ACCOUNTING FOR FINANCIAL INSTRUMENTS UNDER IND AS 109

Accounting for Financial Instruments Under Ind AS 109

Ind AS 109, “Financial Instruments,” is a standard set by the Ministry of Corporate Affairs in India, which aligns with the International Financial Reporting Standard (IFRS) 9. This standard aims to provide comprehensive guidelines for the classification, measurement, and recognition of financial instruments. It has significant implications for entities’ financial statements and is crucial for maintaining transparency and consistency in financial reporting.

Key Points of Ind AS 109

1. Classification of Financial Instruments

Ind AS 109 classifies financial instruments into three primary categories:

Amortized Cost: Financial assets held within a business model whose objective is to hold assets to collect contractual cash flows.
Fair Value Through Other Comprehensive Income (FVOCI): Financial assets held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
Fair Value Through Profit or Loss (FVTPL): Financial assets that do not meet the criteria for amortized cost or FVOCI.

2. Measurement of Financial Instruments

The measurement of financial instruments under Ind AS 109 involves:

Initial Recognition: At fair value, which is generally the transaction price.
Subsequent Measurement: Based on the classification:
- Amortized Cost: Using the effective interest rate method.
- FVOCI: Fair value changes are recognized in other comprehensive income (OCI), except for impairment gains or losses, interest revenue, and foreign exchange gains and losses.
- FVTPL: Fair value changes are recognized in profit or loss.

3. Impairment of Financial Assets

Ind AS 109 introduces the Expected Credit Loss (ECL) model for the impairment of financial assets, replacing the incurred loss model:

12-month ECL: For financial instruments with low credit risk or whose credit risk has not increased significantly since initial recognition.
Lifetime ECL: For financial instruments whose credit risk has increased significantly since initial recognition.

4. Hedge Accounting

Ind AS 109 aims to align hedge accounting more closely with risk management activities by:

Allowing more hedging instruments and hedged items to qualify for hedge accounting.
Providing greater flexibility in the types of hedging relationships.
Improving disclosure requirements about risk management and the effect of hedge accounting on financial statements.

5. Derecognition of Financial Instruments

The standard specifies conditions for the derecognition of financial instruments:

Financial Assets: Derecognized when the contractual rights to cash flows expire or the asset is transferred with all risks and rewards.
Financial Liabilities: Derecognized when the obligation is discharged, canceled, or expires.

6. Embedded Derivatives

Ind AS 109 requires that embedded derivatives be separated from the host contract if the host contract is not a financial asset and the embedded derivative meets the definition of a derivative.

7. Disclosures

Entities must provide extensive disclosures to help users understand the nature and extent of risks arising from financial instruments:

Qualitative Disclosures: Risk exposures, risk management objectives, and policies.
Quantitative Disclosures: Summary of financial instrument categories, fair value measurements, and reconciliation of movements.

Ind AS 109 provides a robust framework for the accounting of financial instruments, ensuring greater transparency and comparability in financial reporting. By adhering to these guidelines, entities in India can enhance the reliability of their financial statements and provide valuable insights to stakeholders.