Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Highlights of Principles under Ind AS 32, 107 & 109

1. Contract that gives rise to a
(a) Financial Asset of one Entity, and
(b) Financial Liability / Equity Instrument of another Entity.
2. Chain of contractual rights / obligation is a Financial Instrument, if it will ultimately lead to
Financial
Instrument (a) Receipt / Payment of Cash, or
(b) Acquisition / Issue of an Equity Instrument.
Note: Ability to exercise a Contractual right / requirement to satisfy a Contractual Obligation may be
absolute or contingent on the occurrence of a future event. Hence, Contingent Right / Obligation is a
Financial Instrument even if it is not recognized in the Financial Statements.
1. Primary Financial Instruments: Receivables, Payables, etc.
Classification
2. Derivative Financial Instruments: Forward, Futures, Options, Interest Rate / Currency Swaps etc.
NonFinancial Prepaid Expenses, Inventory, Property, Plant and Equipment, Intangible Assets, Advances given / received
Instruments for Goods and Services, Deferred Revenue, Warranty Obligations, Income Taxes, Operating Leases, Gold.
1. Cash / Equity Instrument of another Entity,
2. Contractual right to
Financial Asset (a) receive Cash / another Financial Asset from another Entity, or
(b) exchange Financial Assets or Financial Liabilities with another Entity under conditions that are
potentially favourable to the Entity.
Examples of Cash, Cash Equivalents, Bank Balance, Deposits given, Trade and Other Receivables, Bills Receivables,
Financial Investments in Equity Shares / Debentures, Promissory Note to receive Government Bonds, Perpetual
Assets Debt Instruments held, Financial Guarantee received, Finance Lease for Lessor, Gold Bond held.
Contractual Obligation to
Financial (a) deliver Cash or another Financial Asset to another Entity, or
Liability (b) exchange Financial Assets or Financial Liabilities with another Entity under conditions that are
potentially unfavourable to the Entity.
Examples of Deposits received, Trade and Other Receivables, Bills Payables, Loans including Bank Loan, Finance Lease
Fin. Liability for Lessee, Financial Guarantee given, and Promissory Note payable in Government Bonds.
Financial Asset / Liability includes Contract that may besettled in Entitys Own Equity Instruments& is
Contracts
1. NonDerivativefor which the Entity is or may be obliged to receive/ deliver a variable numberof the
settled in own
Entitys own Equity Instruments; or
Equity
Instruments 2. Derivativethat will or may be settled other than bythe exchange of a fixed amount of Cash / another
Financial Asset for a fixed numberof the Entitys own Equity Instruments.
Any Contract that evidences a residual interest in the Entitys Assets after deducting all of its Liabilities.
Equity
Examples: (a) NonPuttableOrdinary Shares,(b) Warrants / Written Call Option that allow the Holder to
Instrument
purchase a fixed number of NonPuttableOrdinary Shares for a fixed amount of Cash/ another Fin. Asset.
Instruments Classification
Puttable Instruments / Instruments imposing If Instrument specific conditions and Issuer specific
obligation to deliver pro rata share in Net Assets conditions are met, classified as Equity Instrument.
only on Liquidation[See Next Point] If not satisfied, it is classified as Financial Liablity.
Conditions for
Preference Shares that provides for Redemption on Financial Liability, since the Issuer has an Obligation
Equity
a specific date or at the option of the Holder to transfer Financial Asset to the Holder.
Instrument
Preference Shares that provides for Redemption at Classification is based on other rights that attach to
the option of Issuer/ NonRedeemable Pref. Shares them, and substance of contractual arrangements.
Cumulative / NonCumulative Pref. Shares,the Equity Instruments
distributions are at the discretion of the Issuer
1. A Puttable Financial Instrument includes a contractual obligation for the Issuer to repurchase /
redeem that Instrument for Cash / another Financial Asset on exercise of the put.
Puttable /
ProRata Entity' s Net Assets on Liquidation
2. Prorata share = No. of Units held by Holder
Total Number of Units

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Instrument 1. Holder is entitled for a prorata share of the Entitys Net Assets on Liquidation,
specific 2. Puttable Instrument is subordinate to all other classes of Instrument, i.e.
conditions for (a) It has no priority over other claims to the Assets on Liquidation, and
Equity (b) Does not require to be converted to another Instrument before it is in the Subordinate Class.
Instrument 3. All Instruments in the class have identical features.
Issuer must have no other Financial Instrument / Contract that has
(a) Total Cash Flows substantially based on
Issuer specific Profit / Loss,
conditions for Change in the recognized Net Assets,
Equity Change in the Fair Value of the recognized and unrecognized Net Assets of the Entity (excluding
Instrument any effects of such Instrument)
(b) The effect of substantially restricting / fixing the residual return to the Puttable Instrument Holders.
Note: If Entity cannot carry out the above tests, the Puttable Instrument is classified as Financial Liability.
1. Financial Instrument / any Contract whose value changes in response to the change in an underlying,
2. It requires no / vey less Initial Investment than it would be required otherwise to enter into a
Derivatives contract in normal course.
3. It is settled at a future period. Settlement can either by delivery of the Underlying or Cash settlement.
Example: Forward Contracts, Futures, Options, Interest Rate & Currency Swaps, etc.
Classification of 1. Financial Assets measured at Amortised Cost,
Financial 2. Financial Assets measured at Fair Value Through Profit or Loss (FVTPL)
Assets 3. Financial Assets measured at Fair Value Through Other Comprehensive Income (FVTOCI)
Classification of 1. Fair Value Through Profit and Loss (FVTPL), or
Fin. Liability 2. Amortised Cost.
Classification of Derivatives classified as Financial Assets would be measured at Fair Value Through Profit and Loss
Derivatives (FVTPL) only.
Entity shall classify Financial Assets depending upon the following criteria and options elected by it
Criteria for
(a) Entitys Business Model (BM) for managing the Financial Assets, and
Classification
(b) Contractual Cash Flow Characteristics (CCFC) of the Financial Assets.
Business Model Entity assesses whether its Financial Assets meet the conditions on the basis of Business Model as
(BM) determined by its Key Managerial Personnel (KMP). [As defined in Ind AS 24 Related Party Disclosures]
1. Entitys Business Model is determined at a level that reflects how groups of Financial Assetsare
managed together to achieve a particular business objective.
2. BM does not depend on Managements intentions for an Individual Instrument. So, it is not an Instrument
byInstrument Approach to classification, and should be determined on a higher level of aggregation.
3. It refers to how an Entity manages its Financial Assets in order to generate Cash Flows, i.e. it
determines whether Cash Flows will result from collecting Contractual Cash Flows, selling Financial
Assets or both. This assessment is not performed on the basis of scenarios that the Entity does not
reasonably expect to occur, such as so called Worst / Stress Case Scenarios.
4. Example: If an Entity expects that it will sell a particular Portfolio of Financial Asset only in a Stress
Case Scenario, that scenario would not affect the Entitys Assessment of BM for those Assets if the
Entity reasonably expects that such a scenario will not occur.
5. If Cash Flows are realised in a way that is different from the Entitys expectations at the date of
Determination assessment of BM, it is not (a) Prior Period Error, or (b) change the classification of the remaining
of BM Financial Assets held in that BM. Example: Entity sells more or fewer Financial Assets than it
expected when it classified the Assets.
6. However, when an Entity assesses BM for newly originated / purchased Fin. Assets, it must consider
information about how CF were realised in the past, along with all other relevant information.
7. BM is a matter of fact and not merely an assertion. Entity will need to use judgement when it
assesses its BM for managing Financial Assets and that assessment is not determined by a single
factor or activity. Instead, the Entity must consider all relevant evidence that is available at the date
of the assessment. Such relevant evidence includes, but is not limited to:
(b) How the Performance of BM and Financial Assetsheld within that BM are evaluated and reported
to the Entitys KMP,
(c) Risks that affect its performance & the way in which those risks are managed, and
(d) How Managers of the Business are compensated (Example: Whether the Compensation is based
on the Fair Value of the Assets managed or on the Contractual Cash Flows collected).

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

1. Hold to collect Contractual Cash Flows (CCF),

Business Model
2. Hold to collect Contractual Cash Flows (CCF) and Selling Financial Assets,
Types
3. Other Business Models.
1. Entity should classify Financial Assets on the basis of CCFC, if it is held within a BM whose objective is
(a) to hold the Assets to collect CCF, or
Contractual
(b) achieved by both collecting CCF and selling Financial Assets.
Cash Flow
Characteristic 2. To do so, an Entity has to determine whether the Assets Contractual Cash Flows are Solely Payments
(CCFC) Test of Principal and Interest (SPPI) on the Principal Amount outstanding.
3. CCF that are SPPI on the principal amount outstanding are consistent with a Basic Lending
Arrangement. In such arrangement, consideration for the Time Value of Money and Credit Risk are
typically the most significant elements of interest.
If there are repayments of Principal, Interest consists of consideration for
(a) Time Value of Money,
SPPI Payments (b) Credit Risk associated with the Principal amount outstanding during a particular period of time, and
(c) For other Basic Lending Risks and Costs,
(d) As well as a Profit Margin.
Situation Classification
Classification of 1. If Conditions of CCFC Test is fulfilled, BM test will be applied
Debt (a) Held to collect Contractual Cash Flows Amortised Cost
Instruments
(Financial (b) Results in collecting CCF and selling Financial Assets FVTOCI (with Recycling)
Assets) (c) If above conditions are not satisfied or FVTPL Option is selected FVTPL
2. If conditions of CCFC Test is not fulfilled FVTPL
Classification of Situation (CCFC Test will not apply) Classification
Equity 1. If it is held for trading FVTPL
(Financial 2. If it is not held for trading and FVTOCI Option is selected FVTOCI (No Recycling)
Assets) 3. If it is not held for trading and FVTOCI Option is not selected FVTPL
Financial Asset / Liability that
(a) is acquired / incurred principally for the purpose of selling / repurchasing it in the near term,
Held for
(b) on initial recognition is part of a portfolio of identified Financial Instruments that are managed
Trading
together and for which there is evidence of a recent actual pattern of short term profit taking, or
(c) is a Derivative, except Financial Guarantee Contract or Hedging Instrument.
Assets / Liabilities Time of Initial Recognition
Receivables / Payables When the Entity becomes a party to the Contract and has a legal right
to receive or a legal obligation to pay cash.
Firm Commitment to Buy / Sell When one of parties has performed,e.g.Entity that places order
Initial Goods / Service recognizes the Liability only when the Goods are shipped / delivered.
Recognition
Forward Contract Commitment Date, Not on the Settlement Date.
Option Contracts When the Holder / Writer becomes a Party to the Contract.
Planned Future Transactions Not Assets / Liabilities,since Entity has not become a Party to it.
Regular Way Purchase or Sale Trade Date / Settlement Date Accounting.
1. Timing: Date in which an Entity commits itself to purchase / sell an Asset.
2. Recognition:
Trade Date (a) Buyers Book: Asset to be Received & Liability to pay.
Accounting (b) Sellers Book: Gain / Loss on Disposal & Receivable.
3. Derecognition: Asset on Trade Date
Note: Interest accrues on Asset &corresponding Liability only on the Settlement Date when title passes.
1. Timing: Date in which an Asset is delivered to / by an Entity.
2. Recognition:
Settlement (a) Buyers Book: Asset on the day it is received.
Date (b) Sellers Book: Gain / Loss from the Buyer for Payment.
Accounting 3. Derecognition: Asset on the day in which it is delivered.
Note: Change in Fair Value of Asset from Trade to Settlement Date shall be accounted in the same way
as it accounts for Acquired Asset.

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Entity shall measure a Financial Asset / Liability (except FVTPL) at its Fair Value plus / minus
Transaction Costs directly attributable to its acquisition / issue. Hence, Transaction Costs are
Measurement (a) Fin. Instr. measured at FVTPL:Charged to P&L, i.e. not added to Fair Value at Initial Recognition,
(Not apply for
(b) Fin. Assets at FVTOCI / Amortised Cost: Added to Initial Recognition Amount,
Trade
Receivables) (c) Fin. Liab. atAmortised Cost: Deducted from Amount of Liability originally recognized.
Note: Transaction Costs on Disposal / Transfer are not included in measurement of all Categories of
Financial Assets / Liabilities. They are charged to Profit and Loss.
(a) Best evidence of the Fair Value of a Financial Instrument at initial recognition is normally the
Transaction Price i.e. Fair Value of Consideration given/ received.
(b) If
Fair Value differs from the Transaction Price, and Difference between Fair
Fair Value Fair Value is evidenced by a Quoted Price in an active market Value at initial recognition
for an identical Asset / Liability or based on a Valuation and the Transaction Price is
technique that uses only data from observable markets, recognized as a Gain/ Loss
(c) In all other cases, Fair Value is adjusted to defer the difference between the Fair Value at initial
recognition and the Transaction Price i.e. Transaction Price is treated as Fair Value.
1. Financial Asset (Debt Instrument only) shall be measured at Amortised Cost, if
(a) It is held within a BM whose objective is to hold it to collect Contractual Cash Flows (CCF), and
Measurement (b) Contractual terms give rise on specified dates to Cash Flows that are SPPI on Principal outstanding
of Financial 2. Financial Asset (Debt & Equity) shall be measured at FVTOCI, if
Asset (a) It is held within a BM whose objective is achieved by both collecting CCF & selling Fin. Assets, and
(b) Contractual terms give rise on specified dates to Cash Flows that are SPPI on Principal outstanding
3. Financial Asset shall be measured at FVTPL if it is not measured at above. (Residuary Category)
An Entity shall classify all Financial Liabilities as subsequently measured at Amortised Cost, except
Measurement
Financial Guarantee Contracts, Commitments to provide Loan at a below Market Interest Rate, Contingent
of Fin.Liability
Consideration recognized by an Acquirer in a Business Combination.
Option to Entity may, at initial recognition, irrevocably designate a Financial Asset as measured at FVTPL, if doing so
FVTPL (Fin. eliminates or significantly reduces Measurement / Recognition Inconsistency (called Accounting Mismatch)
Assets) that would otherwise arise from measuring them / recognizing their Gains & Losses on different basis.
Entity may, at initial recognition, irrevocably designate a Financial Liability as measured at FVTPL, if
(a) It eliminates or significantly reduces Measurement / Recognition Inconsistency (referred as
Option to
Accounting Mismatch) that would otherwise arise from measuring them / recognizing their Gains &
FVTPL
Losses on different basis.
(Financial
Liabilities) (b) Group of Financial Assets / Liabilities is managed and its performance is evaluated on a Fair Value
basis, in accordance with a documented Risk Management or Investment Strategy and information
about the group is provided internally on that basis to the entitys Key Management Personnel.
Only when an Entity changes its BM for managing Fin. Assets, it shall reclassify all affected Fin. Assets
prospectively. Such changes are determined by Entitys Senior Management as a result of external /
Reclassification
internal changes and must be significant to its operation and demonstrable to external parties. BM Change
will occur only when it either begins or ceases to perform an activity that is significant to its operations.
The following are considered as a change in Business Model
1. Acquisition / Disposal / Termination of a Business Line.
2. Entity has Commercial Loans Portfolio which it holds to sell in Short Term. It acquires a Company
Change in BM having a BM that holds Loans to collect Contractual Cash Flows. Commercial Loans Portfolio is no
longer for sale.It is now managed together with the acquired loans and all are held to collect CCF.
3. Financial Services Firm decides to shut down its Retail Mortgage Business. It no longer accepts new
business and it is actively marketing its Mortgage Loan Portfolio for sale.
The following are not considered as a change in Business Model
Not a change 1. Change in intention related to particular Fin. Assets, even in case of significant change in market,
in BM 2. Temporary disappearance of a particular market for Financial Assets,
3. Transfer of Financial Assets between parts of the Entity with different BM.
1. Date of Reclassification,
Disclosures
2. Detailed explanation of change in BM and a qualitative description of its effect on Fin. Statements,
Reclassification
3. Amount reclassified into and out of each category.

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

1. Entity shall derecognize a Financial Asset only when the Contractual rights to the Cash Flows from the
Financial Asset expire.
2. Entity shall derecognize a Financial Liability only when it is extinguished, i.e. when the obligation
Derecognition
specified in the contract is discharged or cancelled or expires.
3. On Derecognition, Amount recognized in P&L A/c = Carrying Amount on Derecognition
[Consideration received + New Asset Obtained New Liability Assumed]
Exchange between Existing Borrower and Lender of Debt Instruments with substantially different terms or
Exchange /
substantial modification of the terms of an existing Financial Liability shall be accounted for as an
Modification
extinguishment of Original Financial Liability and recognition of New Financial Liability.
Entity shall recognize a Loss Allowance for expected Credit Losses on
(a) Financial Asset that is measured at Amortised Cost or FVTOCI,
(b) Lease Receivable,
Impairment
(c) Contract Asset,
(d) Loan Commitment,
(e) Financial Guarantee Contract to which the impairment requirements apply.
Contractual Cash Flow due as per the Contract Less Discounted Cash Flows that Entity expects to receive.
(a) Discount Rate = Effective Interest Rate / Credit Adjusted Effective Interest Rate for purchased /
Credit Loss = originated CreditImpaired Financial Assets.
(b) Cash Flows = All Cash Flows throughout the expected life of that Instrument including CF from the
sale of collateral held and other Credit enhancements that are integral to the contractual terms.
An Entity shall measure Expected Credit Losses of a Financial Instrument in a way that reflects
Crieteria for (a) Unbiased & Probability Weighted Amount determined by evaluating a range of possible outcomes,
Measurement (b) Time Value of Money, and
of Credit Loss (c) Reasonable and supportable information that is available without undue cost or effort at the reporting
date about past events, current conditions and forecasts of future economic conditions.
Loss Allowance Situation Measurement of Loss Allowance
at Reporting Credit Risk has increased significantly since initial recognition Lifetime Expected Credit Losses
Date Credit Risk has not increased significantly since initial recognition 12 Months Expected Credit Losses
Disclosures 1. Entity shall not present Loss Allowance separately in Balance Sheet as reduction in Carrying Amount.
Credit Loss 2. However, it shall disclose the Loss Allowance in the Notes to the Financial Statements.
(a) Component of a Hybrid Contract that also includes a NonDerivative Host, with the effect that some
of the Cash Flows of the Combined Instrument vary in a way similar to a StandAlone Derivative.
Embedded
(b) However, a Derivative that is attached to a Financial Instrument but is contractually transferred
Derivative
independently of that Instrument, or has a different counterparty is not an Embedded Derivative but
a Separate Fin. Instrument.
Contract Host Contract Embedded Derivative
Examples Leases with Contingent Rent Annual Lease Rental Payments Contingent Rent
Forex Construction Contracts Construction Contract Changes in Foreign Exchange Rate
Situation Treatment
Apply Classification & Measurement
(a) Host Contract is an Asset within the scope of this AS
Accounting of Rules to the entire Hybrid Contract
Embedded (b) Host Contract is not an Asset, Contract will give rise to Standalone Split the contract and account for
Derivative Derivative if separated, & Not closely related to Host Contract Embedded Derivative separately
No need of segregating the Contract
(c) Any one of the conditions not satisfied
& accounting separately
Contracts to buy or sell NonFinancial Items. It is not a Financial Instrument as the contractual right to
NonFinancial
receive a NonFinancial Asset / Service and corresponding obligation do not establish a present right /
Contracts
obligation to receive, deliver / exchange a Financial Asset. Example: Options, Futures, Forward on Silver.
NonFinancial Contract that continue to be held for the purpose of receipt / delivery of a NonFinancial
Item is a NonFinancial Instruments. However, the following are Financial Instrument.
Exception
(a) NonFinancial Contract that can be settled net or by exchanging Financial Instruments,
(b) NonFinancial Contract in which the NonFinancial Item is readily convertible to Cash.
Compound Fin. Issuer of a NonDerivative Financial Instrument shall evaluate the terms of the Financial Instrument to
Instruments determine whether it contains both a Liability and Equity Component. Example: Convertible Bonds.
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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

If Compound Financial Instrument has been issued and it has multiple Embedded Derivatives whose
Disclosures
values are interdependent (like Callable Convertible Bond), it shall disclose the existence of those features.
Nature of Liability Component Measurement
Financial Fair Value = Contractual Future Cash Flows
Contractual Arrangement to deliver
Liability discounted at Market Interest Rate of Comparable
Components Cash / another Financial Asset
Component Instruments without the Conversion Option
Option to convert into fixed number Equity Fair Value of the Compound Financial Instrument
of Ordinary Shares Component Less: Fair Value of Financial Liability Component
Recognition on On conversion at maturity, the Entity derecognizes the Liability Component and recognizes it as Equity.
conversion Original Equity Component remains as Equity. There is no gain or loss on conversion at maturity.
1. Entitys own Equity Instrument are not recognised as Fin. Asset regardless of the reason for which
Treasury they are reacquired. If an Entity reacquires its own Equity, they shall be deducted from Equity.
Shares (Own 2. No Gain / Loss shall be recognised in Profit / Loss on the purchase, sale, issue or cancellation.
Equity 3. Treasury Shares may be acquired and held by Entity / other Members of the Group. Consideration
Instrument) paid or received shall be recognised directly in Equity.
4. Exception: When an Entity holds its own Equity on behalf of others, there is an agency relationship.
They are not included in Balance Sheet. Example: Bank holding its own Equity on behalf of Client.
1. Amount of Treasury Shares held is disclosed separately in Balance Sheet / Notes as per Ind AS 1.
Treatment
2. Entity should provide disclosure as per Ind AS 24, if it reacquires its own Equity from Related Parties.
Items Treatment: Recognised
1. Interest, Dividends, Losses and Gains relating to a Financial
Interest, In Profit & Loss A/c
Instrument or a component that is Financial Liability
Dividends,
2. Distributions to holders of Equity Instrument Directly in Equity
Losses and
Gains 3. Transaction Costs of an Equity Transaction As deduction from Equity
4. Income Tax relating to distributions to holders and Transaction As per Ind AS 12, Income Taxes
Costs of an Equity Transaction
1. Carrying Amount of Financial Assets it has pledged as Collateral for Liabilities / Contingent Liabilities
Disclosures
including amounts that have been reclassified,
Collateral
2. Terms and conditions relating to its pledge.
For Loans Payable recognized at the end of the Reporting Period, an Entity shall disclose
1. Details of any defaults during the period of Principal, Interest, Sinking Fund, or Redemption terms,
Defaults &
2. Carrying Amount of the Loans Payable in default at the end of the Reporting period, and
Breaches
3. Whether the default was remedied, or the terms of the Loans payable were renegotiated before the
Financial Statements were approved for issue.
Offsetting Financial Asset and Liability shall be offset and the Net Amount presented only when an Entity
Financial Asset (a) has a legally enforceable right to set off the recognized amounts currently, and
and Liability (b) intends to settle on a Net bases, or to realize the Asset and settle the Liability simultaneously.
Objective of To represent in the Financial Statements, the effect of an Entitys Risk Management Activities to manage
Hedge Exposures arising from particular risks that could affect Profit or Loss or Other Comprehensive Income.
Accounting Entitys Risk Management Activities use Financial Instruments to manage Exposures.
Identifying and Hedged Item can be a single item or a group of items of the following
designating (a) Recognised Asset / Liability,
Hedged Item (b) Unrecognised Firm Commitment,
(c) Forecast Transaction, and
(d) Net Investment in a Foreign Operation.
Conditions for 1. Hedged Item must be reliably measurable.
Hedged Item 2. If a Hedged Item is a Forecast Transaction, it must be highly probable.
Designation of Hedging Instrument Condition
Hedging (a) Derivative measured at FVTPL It cannot be designated for some Written Options.
Instrument
(b) NonDerivative Financial Asset NonDerivative Financial Liability for which the amount of change in
/ Liability measured at FVTPL Fair Value attributable to changes in its Credit risk is presented in
Other Comprehensive Income cannot be designated.

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Conditions for 1. Only Contracts with Party external to Reporting Entity can be designated as a Hedging Instrument.
Hedging 2. Foreign Currency Risk Component of Investment in an Equity Instrument measured at FVTOCI cannot
Instrument be designated as a Hedging Instrument for Hedge of Foreign Currency Risk.
Qualifying 1. Hedging relationship consists only of Eligible Hedging Instruments and Eligible Hedged Items.
Criteria for 2. At the inception of Hedging relationship, there is a formal designation and documentation of Hedging
Hedge relationship and the Entitys Risk Management Objective and Hedging Strategy.
Accounting 3. It meets all of the following Hedge Effectiveness requirements
(a) There is an economic relationship between the Hedged Item and the Hedging Instrument,
(b) Effect of Credit Risk does not dominate the value changes that result from that economic
relationship,
(c) Hedge Ratio = Ratio resulting from the Quantity of Hedged Item and Hedging Instrument.
Types of (a) Fair Value Hedge: Hedge of the exposure to changes in Fair Value ofHedged Item attributable to
Hedging a particular risk and could affect Profit or Loss.
Relationship (b) Cash Flow Hedge: Hedge of the exposure to variability in Cash Flows of Hedged Item
attributable to a particular risk and could affect Profit or Loss.
(c) Hedge of Net Investment in a Foreign Operations, including a Hedge of a Monetary Item.
Fair Value Gain / Loss on Accounted in
Hedge (a) Hedging Instrument OCI, if the Hedging Instrument hedges an Equity
Accounting Instrument measured at FVTOCI. Otherwise in P&L.
(b) Hedged Item being a Financial Asset Profit and Loss (P&L)
measured at FVTOCI
(c) Hedged Item being Equity Instrument Other Comprehensive Income (OCI)
measured at FVTOCI
(d) Hedged Item being Unrecognised Firm Cumulative change its Fair Value is recognized as an asset or
Commitment liability with a corresponding gain or loss recognized in P&L
Cash Flow 1. Separate Cash Flow Hedge Reserve A/c is adjusted to the lower of the following
Hedge (a) Cumulative Gain / Loss on the Hedging Instrument from inception of the Hedge,
Accounting (b) Cumulative Change in Fair Value of the Hedged Item from inception of the Hedge.
2. Portion of Gain / Loss on the Hedging Instrument that is determined to be an effective Hedge shall be
recognized in Other Comprehensive Income.
3. Remaining Gain / Loss is hedge ineffectiveness that shall be recognized in profit or loss.
Hedge of Net Items Recognised
Investment in Portion of Gain / Loss on Hedging Instrument that is determined to be an Effective Hedge In OCI
a Foreign
Operations Ineffective Portion In P&L
Disclosures Entity shall apply Disclosure requirements for those Risk Exposures that an Entity hedges and for which it
elects to apply Hedge Accounting. Hedge Accounting Disclosures shall provide information about
(a) Entitys Risk Management Strategy and how it is applied to manage risk,
(b) How Entitys hedging activities may affect the amount, timing & uncertainty of its future Cash Flows,
(c) Effect that Hedge Accounting has had on Balance Sheet, P&L and Statement of Changes in Equity.

1. Exchange of Financial Liability at unfavourable terms

A Company borrowed ` 50 Lakhs @ 12% p.a. Tenure of the Loan is 10 Years. Interest is payable every year and the Principal is
repayable at the end of 10th Year. The Company defaulted in payment of interest for the Year 4, 5 and 6. A Loan Reschedule
Agreement took place at the end of 7 Year. As per the agreement, the Company is required to pay ` 90 Lakhs at the end of 8th
Year. Calculate the additional amount to be paid on account of rescheduling and also the Book Value of Loan at the end of 8th
year when the Reschedule Agreement took place.

Solution: Assumption: Interest is compounded in case of default.

Particulars Computation `
Loan Amount 50,00,000
Period of default 4 to 8 Years 5 Years
Book Value at the end of 8th Year (i.e Year 4 to Year 8 = 5 Years Compounding) 5,00,000 (1.12)5 88,11,708
Rescheduled amount to be paid at the end of 8th Year 90,00,000
Additional Amount to be paid on Rescheduling 1,88,291

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

2. Option Contracts
Entity A holds an Option to purchase Equity Shares in a Listed Entity B for ` 100 per Share at the end of a 90 day period.
Evaluate the Contract whether a Financial Asset or a Financial Liability? What if the Entity A has written the Option?

Solution:
If Entity A is Call Option Holder
1. Entity A will exercise the Option, if MPS exceeds `100 at
the end of the 90 day period.
2. Since Entity A stands to gain if the call option is
exercised, it is potentially favourable to the Entity.
Therefore, the option is a Derivative Financial Assets
from the time it becomes a party to the contract.
If Entity A is Call Option Writer
1. In this case, Counterparty can force Entity A to sell
Equity Shares, if MPS exceeds `100 at the end of the 90
day period.
2. Since Entity A stands to lose if the Option is exercised, it
is potentially unfavourable and the option is a Derivative
Financial Liability from the time the Entity becomes a
party to the Option Contract.

3. Evaluate whether the following are considered as a Financial Instruments

Instruments FI or not Reasoning

(a) Note payable in
Government Bonds
(b) Financial Guarantee
(c) Operating Leases
(d) Financial Leases
(e) Perpetual Debt
Instruments
(f) Physical Assets incl.
Intangible Assets
(g) Prepaid Expenses /
Warranty Obligations
(h) Constructive
Obligations
(i) Deposit with Bank
It gives the Holder the contractual right to receive and the Issuer the contractual
FI obligation to deliver Government Bonds. These are Fin. Assets since it represent
obligations of the Government to pay Cash.
It gives the Lender the right to receive cash from the Guarantor and corresponding
FI
contractual obligation of the Guarantor to pay the lender, if the Borrower defaults.
Lessor provides the use of an Asset in future periods in exchange for
Not FI consideration, similar to Fee for a Service. However, Individual payments
currently due and payable are considered as Primary Financial Instruments.
It gives a contractual right of the Lessor to receive and an obligation of the
FI Lessee to pay a stream of payments that are substantially the same as blended
payments of Principal and Interest under a Loan Agreement.
It provides the Holder with the contractual right to receive payment, interest at a
FI fixed dates extending into the indefinite future, with no right to receive Principal
or a return of Principal under unfavourable terms or very far in the future.
It only creates an opportunity to generate Cash Inflow or another Financial Asset,
Not FI
but does not give rise to a present right to receive Cash or other Financial Asset.
Future economic benefit is the receipt of goods or services, rather than the right
Not FI
to receive Cash or other Financial Asset.
It means those obligations defined in Ind AS 37 Provisions, Contingent Assets or
Not FI
Contingent Liabilities. They do not arise from Contracts and hence, not a FI.
It gives the Depositor the contractual right to receive Cash or to draw a Cheque
FI or other similar Instrument against the balance in favour of a Creditor in payment
of a Financial Liability, and the Bank the contractual obligation to deliver.

4. Classify the following as Financial Liability (FL) or Equity Instruments (EI)

Particulars Type Reasoning

(a) Rights, Options or Warrants used
to acquire a fixed number of the
Equity Instruments for a fixed
amount of any Currency.
(b) Convertible Bond denominated in
Foreign Currency to acquire a fixed
number of the Equity Instruments
(c) Mandatorily Redeemable
Preference Shares with mandatory
Fixed Dividends
Entity offers the Rights, Options or Warrants to all of its existing owners
EI
of the same class of its own NonDerivative Equity Instruments.
EI The Exercise Price is fixed in any Currency.
There is a contractual obligation to deliver Cash that cannot be avoided
FL mandatory periodic Fixed Dividend Payments and mandatory
Redemption by the Issuer for a fixed amount at a fixed future date.

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Particulars Type Reasoning

(d) NonRedeemable Preference Since Dividends are payable only if Dividend on Ordinary Shares are
Shares with Dividend linked to EI paid, it contains no contractual obligation to pay Dividends & Principal.
Ordinary Shares
(e) Cumulative NonRedeemable If the Dividends can be deferred indefinitely, it will be classified as
Preference Shares with Dividend EI Equity only, since the Entity does not have any contractual obligations
Payments linked to Ordinary whatsoever to pay those dividends. A liability for the dividend payable
Shares would be recognised once the dividend is declared.
Although there are no mandatory periodic Interest payments, it provides
(f) Zero Coupon Bond / Deep for mandatory redemption by the Issuer for a determinable amount at a
FL
Discount Bond fixed or determinable future date. Hence, there is a contractual
obligation to deliver cash for the Redemption Value.
(g) NonRedeemable Callable Bond
with Fixed Coupon. Coupon can be
deferred in perpetuity. Current
Although there is both pressure on the Issuer to pay the Coupon, to
Bond Price is predicated on the
EI maintain the Bond Price, and a constructive obligation to pay the
expectation that the Coupon will
Coupon, there is no contractual obligation to do so.
be paid each year. Policy that it
will be paid each year has been
publicly communicated.

5. NonRedeemable Preference Shares with mandatory fixed Dividends

A Company issued NonRedeemable Preference Shares with mandatory Fixed Dividends. Evaluate whether such Preference
shares are an Equity Instruments or a Financial Liability to the Issuer Entity.

Solution:
1. When Pref. Shares are NonRedeemable, appropriate classification is determined by the other rights attached to them.

2. In such case, the Principal has Equity characteristics. However, the Entity has a contractual obligation to pay dividends,
even in case of lack of funds, or insufficient distributable profits. Hence, obligation to pay dividends is a Fin. Liability.

3. Overall Classification may be as follows

Situation Classification
(a) If the Coupon Rate is other than the prevailing market rate or there is a payment of
Compound Instrument
discretionary dividends in addition to the fixed coupon
(b) If the Coupon was initially set at market rate and there were no provisions for
Financial Liability
payment of discretionary dividends

6. Determination of Business Model Types

Situation
ABC Ltd holds Investments to collect their
Contractual Cash Flows (CCF). Maturity of its
Financial Assets is matched to the Funding Needs. In
the past, when Financial Assets Credit Risk has
increased, they have been sold out.In addition,
infrequent sales have occurred as a result of
unanticipated funding needs. The Company also
monitors Fair Values of Financial Assets, among
other information.
XYZ Ltd anticipates Capital Expenditure in a few
years. It invests its excess Cash in Short and
LongTerm Financial Assets, having Contractual Lives
more than its anticipated Period. The Company will
hold them to collect CCF and, when an opportunity
arises, it will sell them to reinvest the Cash.
BM Reasoning
Although the Company considers Fair Values from a
liquidity perspective, its objective is to hold to collect
CCF. Sales in response to an increase in Credit Risk or
ifrequent sales resulting from unanticipated funding
Hold to
needs (i.e. in a Stress Case Scenario) would not
CCCF
contradict that objective, even if such sales are significant
in value.
Hold to The Company invests excess Cash in ShortTerm Financial
CCCF Assets, until the Company requires the Funds for making
OR Capital Expenditure. When they mature, it reinvests the
Hold to Cash in new Short Term Assets. It maintains this strategy
CCCF& until the Funds are needed, at which time the Company
selling uses the proceeds to fund the Capital Expenditure.

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Situation BM Reasoning
A Company collects Cash from Trade Receivables Hold to The objective is to collect CCF from the Trade Receivables
and has no intention to dispose Trade Receivables. CCCF and, therefore, the Trade Receivables meet BM Test.

7. CCF that are Solely Payments of Principal & Interest on the Principal Amount Outstanding

Situation SPPI Reasoning

Payments of Principal and Interest are
linked to an Inflation Index of the
Currency in which the Instrument is
issued. Inflation Link is not leveraged.
Interest Payments are indexed to
Debtors income or Equity Index
Bond convertible into a fixed number of
Equity Instruments of the Issuer.
SPPI Linking payments to an Unleveraged Inflation Index resets the Time
Value of Money to a current level. Interest Rate reflects Real Interest.
Thus, it is a consideration for Time Value of Money on the principal
amount outstanding.
Not CCF reflects a Return that is inconsistent with a Basic Lending
SPPI Arrangement. However, it only compensates the Holder for changes in
the Credit Risk of the Instrument, such that actual Cash Flows are SPPI.
Not Return is inconsistent with a Basic Lending Arrangement, i.e. the Return
SPPI is linked to the Value of the Equity of the Issuer.

8. Methods of Accounting
On 30.03.2015, an Entity enters into an agreement to purchase a Financial Asset for ` 100 which is the Fair Value on that date.
On Balance Sheet date, the Fair Value is ` 102 and on Settlement Date, i.e. 02.04.2015 the Fair Value is ` 103. Pass Journal
Entries on Trade and Settlement Date, when the Asset acquired is measured at (a) Amortised Cost, (b) FVTPL, (c) FVTOCI.

Solution: 1. If Financial Asset is accounted as Amortised Cost

Trade Date Accounting Settlement Date Accounting
Date Journal Entry Dr. Cr. Journal Entry Dr. Cr.
30.03.2015 Financial Asset A/c Dr. 100
No Entry
To Payables 100
31.03.2015 No Entry No Entry
02.04.2015 Payables A/c Dr. 100 Financial Assets A/c Dr. 100
To Cash A/c 100 To Cash A/c 100

2. If Financial Asset is accounted at FVTPL

Trade Date Accounting Settlement Date Accounting
Date Journal Entry Dr. Cr. Journal Entry Dr. Cr.
30.03.2015 Financial Asset A/c Dr. 100
No Entry
To Payables 100
31.03.2015 Financial Asset A/c Dr. 2 Fair Value Change A/c Dr. 2
To Profit & Loss A/c 2 To Profit & Loss A/c 2
02.04.2015 Financial Asset A/c Dr. 1 Fair Value Change A/c Dr. 1
To Profit & Loss A/c 1 To Profit & Loss A/c 1
02.04.2015 Payables A/c Dr. 100 Financial Assets A/c Dr. 103
To Cash A/c 100 To Cash A/c 100
To Fair Value Change A/c 3

3. If Financial Asset is accounted at FVOCI [OCI = Other Comprehensive Income]

Trade Date Accounting Settlement Date Accounting
Date Journal Entry Dr. Cr. Journal Entry Dr. Cr.
30.03.2015 Financial Asset A/c Dr. 100
No Entry
To Payables 100
31.03.2015 Financial Asset A/c Dr. 2 Fair Value Change A/c Dr. 2
To OCI A/c 2 To OCI A/c 2

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Trade Date Accounting Settlement Date Accounting

Date Journal Entry Dr. Cr. Journal Entry Dr. Cr.
02.04.2015 Financial Asset A/c Dr. 1 Fair Value Change A/c Dr. 1
To OCI A/c 1 To OCI A/c 1
02.04.2015 Payables A/c Dr. 100 Financial Assets A/c Dr. 103
To Cash A/c 100 To Cash A/c 100
To Fair Value Change A/c 3

9. Treatment of Transaction Costs

A Company invested in Equity Shares of another Entity on 15th March for ` 10,000. Transaction Cost = ` 200 (not included in
` 10,000). Fair Value on Balance Sheet Date = ` 12,000. Pass Entries, when the Asset acquired is measured at FVTPL/ FVTOCI.
Solution:
Asset acquired is measured at FVTPL Asset acquired is measured at FVTOCI
Date Journal Entry Dr. Cr. Journal Entry Dr. Cr.
15.03.2015 Investment A/c Dr. 10,000 Investment A/c Dr. 10,200
Transaction Cost A/c Dr. 200 To Bank A/c 10,200
To Bank 10,200
31.03.2015 Investment A/c Dr. 2,000 Investment A/c Dr. 1,800
To Fair Value Gain A/c 2,000 To Fair Value Gain A/c 1,800
31.03.2015 Profit & Loss A/c Dr. 200 Fair Value Gain A/c Dr. 1,800
To Transaction Cost A/c 200 To OCI A/c 1,800
31.03.2015 Fair Value Gain A/c Dr. 2,000 OCI A/c Dr. 1,800
To Profit & Loss A/c 2,000 To Fair Value Reserve A/c 1,800

10. Partial Derecognition of Financial Asset

Hari Ltd has lent a sum of ` 10 Lakhs @ 18% per annum for 10 years. The Loan had a Fair Value of ` 12,23,960 at the effective
interest rate of 13%. To mitigate repayment risks but at the same time retaining control over the Loan, Hari Ltd transferred its
right to receive the Principal Amount of the Loan on its maturity with interest, after retaining rights over 10% of Principal and
4% Interest that carried Fair Value of ` 29,000 and ` 1,84,620 respectively. The consideration for the transaction was ` 9,90,000.
The Interest Component retained included a 2% Fee towards collection of Principal and Interest that has a Fair Value of
`65,160. Defaults if any are deductible to a maximum extent of the Companys claim on the Principal Portion. You are required
to show the Journal Entries to record derecognition of the Loan.
Solution: 1.Computation of Fair Value of Portion transferred (Principal and Interest)
Particulars ` ` Proportionate
Carrying Amnt [Note]
Fair Value of Loan Asset (given) 12,23,960 10,00,000
Less: Fair Value of Principal Retained (given) (29,000) (23,694)
Less: Fair Value of Interest Retained (Balancing Figure) (1,19,460) (97,601)
Less: Fair Value of Collection Asset (i.e. Servicing Asset) (65,160) (1,84,620) (53,237)
Fair Value of Portion transferred 10,10,340 (8,25,468)
10,00,000
Note: Carrying Amount apportioned in ratio of Fair Value. e.g. FV of Principal = 29,000 = 23,694.
12,23,960

2. Journal Entries
Particulars Dr. (`) Cr. (`)
Bank A/c (Consideration Received) Dr. 9,90,000
To Loan Receivable (Asset) A/c (Carrying Amt of derecognised portion) 8,25,468
To Profit and Loss A/c (Gain on DeRecognition) 1,64,532

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Particulars Dr. (`) Cr. (`)

Principal Strip A/c (Carrying Amt of Principal retained) Dr. 23,694
Interest Strip A/c (Carrying Amt of Interest Retained) Dr. 97,601
Servicing Asset (Carrying Amt of Servicing Asset retained) Dr. 53,237
To Loan Receivable (Asset) A/c 1,74,532
Financial Asset A/c 1,00,000
To Financial Liability A/c 1,00,000
Note: Maximum Default that may be borne by the Company = its Maximum Principal Claim for
10% of Loan = `1,00,000. So, an Asset and Liability is recognised to that extent.

11. Derecognition Applicability

Situation To Derecognise or not?

Entity A transfers its Portfolio of Receivables to
Entity B under Factoring Arrangement. Debtors will
pay amounts due to Entity Bdirectly. Entity A has
no additional obligations to repay any sums and
has no rights to any additional sums.
Same as above, but (a) Entity A has not transferred
its rights to receive the Cash Flows, or (b) Any
Credit Default Guarantee is given by Entity A.
Since Entity B has no recourse to Entity A for late payment / Credit
Risk, Entity A has transferred substantially all the risks and rewards of
ownership of the Portfolio. Hence, Entity A should derecognize entire
Portfolio. Difference between the Carrying Value and Cash received is
recognized immediately as a Financing Cost in Profit or Loss A/c.
There is no complete transfer of risk and rewards. In such case, Entity
A should not derecognize the Portfolio.

12. Impairment Probability of Default (POD) Approach

Entity has lent ` 1 Million. At initial recognition, POD over the next 12 months is 0.5%. At the reporting date, there is no change
in 12Month POD and the Entity assesses that no significant increase in Credit Risk since initial recognition. Loss Given
Default (LGD) is determined to be 25% of Gross Carrying Amount. What is the Loss Allowance to be recognized?

Solution:
1. As there is no increase in Credit Risk since initial recognition, Lifetime Expected Credit Loss is not required to be recognised.
2. 12Months Expected Credit Loss to be recognized = ` 1 Million LGD25% 12Months POD 0.5% = ` 1,250.

13. Impairment Loss Rate Approach

A Bank has lent ` 5,00,000. Portfolio segmented into Borrower Groups (X & Y) based on shared Credit Risk characteristics at
initial recognition. Group X comprises 1,000 Loans with a Gross Carrying Value (GCV) per client of` 200, for a total GCV of
` 2,00,000. Similarly, the GCV per Client is ` 300 and the total GCV is ` 3,00,000 for Group Y. Historical defaults per 1,000
Loans sample: 4 Defaults (Group X), 2 Defaults (Group Y). Bank considers forward looking information and expects an
additional 1 increase per Group in defaults over the next 12 Months compared to the historical rate. PV of Observed Loss is 750
(Grp X), 675 (Grp Y). At reporting date, the Entity assesses that the expected increase in defaults does not represent a
significant increase in Credit risk since initial recognition. Comment.

Solution:
1. As there is no increase in Credit Risk since initial recognition, Lifetime Expected Credit Loss is not required to be recognised.

2. Computation of Loss Rate:

Group No. of Clients GCV per Client PV of Loss Loss Rate [Note]
X ` 1,000 ` 200 ` 750 0.375%
Y ` 1,000 ` 300 ` 675 0.225%
Note: Loss Rate = PV of Loss [No. of Client GCV per Client]

3. Loss Rates are used to estimate 12 Month ECL on new loans in Group X & Y that originated during the year and for which
the Credit Risk has not increased significantly since initial recognition.

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

14. Impairment Loss Rate Approach

At the reporting date, an Entity assesses that the expected increase in defaults represents a significant increase in Credit Risk
since initial recognition. Additional Information is an under. Compute the Expected Credit Loss to be recognized.
Age (In Days) Current 1 30 31 60 61 90 91 +
Default Rate 0.3% 1.6% 3.6% 6.6% 10.6%
Gross Carrying Amount (` in Lakhs) 150 75 40 25 10

Solution:
1. As there is increase in Credit Risk since initial recognition, Lifetime Expected Credit Loss is required to be recognised.

2. Computation of Lifetime Expected Credit Loss (LECL):

Age Default Rate (DR) GCV (` in Lakhs) LECL = DR GCV (` 000)
Current 0.3% 150 45
1 30 1.6% 75 120
31 60 3.6% 40 144
61 90 6.6% 25 165
91 + Days 10.6% 10 106
LECL Allowance 580

15. Explain the treatment of the following items

Item
Dividend on Shares recognized as Liabilities
Issuing & Acquiring Cost of its own Equity
Instruments
Cost of Equity Transaction that is abandoned
Transaction Costs relating to issue
Compound Financial Instruments
Gains & Losses related to changes in the
Carrying Amount of a Financial Liability
Entity B places its privately held Ordinary
Shares that are classified as Equity with a
Stock Exchange and simultaneously raises
New Capital by issuing New Ordinary Shares
on the Stock Exchange. Transaction Costs
are incurred in respect of both transactions.
Treatment
Recognised as Expenses in the same way as Bond Interest. However, it is
desirable to disclose them separately in P&L than with Interest because of
the difference between Interest and Dividends.
Deduction from Equity to the extent they are Incremental Costs directly
attributable to Equity Transaction that would otherwise have been avoided
Recognised as Expenses
of Allocated to the Liability and Equity Component in proportion to the
allocation of proceeds.
Recognised as Income / Expenses in Profit / Loss even when they relate to
an Instrument that includes a right to the residual interest in the assets of
the Entity in exchange for Cash or another Financial Asset.
Since the issue of New Shares is the issue of an Equity Instrument, but the
placing of the existing Equity Instruments with the Exchange is not, the
Transaction Costs should be allocated between the two transactions.
Transaction Costs in respect of the New Shares issued will be recognised in
Equity whereas the Transaction Costs incurred in placing the existing
Shares with the Stock Exchange will be recognised in Profit or Loss.

16. Offsetting
X Ltd owes Y Ltd ` 20 Lakhs at the end of 31st March. As part of another Contract, Y Ltd owes X Ltd ` 15 Lakhs at 31st March. X
Ltd has the legal right to set off the Asset and Liability but historically, X Ltd has settled one month after Y Ltd settles. Can X
Ltd offset the Asset and Liability?

Solution: No, since X Ltd cannot demonstrate the intention to settle net or simultaneously for all payments.

17. Financial Asset Accounted as Amortised Cost

A Company lends ` 100 Lakhs to another Company @ 12% p.a. Interest on 01.04.2015. It incurs ` 40,000 incremental Costs for
Documentation. Loan Tenure is 5 Years with Interest charged annually. Pass necessary Journal Entries. Assume Fair Value of
Loan = ` 99,40,000 (1,00,00,000 1,00,000 + 40,000).
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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Solution:
Date Particulars Dr. (`) Cr. (`)
01.04.2015 Loan A/c Dr. 100 Lakhs
To Bank A/c 100 Lakhs
01.04.2015 Loan Processing Expenses A/c Dr. 40,000
To Bank A/c 40,000
01.04.2015 Loan A/c Dr. 40,000
To Loan Processing Expenses A/c 40,000

Note: Fair Value of the Loan is irrelevant.

18. Appropriate Method of Accounting

An Entity is about to purchase a portfolio of Fixed Rate Assets that will be financed by Fixed Rate Debentures. Both Financial
Assets and Liabilities are subject to the same Interest Rate Risk that gives rise to opposite changes in Fair Value that end to
offset each other. Comment on the Appropriate Method of Accounting.

Solution:
1. In the absence of Fair Value Option, the Entity may have classified the Fixed Rate Assets as FVTOCI with Gains &
Losses on changes in Fair Value recognized in Other Comprehensive Income and the Fixed Rate Debentures at
Amortised Cost.

2. Reporting both the Assets and the Liabilities at FVTPL corrects the measurement and inconsistency and produces more
relevant information.

19. Reclassification
Bonds (Assets) are for ` 1,25,000. Fair Value on Reclassification is ` 90,000. Pass Entries for the following reclassifications
(a) Amortised Cost to FVTPL, (c) FVTPL to Amortised Cost, (e) FVTOCI to Amortised Cost,
(b) Amortised Cost to FVTOCI, (d) FVTPL to FVTOVI, (f) FVTOCI to FVTPL.

Solution:
(a) Amortised Cost to FVTPL (b) Amortised Cost to FVTOCI
Bonds (FVTPL) A/c Dr. 90,000 Bonds (FVTOCI) A/c Dr. 90,000
P&L A/c Dr. 35,000 OCI A/c Dr. 35,000
To Bond (Amortised Cost) A/c 1,25,000 To Bond (Amortised Cost) A/c 1,25,000
(c) FVTPL to Amortised Cost (d) FVTPL to FVTOCI
Bonds (Amortised Cost) A/c Dr. 90,000 Bonds (FVTOCI) A/c Dr. 90,000
Impairment Loss (P&L A/c) Dr. 35,000 Impairment Loss (OCI A/c) Dr. 35,000
To Bond (FVTPL) A/c 1,25,000 To Bond (FVTPL) A/c 1,25,000
(e) FVTOCI to Amortised Cost (f) FVTOCI to FVTPL
Bonds (Amortised Cost) A/c Dr. 90,000 Bonds (FVTPL) A/c Dr. 90,000
Loss Allowance (P&L A/c) Dr. 35,000 Reclassification Loss (OCI A/c) Dr. 35,000
To Bond (FVTOCI) A/c 1,25,000 To Bond (FVTOCI) A/c 1,25,000

20. Derivative Recognition

Entity XYZ enters into a fixed price Forward Contract to purchase 10,00,000 Kg of Copper in accordance with its expected
usage requirements. The contract permits XYZ to take physical delivery of the Copper at the end of 12 months or to pay or
receive a net settlement in Cash, based on the change in Fair Value of Copper. Is the Contract covered under Financial
Instruments Standard?

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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Solution:
1. The Contract is a Derivative Instrument as there is no Initial Investment, it is based on the Price of Copper and it is to
be settled at a future date.

2. However, if XYZ intends to settle the contract by taking delivery of the Copper and has no history of settling net in Cash
or of taking delivery and selling it within a short period after delivery for the purpose of generating a profit from short
term fluctuations in price / dealers margin, it is not accounted for as a Derivative.

21. Recognition of Loan at Reduced Rate to Employees

XYZ Ltd grants Loans to its Employees at 4% amounting to ` 10,00,000 at the beginning of 201516. The Principal amount is
repaid over a period of 5 Years whereas the accumulated interest computed on reducing balance at simple interest is collected
in 2 equal annual instalments after collection of the principal amount. Assume the Benchmark Interest Rate is 8%. Show the
Accounting Entries on 01.04.2015 and 31.03.2016.
Solution: 1. Computation of Fair Value at initial recognition & Interest
Year Opening Cash Flow Closing Interest @ Cumulative PVIF @ Discounted
Balance Balance 4% Interest 8% Cash Flow
2016 10,00,000 2,00,000 8,00,000 40,000 40,000 0.926 1,85,185
2017 8,00,000 2,00,000 6,00,000 32,000 72,000 0.857 1,71,468
2018 6,00,000 2,00,000 4,00,000 24,000 96,000 0.794 1,58,766
2019 4,00,000 2,00,000 2,00,000 16,000 1,12,000 0.735 1,47,006
2020 2,00,000 2,00,000 1,20,000 8,000 1,20,000 0.681 1,36,117
2021 1,20,000 60,000 60,000 Note 0.630 37,810
2022 60,000 60,000 0.584 35,009
Fair Value of the Loan at Initial Recognition 8,71,361
Less: Loan Amount 10,00,000
Difference to be recognized as Employee Benefits Expense 1,28,639
Note: Accumulated Interest is collected in 2 Equal Annual Instalments after collection of the principal amount at simple
Interest = 1,20,000 2 = 60,000 p.a.
2. Computation of Interest on Amortised Cost
Year Opening Cash Flow Interest @ 4% Principal Closing Balance
Balance Repayment
2016 8,71,361 2,00,000 69,709 1,30,291 7,41,070
2017 7,41,070 2,00,000 59,286 1,40,714 6,00,356
2018 6,00,356 2,00,000 48,028 1,51,972 4,48,384
2019 4,48,384 2,00,000 35,871 1,64,129 2,84,255
2020 2,84,255 2,00,000 22,740 1,77,260 1,06,995
2021 1,06,995 60,000 8,560 51,440 55,555
2022 55,555 60,000 4,445 55,555
Fair Value of the Loan 8,71,361

3. Journal Entries
Date Particulars Dr. Cr.
01.04.2015 Loans to Employees A/c Dr. 8,71,361
Employee Benefits Expense A/c Dr. 1,28,639
To Bank A/c 10,00,000
31.03.2016 Loans to Employees A/c Dr. 69,709
To Interest Accrued A/c 69,709
31.03.2016 Bank A/c Dr. 2,00,000
To Loans to Employees A/c 2,00,000
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Shree Guru Kripas Institute of Management CA Final Financial Reporting Additional Material

Date Particulars Dr. Cr.

31.03. 2016 Interest Accrued A/c Dr. 69,709
To Profit & Loss A/c 69,709
31.03. 2016 Profit & Loss A/c Dr. 1,28,639
To Employee Benefits Expense A/c 1,28,639

22. Recognition of Debentures

ABC Ltd issued Debentures amounting to ` 100 Lakhs. As per the terms of the issue it has been agreed to issue Equity Shares
amounting to ` 150 Lakhs to redeem the Debentures at the end of Year 3. Assume comparable Market Yield is 10% for Year 0
and 1, and 10.5% for Year 2 end. Show Accounting Entries.

Solution: 1. Computation of Debenture Value to be recognised

Years to Market Yield PVIF @ Rm for N Book Value = PVIF Interest = Increase
Year
Maturity (N) (Rm) Years 150 in Book Value
Issue Proceeds 100.00
0 3 10% 0.751 112.65 12.65
1 2 10% 0.826 123.90 11.25
2 1 10.5% 0.905 135.75 11.85
3 0 10.5% 1 150.00 14.25

2. Journal Entries (Amounts in ` Lakhs)

Date Particulars Dr. Cr.
st
1 Year Beginning Bank A/c Dr. 100.00
Profit and Loss A/c Dr. 12.65
To Debentures A/c 112.65
st
1 Year End Interest A/c Dr. 11.25
To Debentures A/c 11.25
st
1 Year End Profit and Loss A/c Dr. 11.25
To Interest A/c 11.25
nd
2 Year End Interest A/c Dr. 11.85
To Debentures A/c 11.85
2nd Year End Profit and Loss A/c Dr. 11.85
To Interest A/c 11.85
rd
3 Year End Interest A/c Dr. 14.25
To Debentures A/c 14.25
rd
3 Year End Profit and Loss A/c Dr. 14.25
To Interest A/c 14.25
rd
3 Year End Debentures A/c Dr. 150.00
To Equity Share Capital A/c 100.00
To Securities Premium A/c 50.00

16