This is true of most, but not all derivatives, e.g. in some cross-currency interest rate swaps principal is exchanged
on inception (and re-exchanged on maturity).
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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
commitments12, and letters of credit. An interest rate swap contract may be viewed as a variation
12 Loan commitment is firm commitment of an entity to provide credit under pre-specified terms and conditions.
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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.
Contracts to Buy or Sell Non-Financial Items
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
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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.
Presentation
Liabilities and Equity
32. The issuer of a financial instrument should classify the instrument, or its component
parts, on initial recognition as a financial liability, a financial asset or an equity instrument in
accordance with the substance of the contractual arrangement and the definitions of a
financial liability, a financial asset and an equity instrument.
33. When an issuer applies the definitions in paragraph 7 to determine whether a financial
instrument is an equity instrument rather than a financial liability, the instrument is an equity
instrument if, and only if, both conditions (a) and (b) below are met.
(a) The instrument includes no 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 issuer.
(b) If the instrument will or may be settled in the issuer’s own equity instruments, it is
(i) a non-derivative that includes no contractual obligation for the issuer to
deliver a variable number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed
amount of cash or another financial asset for a fixed number of its own
equity instruments. For this purpose the issuer’s own equity instruments
do not include instruments that are themselves contracts for the future
receipt or delivery of the issuer’s own equity instruments.
A contractual obligation, including one arising from a derivative financial instrument that will or
may result in the future receipt or delivery of the issuer’s own equity instruments, but does not
meet conditions (a) and (b) above, is not an equity instrument.
No Contractual Obligation to Deliver Cash or Another Financial Asset (paragraph 33(a))
34. A critical feature in differentiating a financial liability from an equity instrument is the
existence of a contractual obligation of one party to the financial instrument (the issuer) either to
deliver cash or another financial asset to the other party (the holder) or to exchange financial
assets or financial liabilities with the holder under conditions that are potentially unfavourable to
the issuer. Although the holder of an equity instrument may be entitled to receive a pro rata share
of any dividends or other distributions of equity, the issuer does not have a contractual obligation
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to make such distributions because it cannot be required to deliver cash or another financial asset
to another party.
35. The substance of a financial instrument, rather than its legal form, governs its
classification on the entity’s balance sheet. Substance and legal form are commonly consistent,
but not always. Some financial instruments take the legal form of equity but are liabilities in
substance and others may combine features associated with equity instruments and features
associated with financial liabilities. For example:
(a) a preference share that provides for mandatory redemption by the issuer for a
fixed or determinable amount at a fixed or determinable future date, or gives the
holder the right to require the issuer to redeem the instrument at or after a
particular date for a fixed or determinable amount, is a financial liability.
(b) a financial instrument that gives the holder the right to put it back to the issuer for
cash or another financial asset (a ‘puttable instrument’) is a financial liability.
This is so even when the amount of cash or other financial assets is determined on
the basis of an index or other item that has the potential to increase or decrease, or
when the legal form of the puttable instrument gives the holder a right to a
residual interest in the assets of an issuer. The existence of an option for the
holder to put the instrument back to the issuer for cash or another financial asset
means that the puttable instrument meets the definition of a financial liability. For
example, open-ended mutual funds, unit trusts and some co-operative entities may
provide their unitholders or members with a right to redeem their interests in the
issuer at any time for cash equal to their proportionate share of the asset value of
the issuer. However, classification as a financial liability does not preclude the use
of descriptors such as ‘net asset value attributable to unitholders’ and ‘change in
net asset value attributable to unitholders’ on the face of the financial statements
of an entity that has no equity capital (such as some mutual funds and unit trusts,
see Illustrative Example 1 of Appendix A) or the use of additional disclosure to
show that total members’ interests comprise items such as reserves that meet the
definition of equity and puttable instruments that do not (see Illustrative Example
2 of Appendix A).
36. If an entity does not have an unconditional right to avoid delivering cash or another
financial asset to settle a contractual obligation, the obligation meets the definition of a financial
liability. For example:
(a) a restriction on the ability of an entity to satisfy a contractual obligation, such as
lack of access to foreign currency or the need to obtain approval for payment from
a regulatory authority, does not negate the entity’s contractual obligation or the
holder’s contractual right under the instrument.
(b) a contractual obligation that is conditional on a counterparty exercising its right to
redeem is a financial liability because the entity does not have the unconditional
right to avoid delivering cash or another financial asset.
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37. A financial instrument that does not explicitly establish a contractual obligation to deliver
cash or another financial asset may establish an obligation indirectly through its terms and
conditions. For example:
(a) a financial instrument may contain a non-financial obligation that must be settled
if, and only if, the entity fails to make distributions or to redeem the instrument. If
the entity can avoid a transfer of cash or another financial asset only by settling
the non-financial obligation, the financial instrument is a financial liability.
(b) a financial instrument is a financial liability if it provides that on settlement the
entity will deliver either:
(i) cash or another financial asset; or
(ii) its own shares whose value is determined to exceed substantially the value
of the cash or other financial asset.
Although the entity does not have an explicit contractual obligation to deliver
cash or another financial asset, the value of the share settlement alternative is such
that the entity will settle in cash. In any event, the holder has in substance been
guaranteed receipt of an amount that is at least equal to the cash settlement option
(see paragraph 53).
38. 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.
39. 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 noncumulative,
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;
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(c) a possible negative impact on the price of equity shares of the issuer if
distributions are not made (because of restrictions on paying dividends on the
equity 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.
40. The contractual right of the holder of a financial instrument (including members’ shares
in co-operative entities) to request redemption does not, in itself, require that financial instrument
to be classified as a financial liability. Rather, the entity must consider all of the terms and
conditions of the financial instrument in determining its classification as a financial liability or
equity. Those terms and conditions include relevant laws, regulations and the governing rules or
bye-laws of the entity in effect at the date of classification, but not expected future amendments
to those laws, regulations or bye-laws.
41. Members’ shares in co-operative entities that would be classified as equity if the
members did not have a right to request redemption are equity if either of the conditions
described in paragraphs 42 and 43 is present. Demand deposits, including current accounts,
deposit accounts and similar contracts that arise when members act as customers are financial
liabilities of the entity.
42. Members’ shares are equity if the entity has an unconditional right to refuse redemption
of the members’ shares.
43. Law, regulation or the governing rules or bye-laws of the entity can impose various types
of prohibitions on the redemption of members’ shares, e.g., unconditional prohibitions or
prohibitions based on liquidity criteria. If redemption is unconditionally prohibited by law,
regulation or the governing rules or bye-laws of the entity, members’ shares are equity.
However, provisions in law, regulation or the governing rules or bye-laws of the entity that
prohibit redemption only if conditions — such as liquidity constraints — are met (or are not met)
do not result in members’ shares being equity.
44. An unconditional prohibition may be absolute, in that all redemptions are prohibited. An
unconditional prohibition may be partial, in that it prohibits redemption of members’ shares if
redemption would cause the number of members’ shares or amount of paid-up capital from
members’ shares to fall below a specified level. Members’ shares in excess of the prohibition
against redemption are liabilities, unless the entity has the unconditional right to refuse
redemption as described in paragraph 42. In some cases, the number of shares or the amount of
paid-up capital subject to a redemption prohibition may change from time to time. Such a
change in the redemption prohibition leads to a transfer between financial liabilities and equity.
In such a case, the entity should disclose separately the amount, timing and reason for the
transfer.
45. Equity is the residual interest in the assets after deducting all liabilities. Therefore, at
initial recognition, the entity should measure the equity component in the member’s shares at the
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residual amount after deducting from the total amount of the shares as a whole the value
separately determined for its financial liabilities for redemption. The entity measures its financial
liability for redemption at fair value. In the case of members’ shares with a redemption feature,
the fair value of the financial liability for redemption is measured at no less than the maximum
amount payable under the redemption provisions of its governing bye-laws or applicable law
discounted from the first date that the amount could be required to be paid (see Example 3 of
Appendix B).
46. As required by paragraph 71, distributions to holders of equity instruments (net of any
income tax benefits) are recognised directly in the revenue reserves and surplus. Interest,
dividends and other returns relating to financial instruments classified as financial liabilities are
expenses, regardless of whether those amounts paid are legally characterised as dividends,
interest or otherwise.
47. Appendix B, which is an integral part of the Standard, illustrates the application of
paragraphs 40 to 46.
Settlement in the Entity’s Own Equity Instruments (paragraph 33(b))
48. A contract is not an equity instrument solely because it may result in the receipt or
delivery of the entity’s own equity instruments. An entity may have a contractual right or
obligation to receive or deliver a number of its own shares or other equity instruments that varies
so that the fair value of the entity’s own equity instruments to be received or delivered equals the
amount of the contractual right or obligation. Such a contractual right or obligation may be for a
fixed amount or an amount that fluctuates in part or in full in response to changes in a variable
other than the market price of the entity’s own equity instruments (e.g. an interest rate, a
commodity price or a financial instrument price). Two examples are (a) a contract to deliver as
many of the entity’s own equity instruments as are equal in value to Rs.100, and (b) a contract to
deliver as many of the entity’s own equity instruments as are equal in value to the value of 100
grams of gold. Such a contract is a financial liability of the entity even though the entity must or
can settle it by delivering its own equity instruments. It is not an equity instrument because the
entity uses a variable number of its own equity instruments as a means to settle the contract.
Accordingly, the contract does not evidence a residual interest in the entity’s assets after
deducting all of its liabilities.
49. A contract that will be settled by the entity (receiving or) delivering a fixed number of its
own equity instruments in exchange for a fixed amount of cash or another financial asset is an
equity instrument. For example, an issued share option that gives the counterparty a right to buy
a fixed number of the entity’s shares for a fixed price or for a fixed stated principal amount of a
bond is an equity instrument. Changes in the fair value of a contract arising from variations in
market interest rates that do not affect the amount of cash or other financial assets to be paid or
received, or the number of equity instruments to be received or delivered, on settlement of the
contract do not preclude the contract from being an equity instrument. Any consideration
received (such as the premium received for a written option or warrant on the entity’s own
shares) is added directly to equity in an appropriate account. Any consideration paid (such as the
premium paid for a purchased option) is deducted directly from an appropriate equity account.
Changes in the fair value of an equity instrument are not recognised in the financial statements.
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50. A contract that contains an obligation for an entity to purchase its own equity instruments
for cash or another financial asset gives rise to a financial liability for the present value of the
redemption amount (for example, for the present value of the forward repurchase price, option
exercise price or other redemption amount). This is the case even if the contract itself is an equity
instrument. One example is an entity’s obligation under a forward contract to purchase its own
equity instruments for cash. When the financial liability is recognised initially under AS 30, its
fair value (the present value of the redemption amount) is reclassified from equity.
Subsequently, the financial liability is measured in accordance with AS 30. If the contract
expires without delivery, the carrying amount of the financial liability is reclassified to equity.
An entity’s contractual obligation to purchase its own equity instruments gives rise to a financial
liability for the present value of the redemption amount even if the obligation to purchase is
conditional on the counterparty exercising a right to redeem (eg a written put option that gives
the counterparty the right to sell an entity’s own equity instruments to the entity for a fixed
price).
51. A contract that will be settled by the entity delivering or receiving a fixed number of its
own equity instruments in exchange for a variable amount of cash or another financial asset is a
financial asset or financial liability. An example is a contract for the entity to deliver 100 of its
own equity instruments in return for an amount of cash calculated to equal the value of 100
grams of gold.
52. 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 for a fixed amount of cash or another financial asset, is an equity
instrument. 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. 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. 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. One example is a net cash-settled share option.
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(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.
Contingent Settlement Provisions
53. A financial instrument may require the entity to deliver cash or another financial asset, or
otherwise to settle it in such a way that it would be a financial liability, in the event of the
occurrence or non-occurrence of uncertain future events (or on the outcome of uncertain
circumstances) that are beyond the control of both the issuer and the holder of the instrument,
such as a change in a stock market index, consumer price index, interest rate or taxation
requirements, or the issuer’s future revenues, net income or debt-to-equity ratio). The issuer of
such an instrument does not have the unconditional right to avoid delivering cash or another
financial asset (or otherwise to settle it in such a way that it would be a financial liability).
Therefore, it is a financial liability of the issuer unless:
(a) the part of the contingent settlement provision that could require settlement in
cash or another financial asset (or otherwise in such a way that it would be a
financial liability) is not genuine; or
(b) the issuer can be required to settle the obligation in cash or another financial asset
(or otherwise to settle it in such a way that it would be a financial liability) only in
the event of liquidation of the issuer.
54. Paragraph 53 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.
Page23
Settlement Options
55. When a derivative financial instrument gives one party a choice over how it is settled
(eg the issuer or the holder can choose settlement net in cash or by exchanging shares for
cash), it is a financial asset or a financial liability unless all of the settlement alternatives
would result in it being an equity instrument.
56. An example of a derivative financial instrument with a settlement option that is a
financial liability is a share option that the issuer can decide to settle net in cash or by
exchanging its own shares for cash. Similarly, some contracts to buy or sell a non-financial item
in exchange for the entity’ s own equity instruments are within the scope of this Standard
because they can be settled either by delivery of the non-financial item or net in cash or another
financial instrument (see paragraphs 4-6). Such contracts are financial assets or financial
liabilities and not equity instruments.
Treatment in Consolidated Financial Statements
57. In consolidated financial statements, an entity presents minority interests - i.e. the
interests of other parties in the equity and income of its subsidiaries in accordance with AS 1
(revised)13, Presentation of Financial Statements, and AS 21, Consolidated Financial Statements
and Accounting for Investments in Subsidiaries in Separate Financial Statements14. 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 (e.g. 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) is classified as a financial liability in consolidated financial
statements.
13 AS 1 is presently under revision.
14 A limited revision has been made to AS 21 with the issuance of the Accounting Standard (AS) 30, Financial
Instruments: Recognition and Measurement. Pursuant to the limited revision, the title of AS 21 is also modified.
Page24
Compound Financial Instruments
(see also Illustrative Examples 3-6 of Appendix A)
58. The issuer of a non-derivative financial instrument should evaluate the terms of the
financial instrument to determine whether it contains both a liability and an equity
component. Such components should be classified separately as financial liabilities or equity
instruments in accordance with paragraph 32.
59. Paragraph 58 applies only to issuers of non-derivative compound financial instruments.
Paragraph 58 does not deal with compound financial instruments from the perspective of holders.
Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement deals with
the separation of embedded derivatives from the perspective of holders of compound financial
instruments that contain debt and equity features.
60. An entity recognises separately the components of a financial instrument that (a) creates a
financial liability of the entity and (b) grants an option to the holder of the instrument to convert
it into an equity instrument of the entity. For example, a debenture or similar instrument
convertible by the holder into a fixed number of equity shares of the entity is a compound
financial instrument. From the perspective of the entity, such an instrument comprises two
components: a financial liability (a contractual arrangement to deliver cash or another financial
asset) and an equity instrument (a call option granting the holder the right, for a specified period
of time, to convert it into a fixed number of equity shares of the entity). The economic effect of
issuing such an instrument is substantially the same as issuing simultaneously a debt instrument
with an early settlement provision and warrants to purchase equity shares, or issuing a debt
instrument with detachable share purchase warrants. Accordingly, in all cases, the entity presents
the liability and equity components separately on its balance sheet.
61. Classification of the liability and equity components of a convertible instrument is not
revised as a result of a change in the likelihood that a conversion option will be exercised, even
when exercise of the option may appear to have become economically advantageous to some
holders. Holders may not always act in the way that might be expected because, for example, the
tax consequences resulting from conversion may differ among holders. Furthermore, the
likelihood of conversion will change from time to time. The entity’s contractual obligation to
make future payments remains outstanding until it is extinguished through conversion, maturity
of the instrument or some other transaction.
62. Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement
deals with the measurement of financial assets and financial liabilities. Equity instruments are
instruments that evidence a residual interest in the assets of an entity after deducting all of its
liabilities. Therefore, when the initial carrying amount of a compound financial instrument is
allocated to its equity and liability components, the equity component is assigned the residual
amount after deducting from the fair value of the instrument as a whole the amount separately
determined for the liability component. The value of any derivative features (such as a call
option) embedded in the compound financial instrument other than the equity component (such
as an equity conversion option) is included in the liability component. The sum of the carrying
amounts assigned to the liability and equity components on initial recognition is always equal to
Page25
the fair value that would be ascribed to the instrument as a whole. No gain or loss arises from
initially recognising the components of the instrument separately.
63. A common form of compound financial instrument is a debt instrument with an
embedded conversion option, such as a debenture convertible into equity shares of the issuer, and
without any other embedded derivative features. Paragraph 58 requires the issuer of such a
financial instrument to present the liability component and the equity component separately on
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.
Accordingly, the issuer of a debenture convertible into equity shares first
determines the carrying amount of the liability component by measuring the fair
value of a similar liability (including any embedded non-equity derivative
features) that does not have an associated equity component. Thus, 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. The carrying amount of the equity instrument represented by such
option is determined by deducting the fair value of the financial liability from the
fair value of the compound financial instrument as a whole.
64. 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.
65. 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 58-63.
66. 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 the
statement of profit and loss; and
Page26
(b) the amount of consideration relating to the equity component is adjusted in equity
against the original equity component and the balance, if any, against the reserves
and surplus.
67. 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 in the statement of profit and loss.
Treasury shares
68. If an entity reacquires its own equity instruments, those instruments (‘treasury shares’)
should be deducted from equity. No gain or loss should be recognised in statement of profit
and loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments.
Such treasury shares may be acquired and held by the entity or by other members of the
consolidated group. Consideration paid or received should be recognised directly in equity.
69. The amount of treasury shares held is disclosed separately either on the face of the
balance sheet or in the notes, in accordance with AS 115 (Revised), Presentation of Financial
Statements. An entity provides disclosure in accordance with AS 18, Related Party Disclosures,
if the entity reacquires its own equity instruments from related parties.
70. An entity’s own equity instruments are not recognised as a financial asset regardless of
the reason for which they are reacquired. Paragraph 68 requires an entity that reacquires its own
equity instruments to deduct those equity instruments from equity. However, when an entity
holds its own equity on behalf of others, eg, a financial institution holding its own equity on
behalf of a client, there is an agency relationship and as a result those holdings are not included
in the entity’s balance sheet.
Interest, Dividends, Losses and Gains
71. Interest, dividends, losses and gains relating to a financial instrument or a component
of financial instrument that is a financial liability should be recognised as income or expense
in the statement of profit and loss. Distributions to holders of an equity instrument should be
debited by the entity directly to an appropriate equity account, net of any related income tax
benefit. Transaction costs of an equity transaction should be accounted for as a deduction
from equity net of any related income tax benefit.
72. The classification of a financial instrument as a financial liability or an equity instrument
determines whether interest, dividends, losses and gains relating to that instrument are
recognised as expense or income in the statement of profit and loss or are recognised directly in
15 See footnote 13.
Page27
the revenue reserves and surplus. Thus, dividend payments on shares wholly recognised as
liabilities are recognised as expenses in the same way as interest on a bond/ debenture. Similarly,
gains and losses associated with redemptions or refinancings of financial liabilities are
recognised in the statement of profit and loss, whereas redemptions or refinancings of equity
instruments are recognised as changes in equity. Changes in the fair value of an equity
instrument are not recognised in the financial statements.
73. An entity typically incurs various costs in issuing or acquiring its own equity instruments.
Those costs might include regulatory fees, amounts paid to legal, accounting and other
professional advisers, printing costs and stamp duties. The transaction costs (net of any related
income tax benefit) of an equity transaction are recognised directly in the appropriate equity
account to the extent they are incremental costs directly attributable to the equity transaction that
otherwise would have been avoided. The costs of an equity transaction that is abandoned are
recognised as an expense.
74. Transaction costs that relate to the issue of a compound financial instrument are allocated
to the liability and equity components of the instrument in proportion to the allocation of
proceeds. Transaction costs that relate jointly to more than one transaction are allocated to those
transactions using a basis of allocation that is rational and consistent with similar transactions.
75. The amount of transaction costs recognised in the revenue reserves and surplus is
disclosed separately under AS 1 (revised)16.
76. The following example illustrates the application of paragraph 71 to a compound
financial instrument. Assume that a non-cumulative preference share is mandatorily redeemable
for cash in five years, but that dividends are payable at the discretion of the entity before the
redemption date. Such an instrument is a compound financial instrument, with the liability
component being the present value of the redemption amount. The unwinding of the discount on
this component is recognised in statement of profit and loss and classified as interest expense.
Any dividends paid relate to the equity component and, accordingly, are recognised directly in
the revenue reserves and surplus. A similar treatment would apply if the redemption was not
mandatory but at the option of the holder, or if the share was mandatorily convertible into a
variable number of equity shares calculated to equal a fixed amount or an amount based on
changes in an underlying variable (e.g., commodity). However, if any unpaid dividends are
added to the redemption amount, the entire instrument is a liability. In such a case, any dividends
are classified as interest expense.
77. Dividends classified as an expense are presented in the statement of profit and loss as a
separate item. In addition to the requirements of this Standard, disclosure of interest and
dividends is subject to the requirements of AS 1 (revised)17 and Accounting Standard (AS) 32,
Financial Instruments: Disclosures18.
78. Gains and losses related to changes in the carrying amount of a financial liability are
recognised as income or expense in the statement of profit and loss even when they relate to an
16 See footnote 13.
17 See footnote 13.
18 See footnote 4.
Page28
instrument that includes a right to the residual interest in the assets of the entity in exchange for
cash or another financial asset (see paragraph 35(b)). Under AS 1 (revised)19, the entity presents
any gain or loss arising from remeasurement of such an instrument separately on the face of the
statement of profit and loss when it is relevant in explaining the entity’s performance.
Offsetting a Financial Asset and a Financial Liability
79. A financial asset and a financial liability should be offset and the net amount
presented in the balance sheet when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognised amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the
liability simultaneously.
In accounting for a transfer of a financial asset that does not qualify for derecognition,
the entity should not offset the transferred asset and the associated liability (see
Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement).
80. This Standard requires the presentation of financial assets and financial liabilities on a net
basis when doing so reflects an entity’s expected future cash flows from settling two or more
separate financial instruments. When an entity has the right to receive or pay a single net amount
and intends to do so, it has, in effect, only a single financial asset or financial liability. In other
circumstances, financial assets and financial liabilities are presented separately from each other
consistently with their characteristics as resources or obligations of the entity.
81. Offsetting a recognised financial asset and a recognised financial liability and presenting
the net amount differs from the derecognition of a financial asset or a financial liability.
Although offsetting does not give rise to recognition of a gain or loss, the derecognition of a
financial instrument not only results in the removal of the previously recognised item from the
balance sheet but also may result in recognition of a gain or loss.
82. A right of set-off is a debtor’s legal right, by contract or otherwise, to settle or otherwise
eliminate all or a portion of an amount due to a creditor by applying against that amount an
amount due from the creditor. In unusual circumstances, a debtor may have a legal right to apply
an amount due from a third party against the amount due to a creditor provided that there is an
agreement between the three parties that clearly establishes the debtor’s right of set-off. Because
the right of set-off is a legal right, the conditions supporting the right may vary from one legal
jurisdiction to another and the laws applicable to the relationships between the parties need to be
considered.
83. The existence of an enforceable right to set off a financial asset and a financial liability
affects the rights and obligations associated with a financial asset and a financial liability and
may affect an entity’s exposure to credit and liquidity risk. However, the existence of the right,
by itself, is not a sufficient basis for offsetting. In the absence of an intention to exercise the right
or to settle simultaneously, the amount and timing of an entity’s future cash flows are not
19 See footnote 13.
Page29
affected. When an entity intends to exercise the right or to settle simultaneously, presentation of
the asset and liability on a net basis reflects more appropriately the amounts and timing of the
expected future cash flows, as well as the risks to which those cash flows are exposed. An
intention by one or both parties to settle on a net basis without the legal right to do so is not
sufficient to justify offsetting because the rights and obligations associated with the individual
financial asset and financial liability remain unaltered.
84. An entity’s intentions with respect to settlement of particular assets and liabilities may be
influenced by its normal business practices, the requirements of the financial markets and other
circumstances that may limit the ability to settle net or to settle simultaneously. When an entity
has a right of set-off, but does not intend to settle net or to realise the asset and settle the liability
simultaneously, the effect of the right on the entity’s credit risk exposure is disclosed in
accordance with Accounting Standard (AS) 32, Financial Instruments: Disclosures20.
85. Simultaneous settlement of two financial instruments may occur through, for example,
the operation of a clearing house in an organised financial market or a face-to-face exchange. In
these circumstances the cash flows are, in effect, equivalent to a single net amount and there is
no exposure to credit or liquidity risk. In other circumstances, an entity may settle two
instruments by receiving and paying separate amounts, becoming exposed to credit risk for the
full amount of the asset or liquidity risk for the full amount of the liability. Such risk exposures
may be significant even though relatively brief. Accordingly, realisation of a financial asset and
settlement of a financial liability are treated as simultaneous only when the transactions occur at
the same moment.
86. The conditions set out in paragraph 79 are generally not satisfied and offsetting is usually
inappropriate when:
(a) several different financial instruments are used to emulate the features of a single
financial instrument (a ‘synthetic instrument’);
(b) financial assets and financial liabilities arise from financial instruments having the
same primary risk exposure (for example, assets and liabilities within a portfolio
of forward contracts or other derivative instruments) but involve different
counterparties;
(c) financial or other assets are pledged as collateral for non-recourse financial
liabilities;
(d) financial assets are set aside in trust by a debtor for the purpose of discharging an
obligation without those assets having been accepted by the creditor in settlement
of the obligation (for example, a sinking fund arrangement); or
(e) obligations incurred as a result of events giving rise to losses are expected to be
recovered from a third party by virtue of a claim made under an insurance
contract.
87. To offset a financial asset and a financial liability, an entity must have a currently
enforceable legal right to set off the recognised amounts. An entity may have a conditional right
20See footnote 4.
Page30
to set off recognised amounts. An entity that undertakes a number of financial instrument
transactions with a single counterparty may enter into a ‘master netting arrangement’ with that
counterparty. Such an agreement provides for a single net settlement of all financial instruments
covered by the agreement in the event of default on, or termination of, any one contract. These
arrangements are commonly used by financial institutions to provide protection against loss in
the event of bankruptcy or other circumstances that result in a counterparty being unable to meet
its obligations. A master netting arrangement commonly creates a right of set-off that becomes
enforceable and affects the realisation or settlement of individual financial assets and financial
liabilities only following a specified event of default or in other circumstances not expected to
arise in the normal course of business. A master netting arrangement does not provide a basis for
offsetting unless both of the criteria in paragraph 79 are satisfied. When financial assets and
financial liabilities subject to a master netting arrangement are not offset, the effect of the
arrangement on an entity’s exposure to credit risk is disclosed in accordance with Accounting
Standard (AS) 32, Financial Instruments: Disclosures21.
88. The Standard does not provide special treatment for so-called ‘synthetic instruments’,
which are groups of separate financial instruments acquired and held to emulate the
characteristics of another instrument. For example, a floating rate long-term debt combined with
an interest rate swap that involves receiving floating payments and making fixed payments
synthesises a fixed rate long-term debt. Each of the individual financial instruments that together
constitute a ‘synthetic instrument’ represents a contractual right or obligation with its own terms
and conditions and each may be transferred or settled separately. Each financial instrument is
exposed to risks that may differ from the risks to which other financial instruments are exposed.
Accordingly, when one financial instrument in a ‘synthetic instrument’ is an asset and another is
a liability, they are not offset and presented on an entity’s balance sheet on a net basis unless
they meet the criteria for offsetting in paragraph 79.
21 See footnote 4.
Page31
Appendix A
Illustrative Examples
These examples accompany, but are not part of the Accounting Standard (AS) 31, Financial
Instruments: Presentation.
Entities such as Mutual Funds and Co-operatives whose Share Capital is not
Equity as defined in AS 31
Example 1: Entities with no equity
A1. The following example illustrates a statement of profit and loss and balance sheet format
that may be used by entities such as mutual funds that do not have equity as defined in AS 31.
Other formats are possible.
Statement of profit and loss for the year ended 31 March 20x6
20x5-20x6 20x4-20x5
Rs. Rs.
Revenue 2,956 1,718
Expenses (appropriately classified) (644) (614)
Profit from operating activities 2,312 1,104
Finance costs -distributions to unitholders (47) (47)
- other finance costs (50) (50)
Change in net assets attributable to unitholders 2,215 1,007
Balance sheet at 31 March 20x6
20x5-20x6 20x4-20x5
Rs. Rs Rs Rs
ASSETS
Non-current assets
(appropriately classified) 91,374 78,484
Total non-current assets 91,374 78,484
Current assets
(appropriately classified) 1,422 1,769
Total current assets 1,422 1,769
Total assets 92,796 80,253
Page32
LIABILITIES
Current liabilities
(appropriately classified) 647 66
Total current liabilities (647) (66)
Non-current liabilities excluding net
assets attributable to unitholders
(appropriately classified) 280 136
(280) (136)
Net assets attributable to unitholders 91,869 80,051
Example 2: Entities with some equity
A2. The following example illustrates a statement of profit and loss and balance sheet format
that may be used by entities whose share capital is not equity as defined in AS 31, because the
entity has an obligation to repay the share capital on demand. Other formats are possible.
Statement of profit and loss for the year ended 31 March 20x6
20x5-20x6 20x4-20x5
Rs. Rs.
Revenue 472 498
Expenses (appropriately classified) (367) (396)
Profit from operating activities 105 102
Finance costs – distributions to members (50) (50)
– other finance costs (4) (4)
Change in net assets attributable to members 51 48
Balance sheet at 31 March 20x6
20x5-20x6 20x4-
20x5
Rs. Rs. Rs. Rs.
ASSETS
Non-current assets
(appropriately classified) 908 830
Total non-current assets 908 830
Current assets
(appropriately classified) 383 350
Total current assets 383 350
Page33
Total assets 1,291 1,180
LIABILITIES
Current liabilities
(appropriately classified) 372 338
Share capital repayable on demand 202 161
Total current liabilities (574) (499)
Total assets less current liabilities 717 681
Non-current liabilities
(appropriately classified) 187 196
187 196
RESERVES22
Reserves e.g. revaluation reserve, retained earnings
etc
530 485
530 485
717 681
MEMORANDUM NOTE - TOTAL MEMBERS’ INTERESTS
Share capital repayable on demand 202 161
Reserves 530 485
732 646
Accounting for Compound Financial Instruments
Example 3: Separation of a compound financial instrument on initial recognition
A3. Paragraph 58 describes how the components of a compound financial instrument are
separated by the entity on initial recognition. The following example illustrates how such a
separation is made.
A4. An entity issues 2,000 convertible debentures at the start of year 1. The debentures have a
three-year term, and are issued at par with a face value of Rs. 1,000 per debenture, giving total
proceeds of Rs. 2,000,000. Interest is payable annually in arrears at a nominal annual interest rate
of 6 per cent. Each debenture is convertible at any time up to maturity into 250 equity shares.
When the debentures are issued, the prevailing market interest rate for similar debt without
conversion options is 9 per cent.
22 In this example, the entity has no obligation to deliver a share of its reserves to its members.
Page34
A5. The liability component is measured first, and the difference between the proceeds of the
debenture issue and the fair value of the liability is assigned to the equity component. The
present value of the liability component is calculated using a discount rate of 9 per cent, the
market interest rate for similar debentures having no conversion rights, as shown below.
Rs.
Present value of the principal - Rs.
2,000,000 payable at the end of three years 1,544,367
Present value of the interest – Rs. 120,000
payable annually in arrears for three years 303,755
Total liability component 1,848,122
Equity component (balancing figure) 151,878
Proceeds of the debenture issue 2,000,000
Example 4: Separation of a compound financial instrument with multiple embedded
derivative features
A6. The following example illustrates the application of paragraph 62 to the separation of the
liability and equity components of a compound financial instrument with multiple embedded
derivative features.
A7. Assume that the proceeds received on the issue of a callable convertible debenture are Rs.
60. The value of a similar debenture without a call or equity conversion option is Rs. 57. Based
on an option pricing model, it is determined that the value to the entity of the embedded call
feature in a similar debenture without an equity conversion option is Rs. 2. In this case, the value
allocated to the liability component under paragraph 62 is Rs. 55 (Rs. 57 – Rs. 2) and the value
allocated to the equity component is Rs. 5 (Rs. 60 – Rs. 55).
Example 5: Repurchase of a convertible instrument
A8. The following example illustrates how an entity accounts for a repurchase of a
convertible instrument. For simplicity, at inception, the face amount of the instrument is assumed
to be equal to the aggregate carrying amount of its liability and equity components in the
financial statements, i.e. no original issue premium or discount exists. Also, for simplicity, tax
considerations have been omitted from the example.
A9. On 1 January 1999, Entity A issued a 10 per cent convertible debenture with a face value
of Rs. 1,000 maturing on 31 December 2008. The debenture is convertible into equity shares of
Entity A at a conversion price of Rs.25 per share. Interest is payable half-yearly in cash. At the
date of issue, Entity A could have issued non-convertible debt with a ten-year term bearing a
coupon interest rate of 11 per cent.
A10. In the financial statements of Entity A the carrying amount of the debenture was allocated
on issue as follows:
Page35
Rs.
Liability component
Present value of 20 half-yearly interest payments of Rs. 50,
Discounted at 11% 597
Present value of Rs. 1,000 due in 10 years, discounted at 11%,
Compounded half-yearly 343
940
Equity component
(Difference between Rs. 1,000 total proceeds and Rs. 940
allocated above) 60
Total proceeds 1,000
A11. On 1 January 2004, the convertible debenture has a fair value of Rs. 1,700.
A12. Entity A makes a tender offer to the holder of the debenture to repurchase the debenture
for Rs. 1,700, which the holder accepts. At the date of repurchase, Entity A could have issued
non-convertible debt with a five-year term bearing a coupon interest rate of 8 per cent.
A13. The repurchase price is allocated as follows:
Carrying
Value
Fair
Value
Difference
Liability component: Rs. Rs. Rs.
Present value of 10 remaining half-yearly interest
Payments of Rs. 50, discounted at 11% and 8%,
Respectively 377 405
Present value of Rs. 1,000 due in 5 years,
discounted at 11% and 8%, compounded halfyearly,
respectively 585 676
962 1,081 (119)
Equity component 60 61923 (559)
Total 1,022 1,700 (678)
A14. Entity A recognises the repurchase of the debenture as follows:
Dr Liability component Rs. 962
Dr Debt settlement expense (statement of
profit and loss)
Rs. 119
Cr Cash Rs. 1,081
To recognise the repurchase of the liability component.
23 This amount represents the difference between the fair value amount allocated to the liability component and the
repurchase price of Rs. 1,700.
Page36
Dr Equity component Rs. 60
Dr. Reserves and Surplus Rs. 559
Cr Cash Rs. 619
To recognise the cash paid for the equity component.
Example 6: Amendment of the terms of a convertible instrument to induce early
conversion
A15. The following example illustrates how an entity accounts for the additional consideration
paid when the terms of a convertible instrument are amended to induce early conversion.
A16. On 1 January 2005, Entity A issued a 10 per cent convertible debenture with a face value
of Rs. 1,000 with the same terms as described in Example 5. On 1 January 2006, to induce the
holder to convert the convertible debenture promptly, Entity A reduces the conversion price to
Rs.20 if the debenture is converted before 1 March 2006 (i.e. within 60 days).
A17. Assume the market price of Entity A’s equity shares on the date the terms are amended is
Rs.40 per share. The fair value of the incremental consideration paid by Entity A is calculated as
follows:
Number of equity shares to be issued to debenture holders under amended conversion
terms:
Face amount Rs. 1,000
New conversion price /Rs. 20 per share
Number of equity shares to be issued on conversion 50 shares
Number of equity shares to be issued to debenture holders under original conversion
terms:
Face amount Rs. 1,000
Original conversion price /Rs.25 per share
Number of equity shares issued upon conversion 40 shares
Number of incremental equity shares issued upon conversion 10 Shares
Value of incremental equity shares issued upon conversion
Rs.40 per share x 10 incremental shares Rs.400
Page37
A18. The incremental consideration of Rs. 400 is recognised as a loss in the statement of profit
and loss.
Page38
Appendix B
Examples of Application of Paragraphs 40-46
This appendix is an integral part of AS 31.
B1. This appendix sets out seven examples of the application of paragraphs 40-46. The
examples do not constitute an exhaustive list; other fact patterns are possible. Each example
assumes that there are no conditions other than those set out in the facts of the example that
would require the financial instrument to be classified as a financial liability.
Unconditional Right to Refuse Redemption (Paragraph 42)
Example 1
Facts
B2. The governing bye-laws of the entity state that redemptions are made at the sole
discretion of the entity. The bye-laws do not provide further elaboration or limitation on that
discretion. In its history, the entity has never refused to redeem members’ shares, although the
governing board of the entity has the right to do so.
Classification
B3. The entity has the unconditional right to refuse redemption and the members’ shares are
equity. The Standard establishes principles for classification that are based on the terms of the
financial instrument and notes that a history of, or intention to make, discretionary payments
does not trigger liability classification. Paragraph 39 of the Standard states:
“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;
Page39
(c) a possible negative impact on the price of equity shares of the issuer if
distributions are not made (because of restrictions on paying dividends on the
equity 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.”
Example 2
Facts
B4. The governing bye-laws of the entity state that redemptions are made at the sole
discretion of the entity. However, the bye-laws further state that approval of a redemption
request is automatic unless the entity is unable to make payments without violating regulations
regarding liquidity or reserves.
Classification
B5. The entity does not have the unconditional right to refuse redemption and the members’
shares are a financial liability. The restrictions described above are based on the entity’s ability
to settle its liability. They restrict redemptions only if the liquidity or reserve requirements are
not met and then only until such time as they are met. Hence, they do not, under the principles
established in the Standard, result in the classification of the financial instrument as equity.
Paragraph 38 of the Standard states:
“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 is 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. [Emphasis added]”
Prohibitions Against Redemption (Paragraphs 43 and 44)
Example 3
Facts
B6. A co-operative entity has issued shares to its members at different dates and for different
amounts in the past as follows:
Page40
(a) 1 January 20X1: 100,000 shares at Rs. 10 each (Rs. 1,000,000);
(b) 1 January 20X2: 100,000 shares at Rs. 20 each (a further Rs. 2,000,000, so that
the total for shares issued is Rs. 3,000,000).
Shares are redeemable on demand at the amount for which they were issued.
B7. The governing bye-laws of the entity state that cumulative redemptions cannot exceed 20
per cent of the highest number of its members’ shares ever outstanding. At 31 December 20X2,
the entity has 200,000 of outstanding shares, which is the highest number of members’ shares
ever outstanding and no shares have been redeemed in the past. On 1 January 20X3, the entity
amends its governing bye-laws and increases the permitted level of cumulative redemptions to
25 per cent of the highest number of its members’ shares ever outstanding.
Classification
Before the governing bye-laws are amended
B8. Members’ shares in excess of the prohibition against redemption are financial liabilities.
The co-operative entity measures this financial liability at fair value at initial recognition.
Because these shares are redeemable on demand, the co-operative entity determines the fair
value of such financial liabilities as required by paragraph 55 of AS 30, which states: ‘The fair
value of a financial liability with a demand feature (e.g., a demand deposit) is not less than the
amount payable on demand…’. Accordingly, the co-operative entity classifies as financial
liabilities the maximum amount payable on demand under the redemption provisions.
B9. On 1 January 20X1, the maximum amount payable under the redemption provisions is
20,000 shares at Rs. 10 each and, accordingly, the entity classifies Rs. 200,000 as financial
liability and Rs. 800,000 as equity. However, on 1 January 20X2, because of the new issue of
shares at Rs. 20, the maximum amount payable under the redemption provisions increases to
40,000 shares at Rs. 20 each. The issue of additional shares at Rs. 20 creates a new liability that
is measured on initial recognition at fair value. The liability after these shares have been issued is
20 per cent of the total shares in issue (200,000), measured at Rs. 20, or Rs. 800,000. This
requires recognition of an additional liability of Rs. 600,000. In this example no gain or loss is
recognised. Accordingly, the entity now classifies Rs. 800,000 as financial liabilities and Rs.
2,200,000 as equity. This example assumes these amounts are not changed between 1 January
20X1 and 31 December 20X2.
After the governing bye-laws are amended
B10. Following the change in its governing bye-laws, the co-operative entity can now be
required to redeem a maximum of 25 per cent of its outstanding shares or a maximum of 50,000
shares at Rs. 20 each. Accordingly, on 1 January 20X3, the co-operative entity classifies as
financial liabilities an amount of Rs. 1,000,000 being the maximum amount payable on demand
under the redemption provisions, as determined in accordance with paragraph 55 of AS 30. It,
therefore, transfers on 1 January 20X3 from equity to financial liabilities an amount of Rs.
Page41
200,000, leaving Rs. 2,000,000 classified as equity. In this example, the entity does not recognise
a gain or loss on the transfer.
Example 4
Facts
B11. Law governing the operations of co-operatives, or the terms of the governing bye-laws of
the entity, prohibit an entity from redeeming members’ shares if, by redeeming them, it would
reduce paid-in capital from members’ shares below 75 per cent of the highest amount of paid-in
capital from members’ shares. The highest amount for a particular co-operative is Rs. 1,000,000.
At the balance sheet date, the balance of paid-in capital is Rs. 900,000.
Classification
B12. In this case, Rs. 750,000 would be classified as equity and Rs. 150,000 would be
classified as financial liabilities. In addition to the paragraphs already cited, paragraph 35(b) of
the Standard states in part:
“…a financial instrument that gives the holder the right to put it back to the issuer for
cash or another financial asset (a ‘puttable instrument’) is a financial liability. This is so
even when the amount of cash or other financial assets is determined on the basis of an
index or other item that has the potential to increase or decrease, or when the legal form
of the puttable instrument gives the holder a right to a residual interest in the assets of an
issuer. The existence of an option for the holder to put the instrument back to the issuer
for cash or another financial asset means that the puttable instrument meets the definition
of a financial liability. …”
B13. The redemption prohibition described in this example is different from the restrictions
described in paragraphs 36 and 38 of the Standard. Those restrictions are limitations on the
ability of the entity to pay the amount due on a financial liability, i.e., they prevent payment of
the liability only if specified conditions are met. In contrast, this example describes an
unconditional prohibition on redemptions beyond a specified amount, regardless of the entity’s
ability to redeem members’ shares (e.g., given its cash resources, profits or distributable
reserves). In effect, the prohibition against redemption prevents the entity from incurring any
financial liability to redeem more than a specified amount of paid-up capital. Therefore, the
portion of shares subject to the redemption prohibition is not a financial liability. While each
member’s shares may be redeemable individually, a portion of the total shares outstanding is not
redeemable in any circumstances other than liquidation of the entity.
Example 5
Facts
B14. The facts of this example are as stated in example 4. In addition, at the balance sheet date,
liquidity requirements imposed in the jurisdiction prevent the entity from redeeming any
Page42
members’ shares unless its holdings of cash and short-term investments are greater than a
specified amount. The effect of these liquidity requirements at the balance sheet date is that the
entity cannot pay more than Rs. 50,000 to redeem the members’ shares.
Classification
B15. As in example 4, the entity classifies Rs. 750,000 as equity and Rs. 150,000 as a financial
liability. This is because the amount classified as a liability is based on the entity’s unconditional
right to refuse redemption and not on conditional restrictions that prevent redemption only if
liquidity or other conditions are not met and then only until such time as they are met. The
provisions of paragraphs 36 and 38 of the Standard apply in this case.
Example 6
Facts
B16. The governing bye-laws of the entity prohibit it from redeeming members’ shares, except
to the extent of proceeds received from the issue of additional members’ shares to new or
existing members during the preceding three years. Proceeds from issuing members’ shares must
be applied to redeem shares for which members have requested redemption. During the three
preceding years, the proceeds from issuing members’ shares have been Rs. 12,000 and no
member’s shares have been redeemed.
Classification
B17. The entity classifies Rs. 12,000 of the members’ shares as financial liabilities.
Consistently with the conclusions described in example 4, members’ shares subject to an
unconditional prohibition against redemption are not financial liabilities. Such an unconditional
prohibition applies to an amount equal to the proceeds of shares issued before the preceding
three years, and accordingly, this amount is classified as equity. However, an amount equal to
the proceeds from any shares issued in the preceding three years is not subject to an
unconditional prohibition on redemption. Accordingly, proceeds from the issue of members’
shares in the preceding three years give rise to financial liabilities until they are no longer
available for redemption of members’ shares. As a result the entity has a financial liability equal
to the proceeds of shares issued during the three preceding years, net of any redemptions during
that period.
Example 7
Facts
B18. The bye-laws governing the operations of a co-operative entity state that atleast 50 per
cent of the entity’s total ‘outstanding liabilities’ (a term defined in the byelaws to include
members’ share accounts) has to be in the form of members’ paid-up capital. The effect of the
bye-laws is that if all of a co-operative’s outstanding liabilities are in the form of members’
Page43
shares, it is able to redeem them all. On 31 December 20X1, the entity has total outstanding
liabilities of Rs. 200,000, of which Rs. 125,000 represent members’ share accounts. The terms of
the members’ share accounts permit the holder to redeem them on demand and there are no
limitations on redemption in the governing byelaws of the entity.
Classification
B19. In this example, members’ shares are classified as financial liabilities. The redemption
prohibition is similar to the restrictions described in paragraphs 36 and 38 of the Standard. The
restriction is a conditional limitation on the ability of the entity to pay the amount due on a
financial liability, i.e., they prevent payment of the liability only if specified conditions are met.
More specifically, the entity could be required to redeem the entire amount of members’ shares
(Rs. 125,000) if it repaid all of its other liabilities (Rs. 75,000). Consequently, the prohibition
against redemption does not prevent the entity from incurring a financial liability to redeem more
than a specified number of members’ shares or amount of paid-in capital. It allows the entity
only to defer redemption until a condition is met, i.e., the repayment of other liabilities.
Members’ shares in this example are not subject to an unconditional prohibition against
redemption and are therefore classified as financial liabilities.
Page44
Appendix C
Comparison with IAS 32, Financial Instruments: Presentation
Note: This Appendix is not a part of Accounting Standard (AS) 31, Financial Instruments:
Presentation. The purpose of this appendix is only to bring out the major differences between AS
31 and the corresponding International Accounting Standard (IAS) 32.
Comparison with IAS 32, Financial Instruments: Presentation
The Accounting Standard is based on International Accounting Standard (IAS) 32, Financial
Instruments: Presentation and incorporates IFRIC 2, Members’ Shares in Co-operative Entities
and Similar Instruments (Re. IAS 32, Financial Instruments: Presentation), issued by the
International Financial Reporting Interpretation Committee (IFRIC) of the International
Accounting Standards Board (IASB). There is no major difference between AS 31, and IAS 32
and IFRIC 2.
__________
Financial Instruments: Presentation
Issued by
The Institute of Chartered Accountants of India
New Delhi
Page 2
Page 3
Contents
Accounting Standard (AS) 31
Financial Instruments: Presentation
OBJECTIVE Paragraphs 1-2
SCOPE 3-6
DEFINITIONS 7-31
Financial Assets and Financial Liabilities 11-20
Equity Instruments 21-22
Derivative Financial Instruments 23-27
Contracts to Buy or Sell Non-Financial Items 28-31
PRESENTATION 32-88
Liabilities and Equity 32-57
No Contractual Obligation to Deliver Cash or Another
Financial Asset
34-47
Settlement in the Entity’s Own Equity Instruments 48-52
Contingent Settlement Provisions 53-54
Settlement Options 55-56
Treatment in Consolidated Financial Statements 57
Compound Financial Instruments 58-67
Treasury shares 68-70
Interest, Dividends, Losses and Gains 71-78
Offsetting a Financial Asset and a Financial Liability 79-88
Appendix A: Illustrative Examples
Page 4
ENTITIES SUCH AS MUTUAL FUNDS AND COOPERATIVES
WHOSE SHARE CAPITAL IS NOT EQUITY
AS DEFINED IN AS 31
A1-A2
Example 1: Entities with no equity A1
Example 2: Entities with some equity A2
ACCOUNTING FOR COMPOUND FINANCIAL
INSTRUMENTS
A3-A18
Example 3: Separation of a compound financial instrument
on initial recognition
A3-A5
Example 4: Separation of a compound financial instrument
with multiple embedded derivative features
A6-A7
Example 5: Repurchase of a convertible instrument A8-A14
Example 6: Amendment of the terms of a convertible
instrument to induce early conversion
A15-A18
Appendix B: Examples of Application of Paragraphs 40 – 46
UNCONDITIONAL RIGHT TO REFUSE REDEMPTION
(PARAGRAPH 42)
B2-B5
Example 1 B2-B3
Example 2 B4-B5
PROHIBITIONS AGAINST REDEMPTION (PARAGRAPHS
43 AND 44)
B6-19
Example 3 B6-B10
Example 4 B11-B13
Example 5 B14-B15
Example 6 B16-B17
Example 7 B18-B19
Appendix C: Comparison with IAS 32, Financial Instruments:
Presentation
Page 5
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 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.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which accounting standards are
intended to apply only to items which are material.
2 This implies that, while discharging their attest function, it will be the duty of the members of the Institute to
examine whether this Accounting Standard is complied with in the presentation of financial statements covered by
their audit. In the event of any deviation from this Accounting Standard, it will be their duty to make adequate
disclosures in their audit reports so that the users of financial statements may be aware of such deviations.
Page 6
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
prevails3.
The following is the text of the Accounting Standard.
Objective
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: Disclosures4.
3 To illustrate, as per paragraph 35(a) of the Standard, a preference share that provides for mandatory redemption by
the issuer for a fixed or determinable amount at a fixed or determinable future date, or gives the holder the right to
require the issuer to redeem the instrument at or after a particular date for a fixed or determinable amount, is a
financial liability. However, at present, Schedule VI to the Companies Act, 1956, inter alia, requires that all
preference shares should be disclosed as a part of the ‘Share Capital’. Untill Schedule VI is amended, a company
classifying the preference shares as share capital will be considered to be complying with this Accounting Standard
even in a case where as per this Standard the preference shares are to be shown as a liability. In the latter case, as a
corollary to this, dividend on such preference shares treated as a distribution to holders thereof and not as an expense
will also be considered as a compliance with this Accounting Standard. Similarly, in case of a co-operative entity
those requirements of paragraphs 40 to 47 and Appendix B to the Standard would not apply which are contrary to
the law governing such an entity.
4A separate Accounting Standard (AS) 32 on Financial Instruments: Disclosures is being formulated.
Page 7
Scope
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
Contracts7. 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 It may be noted that AS 21, AS 23 and AS 27, at present, make reference to Accounting Standard (AS) 13,
Accounting for Investments, with regard to the accounting for an investment in a subsidiary, associate and joint
venture, respectively. On Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement,
becoming mandatory, AS 13 would stand withdrawn except to the extent it relates to accounting for investment
properties. In other words, accounting for investments in a subsidiary, associate and joint venture would no longer
be covered by AS 13. Keeping this in view, with the issuance of the proposed AS 30, Limited Revisions have been
made to AS 21, AS 23 and AS 27 to replace the references to AS 13 with those to AS 30. Pursuant to these Limited
Revisions, the titles of AS 21 and AS 23 are also modified.
6 ‘Business combination’ is the bringing together of separate entities or businesses into one reporting entity.
At present, Accounting Standard (AS) 14, Accounting for Amalgamations, deals with accounting for contingent
consideration in an amalgamation, which is a form of business combination.
7 A separate Accounting Standard on Insurance Contracts will specify the requirements relating to insurance
contracts.
Page 8
(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
8 See footnote 7.
9 Employee share based payment, which is one of the share-based payment transactions, is accounted for as per the
Guidance Note on Employee Share-based Payment, issued by the ICAI. Further, some other pronouncements of the
ICAI deal with other share-based payments, e.g., AS 10, Accounting for Fixed Assets.
Page 9
(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.
Definitions
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.
Page10
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
Page11
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.
Financial Assets and Financial Liabilities
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
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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 Contracts10.
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
10 See footnote 7.
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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.
Equity Instruments
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.
Derivative Financial Instruments
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 generally11 do not result in a transfer of the underlying primary
11 This is true of most, but not all derivatives, e.g. in some cross-currency interest rate swaps principal is exchanged
on inception (and re-exchanged on maturity).
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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
commitments12, and letters of credit. An interest rate swap contract may be viewed as a variation
12 Loan commitment is firm commitment of an entity to provide credit under pre-specified terms and conditions.
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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.
Contracts to Buy or Sell Non-Financial Items
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
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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.
Presentation
Liabilities and Equity
32. The issuer of a financial instrument should classify the instrument, or its component
parts, on initial recognition as a financial liability, a financial asset or an equity instrument in
accordance with the substance of the contractual arrangement and the definitions of a
financial liability, a financial asset and an equity instrument.
33. When an issuer applies the definitions in paragraph 7 to determine whether a financial
instrument is an equity instrument rather than a financial liability, the instrument is an equity
instrument if, and only if, both conditions (a) and (b) below are met.
(a) The instrument includes no 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 issuer.
(b) If the instrument will or may be settled in the issuer’s own equity instruments, it is
(i) a non-derivative that includes no contractual obligation for the issuer to
deliver a variable number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed
amount of cash or another financial asset for a fixed number of its own
equity instruments. For this purpose the issuer’s own equity instruments
do not include instruments that are themselves contracts for the future
receipt or delivery of the issuer’s own equity instruments.
A contractual obligation, including one arising from a derivative financial instrument that will or
may result in the future receipt or delivery of the issuer’s own equity instruments, but does not
meet conditions (a) and (b) above, is not an equity instrument.
No Contractual Obligation to Deliver Cash or Another Financial Asset (paragraph 33(a))
34. A critical feature in differentiating a financial liability from an equity instrument is the
existence of a contractual obligation of one party to the financial instrument (the issuer) either to
deliver cash or another financial asset to the other party (the holder) or to exchange financial
assets or financial liabilities with the holder under conditions that are potentially unfavourable to
the issuer. Although the holder of an equity instrument may be entitled to receive a pro rata share
of any dividends or other distributions of equity, the issuer does not have a contractual obligation
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to make such distributions because it cannot be required to deliver cash or another financial asset
to another party.
35. The substance of a financial instrument, rather than its legal form, governs its
classification on the entity’s balance sheet. Substance and legal form are commonly consistent,
but not always. Some financial instruments take the legal form of equity but are liabilities in
substance and others may combine features associated with equity instruments and features
associated with financial liabilities. For example:
(a) a preference share that provides for mandatory redemption by the issuer for a
fixed or determinable amount at a fixed or determinable future date, or gives the
holder the right to require the issuer to redeem the instrument at or after a
particular date for a fixed or determinable amount, is a financial liability.
(b) a financial instrument that gives the holder the right to put it back to the issuer for
cash or another financial asset (a ‘puttable instrument’) is a financial liability.
This is so even when the amount of cash or other financial assets is determined on
the basis of an index or other item that has the potential to increase or decrease, or
when the legal form of the puttable instrument gives the holder a right to a
residual interest in the assets of an issuer. The existence of an option for the
holder to put the instrument back to the issuer for cash or another financial asset
means that the puttable instrument meets the definition of a financial liability. For
example, open-ended mutual funds, unit trusts and some co-operative entities may
provide their unitholders or members with a right to redeem their interests in the
issuer at any time for cash equal to their proportionate share of the asset value of
the issuer. However, classification as a financial liability does not preclude the use
of descriptors such as ‘net asset value attributable to unitholders’ and ‘change in
net asset value attributable to unitholders’ on the face of the financial statements
of an entity that has no equity capital (such as some mutual funds and unit trusts,
see Illustrative Example 1 of Appendix A) or the use of additional disclosure to
show that total members’ interests comprise items such as reserves that meet the
definition of equity and puttable instruments that do not (see Illustrative Example
2 of Appendix A).
36. If an entity does not have an unconditional right to avoid delivering cash or another
financial asset to settle a contractual obligation, the obligation meets the definition of a financial
liability. For example:
(a) a restriction on the ability of an entity to satisfy a contractual obligation, such as
lack of access to foreign currency or the need to obtain approval for payment from
a regulatory authority, does not negate the entity’s contractual obligation or the
holder’s contractual right under the instrument.
(b) a contractual obligation that is conditional on a counterparty exercising its right to
redeem is a financial liability because the entity does not have the unconditional
right to avoid delivering cash or another financial asset.
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37. A financial instrument that does not explicitly establish a contractual obligation to deliver
cash or another financial asset may establish an obligation indirectly through its terms and
conditions. For example:
(a) a financial instrument may contain a non-financial obligation that must be settled
if, and only if, the entity fails to make distributions or to redeem the instrument. If
the entity can avoid a transfer of cash or another financial asset only by settling
the non-financial obligation, the financial instrument is a financial liability.
(b) a financial instrument is a financial liability if it provides that on settlement the
entity will deliver either:
(i) cash or another financial asset; or
(ii) its own shares whose value is determined to exceed substantially the value
of the cash or other financial asset.
Although the entity does not have an explicit contractual obligation to deliver
cash or another financial asset, the value of the share settlement alternative is such
that the entity will settle in cash. In any event, the holder has in substance been
guaranteed receipt of an amount that is at least equal to the cash settlement option
(see paragraph 53).
38. 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.
39. 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 noncumulative,
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;
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(c) a possible negative impact on the price of equity shares of the issuer if
distributions are not made (because of restrictions on paying dividends on the
equity 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.
40. The contractual right of the holder of a financial instrument (including members’ shares
in co-operative entities) to request redemption does not, in itself, require that financial instrument
to be classified as a financial liability. Rather, the entity must consider all of the terms and
conditions of the financial instrument in determining its classification as a financial liability or
equity. Those terms and conditions include relevant laws, regulations and the governing rules or
bye-laws of the entity in effect at the date of classification, but not expected future amendments
to those laws, regulations or bye-laws.
41. Members’ shares in co-operative entities that would be classified as equity if the
members did not have a right to request redemption are equity if either of the conditions
described in paragraphs 42 and 43 is present. Demand deposits, including current accounts,
deposit accounts and similar contracts that arise when members act as customers are financial
liabilities of the entity.
42. Members’ shares are equity if the entity has an unconditional right to refuse redemption
of the members’ shares.
43. Law, regulation or the governing rules or bye-laws of the entity can impose various types
of prohibitions on the redemption of members’ shares, e.g., unconditional prohibitions or
prohibitions based on liquidity criteria. If redemption is unconditionally prohibited by law,
regulation or the governing rules or bye-laws of the entity, members’ shares are equity.
However, provisions in law, regulation or the governing rules or bye-laws of the entity that
prohibit redemption only if conditions — such as liquidity constraints — are met (or are not met)
do not result in members’ shares being equity.
44. An unconditional prohibition may be absolute, in that all redemptions are prohibited. An
unconditional prohibition may be partial, in that it prohibits redemption of members’ shares if
redemption would cause the number of members’ shares or amount of paid-up capital from
members’ shares to fall below a specified level. Members’ shares in excess of the prohibition
against redemption are liabilities, unless the entity has the unconditional right to refuse
redemption as described in paragraph 42. In some cases, the number of shares or the amount of
paid-up capital subject to a redemption prohibition may change from time to time. Such a
change in the redemption prohibition leads to a transfer between financial liabilities and equity.
In such a case, the entity should disclose separately the amount, timing and reason for the
transfer.
45. Equity is the residual interest in the assets after deducting all liabilities. Therefore, at
initial recognition, the entity should measure the equity component in the member’s shares at the
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residual amount after deducting from the total amount of the shares as a whole the value
separately determined for its financial liabilities for redemption. The entity measures its financial
liability for redemption at fair value. In the case of members’ shares with a redemption feature,
the fair value of the financial liability for redemption is measured at no less than the maximum
amount payable under the redemption provisions of its governing bye-laws or applicable law
discounted from the first date that the amount could be required to be paid (see Example 3 of
Appendix B).
46. As required by paragraph 71, distributions to holders of equity instruments (net of any
income tax benefits) are recognised directly in the revenue reserves and surplus. Interest,
dividends and other returns relating to financial instruments classified as financial liabilities are
expenses, regardless of whether those amounts paid are legally characterised as dividends,
interest or otherwise.
47. Appendix B, which is an integral part of the Standard, illustrates the application of
paragraphs 40 to 46.
Settlement in the Entity’s Own Equity Instruments (paragraph 33(b))
48. A contract is not an equity instrument solely because it may result in the receipt or
delivery of the entity’s own equity instruments. An entity may have a contractual right or
obligation to receive or deliver a number of its own shares or other equity instruments that varies
so that the fair value of the entity’s own equity instruments to be received or delivered equals the
amount of the contractual right or obligation. Such a contractual right or obligation may be for a
fixed amount or an amount that fluctuates in part or in full in response to changes in a variable
other than the market price of the entity’s own equity instruments (e.g. an interest rate, a
commodity price or a financial instrument price). Two examples are (a) a contract to deliver as
many of the entity’s own equity instruments as are equal in value to Rs.100, and (b) a contract to
deliver as many of the entity’s own equity instruments as are equal in value to the value of 100
grams of gold. Such a contract is a financial liability of the entity even though the entity must or
can settle it by delivering its own equity instruments. It is not an equity instrument because the
entity uses a variable number of its own equity instruments as a means to settle the contract.
Accordingly, the contract does not evidence a residual interest in the entity’s assets after
deducting all of its liabilities.
49. A contract that will be settled by the entity (receiving or) delivering a fixed number of its
own equity instruments in exchange for a fixed amount of cash or another financial asset is an
equity instrument. For example, an issued share option that gives the counterparty a right to buy
a fixed number of the entity’s shares for a fixed price or for a fixed stated principal amount of a
bond is an equity instrument. Changes in the fair value of a contract arising from variations in
market interest rates that do not affect the amount of cash or other financial assets to be paid or
received, or the number of equity instruments to be received or delivered, on settlement of the
contract do not preclude the contract from being an equity instrument. Any consideration
received (such as the premium received for a written option or warrant on the entity’s own
shares) is added directly to equity in an appropriate account. Any consideration paid (such as the
premium paid for a purchased option) is deducted directly from an appropriate equity account.
Changes in the fair value of an equity instrument are not recognised in the financial statements.
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50. A contract that contains an obligation for an entity to purchase its own equity instruments
for cash or another financial asset gives rise to a financial liability for the present value of the
redemption amount (for example, for the present value of the forward repurchase price, option
exercise price or other redemption amount). This is the case even if the contract itself is an equity
instrument. One example is an entity’s obligation under a forward contract to purchase its own
equity instruments for cash. When the financial liability is recognised initially under AS 30, its
fair value (the present value of the redemption amount) is reclassified from equity.
Subsequently, the financial liability is measured in accordance with AS 30. If the contract
expires without delivery, the carrying amount of the financial liability is reclassified to equity.
An entity’s contractual obligation to purchase its own equity instruments gives rise to a financial
liability for the present value of the redemption amount even if the obligation to purchase is
conditional on the counterparty exercising a right to redeem (eg a written put option that gives
the counterparty the right to sell an entity’s own equity instruments to the entity for a fixed
price).
51. A contract that will be settled by the entity delivering or receiving a fixed number of its
own equity instruments in exchange for a variable amount of cash or another financial asset is a
financial asset or financial liability. An example is a contract for the entity to deliver 100 of its
own equity instruments in return for an amount of cash calculated to equal the value of 100
grams of gold.
52. 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 for a fixed amount of cash or another financial asset, is an equity
instrument. 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. 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. 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. One example is a net cash-settled share option.
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(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.
Contingent Settlement Provisions
53. A financial instrument may require the entity to deliver cash or another financial asset, or
otherwise to settle it in such a way that it would be a financial liability, in the event of the
occurrence or non-occurrence of uncertain future events (or on the outcome of uncertain
circumstances) that are beyond the control of both the issuer and the holder of the instrument,
such as a change in a stock market index, consumer price index, interest rate or taxation
requirements, or the issuer’s future revenues, net income or debt-to-equity ratio). The issuer of
such an instrument does not have the unconditional right to avoid delivering cash or another
financial asset (or otherwise to settle it in such a way that it would be a financial liability).
Therefore, it is a financial liability of the issuer unless:
(a) the part of the contingent settlement provision that could require settlement in
cash or another financial asset (or otherwise in such a way that it would be a
financial liability) is not genuine; or
(b) the issuer can be required to settle the obligation in cash or another financial asset
(or otherwise to settle it in such a way that it would be a financial liability) only in
the event of liquidation of the issuer.
54. Paragraph 53 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.
Page23
Settlement Options
55. When a derivative financial instrument gives one party a choice over how it is settled
(eg the issuer or the holder can choose settlement net in cash or by exchanging shares for
cash), it is a financial asset or a financial liability unless all of the settlement alternatives
would result in it being an equity instrument.
56. An example of a derivative financial instrument with a settlement option that is a
financial liability is a share option that the issuer can decide to settle net in cash or by
exchanging its own shares for cash. Similarly, some contracts to buy or sell a non-financial item
in exchange for the entity’ s own equity instruments are within the scope of this Standard
because they can be settled either by delivery of the non-financial item or net in cash or another
financial instrument (see paragraphs 4-6). Such contracts are financial assets or financial
liabilities and not equity instruments.
Treatment in Consolidated Financial Statements
57. In consolidated financial statements, an entity presents minority interests - i.e. the
interests of other parties in the equity and income of its subsidiaries in accordance with AS 1
(revised)13, Presentation of Financial Statements, and AS 21, Consolidated Financial Statements
and Accounting for Investments in Subsidiaries in Separate Financial Statements14. 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 (e.g. 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) is classified as a financial liability in consolidated financial
statements.
13 AS 1 is presently under revision.
14 A limited revision has been made to AS 21 with the issuance of the Accounting Standard (AS) 30, Financial
Instruments: Recognition and Measurement. Pursuant to the limited revision, the title of AS 21 is also modified.
Page24
Compound Financial Instruments
(see also Illustrative Examples 3-6 of Appendix A)
58. The issuer of a non-derivative financial instrument should evaluate the terms of the
financial instrument to determine whether it contains both a liability and an equity
component. Such components should be classified separately as financial liabilities or equity
instruments in accordance with paragraph 32.
59. Paragraph 58 applies only to issuers of non-derivative compound financial instruments.
Paragraph 58 does not deal with compound financial instruments from the perspective of holders.
Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement deals with
the separation of embedded derivatives from the perspective of holders of compound financial
instruments that contain debt and equity features.
60. An entity recognises separately the components of a financial instrument that (a) creates a
financial liability of the entity and (b) grants an option to the holder of the instrument to convert
it into an equity instrument of the entity. For example, a debenture or similar instrument
convertible by the holder into a fixed number of equity shares of the entity is a compound
financial instrument. From the perspective of the entity, such an instrument comprises two
components: a financial liability (a contractual arrangement to deliver cash or another financial
asset) and an equity instrument (a call option granting the holder the right, for a specified period
of time, to convert it into a fixed number of equity shares of the entity). The economic effect of
issuing such an instrument is substantially the same as issuing simultaneously a debt instrument
with an early settlement provision and warrants to purchase equity shares, or issuing a debt
instrument with detachable share purchase warrants. Accordingly, in all cases, the entity presents
the liability and equity components separately on its balance sheet.
61. Classification of the liability and equity components of a convertible instrument is not
revised as a result of a change in the likelihood that a conversion option will be exercised, even
when exercise of the option may appear to have become economically advantageous to some
holders. Holders may not always act in the way that might be expected because, for example, the
tax consequences resulting from conversion may differ among holders. Furthermore, the
likelihood of conversion will change from time to time. The entity’s contractual obligation to
make future payments remains outstanding until it is extinguished through conversion, maturity
of the instrument or some other transaction.
62. Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement
deals with the measurement of financial assets and financial liabilities. Equity instruments are
instruments that evidence a residual interest in the assets of an entity after deducting all of its
liabilities. Therefore, when the initial carrying amount of a compound financial instrument is
allocated to its equity and liability components, the equity component is assigned the residual
amount after deducting from the fair value of the instrument as a whole the amount separately
determined for the liability component. The value of any derivative features (such as a call
option) embedded in the compound financial instrument other than the equity component (such
as an equity conversion option) is included in the liability component. The sum of the carrying
amounts assigned to the liability and equity components on initial recognition is always equal to
Page25
the fair value that would be ascribed to the instrument as a whole. No gain or loss arises from
initially recognising the components of the instrument separately.
63. A common form of compound financial instrument is a debt instrument with an
embedded conversion option, such as a debenture convertible into equity shares of the issuer, and
without any other embedded derivative features. Paragraph 58 requires the issuer of such a
financial instrument to present the liability component and the equity component separately on
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.
Accordingly, the issuer of a debenture convertible into equity shares first
determines the carrying amount of the liability component by measuring the fair
value of a similar liability (including any embedded non-equity derivative
features) that does not have an associated equity component. Thus, 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. The carrying amount of the equity instrument represented by such
option is determined by deducting the fair value of the financial liability from the
fair value of the compound financial instrument as a whole.
64. 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.
65. 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 58-63.
66. 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 the
statement of profit and loss; and
Page26
(b) the amount of consideration relating to the equity component is adjusted in equity
against the original equity component and the balance, if any, against the reserves
and surplus.
67. 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 in the statement of profit and loss.
Treasury shares
68. If an entity reacquires its own equity instruments, those instruments (‘treasury shares’)
should be deducted from equity. No gain or loss should be recognised in statement of profit
and loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments.
Such treasury shares may be acquired and held by the entity or by other members of the
consolidated group. Consideration paid or received should be recognised directly in equity.
69. The amount of treasury shares held is disclosed separately either on the face of the
balance sheet or in the notes, in accordance with AS 115 (Revised), Presentation of Financial
Statements. An entity provides disclosure in accordance with AS 18, Related Party Disclosures,
if the entity reacquires its own equity instruments from related parties.
70. An entity’s own equity instruments are not recognised as a financial asset regardless of
the reason for which they are reacquired. Paragraph 68 requires an entity that reacquires its own
equity instruments to deduct those equity instruments from equity. However, when an entity
holds its own equity on behalf of others, eg, a financial institution holding its own equity on
behalf of a client, there is an agency relationship and as a result those holdings are not included
in the entity’s balance sheet.
Interest, Dividends, Losses and Gains
71. Interest, dividends, losses and gains relating to a financial instrument or a component
of financial instrument that is a financial liability should be recognised as income or expense
in the statement of profit and loss. Distributions to holders of an equity instrument should be
debited by the entity directly to an appropriate equity account, net of any related income tax
benefit. Transaction costs of an equity transaction should be accounted for as a deduction
from equity net of any related income tax benefit.
72. The classification of a financial instrument as a financial liability or an equity instrument
determines whether interest, dividends, losses and gains relating to that instrument are
recognised as expense or income in the statement of profit and loss or are recognised directly in
15 See footnote 13.
Page27
the revenue reserves and surplus. Thus, dividend payments on shares wholly recognised as
liabilities are recognised as expenses in the same way as interest on a bond/ debenture. Similarly,
gains and losses associated with redemptions or refinancings of financial liabilities are
recognised in the statement of profit and loss, whereas redemptions or refinancings of equity
instruments are recognised as changes in equity. Changes in the fair value of an equity
instrument are not recognised in the financial statements.
73. An entity typically incurs various costs in issuing or acquiring its own equity instruments.
Those costs might include regulatory fees, amounts paid to legal, accounting and other
professional advisers, printing costs and stamp duties. The transaction costs (net of any related
income tax benefit) of an equity transaction are recognised directly in the appropriate equity
account to the extent they are incremental costs directly attributable to the equity transaction that
otherwise would have been avoided. The costs of an equity transaction that is abandoned are
recognised as an expense.
74. Transaction costs that relate to the issue of a compound financial instrument are allocated
to the liability and equity components of the instrument in proportion to the allocation of
proceeds. Transaction costs that relate jointly to more than one transaction are allocated to those
transactions using a basis of allocation that is rational and consistent with similar transactions.
75. The amount of transaction costs recognised in the revenue reserves and surplus is
disclosed separately under AS 1 (revised)16.
76. The following example illustrates the application of paragraph 71 to a compound
financial instrument. Assume that a non-cumulative preference share is mandatorily redeemable
for cash in five years, but that dividends are payable at the discretion of the entity before the
redemption date. Such an instrument is a compound financial instrument, with the liability
component being the present value of the redemption amount. The unwinding of the discount on
this component is recognised in statement of profit and loss and classified as interest expense.
Any dividends paid relate to the equity component and, accordingly, are recognised directly in
the revenue reserves and surplus. A similar treatment would apply if the redemption was not
mandatory but at the option of the holder, or if the share was mandatorily convertible into a
variable number of equity shares calculated to equal a fixed amount or an amount based on
changes in an underlying variable (e.g., commodity). However, if any unpaid dividends are
added to the redemption amount, the entire instrument is a liability. In such a case, any dividends
are classified as interest expense.
77. Dividends classified as an expense are presented in the statement of profit and loss as a
separate item. In addition to the requirements of this Standard, disclosure of interest and
dividends is subject to the requirements of AS 1 (revised)17 and Accounting Standard (AS) 32,
Financial Instruments: Disclosures18.
78. Gains and losses related to changes in the carrying amount of a financial liability are
recognised as income or expense in the statement of profit and loss even when they relate to an
16 See footnote 13.
17 See footnote 13.
18 See footnote 4.
Page28
instrument that includes a right to the residual interest in the assets of the entity in exchange for
cash or another financial asset (see paragraph 35(b)). Under AS 1 (revised)19, the entity presents
any gain or loss arising from remeasurement of such an instrument separately on the face of the
statement of profit and loss when it is relevant in explaining the entity’s performance.
Offsetting a Financial Asset and a Financial Liability
79. A financial asset and a financial liability should be offset and the net amount
presented in the balance sheet when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognised amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the
liability simultaneously.
In accounting for a transfer of a financial asset that does not qualify for derecognition,
the entity should not offset the transferred asset and the associated liability (see
Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement).
80. This Standard requires the presentation of financial assets and financial liabilities on a net
basis when doing so reflects an entity’s expected future cash flows from settling two or more
separate financial instruments. When an entity has the right to receive or pay a single net amount
and intends to do so, it has, in effect, only a single financial asset or financial liability. In other
circumstances, financial assets and financial liabilities are presented separately from each other
consistently with their characteristics as resources or obligations of the entity.
81. Offsetting a recognised financial asset and a recognised financial liability and presenting
the net amount differs from the derecognition of a financial asset or a financial liability.
Although offsetting does not give rise to recognition of a gain or loss, the derecognition of a
financial instrument not only results in the removal of the previously recognised item from the
balance sheet but also may result in recognition of a gain or loss.
82. A right of set-off is a debtor’s legal right, by contract or otherwise, to settle or otherwise
eliminate all or a portion of an amount due to a creditor by applying against that amount an
amount due from the creditor. In unusual circumstances, a debtor may have a legal right to apply
an amount due from a third party against the amount due to a creditor provided that there is an
agreement between the three parties that clearly establishes the debtor’s right of set-off. Because
the right of set-off is a legal right, the conditions supporting the right may vary from one legal
jurisdiction to another and the laws applicable to the relationships between the parties need to be
considered.
83. The existence of an enforceable right to set off a financial asset and a financial liability
affects the rights and obligations associated with a financial asset and a financial liability and
may affect an entity’s exposure to credit and liquidity risk. However, the existence of the right,
by itself, is not a sufficient basis for offsetting. In the absence of an intention to exercise the right
or to settle simultaneously, the amount and timing of an entity’s future cash flows are not
19 See footnote 13.
Page29
affected. When an entity intends to exercise the right or to settle simultaneously, presentation of
the asset and liability on a net basis reflects more appropriately the amounts and timing of the
expected future cash flows, as well as the risks to which those cash flows are exposed. An
intention by one or both parties to settle on a net basis without the legal right to do so is not
sufficient to justify offsetting because the rights and obligations associated with the individual
financial asset and financial liability remain unaltered.
84. An entity’s intentions with respect to settlement of particular assets and liabilities may be
influenced by its normal business practices, the requirements of the financial markets and other
circumstances that may limit the ability to settle net or to settle simultaneously. When an entity
has a right of set-off, but does not intend to settle net or to realise the asset and settle the liability
simultaneously, the effect of the right on the entity’s credit risk exposure is disclosed in
accordance with Accounting Standard (AS) 32, Financial Instruments: Disclosures20.
85. Simultaneous settlement of two financial instruments may occur through, for example,
the operation of a clearing house in an organised financial market or a face-to-face exchange. In
these circumstances the cash flows are, in effect, equivalent to a single net amount and there is
no exposure to credit or liquidity risk. In other circumstances, an entity may settle two
instruments by receiving and paying separate amounts, becoming exposed to credit risk for the
full amount of the asset or liquidity risk for the full amount of the liability. Such risk exposures
may be significant even though relatively brief. Accordingly, realisation of a financial asset and
settlement of a financial liability are treated as simultaneous only when the transactions occur at
the same moment.
86. The conditions set out in paragraph 79 are generally not satisfied and offsetting is usually
inappropriate when:
(a) several different financial instruments are used to emulate the features of a single
financial instrument (a ‘synthetic instrument’);
(b) financial assets and financial liabilities arise from financial instruments having the
same primary risk exposure (for example, assets and liabilities within a portfolio
of forward contracts or other derivative instruments) but involve different
counterparties;
(c) financial or other assets are pledged as collateral for non-recourse financial
liabilities;
(d) financial assets are set aside in trust by a debtor for the purpose of discharging an
obligation without those assets having been accepted by the creditor in settlement
of the obligation (for example, a sinking fund arrangement); or
(e) obligations incurred as a result of events giving rise to losses are expected to be
recovered from a third party by virtue of a claim made under an insurance
contract.
87. To offset a financial asset and a financial liability, an entity must have a currently
enforceable legal right to set off the recognised amounts. An entity may have a conditional right
20See footnote 4.
Page30
to set off recognised amounts. An entity that undertakes a number of financial instrument
transactions with a single counterparty may enter into a ‘master netting arrangement’ with that
counterparty. Such an agreement provides for a single net settlement of all financial instruments
covered by the agreement in the event of default on, or termination of, any one contract. These
arrangements are commonly used by financial institutions to provide protection against loss in
the event of bankruptcy or other circumstances that result in a counterparty being unable to meet
its obligations. A master netting arrangement commonly creates a right of set-off that becomes
enforceable and affects the realisation or settlement of individual financial assets and financial
liabilities only following a specified event of default or in other circumstances not expected to
arise in the normal course of business. A master netting arrangement does not provide a basis for
offsetting unless both of the criteria in paragraph 79 are satisfied. When financial assets and
financial liabilities subject to a master netting arrangement are not offset, the effect of the
arrangement on an entity’s exposure to credit risk is disclosed in accordance with Accounting
Standard (AS) 32, Financial Instruments: Disclosures21.
88. The Standard does not provide special treatment for so-called ‘synthetic instruments’,
which are groups of separate financial instruments acquired and held to emulate the
characteristics of another instrument. For example, a floating rate long-term debt combined with
an interest rate swap that involves receiving floating payments and making fixed payments
synthesises a fixed rate long-term debt. Each of the individual financial instruments that together
constitute a ‘synthetic instrument’ represents a contractual right or obligation with its own terms
and conditions and each may be transferred or settled separately. Each financial instrument is
exposed to risks that may differ from the risks to which other financial instruments are exposed.
Accordingly, when one financial instrument in a ‘synthetic instrument’ is an asset and another is
a liability, they are not offset and presented on an entity’s balance sheet on a net basis unless
they meet the criteria for offsetting in paragraph 79.
21 See footnote 4.
Page31
Appendix A
Illustrative Examples
These examples accompany, but are not part of the Accounting Standard (AS) 31, Financial
Instruments: Presentation.
Entities such as Mutual Funds and Co-operatives whose Share Capital is not
Equity as defined in AS 31
Example 1: Entities with no equity
A1. The following example illustrates a statement of profit and loss and balance sheet format
that may be used by entities such as mutual funds that do not have equity as defined in AS 31.
Other formats are possible.
Statement of profit and loss for the year ended 31 March 20x6
20x5-20x6 20x4-20x5
Rs. Rs.
Revenue 2,956 1,718
Expenses (appropriately classified) (644) (614)
Profit from operating activities 2,312 1,104
Finance costs -distributions to unitholders (47) (47)
- other finance costs (50) (50)
Change in net assets attributable to unitholders 2,215 1,007
Balance sheet at 31 March 20x6
20x5-20x6 20x4-20x5
Rs. Rs Rs Rs
ASSETS
Non-current assets
(appropriately classified) 91,374 78,484
Total non-current assets 91,374 78,484
Current assets
(appropriately classified) 1,422 1,769
Total current assets 1,422 1,769
Total assets 92,796 80,253
Page32
LIABILITIES
Current liabilities
(appropriately classified) 647 66
Total current liabilities (647) (66)
Non-current liabilities excluding net
assets attributable to unitholders
(appropriately classified) 280 136
(280) (136)
Net assets attributable to unitholders 91,869 80,051
Example 2: Entities with some equity
A2. The following example illustrates a statement of profit and loss and balance sheet format
that may be used by entities whose share capital is not equity as defined in AS 31, because the
entity has an obligation to repay the share capital on demand. Other formats are possible.
Statement of profit and loss for the year ended 31 March 20x6
20x5-20x6 20x4-20x5
Rs. Rs.
Revenue 472 498
Expenses (appropriately classified) (367) (396)
Profit from operating activities 105 102
Finance costs – distributions to members (50) (50)
– other finance costs (4) (4)
Change in net assets attributable to members 51 48
Balance sheet at 31 March 20x6
20x5-20x6 20x4-
20x5
Rs. Rs. Rs. Rs.
ASSETS
Non-current assets
(appropriately classified) 908 830
Total non-current assets 908 830
Current assets
(appropriately classified) 383 350
Total current assets 383 350
Page33
Total assets 1,291 1,180
LIABILITIES
Current liabilities
(appropriately classified) 372 338
Share capital repayable on demand 202 161
Total current liabilities (574) (499)
Total assets less current liabilities 717 681
Non-current liabilities
(appropriately classified) 187 196
187 196
RESERVES22
Reserves e.g. revaluation reserve, retained earnings
etc
530 485
530 485
717 681
MEMORANDUM NOTE - TOTAL MEMBERS’ INTERESTS
Share capital repayable on demand 202 161
Reserves 530 485
732 646
Accounting for Compound Financial Instruments
Example 3: Separation of a compound financial instrument on initial recognition
A3. Paragraph 58 describes how the components of a compound financial instrument are
separated by the entity on initial recognition. The following example illustrates how such a
separation is made.
A4. An entity issues 2,000 convertible debentures at the start of year 1. The debentures have a
three-year term, and are issued at par with a face value of Rs. 1,000 per debenture, giving total
proceeds of Rs. 2,000,000. Interest is payable annually in arrears at a nominal annual interest rate
of 6 per cent. Each debenture is convertible at any time up to maturity into 250 equity shares.
When the debentures are issued, the prevailing market interest rate for similar debt without
conversion options is 9 per cent.
22 In this example, the entity has no obligation to deliver a share of its reserves to its members.
Page34
A5. The liability component is measured first, and the difference between the proceeds of the
debenture issue and the fair value of the liability is assigned to the equity component. The
present value of the liability component is calculated using a discount rate of 9 per cent, the
market interest rate for similar debentures having no conversion rights, as shown below.
Rs.
Present value of the principal - Rs.
2,000,000 payable at the end of three years 1,544,367
Present value of the interest – Rs. 120,000
payable annually in arrears for three years 303,755
Total liability component 1,848,122
Equity component (balancing figure) 151,878
Proceeds of the debenture issue 2,000,000
Example 4: Separation of a compound financial instrument with multiple embedded
derivative features
A6. The following example illustrates the application of paragraph 62 to the separation of the
liability and equity components of a compound financial instrument with multiple embedded
derivative features.
A7. Assume that the proceeds received on the issue of a callable convertible debenture are Rs.
60. The value of a similar debenture without a call or equity conversion option is Rs. 57. Based
on an option pricing model, it is determined that the value to the entity of the embedded call
feature in a similar debenture without an equity conversion option is Rs. 2. In this case, the value
allocated to the liability component under paragraph 62 is Rs. 55 (Rs. 57 – Rs. 2) and the value
allocated to the equity component is Rs. 5 (Rs. 60 – Rs. 55).
Example 5: Repurchase of a convertible instrument
A8. The following example illustrates how an entity accounts for a repurchase of a
convertible instrument. For simplicity, at inception, the face amount of the instrument is assumed
to be equal to the aggregate carrying amount of its liability and equity components in the
financial statements, i.e. no original issue premium or discount exists. Also, for simplicity, tax
considerations have been omitted from the example.
A9. On 1 January 1999, Entity A issued a 10 per cent convertible debenture with a face value
of Rs. 1,000 maturing on 31 December 2008. The debenture is convertible into equity shares of
Entity A at a conversion price of Rs.25 per share. Interest is payable half-yearly in cash. At the
date of issue, Entity A could have issued non-convertible debt with a ten-year term bearing a
coupon interest rate of 11 per cent.
A10. In the financial statements of Entity A the carrying amount of the debenture was allocated
on issue as follows:
Page35
Rs.
Liability component
Present value of 20 half-yearly interest payments of Rs. 50,
Discounted at 11% 597
Present value of Rs. 1,000 due in 10 years, discounted at 11%,
Compounded half-yearly 343
940
Equity component
(Difference between Rs. 1,000 total proceeds and Rs. 940
allocated above) 60
Total proceeds 1,000
A11. On 1 January 2004, the convertible debenture has a fair value of Rs. 1,700.
A12. Entity A makes a tender offer to the holder of the debenture to repurchase the debenture
for Rs. 1,700, which the holder accepts. At the date of repurchase, Entity A could have issued
non-convertible debt with a five-year term bearing a coupon interest rate of 8 per cent.
A13. The repurchase price is allocated as follows:
Carrying
Value
Fair
Value
Difference
Liability component: Rs. Rs. Rs.
Present value of 10 remaining half-yearly interest
Payments of Rs. 50, discounted at 11% and 8%,
Respectively 377 405
Present value of Rs. 1,000 due in 5 years,
discounted at 11% and 8%, compounded halfyearly,
respectively 585 676
962 1,081 (119)
Equity component 60 61923 (559)
Total 1,022 1,700 (678)
A14. Entity A recognises the repurchase of the debenture as follows:
Dr Liability component Rs. 962
Dr Debt settlement expense (statement of
profit and loss)
Rs. 119
Cr Cash Rs. 1,081
To recognise the repurchase of the liability component.
23 This amount represents the difference between the fair value amount allocated to the liability component and the
repurchase price of Rs. 1,700.
Page36
Dr Equity component Rs. 60
Dr. Reserves and Surplus Rs. 559
Cr Cash Rs. 619
To recognise the cash paid for the equity component.
Example 6: Amendment of the terms of a convertible instrument to induce early
conversion
A15. The following example illustrates how an entity accounts for the additional consideration
paid when the terms of a convertible instrument are amended to induce early conversion.
A16. On 1 January 2005, Entity A issued a 10 per cent convertible debenture with a face value
of Rs. 1,000 with the same terms as described in Example 5. On 1 January 2006, to induce the
holder to convert the convertible debenture promptly, Entity A reduces the conversion price to
Rs.20 if the debenture is converted before 1 March 2006 (i.e. within 60 days).
A17. Assume the market price of Entity A’s equity shares on the date the terms are amended is
Rs.40 per share. The fair value of the incremental consideration paid by Entity A is calculated as
follows:
Number of equity shares to be issued to debenture holders under amended conversion
terms:
Face amount Rs. 1,000
New conversion price /Rs. 20 per share
Number of equity shares to be issued on conversion 50 shares
Number of equity shares to be issued to debenture holders under original conversion
terms:
Face amount Rs. 1,000
Original conversion price /Rs.25 per share
Number of equity shares issued upon conversion 40 shares
Number of incremental equity shares issued upon conversion 10 Shares
Value of incremental equity shares issued upon conversion
Rs.40 per share x 10 incremental shares Rs.400
Page37
A18. The incremental consideration of Rs. 400 is recognised as a loss in the statement of profit
and loss.
Page38
Appendix B
Examples of Application of Paragraphs 40-46
This appendix is an integral part of AS 31.
B1. This appendix sets out seven examples of the application of paragraphs 40-46. The
examples do not constitute an exhaustive list; other fact patterns are possible. Each example
assumes that there are no conditions other than those set out in the facts of the example that
would require the financial instrument to be classified as a financial liability.
Unconditional Right to Refuse Redemption (Paragraph 42)
Example 1
Facts
B2. The governing bye-laws of the entity state that redemptions are made at the sole
discretion of the entity. The bye-laws do not provide further elaboration or limitation on that
discretion. In its history, the entity has never refused to redeem members’ shares, although the
governing board of the entity has the right to do so.
Classification
B3. The entity has the unconditional right to refuse redemption and the members’ shares are
equity. The Standard establishes principles for classification that are based on the terms of the
financial instrument and notes that a history of, or intention to make, discretionary payments
does not trigger liability classification. Paragraph 39 of the Standard states:
“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;
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(c) a possible negative impact on the price of equity shares of the issuer if
distributions are not made (because of restrictions on paying dividends on the
equity 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.”
Example 2
Facts
B4. The governing bye-laws of the entity state that redemptions are made at the sole
discretion of the entity. However, the bye-laws further state that approval of a redemption
request is automatic unless the entity is unable to make payments without violating regulations
regarding liquidity or reserves.
Classification
B5. The entity does not have the unconditional right to refuse redemption and the members’
shares are a financial liability. The restrictions described above are based on the entity’s ability
to settle its liability. They restrict redemptions only if the liquidity or reserve requirements are
not met and then only until such time as they are met. Hence, they do not, under the principles
established in the Standard, result in the classification of the financial instrument as equity.
Paragraph 38 of the Standard states:
“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 is 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. [Emphasis added]”
Prohibitions Against Redemption (Paragraphs 43 and 44)
Example 3
Facts
B6. A co-operative entity has issued shares to its members at different dates and for different
amounts in the past as follows:
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(a) 1 January 20X1: 100,000 shares at Rs. 10 each (Rs. 1,000,000);
(b) 1 January 20X2: 100,000 shares at Rs. 20 each (a further Rs. 2,000,000, so that
the total for shares issued is Rs. 3,000,000).
Shares are redeemable on demand at the amount for which they were issued.
B7. The governing bye-laws of the entity state that cumulative redemptions cannot exceed 20
per cent of the highest number of its members’ shares ever outstanding. At 31 December 20X2,
the entity has 200,000 of outstanding shares, which is the highest number of members’ shares
ever outstanding and no shares have been redeemed in the past. On 1 January 20X3, the entity
amends its governing bye-laws and increases the permitted level of cumulative redemptions to
25 per cent of the highest number of its members’ shares ever outstanding.
Classification
Before the governing bye-laws are amended
B8. Members’ shares in excess of the prohibition against redemption are financial liabilities.
The co-operative entity measures this financial liability at fair value at initial recognition.
Because these shares are redeemable on demand, the co-operative entity determines the fair
value of such financial liabilities as required by paragraph 55 of AS 30, which states: ‘The fair
value of a financial liability with a demand feature (e.g., a demand deposit) is not less than the
amount payable on demand…’. Accordingly, the co-operative entity classifies as financial
liabilities the maximum amount payable on demand under the redemption provisions.
B9. On 1 January 20X1, the maximum amount payable under the redemption provisions is
20,000 shares at Rs. 10 each and, accordingly, the entity classifies Rs. 200,000 as financial
liability and Rs. 800,000 as equity. However, on 1 January 20X2, because of the new issue of
shares at Rs. 20, the maximum amount payable under the redemption provisions increases to
40,000 shares at Rs. 20 each. The issue of additional shares at Rs. 20 creates a new liability that
is measured on initial recognition at fair value. The liability after these shares have been issued is
20 per cent of the total shares in issue (200,000), measured at Rs. 20, or Rs. 800,000. This
requires recognition of an additional liability of Rs. 600,000. In this example no gain or loss is
recognised. Accordingly, the entity now classifies Rs. 800,000 as financial liabilities and Rs.
2,200,000 as equity. This example assumes these amounts are not changed between 1 January
20X1 and 31 December 20X2.
After the governing bye-laws are amended
B10. Following the change in its governing bye-laws, the co-operative entity can now be
required to redeem a maximum of 25 per cent of its outstanding shares or a maximum of 50,000
shares at Rs. 20 each. Accordingly, on 1 January 20X3, the co-operative entity classifies as
financial liabilities an amount of Rs. 1,000,000 being the maximum amount payable on demand
under the redemption provisions, as determined in accordance with paragraph 55 of AS 30. It,
therefore, transfers on 1 January 20X3 from equity to financial liabilities an amount of Rs.
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200,000, leaving Rs. 2,000,000 classified as equity. In this example, the entity does not recognise
a gain or loss on the transfer.
Example 4
Facts
B11. Law governing the operations of co-operatives, or the terms of the governing bye-laws of
the entity, prohibit an entity from redeeming members’ shares if, by redeeming them, it would
reduce paid-in capital from members’ shares below 75 per cent of the highest amount of paid-in
capital from members’ shares. The highest amount for a particular co-operative is Rs. 1,000,000.
At the balance sheet date, the balance of paid-in capital is Rs. 900,000.
Classification
B12. In this case, Rs. 750,000 would be classified as equity and Rs. 150,000 would be
classified as financial liabilities. In addition to the paragraphs already cited, paragraph 35(b) of
the Standard states in part:
“…a financial instrument that gives the holder the right to put it back to the issuer for
cash or another financial asset (a ‘puttable instrument’) is a financial liability. This is so
even when the amount of cash or other financial assets is determined on the basis of an
index or other item that has the potential to increase or decrease, or when the legal form
of the puttable instrument gives the holder a right to a residual interest in the assets of an
issuer. The existence of an option for the holder to put the instrument back to the issuer
for cash or another financial asset means that the puttable instrument meets the definition
of a financial liability. …”
B13. The redemption prohibition described in this example is different from the restrictions
described in paragraphs 36 and 38 of the Standard. Those restrictions are limitations on the
ability of the entity to pay the amount due on a financial liability, i.e., they prevent payment of
the liability only if specified conditions are met. In contrast, this example describes an
unconditional prohibition on redemptions beyond a specified amount, regardless of the entity’s
ability to redeem members’ shares (e.g., given its cash resources, profits or distributable
reserves). In effect, the prohibition against redemption prevents the entity from incurring any
financial liability to redeem more than a specified amount of paid-up capital. Therefore, the
portion of shares subject to the redemption prohibition is not a financial liability. While each
member’s shares may be redeemable individually, a portion of the total shares outstanding is not
redeemable in any circumstances other than liquidation of the entity.
Example 5
Facts
B14. The facts of this example are as stated in example 4. In addition, at the balance sheet date,
liquidity requirements imposed in the jurisdiction prevent the entity from redeeming any
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members’ shares unless its holdings of cash and short-term investments are greater than a
specified amount. The effect of these liquidity requirements at the balance sheet date is that the
entity cannot pay more than Rs. 50,000 to redeem the members’ shares.
Classification
B15. As in example 4, the entity classifies Rs. 750,000 as equity and Rs. 150,000 as a financial
liability. This is because the amount classified as a liability is based on the entity’s unconditional
right to refuse redemption and not on conditional restrictions that prevent redemption only if
liquidity or other conditions are not met and then only until such time as they are met. The
provisions of paragraphs 36 and 38 of the Standard apply in this case.
Example 6
Facts
B16. The governing bye-laws of the entity prohibit it from redeeming members’ shares, except
to the extent of proceeds received from the issue of additional members’ shares to new or
existing members during the preceding three years. Proceeds from issuing members’ shares must
be applied to redeem shares for which members have requested redemption. During the three
preceding years, the proceeds from issuing members’ shares have been Rs. 12,000 and no
member’s shares have been redeemed.
Classification
B17. The entity classifies Rs. 12,000 of the members’ shares as financial liabilities.
Consistently with the conclusions described in example 4, members’ shares subject to an
unconditional prohibition against redemption are not financial liabilities. Such an unconditional
prohibition applies to an amount equal to the proceeds of shares issued before the preceding
three years, and accordingly, this amount is classified as equity. However, an amount equal to
the proceeds from any shares issued in the preceding three years is not subject to an
unconditional prohibition on redemption. Accordingly, proceeds from the issue of members’
shares in the preceding three years give rise to financial liabilities until they are no longer
available for redemption of members’ shares. As a result the entity has a financial liability equal
to the proceeds of shares issued during the three preceding years, net of any redemptions during
that period.
Example 7
Facts
B18. The bye-laws governing the operations of a co-operative entity state that atleast 50 per
cent of the entity’s total ‘outstanding liabilities’ (a term defined in the byelaws to include
members’ share accounts) has to be in the form of members’ paid-up capital. The effect of the
bye-laws is that if all of a co-operative’s outstanding liabilities are in the form of members’
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shares, it is able to redeem them all. On 31 December 20X1, the entity has total outstanding
liabilities of Rs. 200,000, of which Rs. 125,000 represent members’ share accounts. The terms of
the members’ share accounts permit the holder to redeem them on demand and there are no
limitations on redemption in the governing byelaws of the entity.
Classification
B19. In this example, members’ shares are classified as financial liabilities. The redemption
prohibition is similar to the restrictions described in paragraphs 36 and 38 of the Standard. The
restriction is a conditional limitation on the ability of the entity to pay the amount due on a
financial liability, i.e., they prevent payment of the liability only if specified conditions are met.
More specifically, the entity could be required to redeem the entire amount of members’ shares
(Rs. 125,000) if it repaid all of its other liabilities (Rs. 75,000). Consequently, the prohibition
against redemption does not prevent the entity from incurring a financial liability to redeem more
than a specified number of members’ shares or amount of paid-in capital. It allows the entity
only to defer redemption until a condition is met, i.e., the repayment of other liabilities.
Members’ shares in this example are not subject to an unconditional prohibition against
redemption and are therefore classified as financial liabilities.
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Appendix C
Comparison with IAS 32, Financial Instruments: Presentation
Note: This Appendix is not a part of Accounting Standard (AS) 31, Financial Instruments:
Presentation. The purpose of this appendix is only to bring out the major differences between AS
31 and the corresponding International Accounting Standard (IAS) 32.
Comparison with IAS 32, Financial Instruments: Presentation
The Accounting Standard is based on International Accounting Standard (IAS) 32, Financial
Instruments: Presentation and incorporates IFRIC 2, Members’ Shares in Co-operative Entities
and Similar Instruments (Re. IAS 32, Financial Instruments: Presentation), issued by the
International Financial Reporting Interpretation Committee (IFRIC) of the International
Accounting Standards Board (IASB). There is no major difference between AS 31, and IAS 32
and IFRIC 2.
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