Exposure Draft
Indian Accounting Standard (Ind AS) 109,
Financial Instruments
(Last date for Comments: October 25, 2014)
Issued by
Accounting Standards Board
The Institute of Chartered Accountants of India
Exposure Draft
Indian Accounting Standard (Ind AS) 109
Financial Instruments
Following is the Exposure Draft of Indian Accounting Standard (Ind AS) 109,
Financial instruments issued by the Accounting Standards Board of The Institute
of Chartered Accountants of India, for comments. The Board invites comments on
any specific aspect of the Exposure Draft. Comments are most helpful if they
indicate the specific paragraph or group of paragraphs to which they relate,
contain a clear rationale and, where applicable, provide a suggestion for
alternative wording.
Comments should be submitted in writing to the Secretary, Accounting Standards
Board, The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box
No. 7100, Indraprastha Marg, New Delhi 110 002, so as to be received not later
than October 25, 2014. Comments can also be sent by email to
commentsasb@icai.in or can now be submitted online on
http://www.icai.org/comments/asb/. Further clarifications on this Exposure Draft
can be sought by email to achin.poddar@icai.in.
Indian Accounting Standard (Ind AS) 109 supersedes Ind AS 39, Financial
Instruments: Recognition and Measurement.
(The Exposure Draft of the Indian Accounting Standard includes paragraphs set
in bold type and plain type, which have equal authority. Paragraphs in bold type
indicate the main principles. This Exposure Draft of the Indian Accounting
Standard should be read in the context of its objective and the Preface to the
Statements of Accounting Standards1)
Questions to the Respondents
Question 1:
Paragraph 4.1.4 of this standard provides an irrevocable option to an entity at
initial recognition for particular investments in equity instruments that would
otherwise be measured at fair value through profit or loss to present subsequent
changes in fair value in other comprehensive income (OCI). Further, Paragraph
5.7.1(b) prohibits recognition of gain or loss on remeasurement at fair value of
such instruments in profit or loss.
There is a view that though the standard may permit an entity to elect the option
provided in paragraph 4.1.4 with respect to equity investments, yet, gains or losses
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.
accumulated on such investments should be permitted to be reclassified in profit
or loss on derecognition of such investments, for example, on sale thereof. The
proponents of this view argue that on derecognition, the gains and losses are
realised and, therefore, there is no justification of recognising the realised gains
and losses in OCI.
On the other hand, the counter-view is that as designation of equity investments
through other comprehensive income is an option to the entity and the entity
decides to exercise that option fully knowing the requirements of the standard,
gain or loss on such equity investments should not be allowed to be reclassified in
profit or loss. One of the apprehensions as indicated by the International
Accounting Standards Board and certain regulators is that if gain or loss on such
investments is permitted to be reclassified in profit or loss, the requirement may
lead to structuring of transactions. Therefore, the option of reclassification should
not be allowed. Further, it is argued that certain other Ind ASs also do not permit
reclassification of gain or loss from the other comprehensive income to profit or
loss even at the derecognition of an asset or a liability, e.g., actuarial gains and
losses in accordance with Ind AS 19, Employee Benefits.
(a) Whether gain or loss on such equity investments should be required to be
reclassified in profit or loss at the time of derecognition? Yes or no? Why?
(b) If your answer to (a) is yes, whether in other cases where Indian
Accounting Standards (Ind ASs) do not permit reclassification in profit or
loss, whether such reclassification should be required or not? Why?
Question 2:
Paragraph 6.1.3 to this standard provides that an entity may apply hedge
accounting requirements as prescribed in Ind AS 39 for fair value hedge of the
interest rate exposure of a portfolio of financial assets or financial liabilities
instead of this standard.
The Board seeks views of the stakeholders as to what policy should be adopted by
it in this regard in Ind AS 109. One of the views is that the relevant paragraphs of
IAS 39 should be incorporated in the Ind AS 109 as an appendix. It may be noted
that the relevant paragraphs in Ind AS 39, viz., Paragraphs No. 81A, 89-94 and
AG114-AG132, inter alia, provide cross references to various other paragraphs of
Ind AS 39, which in turn provide references to other paragraphs of Ind AS 39.
Accordingly, the Board seeks views of the stakeholders on:
a) Whether the option as provided in IFRS 9 to apply hedge accounting
requirement of IAS 39 should also be given in Ind AS 109? OR only
permit the hedge accounting requirements under Ind AS 109. Why or why
not?
b) If your answer to (a) above is to allow the option to apply Ind AS 39, what
strategy do you suggest to be adopted by the Board to include reference to
Ind AS 39 in Ind AS 109? The following are the possible ways to deal
with the same:
(i) Insert the corresponding requirements of Ind AS 39 in Ind AS 109
at appropriate places.
(ii) Add an Appendix providing the requirements contained in Ind AS
39 and refer to the Appendix in Ind AS 109 wherever reference to
Ind AS 39 is stated.
(iii) Notify Ind AS 39 alongwith Ind AS 109; Ind AS 39 to be applicable
only in the situation as that provided for in Ind AS 109.
(iv) Any other.
In this Exposure Draft, approach as mentioned at (b) (iii) above has been
followed. Accordingly, no changes with respect to reference to Ind AS 39 have
been made.
EXPOSURE DRAFT
INDIAN ACCOUNTING STANDARD 109 FINANCIAL INSTRUMENTS
CONTENTS
from paragraph
CHAPTERS
1 OBJECTIVE 1.1
2. SCOPE 2.1
3. RECOGNITION AND DERECOGNITION 3.1.1
4. CLASSIFICATION 4.1.1
5. MEASUREMENT 5.1.1
6. HEDGE ACCOUNTING 6.1.1
APPENDICES
A Defined terms
B Application guidance
C Amendments to other Standards
D Hedges of a Net Investment in a Foreign Operation
E Extinguishing Financial Liabilities with Equity Instruments
Exposure Draft
Indian Accounting Standard (Ind AS) 109
Financial instruments
Chapter 1 Objective
1.1 The objective of this Standard is to establish principles for the
financial reporting of financial assets and financial liabilities that will
present relevant and useful information to users of financial
statements for their assessment of the amounts, timing and uncertainty
of an entity's future cash flows.
Chapter 2 Scope
2.1 This Standard shall 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 Ind AS 110
Consolidated Financial Statements, Ind AS 27 Separate
Financial Statements or Ind AS 28 Investments in Associates
and Joint Ventures. However, in some cases, Ind AS 110,
Ind AS 27 or Ind AS 28 require or permit an entity to
account for an interest in a subsidiary, associate or joint
venture in accordance with some or all of the requirements
of this Standard. Entities shall also apply this Standard to
derivatives on an interest in a subsidiary, associate or joint
venture unless the derivative meets the definition of an
equity instrument of the entity in Ind AS 32 Financial
Instruments: Presentation.
(b) rights and obligations under leases to which Ind AS 17
Leases applies. However:
(i) lease receivables recognised by a lessor are subject
to the derecognition and impairment requirements
of this Standard;
(ii) finance lease payables recognised by a lessee are
subject to the derecognition requirements of this
Standard; and
(iii) derivatives that are embedded in leases are subject
to the embedded derivatives requirements of this
Standard.
(c) employers' rights and obligations under employee benefit
plans, to which Ind AS 19 Employee Benefits applies.
(d) financial instruments issued by the entity that meet the
definition of an equity instrument in Ind AS 32 (including
options and warrants) or that are required to be classified
as an equity instrument in accordance with paragraphs
16A and 16B or paragraphs 16C and 16D of Ind AS 32.
However, the holder of such equity instruments shall apply
this Standard to those instruments, unless they meet the
exception in (a).
(e) rights and obligations arising under (i) an insurance
contract as defined in Ind AS 104 Insurance Contracts,
other than an issuer's rights and obligations arising under
an insurance contract that meets the definition of a
financial guarantee contract, or (ii) a contract that is within
the scope of Ind AS 104 because it contains a discretionary
participation feature. However, this Standard applies to a
derivative that is embedded in a contract within the scope
of Ind AS 104 if the derivative is not itself a contract within
the scope of Ind AS 104. Moreover, if an issuer of financial
guarantee contracts has previously asserted explicitly that
it regards such contracts as insurance contracts and has
used accounting that is applicable to insurance contracts,
the issuer may elect to apply either this Standard or Ind AS
104 to such financial guarantee contracts (see paragraphs
B2.5B2.6). The issuer may make that election contract by
contract, but the election for each contract is irrevocable.
(f) any forward contract between an acquirer and a selling
shareholder to buy or sell an acquiree that will result in a
business combination within the scope of Ind AS 103
Business Combinations at a future acquisition date. The
term of the forward contract should not exceed a
reasonable period normally necessary to obtain any
required approvals and to complete the transaction.
(g) loan commitments other than those loan commitments
described in paragraph 2.3. However, an issuer of loan
commitments shall apply the impairment requirements of
this Standard to loan commitments that are not otherwise
within the scope of this Standard. Also, all loan
commitments are subject to the derecognition
requirements of this Standard.
(h) financial instruments, contracts and obligations under
share-based payment transactions to which Ind AS 102
Share-based Payment applies, except for contracts within
the scope of paragraphs 2.42.7 of this Standard to which
this Standard applies.
(i) rights to payments to reimburse the entity for expenditure
that it is required to make to settle a liability that it
recognises as a provision in accordance with Ind AS 37
Provisions, Contingent Liabilities and Contingent Assets, or
for which, in an earlier period, it recognised a provision in
accordance with Ind AS 37.
(j) rights and obligations within the scope of Ind AS 115
Revenue from Contracts with Customers that are financial
instruments, except for those that Ind AS 115 specifies are
accounted for in accordance with this Standard.
2.2 The impairment requirements of this Standard shall be applied to
those rights that Ind AS 115 specifies are accounted for in
accordance with this Standard for the purposes of recognising
impairment gains or losses.
2.3 The following loan commitments are within the scope of this
Standard:
(a) loan commitments that the entity designates as financial
liabilities at fair value through profit or loss (see paragraph
4.2.2). An entity that has a past practice of selling the assets
resulting from its loan commitments shortly after
origination shall apply this Standard to all its loan
commitments in the same class.
(b) loan commitments that can be settled net in cash or by
delivering or issuing another financial instrument. These
loan commitments are derivatives. A loan commitment is
not regarded as settled net merely because the loan is paid
out in instalments (for example, a mortgage construction
loan that is paid out in instalments in line with the progress
of construction).
(c) commitments to provide a loan at a below-market interest
rate (see paragraph 4.2.1(d)).
2.4 This Standard shall 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 non-financial item in
accordance with the entity's expected purchase, sale or usage
requirements. However, this Standard shall be applied to those
contracts that an entity designates as measured at fair value
through profit or loss in accordance with paragraph 2.5.
2.5 A contract 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 contract was a financial
instrument, may be irrevocably designated as measured at fair
value through profit or loss even if it was entered into for the
purpose of the receipt or delivery of a non-financial item in
accordance with the entity's expected purchase, sale or usage
requirements. This designation is available only at inception of the
contract and only if it eliminates or significantly reduces a
recognition inconsistency (sometimes referred to as an
`accounting mismatch') that would otherwise arise from not
recognising that contract because it is excluded from the scope of
this Standard (see paragraph 2.4).
2.6 There are various ways in which a contract to buy or sell a non-
financial item can be settled net in cash or another financial
instrument or by exchanging financial instruments. These include:
(a) when the terms of the contract permit either party to settle it
net in cash or another financial instrument or by exchanging
financial instruments;
(b) when the ability to settle net in cash or another financial
instrument, or by exchanging financial instruments, is not
explicit in the terms of the contract, but the entity has a
practice of settling similar contracts net in cash or another
financial instrument or by exchanging financial instruments
(whether with the counterparty, by entering into offsetting
contracts or by selling the contract before its exercise or lapse);
(c) when, for similar contracts, the entity has a practice of taking
delivery of the underlying and selling it within a short period
after delivery for the purpose of generating a profit from short-
term fluctuations in price or dealer's margin; and
(d) when the non-financial item that is the subject of the contract
is readily convertible to cash.
A contract to which (b) or (c) applies is not entered into for the
purpose of the receipt or delivery of the non-financial item in
accordance with the entity's expected purchase, sale or usage
requirements and, accordingly, is within the scope of this Standard.
Other contracts to which paragraph 2.4 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 non-financial item in
accordance with the entity's expected purchase, sale or usage
requirements and, accordingly, whether they are within the scope of
this Standard.
2.7 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 2.6(a) or 2.6(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.
Chapter 3 Recognition and derecognition
3.1 Initial recognition
3.1.1 An entity shall recognise a financial asset or a financial liability in
its balance sheet when, and only when, the entity becomes party to
the contractual provisions of the instrument (see paragraphs
B3.1.1 and B3.1.2). When an entity first recognises a financial
asset, it shall classify it in accordance with paragraphs 4.1.14.1.5
and measure it in accordance with paragraphs 5.1.15.1.3. When
an entity first recognises a financial liability, it shall classify it in
accordance with paragraphs 4.2.1 and 4.2.2 and measure it in
accordance with paragraph 5.1.1.
Regular way purchase or sale of financial assets
3.1.2 A regular way purchase or sale of financial assets shall be
recognised and derecognised, as applicable, using trade date
accounting or settlement date accounting (see paragraphs B3.1.3
B3.1.6).
3.2 Derecognition of financial assets
3.2.1 In consolidated financial statements, paragraphs 3.2.23.2.9, B3.1.1,
B3.1.2 and B3.2.1B3.2.17 are applied at a consolidated level. Hence,
an entity first consolidates all subsidiaries in accordance with Ind AS
110 and then applies those paragraphs to the resulting group.
3.2.2 Before evaluating whether, and to what extent, derecognition is
appropriate under paragraphs 3.2.33.2.9, an entity determines
whether those paragraphs should be applied to a part of a
financial asset (or a part of a group of similar financial assets) or a
financial asset (or a group of similar financial assets) in its
entirety, as follows.
(a) Paragraphs 3.2.33.2.9 are applied to a part of a financial
asset (or a part of a group of similar financial assets) if, and
only if, the part being considered for derecognition meets
one of the following three conditions.
(i) The part comprises only specifically identified cash
flows from a financial asset (or a group of similar
financial assets). For example, when an entity enters
into an interest rate strip whereby the counterparty
obtains the right to the interest cash flows, but not the
principal cash flows from a debt instrument,
paragraphs 3.2.33.2.9 are applied to the interest cash
flows.
(ii) The part comprises only a fully proportionate (pro
rata) share of the cash flows from a financial asset (or
a group of similar financial assets). For example,
when an entity enters into an arrangement whereby
the counterparty obtains the rights to a 90 per cent
share of all cash flows of a debt instrument,
paragraphs 3.2.33.2.9 are applied to 90 per cent of
those cash flows. If there is more than one
counterparty, each counterparty is not required to
have a proportionate share of the cash flows provided
that the transferring entity has a fully proportionate
share.
(iii) The part comprises only a fully proportionate (pro
rata) share of specifically identified cash flows from a
financial asset (or a group of similar financial assets).
For example, when an entity enters into an
arrangement whereby the counterparty obtains the
rights to a 90 per cent share of interest cash flows
from a financial asset, paragraphs 3.2.33.2.9 are
applied to 90 per cent of those interest cash flows. If
there is more than one counterparty, each
counterparty is not required to have a proportionate
share of the specifically identified cash flows provided
that the transferring entity has a fully proportionate
share.
(b) In all other cases, paragraphs 3.2.33.2.9 are applied to the
financial asset in its entirety (or to the group of similar
financial assets in their entirety). For example, when an
entity transfers (i) the rights to the first or the last 90 per
cent of cash collections from a financial asset (or a group of
financial assets), or (ii) the rights to 90 per cent of the cash
flows from a group of receivables, but provides a guarantee
to compensate the buyer for any credit losses up to 8 per
cent of the principal amount of the receivables, paragraphs
3.2.33.2.9 are applied to the financial asset (or a group of
similar financial assets) in its entirety.
In paragraphs 3.2.33.2.12, the term `financial asset' refers to
either a part of a financial asset (or a part of a group of similar
financial assets) as identified in (a) above or, otherwise, a financial
asset (or a group of similar financial assets) in its entirety.
3.2.3 An entity shall derecognise a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial
asset expire, or
(b) it transfers the financial asset as set out in paragraphs 3.2.4
and 3.2.5 and the transfer qualifies for derecognition in
accordance with paragraph 3.2.6.
(See paragraph 3.1.2 for regular way sales of financial assets.)
3.2.4 An entity transfers a financial asset if, and only if, it either:
(a) transfers the contractual rights to receive the cash flows of
the financial asset, or
(b) retains the contractual rights to receive the cash flows of
the financial asset, but assumes a contractual obligation to
pay the cash flows to one or more recipients in an
arrangement that meets the conditions in paragraph 3.2.5.
3.2.5 When an entity retains the contractual rights to receive the cash
flows of a financial asset (the `original asset'), but assumes a
contractual obligation to pay those cash flows to one or more
entities (the `eventual recipients'), the entity treats the transaction
as a transfer of a financial asset if, and only if, all of the following
three conditions are met.
(a) The entity has no obligation to pay amounts to the eventual
recipients unless it collects equivalent amounts from the
original asset. Short-term advances by the entity with the
right of full recovery of the amount lent plus accrued
interest at market rates do not violate this condition.
(b) The entity is prohibited by the terms of the transfer
contract from selling or pledging the original asset other
than as security to the eventual recipients for the obligation
to pay them cash flows.
(c) The entity has an obligation to remit any cash flows it
collects on behalf of the eventual recipients without
material delay. In addition, the entity is not entitled to
reinvest such cash flows, except for investments in cash or
cash equivalents (as defined in Ind AS 7 Statement of Cash
Flows) during the short settlement period from the
collection date to the date of required remittance to the
eventual recipients, and interest earned on such
investments is passed to the eventual recipients.
3.2.6 When an entity transfers a financial asset (see paragraph 3.2.4), it
shall evaluate the extent to which it retains the risks and rewards
of ownership of the financial asset. In this case:
(a) if the entity transfers substantially all the risks and
rewards of ownership of the financial asset, the entity shall
derecognise the financial asset and recognise separately as
assets or liabilities any rights and obligations created or
retained in the transfer.
(b) if the entity retains substantially all the risks and rewards
of ownership of the financial asset, the entity shall continue
to recognise the financial asset.
(c) if the entity neither transfers nor retains substantially all
the risks and rewards of ownership of the financial asset,
the entity shall determine whether it has retained control of
the financial asset. In this case:
(i) if the entity has not retained control, it shall
derecognise the financial asset and recognise separately
as assets or liabilities any rights and obligations
created or retained in the transfer.
(ii) if the entity has retained control, it shall continue to
recognise the financial asset to the extent of its
continuing involvement in the financial asset (see
paragraph 3.2.16).
3.2.7 The transfer of risks and rewards (see paragraph 3.2.6) is evaluated by
comparing the entity's exposure, before and after the transfer, with the
variability in the amounts and timing of the net cash flows of the
transferred asset. An entity has retained substantially all the risks and
rewards of ownership of a financial asset if its exposure to the
variability in the present value of the future net cash flows from the
financial asset does not change significantly as a result of the transfer
(eg because the entity has sold a financial asset subject to an
agreement to buy it back at a fixed price or the sale price plus a
lender's return). An entity has transferred substantially all the risks
and rewards of ownership of a financial asset if its exposure to such
variability is no longer significant in relation to the total variability in
the present value of the future net cash flows associated with the
financial asset (eg because the entity has sold a financial asset subject
only to an option to buy it back at its fair value at the time of
repurchase or has transferred a fully proportionate share of the cash
flows from a larger financial asset in an arrangement, such as a loan
sub-participation, that meets the conditions in paragraph 3.2.5).
3.2.8 Often it will be obvious whether the entity has transferred or retained
substantially all risks and rewards of ownership and there will be no
need to perform any computations. In other cases, it will be necessary
to compute and compare the entity's exposure to the variability in the
present value of the future net cash flows before and after the transfer.
The computation and comparison are made using as the discount rate
an appropriate current market interest rate. All reasonably possible
variability in net cash flows is considered, with greater weight being
given to those outcomes that are more likely to occur.
3.2.9 Whether the entity has retained control (see paragraph 3.2.6(c)) of the
transferred asset depends on the transferee's ability to sell the asset. If
the transferee has the practical ability to sell the asset in its entirety to
an unrelated third party and is able to exercise that ability unilaterally
and without needing to impose additional restrictions on the transfer,
the entity has not retained control. In all other cases, the entity has
retained control.
Transfers that qualify for derecognition
3.2.10 If an entity transfers a financial asset in a transfer that qualifies
for derecognition in its entirety and retains the right to service the
financial asset for a fee, it shall recognise either a servicing asset
or a servicing liability for that servicing contract. If the fee to be
received is not expected to compensate the entity adequately for
performing the servicing, a servicing liability for the servicing
obligation shall be recognised at its fair value. If the fee to be
received is expected to be more than adequate compensation for
the servicing, a servicing asset shall be recognised for the servicing
right at an amount determined on the basis of an allocation of the
carrying amount of the larger financial asset in accordance with
paragraph 3.2.13.
3.2.11 If, as a result of a transfer, a financial asset is derecognised in its
entirety but the transfer results in the entity obtaining a new
financial asset or assuming a new financial liability, or a servicing
liability, the entity shall recognise the new financial asset,
financial liability or servicing liability at fair value.
3.2.12 On derecognition of a financial asset in its entirety, the difference
between:
(a) the carrying amount (measured at the date of derecognition)
and
(b) the consideration received (including any new asset obtained
less any new liability assumed)
shall be recognised in profit or loss.
3.2.13 If the transferred asset is part of a larger financial asset (eg when
an entity transfers interest cash flows that are part of a debt
instrument, see paragraph 3.2.2(a)) and the part transferred
qualifies for derecognition in its entirety, the previous carrying
amount of the larger financial asset shall be allocated between the
part that continues to be recognised and the part that is
derecognised, on the basis of the relative fair values of those parts
on the date of the transfer. For this purpose, a retained servicing
asset shall be treated as a part that continues to be recognised.
The difference between:
(a) the carrying amount (measured at the date of derecognition)
allocated to the part derecognised and
(b) the consideration received for the part derecognised
(including any new asset obtained less any new liability
assumed)
shall be recognised in profit or loss.
3.2.14 When an entity allocates the previous carrying amount of a larger
financial asset between the part that continues to be recognised and
the part that is derecognised, the fair value of the part that continues to
be recognised needs to be measured. When the entity has a history of
selling parts similar to the part that continues to be recognised or other
market transactions exist for such parts, recent prices of actual
transactions provide the best estimate of its fair value. When there are
no price quotes or recent market transactions to support the fair value
of the part that continues to be recognised, the best estimate of the fair
value is the difference between the fair value of the larger financial
asset as a whole and the consideration received from the transferee for
the part that is derecognised.
Transfers that do not qualify for derecognition
3.2.15 If a transfer does not result in derecognition because the entity
has retained substantially all the risks and rewards of ownership
of the transferred asset, the entity shall continue to recognise the
transferred asset in its entirety and shall recognise a financial
liability for the consideration received. In subsequent periods, the
entity shall recognise any income on the transferred asset and any
expense incurred on the financial liability.
Continuing involvement in transferred assets
3.2.16 If an entity neither transfers nor retains substantially all the risks
and rewards of ownership of a transferred asset, and retains
control of the transferred asset, the entity continues to recognise
the transferred asset to the extent of its continuing involvement.
The extent of the entity's continuing involvement in the
transferred asset is the extent to which it is exposed to changes in
the value of the transferred asset. For example:
(a) When the entity's continuing involvement takes the form of
guaranteeing the transferred asset, the extent of the entity's
continuing involvement is the lower of (i) the amount of the
asset and (ii) the maximum amount of the consideration
received that the entity could be required to repay (`the
guarantee amount').
(b) When the entity's continuing involvement takes the form of
a written or purchased option (or both) on the transferred
asset, the extent of the entity's continuing involvement is the
amount of the transferred asset that the entity may
repurchase. However, in the case of a written put option on
an asset that is measured at fair value, the extent of the
entity's continuing involvement is limited to the lower of the
fair value of the transferred asset and the option exercise
price (see paragraph B3.2.13).
(c) When the entity's continuing involvement takes the form of
a cash-settled option or similar provision on the transferred
asset, the extent of the entity's continuing involvement is
measured in the same way as that which results from non-
cash settled options as set out in (b) above.
3.2.17 When an entity continues to recognise an asset to the extent of its
continuing involvement, the entity also recognises an associated
liability. Despite the other measurement requirements in this
Standard, the transferred asset and the associated liability are
measured on a basis that reflects the rights and obligations that
the entity has retained. The associated liability is measured in
such a way that the net carrying amount of the transferred asset
and the associated liability is:
(a) the amortised cost of the rights and obligations retained by the
entity, if the transferred asset is measured at amortised cost, or
(b) equal to the fair value of the rights and obligations retained by
the entity when measured on a stand-alone basis, if the
transferred asset is measured at fair value.
3.2.18 The entity shall continue to recognise any income arising on the
transferred asset to the extent of its continuing involvement and
shall recognise any expense incurred on the associated liability.
3.2.19 For the purpose of subsequent measurement, recognised changes
in the fair value of the transferred asset and the associated
liability are accounted for consistently with each other in
accordance with paragraph 5.7.1, and shall not be offset.
3.2.20 If an entity's continuing involvement is in only a part of a
financial asset (eg when an entity retains an option to repurchase
part of a transferred asset, or retains a residual interest that does
not result in the retention of substantially all the risks and
rewards of ownership and the entity retains control), the entity
allocates the previous carrying amount of the financial asset
between the part it continues to recognise under continuing
involvement, and the part it no longer recognises on the basis of
the relative fair values of those parts on the date of the transfer.
For this purpose, the requirements of paragraph 3.2.14 apply. The
difference between:
(a) the carrying amount (measured at the date of derecognition)
allocated to the part that is no longer recognised and
(b) the consideration received for the part no longer recognised
shall be recognised in profit or loss.
3.2.21 If the transferred asset is measured at amortised cost, the option in this
Standard to designate a financial liability as at fair value through
profit or loss is not applicable to the associated liability.
All transfers
3.2.22 If a transferred asset continues to be recognised, the asset and the
associated liability shall not be offset. Similarly, the entity shall
not offset any income arising from the transferred asset with any
expense incurred on the associated liability (see paragraph 42 of
Ind AS 32).
3.2.23 If a transferor provides non-cash collateral (such as debt or equity
instruments) to the transferee, the accounting for the collateral by
the transferor and the transferee depends on whether the
transferee has the right to sell or repledge the collateral and on
whether the transferor has defaulted. The transferor and
transferee shall account for the collateral as follows:
(a) If the transferee has the right by contract or custom to sell
or repledge the collateral, then the transferor shall reclassify
that asset in its balance sheet (eg as a loaned asset, pledged
equity instruments or repurchase receivable) separately
from other assets.
(b) If the transferee sells collateral pledged to it, it shall
recognise the proceeds from the sale and a liability measured
at fair value for its obligation to return the collateral.
(c) If the transferor defaults under the terms of the contract
and is no longer entitled to redeem the collateral, it shall
derecognise the collateral, and the transferee shall recognise
the collateral as its asset initially measured at fair value or, if
it has already sold the collateral, derecognise its obligation to
return the collateral.
(d) Except as provided in (c), the transferor shall continue to
carry the collateral as its asset, and the transferee shall not
recognise the collateral as an asset.
3.3 Derecognition of financial liabilities
3.3.1 An entity shall remove a financial liability (or a part of a financial
liability) from its balance sheet when, and only when, it is
extinguished--ie when the obligation specified in the contract is
discharged or cancelled or expires.
3.3.2 An exchange between an existing borrower and lender of debt
instruments with substantially different terms shall be accounted
for as an extinguishment of the original financial liability and the
recognition of a new financial liability. Similarly, a substantial
modification of the terms of an existing financial liability or a part
of it (whether or not attributable to the financial difficulty of the
debtor) shall be accounted for as an extinguishment of the original
financial liability and the recognition of a new financial liability.
3.3.3 The difference between the carrying amount of a financial liability
(or part of a financial liability) extinguished or transferred to
another party and the consideration paid, including any non-cash
assets transferred or liabilities assumed, shall be recognised in
profit or loss.
3.3.4 If an entity repurchases a part of a financial liability, the entity shall
allocate the previous carrying amount of the financial liability
between the part that continues to be recognised and the part that is
derecognised based on the relative fair values of those parts on the
date of the repurchase. The difference between (a) the carrying
amount allocated to the part derecognised and (b) the consideration
paid, including any non-cash assets transferred or liabilities assumed,
for the part derecognised shall be recognised in profit or loss.
Chapter 4 Classification
4.1 Classification of financial assets
4.1.1 Unless paragraph 4.1.5 applies, an entity shall classify financial
assets as subsequently measured at amortised cost, fair value
through other comprehensive income or fair value through profit
or loss on the basis of both:
(a) the entity's business model for managing the financial assets
and
(b) the contractual cash flow characteristics of the financial
asset.
4.1.2 A financial asset shall be measured at amortised cost if both of the
following conditions are met:
(a) the financial asset is held within a business model whose
objective is to hold financial assets in order to collect
contractual cash flows and
(b) the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.
Paragraphs B4.1.1B4.1.26 provide guidance on how to apply
these conditions.
4.1.2A A financial asset shall be measured at fair value through other
comprehensive income if both of the following conditions are met:
(a) the financial asset is held within a business model whose
objective is achieved by both collecting contractual cash
flows and selling financial assets and
(b) the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.
Paragraphs B4.1.1B4.1.26 provide guidance on how to apply
these conditions.
4.1.3 For the purpose of applying paragraphs 4.1.2(b) and 4.1.2A(b):
(a) principal is the fair value of the financial asset at initial
recognition. Paragraph B4.1.7B provides additional
guidance on the meaning of principal.
(b) interest consists of consideration for the time value of
money, for the credit risk associated with the principal
amount outstanding during a particular period of time and
for other basic lending risks and costs, as well as a profit
margin. Paragraphs B4.1.7A and B4.1.9AB4.1.9E provide
additional guidance on the meaning of interest, including the
meaning of the time value of money.
4.1.4 A financial asset shall be measured at fair value through profit or
loss unless it is measured at amortised cost in accordance with
paragraph 4.1.2 or at fair value through other comprehensive
income in accordance with paragraph 4.1.2A. However an entity
may make an irrevocable election at initial recognition for
particular investments in equity instruments that would otherwise
be measured at fair value through profit or loss to present
subsequent changes in fair value in other comprehensive income
(see paragraphs 5.7.55.7.6).
Option to designate a financial asset at fair value
through profit or loss
4.1.5 Despite paragraphs 4.1.14.1.4, an entity may, at initial
recognition, irrevocably designate a financial asset as measured at
fair value through profit or loss if doing so eliminates or
significantly reduces a measurement or recognition inconsistency
(sometimes referred to as an `accounting mismatch') that would
otherwise arise from measuring assets or liabilities or recognising
the gains and losses on them on different bases (see paragraphs
B4.1.29B4.1.32).
4.2 Classification of financial liabilities
4.2.1 An entity shall classify all financial liabilities as subsequently
measured at amortised cost, except for:
(a) financial liabilities at fair value through profit or loss. Such
liabilities, including derivatives that are liabilities, shall be
subsequently measured at fair value.
(b) financial liabilities that arise when a transfer of a financial
asset does not qualify for derecognition or when the
continuing involvement approach applies. Paragraphs 3.2.15
and 3.2.17 apply to the measurement of such financial
liabilities.
(c) financial guarantee contracts. After initial recognition, an
issuer of such a contract shall (unless paragraph 4.2.1(a) or
(b) applies) subsequently measure it at the higher of:
(i) the amount of the loss allowance determined in
accordance with Section 5.5 and
(ii) the amount initially recognised (see paragraph 5.1.1)
less, when appropriate, the cumulative amount of
income recognised in accordance with the principles of
Ind AS 115.
(d) commitments to provide a loan at a below-market interest
rate. An issuer of such a commitment shall (unless
paragraph 4.2.1(a) applies) subsequently measure it at the
higher of:
(i) the amount of the loss allowance determined in
accordance with Section 5.5 and
(ii) the amount initially recognised (see paragraph 5.1.1)
less, when appropriate, the cumulative amount of
income recognised in accordance with the principles of
Ind AS 115.
(e) contingent consideration recognised by an acquirer in a
business combination to which Ind AS 103 applies. Such
contingent consideration shall subsequently be measured at
fair value with changes recognised in profit or loss.
Option to designate a financial liability at fair value
through profit or loss
4.2.2 An entity may, at initial recognition, irrevocably designate a
financial liability as measured at fair value through profit or loss
when permitted by paragraph 4.3.5, or when doing so results in
more relevant information, because either:
(a) it eliminates or significantly reduces a measurement or
recognition inconsistency (sometimes referred to as `an
accounting mismatch') that would otherwise arise from
measuring assets or liabilities or recognising the gains and
losses on them on different bases (see paragraphs B4.1.29
B4.1.32); or
(b) a group of financial liabilities or financial assets and
financial 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 entity's key management personnel (as defined
in Ind AS 24 Related Party Disclosures), for example, the
entity's board of directors and chief executive officer (see
paragraphs B4.1.33B4.1.36).
4.3 Embedded derivatives
4.3.1 An embedded derivative is a component of a hybrid contract that also
includes a non-derivative host--with the effect that some of the cash
flows of the combined instrument vary in a way similar to a stand-
alone derivative. An embedded derivative causes some or all of the
cash flows that otherwise would be required by the contract to be
modified according to a specified interest rate, financial instrument
price, commodity price, foreign exchange rate, index of prices or
rates, credit rating or credit index, or other variable, provided in the
case of a non-financial variable that the variable is not specific to a
party to the contract. A derivative that is attached to a financial
instrument but is contractually transferable independently of that
instrument, or has a different counterparty, is not an embedded
derivative, but a separate financial instrument.
Hybrid contracts with financial asset hosts
4.3.2 If a hybrid contract contains a host that is an asset within the
scope of this Standard, an entity shall apply the requirements
in paragraphs 4.1.14.1.5 to the entire hybrid contract.
Other hybrid contracts
4.3.3 If a hybrid contract contains a host that is not an asset within the
scope of this Standard, an embedded derivative shall be separated
from the host and accounted for as a derivative under this
Standard if, and only if:
(a) the economic characteristics and risks of the embedded
derivative are not closely related to the economic
characteristics and risks of the host (see paragraphs B4.3.5
and B4.3.8);
(b) a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative; and
(c) the hybrid contract is not measured at fair value with
changes in fair value recognised in profit or loss (ie a
derivative that is embedded in a financial liability at fair
value through profit or loss is not separated).
4.3.4 If an embedded derivative is separated, the host contract shall be
accounted for in accordance with the appropriate Standards. This
Standard does not address whether an embedded derivative shall
be presented separately in the balance sheet.
4.3.5 Despite paragraphs 4.3.3 and 4.3.4, if a contract contains one or
more embedded derivatives and the host is not an asset within the
scope of this Standard, an entity may designate the entire hybrid
contract as at fair value through profit or loss unless:
(a) the embedded derivative(s) do(es) not significantly modify
the cash flows that otherwise would be required by the
contract; or
(b) it is clear with little or no analysis when a similar hybrid
instrument is first considered that separation of the
embedded derivative(s) is prohibited, such as a prepayment
option embedded in a loan that permits the holder to prepay
the loan for approximately its amortised cost.
4.3.6 If an entity is required by this Standard to separate an embedded
derivative from its host, but is unable to measure the embedded
derivative separately either at acquisition or at the end of a
subsequent financial reporting period, it shall designate the entire
hybrid contract as at fair value through profit or loss.
4.3.7 If an entity is unable to measure reliably the fair value of an embedded
derivative on the basis of its terms and conditions, the fair value of the
embedded derivative is the difference between the fair value of the
hybrid contract and the fair value of the host. If the entity is unable to
measure the fair value of the embedded derivative using this method,
paragraph 4.3.6 applies and the hybrid contract is designated as at fair
value through profit or loss.
4.4 Reclassification
4.4.1 When, and only when, an entity changes its business model for
managing financial assets it shall reclassify all affected financial
assets in accordance with paragraphs 4.1.14.1.4. See paragraphs
5.6.15.6.7, B4.4.1B4.4.3 and B5.6.1B5.6.2 for additional
guidance on reclassifying financial assets.
4.4.2 An entity shall not reclassify any financial liability.
4.4.3 The following changes in circumstances are not reclassifications for
the purposes of paragraphs 4.4.14.4.2:
(a) an item that was previously a designated and effective hedging
instrument in a cash flow hedge or net investment hedge no
longer qualifies as such;
(b) an item becomes a designated and effective hedging instrument
in a cash flow hedge or net investment hedge; and
(c) changes in measurement in accordance with Section 6.7.
Chapter 5 Measurement
5.1 Initial measurement
5.1.1 Except for trade receivables within the scope of paragraph 5.1.3,
at initial recognition, an entity shall measure a financial asset or
financial liability at its fair value plus or minus, in the case of a
financial asset or financial liability not at fair value through profit
or loss, transaction costs that are directly attributable to the
acquisition or issue of the financial asset or financial liability.
5.1.1A However, if the fair value of the financial asset or financial
liability at initial recognition differs from the transaction price, an
entity shall apply paragraph B5.1.2A.
5.1.2 When an entity uses settlement date accounting for an asset that is
subsequently measured at amortised cost, the asset is recognised
initially at its fair value on the trade date (see paragraphs B3.1.3
B3.1.6).
5.1.3 Despite the requirement in paragraph 5.1.1, at initial recognition, an
entity shall measure trade receivables that do not have a significant
financing component (determined in accordance with Ind AS 115) at
their transaction price (as defined in Ind AS 115).
5.2 Subsequent measurement of financial assets
5.2.1 After initial recognition, an entity shall measure a financial asset
in accordance with paragraphs 4.1.14.1.5 at:
(a) amortised cost;
(b) fair value through other comprehensive income; or
(c) fair value through profit or loss.
5.2.2 An entity shall apply the impairment requirements in Section 5.5
to financial assets that are measured at amortised cost in
accordance with paragraph 4.1.2 and to financial assets that are
measured at fair value through other comprehensive income in
accordance with paragraph 4.1.2A.
5.2.3 An entity shall apply the hedge accounting requirements in
paragraphs 6.5.86.5.14 (and, if applicable, paragraphs 8994 of
Ind AS 39 for the fair value hedge accounting for a portfolio
hedge of interest rate risk) to a financial asset that is designated as
a hedged item.
5.3 Subsequent measurement of financial liabilities
5.3.1 After initial recognition, an entity shall measure a financial
liability in accordance with paragraphs 4.2.14.2.2.
5.3.2 An entity shall apply the hedge accounting requirements in
paragraphs 6.5.86.5.14 (and, if applicable, paragraphs 8994 of
Ind AS 39 for the fair value hedge accounting for a portfolio
hedge of interest rate risk) to a financial liability that is designated
as a hedged item.
5.4 Amortised cost measurement
Financial assets
Effective interest method
5.4.1 Interest revenue shall be calculated by using the effective interest
method (see Appendix A and paragraphs B5.4.1B5.4.7). This
shall be calculated by applying the effective interest rate to the
gross carrying amount of a financial asset except for:
(a) purchased or originated credit-impaired financial assets. For
those financial assets, the entity shall apply the credit-adjusted
effective interest rate to the amortised cost of the financial asset
from initial recognition.
(b) financial assets that are not purchased or originated credit-
impaired financial assets but subsequently have become
credit-impaired financial assets. For those financial assets, the
entity shall apply the effective interest rate to the amortised
cost of the financial asset in subsequent reporting periods.
5.4.2 An entity that, in a reporting period, calculates interest revenue by
applying the effective interest method to the amortised cost of a
financial asset in accordance with paragraph 5.4.1(b), shall, in
subsequent reporting periods, calculate the interest revenue by
applying the effective interest rate to the gross carrying amount if the
credit risk on the financial instrument improves so that the financial
asset is no longer credit-impaired and the improvement can be related
objectively to an event occurring after the requirements in paragraph
5.4.1(b) were applied (such as an improvement in the borrower's
credit rating).
Modification of contractual cash flows
5.4.3 When the contractual cash flows of a financial asset are renegotiated
or otherwise modified and the renegotiation or modification does not
result in the derecognition of that financial asset in accordance with
this Standard, an entity shall recalculate the gross carrying amount of
the financial asset and shall recognise a modification gain or loss in
profit or loss. The gross carrying amount of the financial asset shall be
recalculated as the present value of the renegotiated or modified
contractual cash flows that are discounted at the financial asset's
original effective interest rate (or credit-adjusted effective interest rate
for purchased or originated credit-impaired financial assets) or, when
applicable, the revised effective interest rate calculated in accordance
with paragraph 6.5.10. Any costs or fees incurred adjust the carrying
amount of the modified financial asset and are amortised over the
remaining term of the modified financial asset.
Write-off
5.4.4 An entity shall directly reduce the gross carrying amount of a
financial asset when the entity has no reasonable expectations of
recovering a financial asset in its entirety or a portion thereof. A
write-off constitutes a derecognition event (see paragraph
B3.2.16(r)).
5.5 Impairment
Recognition of expected credit losses
General approach
5.5.1 An entity shall recognise a loss allowance for expected credit losses
on a financial asset that is measured in accordance with
paragraphs 4.1.2 or 4.1.2A, a lease receivable, a contract asset or a
loan commitment and a financial guarantee contract to which the
impairment requirements apply in accordance with paragraphs
2.1(g), 4.2.1(c) or 4.2.1(d).
5.5.2 An entity shall apply the impairment requirements for the recognition
and measurement of a loss allowance for financial assets that are
measured at fair value through other comprehensive income in
accordance with paragraph 4.1.2A. However, the loss allowance shall
be recognised in other comprehensive income and shall not reduce the
carrying amount of the financial asset in the balance sheet.
5.5.3 Subject to paragraphs 5.5.135.5.16, at each reporting date, an
entity shall measure the loss allowance for a financial instrument
at an amount equal to the lifetime expected credit losses if the
credit risk on that financial instrument has increased significantly
since initial recognition.
5.5.4 The objective of the impairment requirements is to recognise lifetime
expected credit losses for all financial instruments for which there
have been significant increases in credit risk since initial recognition -
whether assessed on an individual or collective basis - considering all
reasonable and supportable information, including that which is
forward-looking.
5.5.5 Subject to paragraphs 5.5.135.5.16, if, at the reporting date, the
credit risk on a financial instrument has not increased
significantly since initial recognition, an entity shall measure the
loss allowance for that financial instrument at an amount equal to
12-month expected credit losses.
5.5.6 For loan commitments and financial guarantee contracts, the date that
the entity becomes a party to the irrevocable commitment shall be
considered to be the date of initial recognition for the purposes of
applying the impairment requirements.
5.5.7 If an entity has measured the loss allowance for a financial instrument
at an amount equal to lifetime expected credit losses in the previous
reporting period, but determines at the current reporting date that
paragraph 5.5.3 is no longer met, the entity shall measure the loss
allowance at an amount equal to 12-month expected credit losses at
the current reporting date.
5.5.8 An entity shall recognise in profit or loss, as an impairment gain or
loss, the amount of expected credit losses (or reversal) that is required
to adjust the loss allowance at the reporting date to the amount that is
required to be recognised in accordance with this Standard.
Determining significant increases in credit risk
5.5.9 At each reporting date, an entity shall assess whether the credit risk on
a financial instrument has increased significantly since initial
recognition. When making the assessment, an entity shall use the
change in the risk of a default occurring over the expected life of the
financial instrument instead of the change in the amount of expected
credit losses. To make that assessment, an entity shall compare the
risk of a default occurring on the financial instrument as at the
reporting date with the risk of a default occurring on the financial
instrument as at the date of initial recognition and consider reasonable
and supportable information, that is available without undue cost or
effort, that is indicative of significant increases in credit risk since
initial recognition.
5.5.10 An entity may assume that the credit risk on a financial instrument has
not increased significantly since initial recognition if the financial
instrument is determined to have low credit risk at the reporting
date (see paragraphs B5.5.22 B5.5.24).
5.5.11 If reasonable and supportable forward-looking information is
available without undue cost or effort, an entity cannot rely solely on
past due information when determining whether credit risk has
increased significantly since initial recognition. However, when
information that is more forward-looking than past due status (either
on an individual or a collective basis) is not available without undue
cost or effort, an entity may use past due information to determine
whether there have been significant increases in credit risk since initial
recognition. Regardless of the way in which an entity assesses
significant increases in credit risk, there is a rebuttable presumption
that the credit risk on a financial asset has increased significantly since
initial recognition when contractual payments are more than 30 days
past due. An entity can rebut this presumption if the entity has
reasonable and supportable information that is available without
undue cost or effort, that demonstrates that the credit risk has not
increased significantly since initial recognition even though the
contractual payments are more than 30 days past due. When an entity
determines that there have been significant increases in credit risk
before contractual payments are more than 30 days past due, the
rebuttable presumption does not apply.
Modified financial assets
5.5.12 If the contractual cash flows on a financial asset have been
renegotiated or modified and the financial asset was not derecognised,
an entity shall assess whether there has been a significant increase in
the credit risk of the financial instrument in accordance with
paragraph 5.5.3 by comparing:
(a) the risk of a default occurring at the reporting date (based on the
modified contractual terms); and
(b) the risk of a default occurring at initial recognition (based on the
original, unmodified contractual terms).
Purchased or originated credit-impaired financial assets
5.5.13 Despite paragraphs 5.5.3 and 5.5.5, at the reporting date, an entity
shall only recognise the cumulative changes in lifetime expected
credit losses since initial recognition as a loss allowance for
purchased or originated credit-impaired financial assets.
5.5.14 At each reporting date, an entity shall recognise in profit or loss the
amount of the change in lifetime expected credit losses as an
impairment gain or loss. An entity shall recognise favourable changes
in lifetime expected credit losses as an impairment gain, even if the
lifetime expected credit losses are less than the amount of expected
credit losses that were included in the estimated cash flows on initial
recognition.
Simplified approach for trade receivables, contract
assets and lease receivables
5.5.15 Despite paragraphs 5.5.3 and 5.5.5, an entity shall always measure
the loss allowance at an amount equal to lifetime expected credit
losses for:
(a) trade receivables or contract assets that result from
transactions that are within the scope of Ind AS 115, and
that:
(i) do not contain a significant financing component (or
when the entity applies the practical expedient for
contracts that are one year or less) in accordance with
Ind AS 115; or
(ii) contain a significant financing component in accordance
with Ind AS 115, if the entity chooses as its accounting
policy to measure the loss allowance at an amount equal
to lifetime expected credit losses. That accounting policy
shall be applied to all such trade receivables or contract
assets but may be applied separately to trade receivables
and contract assets.
(b) lease receivables that result from transactions that are
within the scope of Ind AS 17, if the entity chooses as its
accounting policy to measure the loss allowance at an
amount equal to lifetime expected credit losses. That
accounting policy shall be applied to all lease receivables but
may be applied separately to finance and operating lease
receivables.
5.5.16 An entity may select its accounting policy for trade receivables, lease
receivables and contract assets independently of each other.
Measurement of expected credit losses
5.5.17 An entity shall measure expected credit losses of a financial
instrument in a way that reflects:
(a) an unbiased and probability-weighted amount that is
determined by evaluating a range of possible outcomes;
(b) the time value of money; and
(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.
5.5.18 When measuring expected credit losses, an entity need not necessarily
identify every possible scenario. However, it shall consider the risk or
probability that a credit loss occurs by reflecting the possibility that a
credit loss occurs and the possibility that no credit loss occurs, even if
the possibility of a credit loss occurring is very low.
5.5.19 The maximum period to consider when measuring expected credit
losses is the maximum contractual period (including extension
options) over which the entity is exposed to credit risk and not a
longer period, even if that longer period is consistent with business
practice.
5.5.20 However, some financial instruments include both a loan and an
undrawn commitment component and the entity's contractual ability
to demand repayment and cancel the undrawn commitment does not
limit the entity's exposure to credit losses to the contractual notice
period. For such financial instruments, and only those financial
instruments, the entity shall measure expected credit losses over the
period that the entity is exposed to credit risk and expected credit
losses would not be mitigated by credit risk management actions, even
if that period extends beyond the maximum contractual period.
5.6 Reclassification of financial assets
5.6.1 If an entity reclassifies financial assets in accordance with
paragraph 4.4.1, it shall apply the reclassification prospectively
from the reclassification date. The entity shall not restate any
previously recognised gains, losses (including impairment gains
or losses) or interest. Paragraphs 5.6.25.6.7 set out the
requirements for reclassifications.
5.6.2 If an entity reclassifies a financial asset out of the amortised cost
measurement category and into the fair value through profit or
loss measurement category, its fair value is measured at the
reclassification date. Any gain or loss arising from a difference
between the previous amortised cost of the financial asset and fair
value is recognised in profit or loss.
5.6.3 If an entity reclassifies a financial asset out of the fair value
through profit or loss measurement category and into the
amortised cost measurement category, its fair value at the
reclassification date becomes its new gross carrying amount. (See
paragraph B5.6.2 for guidance on determining an effective
interest rate and a loss allowance at the reclassification date.)
5.6.4 If an entity reclassifies a financial asset out of the amortised cost
measurement category and into the fair value through other
comprehensive income measurement category, its fair value is
measured at the reclassification date. Any gain or loss arising
from a difference between the previous amortised cost of the
financial asset and fair value is recognised in other comprehensive
income. The effective interest rate and the measurement of
expected credit losses are not adjusted as a result of the
reclassification. (See paragraph B5.6.1.)
5.6.5 If an entity reclassifies a financial asset out of the fair value
through other comprehensive income measurement category and
into the amortised cost measurement category, the financial asset
is reclassified at its fair value at the reclassification date. However,
the cumulative gain or loss previously recognised in other
comprehensive income is removed from equity and adjusted
against the fair value of the financial asset at the reclassification
date. As a result, the financial asset is measured at the
reclassification date as if it had always been measured at
amortised cost. This adjustment affects other comprehensive
income but does not affect profit or loss and therefore is not a
reclassification adjustment (see Ind AS 1 Presentation of Financial
Statements). The effective interest rate and the measurement of
expected credit losses are not adjusted as a result of the
reclassification. (See paragraph B5.6.1.)
5.6.6 If an entity reclassifies a financial asset out of the fair value
through profit or loss measurement category and into the fair
value through other comprehensive income measurement
category, the financial asset continues to be measured at fair
value. (See paragraph B5.6.2 for guidance on determining an
effective interest rate and a loss allowance at the reclassification
date.)
5.6.7 If an entity reclassifies a financial asset out of the fair value
through other comprehensive income measurement category and
into the fair value through profit or loss measurement category,
the financial asset continues to be measured at fair value. The
cumulative gain or loss previously recognised in other
comprehensive income is reclassified from equity to profit or loss
as a reclassification adjustment (see Ind AS 1) at the
reclassification date.
5.7 Gains and losses
5.7.1 A gain or loss on a financial asset or financial liability that is
measured at fair value shall be recognised in profit or loss unless:
(a) it is part of a hedging relationship (see paragraphs 6.5.8
6.5.14 and, if applicable, paragraphs 8994 of Ind AS 39 for
the fair value hedge accounting for a portfolio hedge of
interest rate risk);
(b) it is an investment in an equity instrument and the entity has
elected to present gains and losses on that investment in
other comprehensive income in accordance with paragraph
5.7.5;
(c) it is a financial liability designated as at fair value through
profit or loss and the entity is required to present the effects
of changes in the liability's credit risk in other
comprehensive income in accordance with paragraph 5.7.7;
or
(d) it is a financial asset measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A
and the entity is required to recognise some changes in fair
value in other comprehensive income in accordance with
paragraph 5.7.10.
5.7.1A Dividends are recognised in profit or loss only when:
(a) the entity's right to receive payment of the dividend is
established;
(b) it is probable that the economic benefits associated with the
dividend will flow to the entity; and
(c) the amount of the dividend can be measured reliably.
5.7.2 A gain or loss on a financial asset that is measured at amortised
cost and is not part of a hedging relationship (see paragraphs
6.5.86.5.14 and, if applicable, paragraphs 8994 of Ind AS 39 for
the fair value hedge accounting for a portfolio hedge of interest
rate risk)) shall be recognised in profit or loss when the financial
asset is derecognised, reclassified in accordance with paragraph
5.6.2, through the amortisation process or in order to recognise
impairment gains or losses. An entity shall apply paragraphs 5.6.2
and 5.6.4 if it reclassifies financial assets out of the amortised cost
measurement category. A gain or loss on a financial liability that
is measured at amortised cost and is not part of a hedging
relationship (see paragraphs 6.5.86.5.14 and, if applicable,
paragraphs 8994 of Ind AS 39 for the fair value hedge
accounting for a portfolio hedge of interest rate risk) shall be
recognised in profit or loss when the financial liability is
derecognised and through the amortisation process. (See
paragraph B5.7.2 for guidance on foreign exchange gains or
losses.)
5.7.3 A gain or loss on financial assets or financial liabilities that are
hedged items in a hedging relationship shall be recognised in
accordance with paragraphs 6.5.86.5.14 and, if applicable,
paragraphs 8994 of Ind AS 39 for the fair value hedge
accounting for a portfolio hedge of interest rate risk.
5.7.4 If an entity recognises financial assets using settlement date
accounting (see paragraphs 3.1.2, B3.1.3 and B3.1.6), any change
in the fair value of the asset to be received during the period
between the trade date and the settlement date is not recognised
for assets measured at amortised cost. For assets measured at fair
value, however, the change in fair value shall be recognised in
profit or loss or in other comprehensive income, as appropriate in
accordance with paragraph 5.7.1. The trade date shall be
considered the date of initial recognition for the purposes of
applying the impairment requirements.
Investments in equity instruments
5.7.5 At initial recognition, an entity may make an irrevocable election
to present in other comprehensive income subsequent changes in
the fair value of an investment in an equity instrument within the
scope of this Standard that is neither held for trading nor
contingent consideration recognised by an acquirer in a business
combination to which Ind AS 103 applies. (See paragraph B5.7.3
for guidance on foreign exchange gains or losses.)
5.7.6 If an entity makes the election in paragraph 5.7.5, it shall recognise in
profit or loss dividends from that investment in accordance with
paragraph 5.7.1A.
Liabilities designated as at fair value through profit or loss
5.7.7 An entity shall present a gain or loss on a financial liability that is
designated as at fair value through profit or loss in accordance
with paragraph 4.2.2 or paragraph 4.3.5 as follows:
(a) The amount of change in the fair value of the financial
liability that is attributable to changes in the credit risk of
that liability shall be presented in other comprehensive
income (see paragraphs B5.7.13B5.7.20), and
(b) the remaining amount of change in the fair value of the
liability shall be presented in profit or loss
unless the treatment of the effects of changes in the liability's
credit risk described in (a) would create or enlarge an accounting
mismatch in profit or loss (in which case paragraph 5.7.8 applies).
Paragraphs B5.7.5B5.7.7 and B5.7.10B5.7.12 provide guidance
on determining whether an accounting mismatch would be
created or enlarged.
5.7.8 If the requirements in paragraph 5.7.7 would create or enlarge an
accounting mismatch in profit or loss, an entity shall present all
gains or losses on that liability (including the effects of changes in
the credit risk of that liability) in profit or loss.
5.7.9 Despite the requirements in paragraphs 5.7.7 and 5.7.8, an entity shall
present in profit or loss all gains and losses on loan commitments and
financial guarantee contracts that are designated as at fair value
through profit or loss.
Assets measured at fair value through other comprehensive
income
5.7.10 A gain or loss on a financial asset measured at fair value through
other comprehensive income in accordance with paragraph 4.1.2A
shall be recognised in other comprehensive income, except for
impairment gains or losses (see Section 5.5) and foreign exchange
gains and losses (see paragraphs B5.7.2B5.7.2A), until the
financial asset is derecognised or reclassified. When the financial
asset is derecognised the cumulative gain or loss previously
recognised in other comprehensive income is reclassified from
equity to profit or loss as a reclassification adjustment (see Ind
AS 1). If the financial asset is reclassified out of the fair value
through other comprehensive income measurement category, the
entity shall account for the cumulative gain or loss that was
previously recognised in other comprehensive income in
accordance with paragraphs 5.6.5 and 5.6.7. Interest calculated
using the effective interest method is recognised in profit or loss.
5.7.11 As described in paragraph 5.7.10, if a financial asset is measured
at fair value through other comprehensive income in accordance
with paragraph 4.1.2A, the amounts that are recognised in profit
or loss are the same as the amounts that would have been
recognised in profit or loss if the financial asset had been
measured at amortised cost.
Chapter 6 Hedge accounting
6.1 Objective and scope of hedge accounting
6.1.1 The objective of hedge accounting is to represent, in the financial
statements, the effect of an entity's risk management activities that use
financial instruments to manage exposures arising from particular
risks that could affect profit or loss (or other comprehensive income,
in the case of investments in equity instruments for which an entity
has elected to present changes in fair value in other comprehensive
income in accordance with paragraph 5.7.5). This approach aims to
convey the context of hedging instruments for which hedge
accounting is applied in order to allow insight into their purpose and
effect.
6.1.2 An entity may choose to designate a hedging relationship between a
hedging instrument and a hedged item in accordance with paragraphs
6.2.16.3.7 and B6.2.1B6.3.25. For hedging relationships that meet
the qualifying criteria, an entity shall account for the gain or loss on
the hedging instrument and the hedged item in accordance with
paragraphs 6.5.16.5.14 and B6.5.1B6.5.28. When the hedged item
is a group of items, an entity shall comply with the additional
requirements in paragraphs 6.6.16.6.6 and B6.6.1B6.6.16.
6.1.3 For a fair value hedge of the interest rate exposure of a portfolio of
financial assets or financial liabilities (and only for such a hedge), an
entity may apply the hedge accounting requirements in Ind AS 39
instead of those in this Standard. In that case, the entity must also
apply the specific requirements for the fair value hedge accounting for
a portfolio hedge of interest rate risk and designate as the hedged item
a portion that is a currency amount (see paragraphs 81A, 89A and
AG114AG132 of Ind AS 39).
6.2 Hedging instruments
Qualifying instruments
6.2.1 A derivative measured at fair value through profit or loss may be
designated as a hedging instrument, except for some written
options (see paragraph B6.2.4).
6.2.2 A non-derivative financial asset or a non-derivative financial
liability measured at fair value through profit or loss may be
designated as a hedging instrument unless it is a financial liability
designated as at fair value through profit or loss for which the
amount of its change in fair value that is attributable to changes in
the credit risk of that liability is presented in other comprehensive
income in accordance with paragraph 5.7.7. For a hedge of
foreign currency risk, the foreign currency risk component of a
non-derivative financial asset or a non-derivative financial
liability may be designated as a hedging instrument provided that
it is not an investment in an equity instrument for which an entity
has elected to present changes in fair value in other
comprehensive income in accordance with paragraph 5.7.5.
6.2.3 For hedge accounting purposes, only contracts with a party
external to the reporting entity (ie external to the group or
individual entity that is being reported on) can be designated as
hedging instruments.
Designation of hedging instruments
6.2.4 A qualifying instrument must be designated in its entirety as a hedging
instrument. The only exceptions permitted are:
(a) separating the intrinsic value and time value of an option
contract and designating as the hedging instrument only the
change in intrinsic value of an option and not the change in its
time value (see paragraphs 6.5.15 and B6.5.29B6.5.33);
(b) separating the forward element and the spot element of a
forward contract and designating as the hedging instrument
only the change in the value of the spot element of a forward
contract and not the forward element; similarly, the foreign
currency basis spread may be separated and excluded from the
designation of a financial instrument as the hedging instrument
(see paragraphs 6.5.16 and B6.5.34B6.5.39); and
(c) a proportion of the entire hedging instrument, such as 50 per
cent of the nominal amount, may be designated as the hedging
instrument in a hedging relationship. However, a hedging
instrument may not be designated for a part of its change in
fair value that results from only a portion of the time period
during which the hedging instrument remains outstanding.
6.2.5 An entity may view in combination, and jointly designate as the
hedging instrument, any combination of the following (including
those circumstances in which the risk or risks arising from some
hedging instruments offset those arising from others):
(a) derivatives or a proportion of them; and
(b) non-derivatives or a proportion of them.
6.2.6 However, a derivative instrument that combines a written option and a
purchased option (for example, an interest rate collar) does not qualify
as a hedging instrument if it is, in effect, a net written option at the
date of designation (unless it qualifies in accordance with paragraph
B6.2.4). Similarly, two or more instruments (or proportions of them)
may be jointly designated as the hedging instrument only if, in
combination, they are not, in effect, a net written option at the date of
designation (unless it qualifies in accordance with paragraph B6.2.4).
6.3 Hedged items
Qualifying items
6.3.1 A hedged item can be a recognised asset or liability, an
unrecognised firm commitment, a forecast transaction or a net
investment in a foreign operation. The hedged item can be:
(a) a single item; or
(b) a group of items (subject to paragraphs 6.6.16.6.6 and
B6.6.1B6.6.16).
A hedged item can also be a component of such an item or group
of items (see paragraphs 6.3.7 and B6.3.7B6.3.25).
6.3.2 The hedged item must be reliably measurable.
6.3.3 If a hedged item is a forecast transaction (or a component
thereof), that transaction must be highly probable.
6.3.4 An aggregated exposure that is a combination of an exposure that
could qualify as a hedged item in accordance with paragraph 6.3.1
and a derivative may be designated as a hedged item (see
paragraphs B6.3.3B6.3.4). This includes a forecast transaction of
an aggregated exposure (ie uncommitted but anticipated future
transactions that would give rise to an exposure and a derivative)
if that aggregated exposure is highly probable and, once it has
occurred and is therefore no longer forecast, is eligible as a
hedged item.
6.3.5 For hedge accounting purposes, only assets, liabilities, firm
commitments or highly probable forecast transactions with a
party external to the reporting entity can be designated as hedged
items. Hedge accounting can be applied to transactions between
entities in the same group only in the individual or separate
financial statements of those entities and not in the consolidated
financial statements of the group, except for the consolidated
financial statements of an investment entity, as defined in Ind AS
110, where transactions between an investment entity and its
subsidiaries measured at fair value through profit or loss will not
be eliminated in the consolidated financial statements.
6.3.6 However, as an exception to paragraph 6.3.5, the foreign currency risk
of an intragroup monetary item (for example, a payable/receivable
between two subsidiaries) may qualify as a hedged item in the
consolidated financial statements if it results in an exposure to foreign
exchange rate gains or losses that are not fully eliminated on
consolidation in accordance with Ind AS 21 The Effects of Changes in
Foreign Exchange Rates. In accordance with Ind AS 21, foreign
exchange rate gains and losses on intragroup monetary items are not
fully eliminated on consolidation when the intragroup monetary item
is transacted between two group entities that have different functional
currencies. In addition, the foreign currency risk of a highly probable
forecast intragroup transaction may qualify as a hedged item in
consolidated financial statements provided that the transaction is
denominated in a currency other than the functional currency of the
entity entering into that transaction and the foreign currency risk will
affect consolidated profit or loss.
Designation of hedged items
6.3.7 An entity may designate an item in its entirety or a component of an item
as the hedged item in a hedging relationship. An entire item comprises all
changes in the cash flows or fair value of an item. A component
comprises less than the entire fair value change or cash flow variability of
an item. In that case, an entity may designate only the following types of
components (including combinations) as hedged items:
(a) only changes in the cash flows or fair value of an item attributable
to a specific risk or risks (risk component), provided that, based on
an assessment within the context of the particular market structure,
the risk component is separately identifiable and reliably
measurable (see paragraphs B6.3.8B6.3.15). Risk components
include a designation of only changes in the cash flows or the fair
value of a hedged item above or below a specified price or other
variable (a one-sided risk).
(b) one or more selected contractual cash flows.
(c) components of a nominal amount, ie a specified part of the amount
of an item (see paragraphs B6.3.16B6.3.20).
6.4 Qualifying criteria for hedge accounting
6.4.1 A hedging relationship qualifies for hedge accounting only if all of
the following criteria are met:
(a) the hedging relationship consists only of eligible hedging
instruments and eligible hedged items.
(b) at the inception of the hedging relationship there is formal
designation and documentation of the hedging relationship and
the entity's risk management objective and strategy for
undertaking the hedge. That documentation shall include
identification of the hedging instrument, the hedged item, the
nature of the risk being hedged and how the entity will assess
whether the hedging relationship meets the hedge effectiveness
requirements (including its analysis of the sources of hedge
ineffectiveness and how it determines the hedge ratio).
(c) the hedging relationship meets all of the following hedge
effectiveness requirements:
(i) there is an economic relationship between the hedged
item and the hedging instrument (see paragraphs B6.4.4
B6.4.6);
(ii) the effect of credit risk does not dominate the value
changes that result from that economic relationship (see
paragraphs B6.4.7B6.4.8); and
(iii) the hedge ratio of the hedging relationship is the same as
that resulting from the quantity of the hedged item that
the entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge that
quantity of hedged item. However, that designation shall
not reflect an imbalance between the weightings of the
hedged item and the hedging instrument that would
create hedge ineffectiveness (irrespective of whether
recognised or not) that could result in an accounting
outcome that would be inconsistent with the purpose of
hedge accounting (see paragraphs B6.4.9B6.4.11).
6.5 Accounting for qualifying hedging relationships
6.5.1 An entity applies hedge accounting to hedging relationships that
meet the qualifying criteria in paragraph 6.4.1 (which include the
entity's decision to designate the hedging relationship).
6.5.2 There are three types of hedging relationships:
(a) fair value hedge: a hedge of the exposure to changes in fair
value of a recognised asset or liability or an unrecognised firm
commitment, or a component of any such item, that is
attributable to a particular risk and could affect profit or loss.
(b) cash flow hedge: a hedge of the exposure to variability in cash
flows that is attributable to a particular risk associated with all,
or a component of, a recognised asset or liability (such as all or
some future interest payments on variable-rate debt) or a
highly probable forecast transaction, and could affect profit or
loss.
(c) hedge of a net investment in a foreign operation as defined in
Ind AS 21.
6.5.3 If the hedged item is an equity instrument for which an entity has elected
to present changes in fair value in other comprehensive income in
accordance with paragraph 5.7.5, the hedged exposure referred to in
paragraph 6.5.2(a) must be one that could affect other comprehensive
income. In that case, and only in that case, the recognised hedge
ineffectiveness is presented in other comprehensive income.
6.5.4 A hedge of the foreign currency risk of a firm commitment may be
accounted for as a fair value hedge or a cash flow hedge.
6.5.5 If a hedging relationship ceases to meet the hedge effectiveness
requirement relating to the hedge ratio (see paragraph 6.4.1(c)(iii))
but the risk management objective for that designated hedging
relationship remains the same, an entity shall adjust the hedge ratio
of the hedging relationship so that it meets the qualifying criteria
again (this is referred to in this Standard as `rebalancing'--see
paragraphs B6.5.7B6.5.21).
6.5.6 An entity shall discontinue hedge accounting prospectively only when
the hedging relationship (or a part of a hedging relationship) ceases
to meet the qualifying criteria (after taking into account any
rebalancing of the hedging relationship, if applicable). This includes
instances when the hedging instrument expires or is sold, terminated
or exercised. For this purpose, the replacement or rollover of a
hedging instrument into another hedging instrument is not an
expiration or termination if such a replacement or rollover is part of,
and consistent with, the entity's documented risk management
objective. Additionally, for this purpose there is not an expiration or
termination of the hedging instrument if:
(a) as a consequence of laws or regulations or the introduction of
laws or regulations, the parties to the hedging instrument agree
that one or more clearing counterparties replace their original
counterparty to become the new counterparty to each of the
parties. For this purpose, a clearing counterparty is a central
counterparty (sometimes called a `clearing organisation' or
`clearing agency') or an entity or entities, for example, a
clearing member of a clearing organisation or a client of a
clearing member of a clearing organisation, that are acting as a
counterparty in order to effect clearing by a central
counterparty. However, when the parties to the hedging
instrument replace their original counterparties with different
counterparties the requirement in this subparagraph is met
only if each of those parties effects clearing with the same
central counterparty.
(b) other changes, if any, to the hedging instrument are limited to
those that are necessary to effect such a replacement of the
counterparty. Such changes are limited to those that are
consistent with the terms that would be expected if the hedging
instrument were originally cleared with the clearing
counterparty. These changes include changes in the collateral
requirements, rights to offset receivables and payables
balances, and charges levied.
Discontinuing hedge accounting can either affect a hedging
relationship in its entirety or only a part of it (in which case hedge
accounting continues for the remainder of the hedging relationship).
6.5.7 An entity shall apply:
(a) paragraph 6.5.10 when it discontinues hedge accounting for a fair
value hedge for which the hedged item is (or is a component of) a
financial instrument measured at amortised cost; and
(b) paragraph 6.5.12 when it discontinues hedge accounting for cash
flow hedges.
Fair value hedges
6.5.8 As long as a fair value hedge meets the qualifying criteria in
paragraph 6.4.1, the hedging relationship shall be accounted for as
follows:
(a) the gain or loss on the hedging instrument shall be recognised
in profit or loss (or other comprehensive income, if the hedging
instrument hedges an equity instrument for which an entity has
elected to present changes in fair value in other comprehensive
income in accordance with paragraph 5.7.5).
(b) the hedging gain or loss on the hedged item shall adjust the
carrying amount of the hedged item (if applicable) and be
recognised in profit or loss. If the hedged item is a financial
asset (or a component thereof) that is measured at fair value
through other comprehensive income in accordance with
paragraph 4.1.2A, the hedging gain or loss on the hedged item
shall be recognised in profit or loss. However, if the hedged
item is an equity instrument for which an entity has elected to
present changes in fair value in other comprehensive income in
accordance with paragraph 5.7.5, those amounts shall remain
in other comprehensive income. When a hedged item is an
unrecognised firm commitment (or a component thereof), the
cumulative change in the fair value of the hedged item
subsequent to its designation is recognised as an asset or a
liability with a corresponding gain or loss recognised in profit
or loss.
6.5.9 When a hedged item in a fair value hedge is a firm commitment (or a
component thereof) to acquire an asset or assume a liability, the initial
carrying amount of the asset or the liability that results from the entity
meeting the firm commitment is adjusted to include the cumulative
change in the fair value of the hedged item that was recognised in the
balance sheet.
6.5.10 Any adjustment arising from paragraph 6.5.8(b) shall be amortised to
profit or loss if the hedged item is a financial instrument (or a component
thereof) measured at amortised cost. Amortisation may begin as soon as
an adjustment exists and shall begin no later than when the hedged item
ceases to be adjusted for hedging gains and losses. The amortisation is
based on a recalculated effective interest rate at the date that amortisation
begins. In the case of a financial asset (or a component thereof) that is a
hedged item and that is measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A,
amortisation applies in the same manner but to the amount that represents
the cumulative gain or loss previously recognised in accordance with
paragraph 6.5.8(b) instead of by adjusting the carrying amount.
Cash flow hedges
6.5.11 As long as a cash flow hedge meets the qualifying criteria in
paragraph 6.4.1, the hedging relationship shall be accounted for as
follows:
(a) the separate component of equity associated with the hedged
item (cash flow hedge reserve) is adjusted to the lower of the
following (in absolute amounts):
(i) the cumulative gain or loss on the hedging instrument
from inception of the hedge; and
(ii) the cumulative change in fair value (present value) of the
hedged item (ie the present value of the cumulative
change in the hedged expected future cash flows) from
inception of the hedge.
(b) the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge (ie the portion that is offset
by the change in the cash flow hedge reserve calculated in
accordance with (a)) shall be recognised in other
comprehensive income.
(c) any remaining gain or loss on the hedging instrument (or any
gain or loss required to balance the change in the cash flow
hedge reserve calculated in accordance with (a)) is hedge
ineffectiveness that shall be recognised in profit or loss.
(d) the amount that has been accumulated in the cash flow hedge
reserve in accordance with (a) shall be accounted for as
follows:
(i) if a hedged forecast transaction subsequently results in
the recognition of a non-financial asset or non-financial
liability, or a hedged forecast transaction for a non-
financial asset or a non-financial liability becomes a firm
commitment for which fair value hedge accounting is
applied, the entity shall remove that amount from the
cash flow hedge reserve and include it directly in the
initial cost or other carrying amount of the asset or the
liability. This is not a reclassification adjustment (see Ind
AS 1) and hence it does not affect other comprehensive
income.
(ii) for cash flow hedges other than those covered by (i), that
amount shall be reclassified from the cash flow hedge
reserve to profit or loss as a reclassification adjustment
(see Ind AS 1) in the same period or periods during which
the hedged expected future cash flows affect profit or loss
(for example, in the periods that interest income or
interest expense is recognised or when a forecast sale
occurs).
(iii) however, if that amount is a loss and an entity expects
that all or a portion of that loss will not be recovered in
one or more future periods, it shall immediately reclassify
the amount that is not expected to be recovered into profit
or loss as a reclassification adjustment (see Ind AS 1).
6.5.12 When an entity discontinues hedge accounting for a cash flow hedge (see
paragraphs 6.5.6 and 6.5.7(b)) it shall account for the amount that has
been accumulated in the cash flow hedge reserve in accordance
with paragraph 6.5.11(a) as follows:
(a) if the hedged future cash flows are still expected to occur, that
amount shall remain in the cash flow hedge reserve until the future
cash flows occur or until paragraph 6.5.11(d)(iii) applies. When the
future cash flows occur, paragraph 6.5.11(d) applies.
(b) if the hedged future cash flows are no longer expected to occur, that
amount shall be immediately reclassified from the cash flow hedge
reserve to profit or loss as a reclassification adjustment (see Ind AS
1). A hedged future cash flow that is no longer highly probable to
occur may still be expected to occur.
Hedges of a net investment in a foreign operation
6.5.13 Hedges of a net investment in a foreign operation, including a hedge
of a monetary item that is accounted for as part of the net investment
(see Ind AS 21), shall be accounted for similarly to cash flow hedges:
(a) the portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge shall be recognised in other
comprehensive income (see paragraph 6.5.11); and
(b) the ineffective portion shall be recognised in profit or loss.
6.5.14 The cumulative gain or loss on the hedging instrument relating to the
effective portion of the hedge that has been accumulated in the
foreign currency translation reserve shall be reclassified from equity
to profit or loss as a reclassification adjustment (see Ind AS 1) in
accordance with paragraphs 4849 of Ind AS 21 on the disposal or
partial disposal of the foreign operation.
Accounting for the time value of options
6.5.15 When an entity separates the intrinsic value and time value of an option
contract and designates as the hedging instrument only the change in
intrinsic value of the option (see paragraph 6.2.4(a)), it shall account for
the time value of the option as follows (see paragraphs B6.5.29
B6.5.33):
(a) an entity shall distinguish the time value of options by the type of
hedged item that the option hedges (see paragraph B6.5.29):
(i) a transaction related hedged item; or
(ii) a time-period related hedged item.
(b) the change in fair value of the time value of an option that hedges a
transaction related hedged item shall be recognised in other
comprehensive income to the extent that it relates to the hedged
item and shall be accumulated in a separate component of equity.
The cumulative change in fair value arising from the time value of
the option that has been accumulated in a separate component of
equity (the `amount') shall be accounted for as follows:
(i) if the hedged item subsequently results in the recognition of a
non-financial asset or a non-financial liability, or a firm
commitment for a non-financial asset or a non-financial
liability for which fair value hedge accounting is applied, the
entity shall remove the amount from the separate component
of equity and include it directly in the initial cost or other
carrying amount of the asset or the liability. This is not a
reclassification adjustment (see Ind AS 1) and hence does
not affect other comprehensive income.
(ii) for hedging relationships other than those covered by (i), the
amount shall be reclassified from the separate component of
equity to profit or loss as a reclassification adjustment (see
Ind AS 1) in the same period or periods during which the
hedged expected future cash flows affect profit or loss (for
example, when a forecast sale occurs).
(iii) however, if all or a portion of that amount is not expected to
be recovered in one or more future periods, the amount that is
not expected to be recovered shall be immediately
reclassified into profit or loss as a reclassification adjustment
(see Ind AS 1).
(c) the change in fair value of the time value of an option that hedges a
time-period related hedged item shall be recognised in other
comprehensive income to the extent that it relates to the hedged
item and shall be accumulated in a separate component of equity.
The time value at the date of designation of the option as a hedging
instrument, to the extent that it relates to the hedged item, shall be
amortised on a systematic and rational basis over the period during
which the hedge adjustment for the option's intrinsic value could
affect profit or loss (or other comprehensive income, if the hedged
item is an equity instrument for which an entity has elected to
present changes in fair value in other comprehensive income in
accordance with paragraph 5.7.5). Hence, in each reporting period,
the amortisation amount shall be reclassified from the separate
component of equity to profit or loss as a reclassification
adjustment (see Ind AS 1). However, if hedge accounting is
discontinued for the hedging relationship that includes the change
in intrinsic value of the option as the hedging instrument, the net
amount (ie including cumulative amortisation) that has been
accumulated in the separate component of equity shall be
immediately reclassified into profit or loss as a reclassification
adjustment (see Ind AS 1).
Accounting for the forward element of forward contracts and
foreign currency basis spreads of financial instruments
6.5.16 When an entity separates the forward element and the spot element of a
forward contract and designates as the hedging instrument only the
change in the value of the spot element of the forward contract, or when
an entity separates the foreign currency basis spread from a financial
instrument and excludes it from the designation of that financial
instrument as the hedging instrument (see paragraph 6.2.4(b)), the entity
may apply paragraph 6.5.15 to the forward element of the forward
contract or to the foreign currency basis spread in the same manner as it
is applied to the time value of an option. In that case, the entity shall
apply the application guidance in paragraphs B6.5.34B6.5.39.
6.6 Hedges of a group of items
Eligibility of a group of items as the hedged item
6.6.1 A group of items (including a group of items that constitute a net
position; see paragraphs B6.6.1B6.6.8) is an eligible hedged item
only if:
(a) it consists of items (including components of items) that are,
individually, eligible hedged items;
(b) the items in the group are managed together on a group basis
for risk management purposes; and
(c) in the case of a cash flow hedge of a group of items whose
variabilities in cash flows are not expected to be approximately
proportional to the overall variability in cash flows of the
group so that offsetting risk positions arise:
(i) it is a hedge of foreign currency risk; and
(ii) the designation of that net position specifies the reporting
period in which the forecast transactions are expected to
affect profit or loss, as well as their nature and volume
(see paragraphs B6.6.7B6.6.8).
Designation of a component of a nominal amount
6.6.2 A component that is a proportion of an eligible group of items is an
eligible hedged item provided that designation is consistent with the
entity's risk management objective.
6.6.3 A layer component of an overall group of items (for example, a bottom
layer) is eligible for hedge accounting only if:
(a) it is separately identifiable and reliably measurable;
(b) the risk management objective is to hedge a layer component;
(c) the items in the overall group from which the layer is identified are
exposed to the same hedged risk (so that the measurement of the
hedged layer is not significantly affected by which particular items
from the overall group form part of the hedged layer);
(d) for a hedge of existing items (for example, an unrecognised firm
commitment or a recognised asset) an entity can identify and track
the overall group of items from which the hedged layer is defined
(so that the entity is able to comply with the requirements for the
accounting for qualifying hedging relationships); and
(e) any items in the group that contain prepayment options meet the
requirements for components of a nominal amount (see
paragraph B6.3.20).
Presentation
6.6.4 For a hedge of a group of items with offsetting risk positions (ie in a
hedge of a net position) whose hedged risk affects different line items in
the statement of profit and loss, any hedging gains or losses in that
statement shall be presented in a separate line from those affected by the
hedged items. Hence, in that statement the amount in the line item that
relates to the hedged item itself (for example, revenue or cost of sales)
remains unaffected.
6.6.5 For assets and liabilities that are hedged together as a group in a fair
value hedge, the gain or loss in the balance sheet on the individual assets
and liabilities shall be recognised as an adjustment of the carrying
amount of the respective individual items comprising the group in
accordance with paragraph 6.5.8(b).
Nil net positions
6.6.6 When the hedged item is a group that is a nil net position (ie the hedged
items among themselves fully offset the risk that is managed on a group
basis), an entity is permitted to designate it in a hedging relationship that
does not include a hedging instrument, provided that:
(a) the hedge is part of a rolling net risk hedging strategy, whereby the
entity routinely hedges new positions of the same type as time
moves on (for example, when transactions move into the time
horizon for which the entity hedges);
(b) the hedged net position changes in size over the life of the rolling
net risk hedging strategy and the entity uses eligible hedging
instruments to hedge the net risk (ie when the net position is not
nil);
(c) hedge accounting is normally applied to such net positions when
the net position is not nil and it is hedged with eligible hedging
instruments; and
(d) not applying hedge accounting to the nil net position would give
rise to inconsistent accounting outcomes, because the accounting
would not recognise the offsetting risk positions that would
otherwise be recognised in a hedge of a net position.
6.7 Option to designate a credit exposure as measured at fair value
through profit or loss
Eligibility of credit exposures for designation at fair value
through profit or loss
6.7.1 If an entity uses a credit derivative that is measured at fair value
through profit or loss to manage the credit risk of all, or a part of, a
financial instrument (credit exposure) it may designate that financial
instrument to the extent that it is so managed (ie all or a proportion
of it) as measured at fair value through profit or loss if:
(a) the name of the credit exposure (for example, the borrower, or
the holder of a loan commitment) matches the reference entity
of the credit derivative (`name matching'); and
(b) the seniority of the financial instrument matches that of the
instruments that can be delivered in accordance with the credit
derivative.
An entity may make this designation irrespective of whether the
financial instrument that is managed for credit risk is within the
scope of this Standard (for example, an entity may designate loan
commitments that are outside the scope of this Standard). The entity
may designate that financial instrument at, or subsequent to, initial
recognition, or while it is unrecognised. The entity shall document
the designation concurrently.
Accounting for credit exposures designated at fair value
through profit or loss
6.7.2 If a financial instrument is designated in accordance with paragraph 6.7.1
as measured at fair value through profit or loss after its initial
recognition, or was previously not recognised, the difference at the time
of designation between the carrying amount, if any, and the fair value
shall immediately be recognised in profit or loss. For financial assets
measured at fair value through other comprehensive income in
accordance with paragraph 4.1.2A, the cumulative gain or loss previously
recognised in other comprehensive income shall immediately be
reclassified from equity to profit or loss as a reclassification adjustment
(see Ind AS 1).
6.7.3 An entity shall discontinue measuring the financial instrument that gave
rise to the credit risk, or a proportion of that financial instrument, at fair
value through profit or loss if:
(a) the qualifying criteria in paragraph 6.7.1 are no longer met, for
example:
(i) the credit derivative or the related financial instrument that
gives rise to the credit risk expires or is sold, terminated or
settled; or
(ii) the credit risk of the financial instrument is no longer
managed using credit derivatives. For example, this could
occur because of improvements in the credit quality of the
borrower or the loan commitment holder or changes to
capital requirements imposed on an entity; and
(b) the financial instrument that gives rise to the credit risk is not
otherwise required to be measured at fair value through profit or
loss (ie the entity's business model has not changed in the
meantime so that a reclassification in accordance with paragraph
4.4.1 was required).
6.7.4 When an entity discontinues measuring the financial instrument that
gives rise to the credit risk, or a proportion of that financial instrument, at
fair value through profit or loss, that financial instrument's fair value at
the date of discontinuation becomes its new carrying amount.
Subsequently, the same measurement that was used before designating
the financial instrument at fair value through profit or loss shall be
applied (including amortisation that results from the new carrying
amount). For example, a financial asset that had originally been classified
as measured at amortised cost would revert to that measurement and its
effective interest rate would be recalculated based on its new gross
carrying amount on the date of discontinuing measurement at fair value
through profit or loss.
Chapter 7 Effective date and transition
Appendix A
Defined terms
This appendix is an integral part of the Standard.
12-month expected The portion of lifetime expected credit losses that
credit losses represent the expected credit losses that result from
default events on a financial instrument that are possible
within the 12 months after the reporting date.
amortised cost of a The amount at which the financial asset or financial
financial asset or liability is measured at initial recognition minus the
financial liability principal repayments, plus or minus the cumulative
amortisation using the effective interest method of any
difference between that initial amount and the maturity
amount and, for financial assets, adjusted for any loss
allowance.
contract assets Those rights that Ind AS 115 Revenue from Contracts
with Customers specifies are accounted for in accordance
with this Standard for the purposes of recognising and
measuring impairment gains or losses.
credit-impaired A financial asset is credit-impaired when one or more
financial asset events that have a detrimental impact on the estimated
future cash flows of that financial asset have occurred.
Evidence that a financial asset is credit-impaired include
observable data about the following events:
(a) significant financial difficulty of the issuer or the
borrower;
(b) a breach of contract, such as a default or past due
event;
(c) the lender(s) of the borrower, for economic or
contractual reasons relating to the borrower's
financial difficulty, having granted to the borrower a
concession(s) that the lender(s) would not otherwise
consider;
(d) it is becoming probable that the borrower will enter
bankruptcy or other financial reorganisation;
(e) the disappearance of an active market for that
financial asset because of financial difficulties; or
(f) the purchase or origination of a financial asset at a
deep discount that reflects the incurred credit losses.
It may not be possible to identify a single discrete event--
instead, the combined effect of several events may have
caused financial assets to become credit-impaired.
credit loss The difference between all contractual cash flows that are
due to an entity in accordance with the contract and all the
cash flows that the entity expects to receive (ie all cash
shortfalls), discounted at the original effective interest
rate (or credit-adjusted effective interest rate for
purchased or originated credit-impaired financial
assets). An entity shall estimate cash flows by considering
all contractual terms of the financial instrument (for
example, prepayment, extension, call and similar options)
through the expected life of that financial instrument. The
cash flows that are considered shall include cash flows
from the sale of collateral held or other credit
enhancements that are integral to the contractual terms.
There is a presumption that the expected life of a financial
instrument can be estimated reliably. However, in those
rare cases when it is not possible to reliably estimate the
expected life of a financial instrument, the entity shall use
the remaining contractual term of the financial instrument.
credit-adjusted The rate that exactly discounts the estimated future cash
effective interest payments or receipts through the expected life of the
rate financial asset to the amortised cost of a financial asset
that is a purchased or originated credit-impaired
financial asset. When calculating the credit-adjusted
effective interest rate, an entity shall estimate the expected
cash flows by considering all contractual terms of the
financial asset (for example, prepayment, extension, call
and similar options) and expected credit losses. The
calculation includes all fees and points paid or received
between parties to the contract that are an integral part of
the effective interest rate (see paragraphs B5.4.1 B5.4.3),
transaction costs, and all other premiums or discounts.
There is a presumption that the cash flows and the
expected life of a group of similar financial instruments
can be estimated reliably. However, in those rare cases
when it is not possible to reliably estimate the cash flows
or the remaining life of a financial instrument (or group of
financial instruments), the entity shall use the contractual
cash flows over the full contractual term of the financial
instrument (or group of financial instruments).
Derecognition The removal of a previously recognised financial asset or
financial liability from an entity's balance sheet.
A financial instrument or other contract within the scope
of this Standard with all three of the following
characteristics.
(a) its value changes in response to the change in a
Derivative specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of
prices or rates, credit rating or credit index, or other
variable, provided in the case of a non-financial
variable that the variable is not specific to a party to
the contract (sometimes called the `underlying').
(b) it requires no initial net investment or an initial net
investment that is smaller than would be required for
other types of contracts that would be expected to
have a similar response to changes in market factors.
(c) it is settled at a future date.
Dividends Distributions of profits to holders of equity instruments in
proportion to their holdings of a particular class of capital.
effective interest The rate that exactly discounts estimated future cash
method payments or receipts through the expected life of the
financial asset or financial liability to the gross carrying
amount of a financial asset or to the amortised cost of a
financial liability. When calculating the effective interest
rate, an entity shall estimate the expected cash flows by
considering all the contractual terms of the financial
instrument (for example, prepayment, extension, call and
similar options) but shall not consider the expected credit
losses. The calculation includes all fees and points paid or
received between parties to the contract that are an integral
part of the effective interest rate (see paragraphs B5.4.1
B5.4.3), transaction costs, and all other premiums or
discounts. There is a presumption that the cash flows and
the expected life of a group of similar financial
instruments can be estimated reliably. However, in those
rare cases when it is not possible to reliably estimate the
cash flows or the expected life of a financial instrument
(or group of financial instruments), the entity shall use the
contractual cash flows over the full contractual term of the
financial instrument (or group of financial instruments).
expected credit The weighted average of credit losses with the respective
losses risks of a default occurring as the weights.
financial guarantee A contract that requires the issuer to make specified
contract payments to reimburse the holder for a loss it incurs
because a specified debtor fails to make payment when
due in accordance with the original or modified terms of a
debt instrument.
financial liability at A financial liability that meets one of the following
fair value through conditions:
profit or loss (a) it meets the definition of held for trading.
(b) upon initial recognition it is designated by the entity
as at fair value through profit or loss in accordance
with paragraph 4.2.2 or 4.3.5.
(c) it is designated either upon initial recognition or
subsequently as at fair value through profit or loss in
accordance with paragraph 6.7.1.
firm commitment A binding agreement for the exchange of a specified
quantity of resources at a specified price on a specified
future date or dates.
forecast
transaction An uncommitted but anticipated future transaction.
gross carrying
amount of a The amortised cost of a financial asset, before adjusting
financial asset for any loss allowance.
a designated derivative or (for a hedge of the risk of
changes in foreign currency exchange rates only) a
hedging instrument designated non-derivative financial asset or non-derivative
financial liability whose fair value or cash flows are
expected to offset changes in the fair value or cash flows
of a designated hedged item
hedge ratio The relationship between the quantity of the hedging
instrument and the quantity of the hedged item in terms of
their relative weighting.
held for trading A financial asset or financial liability that:
(a) is acquired or incurred principally for the purpose
of selling or repurchasing it in the near term;
(b) on initial recognition is part of a portfolio of
identified financial instruments that are managed
together and for which there is evidence of a recent
actual pattern of short-term profit-taking; or
(c) is a derivative (except for a derivative that is a
financial guarantee contract or a designated and
effective hedging instrument).
impairment gain or Gains or losses that are recognised in profit or loss in
loss accordance with paragraph 5.5.8 and that arise from
applying the impairment requirements in Section 5.5.
lifetime expected The expected credit losses that result from all possible
credit losses default events over the expected life of a financial
instrument.
loss allowance The allowance for expected credit losses on financial
assets measured in accordance with paragraph 4.1.2, lease
receivables and contract assets, the accumulated
impairment amount for financial assets measured in
accordance with paragraph 4.1.2A and the provision for
expected credit losses on loan commitments and financial
guarantee contracts.
modification gain The amount arising from adjusting the gross carrying
or loss amount of a financial asset to reflect the renegotiated or
modified contractual cash flows. The entity recalculates
the gross carrying amount of a financial asset as the
present value of the estimated future cash payments or
receipts through the expected life of the renegotiated or
modified financial asset that are discounted at the financial
asset's original effective interest rate (or the
original credit-adjusted effective interest rate for
purchased or originated credit-impaired financial
assets) or, when applicable, the revised effective interest
rate calculated in accordance with paragraph 6.5.10.
When estimating the expected cash flows of a financial
asset, an entity shall consider all contractual terms of the
financial asset (for example, prepayment, call and similar
options) but shall not consider the expected credit losses,
unless the financial asset is a purchased or originated
credit-impaired financial asset, in which case an entity
shall also consider the initial expected credit losses that
were considered when calculating the original credit-
adjusted effective interest rate.
past due A financial asset is past due when a counterparty has
failed to make a payment when that payment was
contractually due.
purchased or Purchased or originated financial asset(s) that are credit-
originated impaired on initial recognition.
credit-impaired
financial asset
reclassification The first day of the first reporting period following the
date change in business model that results in an entity
reclassifying financial assets.
regular way A purchase or sale of a financial asset under a contract
purchase or sale whose terms require delivery of the asset within the time
frame established generally by regulation or convention in
the marketplace concerned.
transaction costs Incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or
financial liability (see paragraph B5.4.8). An incremental
cost is one that would not have been incurred if the entity
had not acquired, issued or disposed of the financial
instrument.
The following terms are defined in paragraph 11 of Ind AS 32, Appendix A of Ind
AS 107, Appendix A of Ind AS 113 or Appendix A of Ind AS 115 and are used in
this Standard with the meanings specified in Ind AS 32, Ind AS 107, Ind AS 113
or Ind AS 115:
(a) credit risk;2
(b) equity instrument;
(c) fair value;
(d) financial asset;
(e) financial instrument;
(f) financial liability;
(g) transaction price.
2
This term (as defined in Ind AS 107) is used in the requirements for
presenting the effects of changes in credit risk on liabilities designated as at
fair value through profit or loss (see paragraph 5.7.7).
Appendix B
Application guidance
This appendix is an integral part of the Standard.
Scope (Chapter 2)
B2.1 Some contracts require a payment based on climatic, geological or other
physical variables. (Those based on climatic variables are sometimes
referred to as `weather derivatives'.) If those contracts are not within the
scope of Ind AS 104, they are within the scope of this Standard.
B2.2 This Standard does not change the requirements relating to royalty
agreements based on the volume of sales or service revenues that are
accounted for under Ind AS 115 Revenue from Contracts with
Customers.
B2.3 Sometimes, an entity makes what it views as a `strategic investment' in
equity instruments issued by another entity, with the intention of
establishing or maintaining a long-term operating relationship with the
entity in which the investment is made. The investor or joint venturer
entity uses Ind AS 28 to determine whether the equity method of
accounting shall be applied to such an investment.
B2.4 This Standard applies to the financial assets and financial liabilities of
insurers, other than rights and obligations that paragraph 2.1(e) excludes
because they arise under contracts within the scope of Ind AS 104
Insurance Contracts.
B2.5 Financial guarantee contracts may have various legal forms, such as a
guarantee, some types of letter of credit, a credit default contract or an
insurance contract. Their accounting treatment does not depend on their
legal form. The following are examples of the appropriate treatment (see
paragraph 2.1(e)):
(a) Although a financial guarantee contract meets the definition of an
insurance contract in Ind AS 104 if the risk transferred is
significant, the issuer applies this Standard. Nevertheless, if the
issuer has previously asserted explicitly that it regards such
contracts as insurance contracts and has used accounting that is
applicable to insurance contracts, the issuer may elect to apply
either this Standard or Ind AS 104 to such financial guarantee
contracts. If this Standard applies, paragraph 5.1.1 requires the
issuer to recognise a financial guarantee contract initially at fair
value. If the financial guarantee contract was issued to an unrelated
party in a stand-alone arm's length transaction, its fair value at
inception is likely to equal the premium received, unless there is
evidence to the contrary. Subsequently, unless the financial
guarantee contract was designated at inception as at fair value
through profit or loss or unless paragraphs 3.2.153.2.23 and
B3.2.12B3.2.17 apply (when a transfer of a financial asset does
not qualify for derecognition or the continuing involvement
approach applies), the issuer measures it at the higher of:
(i) the amount determined in accordance with Section 5.5; and
(ii) the amount initially recognised less, when appropriate, the
cumulative amount of income recognised in accordance with
the principles of Ind AS 115 (see paragraph 4.2.1(c)).
(b) Some credit-related guarantees do not, as a precondition for
payment, require that the holder is exposed to, and has incurred a
loss on, the failure of the debtor to make payments on the
guaranteed asset when due. An example of such a guarantee is one
that requires payments in response to changes in a specified credit
rating or credit index. Such guarantees are not financial guarantee
contracts as defined in this Standard, and are not insurance
contracts as defined in Ind AS 104. Such guarantees are derivatives
and the issuer applies this Standard to them.
(c) If a financial guarantee contract was issued in connection with the
sale of goods, the issuer applies Ind AS 115 in determining when it
recognises the revenue from the guarantee and from the sale of
goods.
B2.6 Assertions that an issuer regards contracts as insurance contracts are
typically found throughout the issuer's communications with customers
and regulators, contracts, business documentation and financial
statements. Furthermore, insurance contracts are often subject to
accounting requirements that are distinct from the requirements for other
types of transaction, such as contracts issued by banks or commercial
companies. In such cases, an issuer's financial statements typically
include a statement that the issuer has used those accounting
requirements.
Recognition and derecognition (Chapter 3)
Initial recognition (Section 3.1)
B3.1.1 As a consequence of the principle in paragraph 3.1.1, an entity recognises
all of its contractual rights and obligations under derivatives in its
balance sheet as assets and liabilities, respectively, except for derivatives
that prevent a transfer of financial assets from being accounted for as a
sale (see paragraph B3.2.14). If a transfer of a financial asset does not
qualify for derecognition, the transferee does not recognise the
transferred asset as its asset (see paragraph B3.2.15).
B3.1.2 The following are examples of applying the principle in paragraph 3.1.1:
(a) Unconditional receivables and payables are recognised as assets or
liabilities when the entity becomes a party to the contract and, as a
consequence, has a legal right to receive or a legal obligation to pay
cash.
(b) Assets to be acquired and liabilities to be incurred as a result of a
firm commitment to purchase or sell goods or services are
generally not recognised until at least one of the parties has
performed under the agreement. For example, an entity that
receives a firm order does not generally recognise an asset (and the
entity that places the order does not recognise a liability) at the time
of the commitment but, instead, delays recognition until the
ordered goods or services have been shipped, delivered or
rendered. If a firm commitment to buy or sell non-financial items is
within the scope of this Standard in accordance with paragraphs
2.42.7, its net fair value is recognised as an asset or a liability on
the commitment date (see paragraph B4.1.30(c)). In addition, if a
previously unrecognised firm commitment is designated as a
hedged item in a fair value hedge, any change in the net fair value
attributable to the hedged risk is recognised as an asset or a liability
after the inception of the hedge (see paragraphs 6.5.8(b) and 6.5.9).
(c) A forward contract that is within the scope of this Standard (see
paragraph 2.1) is recognised as an asset or a liability on the
commitment date, instead of on the date on which settlement takes
place. When an entity becomes a party to a forward contract, the
fair values of the right and obligation are often equal, so that the net
fair value of the forward is zero. If the net fair value of the right
and obligation is not zero, the contract is recognised as an asset or
liability.
(d) Option contracts that are within the scope of this Standard (see
paragraph 2.1) are recognised as assets or liabilities when the
holder or writer becomes a party to the contract.
(e) Planned future transactions, no matter how likely, are not assets
and liabilities because the entity has not become a party to a
contract.
Regular way purchase or sale of financial assets
B3.1.3 A regular way purchase or sale of financial assets is recognised using
either trade date accounting or settlement date accounting as described in
paragraphs B3.1.5 and B3.1.6. An entity shall apply the same method
consistently for all purchases and sales of financial assets that are
classified in the same way in accordance with this Standard. For this
purpose assets that are mandatorily measured at fair value through profit
or loss form a separate classification from assets designated as measured
at fair value through profit or loss. In addition, investments in equity
instruments accounted for using the option provided in paragraph 5.7.5
form a separate classification.
B3.1.4 A contract that requires or permits net settlement of the change in the
value of the contract is not a regular way contract. Instead, such a
contract is accounted for as a derivative in the period between the trade
date and the settlement date.
B3.1.5 The trade date is the date that an entity commits itself to purchase or sell
an asset. Trade date accounting refers to (a) the recognition of an asset to
be received and the liability to pay for it on the trade date, and (b)
derecognition of an asset that is sold, recognition of any gain or loss on
disposal and the recognition of a receivable from the buyer for payment
on the trade date. Generally, interest does not start to accrue on the asset
and corresponding liability until the settlement date when title passes.
B3.1.6 The settlement date is the date that an asset is delivered to or by an entity.
Settlement date accounting refers to (a) the recognition of an asset on the
day it is received by the entity, and (b) the derecognition of an asset and
recognition of any gain or loss on disposal on the day that it is delivered
by the entity. When settlement date accounting is applied an entity
accounts for any change in the fair value of the asset to be received
during the period between the trade date and the settlement date in the
same way as it accounts for the acquired asset. In other words, the change
in value is not recognised for assets measured at amortised cost; it is
recognised in profit or loss for assets classified as financial assets
measured at fair value through profit or loss; and it is recognised in other
comprehensive income for financial assets measured at fair value through
other comprehensive income in accordance with paragraph 4.1.2A and
for investments in equity instruments accounted for in accordance with
paragraph 5.7.5.
Derecognition of financial assets (Section 3.2)
B3.2.1 The following flow chart illustrates the evaluation of whether and to what
extent a financial asset is derecognised.
Consolidate all subsidiaries [Paragraph 3.2.1]
Determine whether the derecognition principle below are applied to
a part or all of an asset (or group of similar assets) [Paragraph 3.2.2]
Have the right to the cash from the asset
expired? [[Paragraph 3.2.3(a)] Yes Derecognise the asset
No
Has the entity transferred its right to receive the
cash flows from the asset? [Paragraph 3.2.4(a)]
No
Has the entity assumed an obligation to pay the
cash flows from the asset that meets the No Continue to recognise
conditions in paragraph 3.2.5? [Paragraph 3.2.4(b)] the asset the asset
Yes
Has the entity transferred substantially all risks
and rewards? [Paragraph 3.2.6(a)] Yes Derecognise the asset
No
Has the entity retained substantially all risks and
Continue to recognise
rewards? [Paragraph 3.2.6(b)] Yes
the asset the asset
No
Has the entity retained control of the asset? Derecognise the asset
[Paragraph 3.2.6(c)] No
Yes
Continue to recognise the asset to the extent of the entity's
continuing involvement
Arrangements under which an entity retains the contractual rights to receive the
cash flows of a financial asset, but assumes a contractual obligation to pay the
cash flows to one or more recipients (paragraph 3.2.4(b))
B3.2.2 The situation described in paragraph 3.2.4(b) (when an entity retains the
contractual rights to receive the cash flows of the financial asset, but assumes a
contractual obligation to pay the cash flows to one or more recipients) occurs, for
example, if the entity is a trust, and issues to investors beneficial interests in the
underlying financial assets that it owns and provides servicing of those financial
assets. In that case, the financial assets qualify for derecognition if the conditions
in paragraphs 3.2.5 and 3.2.6 are met.
B3.2.3 In applying paragraph 3.2.5, the entity could be, for example, the originator of the
financial asset, or it could be a group that includes a subsidiary that has acquired
the financial asset and passes on cash flows to unrelated third party investors.
Evaluation of the transfer of risks and rewards of ownership (paragraph 3.2.6)
B3.2.4 Examples of when an entity has transferred substantially all the risks and rewards
of ownership are:
(a) an unconditional sale of a financial asset;
(b) a sale of a financial asset together with an option to repurchase the financial
asset at its fair value at the time of repurchase; and
(c) a sale of a financial asset together with a put or call option that is deeply out
of the money (ie an option that is so far out of the money it is highly
unlikely to go into the money before expiry).
B3.2.5 Examples of when an entity has retained substantially all the risks and rewards of
ownership are:
(a) a sale and repurchase transaction where the repurchase price is a fixed price
or the sale price plus a lender's return;
(b) a securities lending agreement;
(c) a sale of a financial asset together with a total return swap that transfers the
market risk exposure back to the entity;
(d) a sale of a financial asset together with a deep in-the-money put or call
option (ie an option that is so far in the money that it is highly unlikely to go
out of the money before expiry); and
(e) a sale of short-term receivables in which the entity guarantees to
compensate the transferee for credit losses that are likely to occur.
B3.2.6 If an entity determines that as a result of the transfer, it has transferred
substantially all the risks and rewards of ownership of the transferred asset, it does
not recognise the transferred asset again in a future period, unless it reacquires the
transferred asset in a new transaction.
Evaluation of the transfer of control
B3.2.7 An entity has not retained control of a transferred asset if the transferee has the
practical ability to sell the transferred asset. An entity has retained control of a
transferred asset if the transferee does not have the practical ability to sell the
transferred asset. A transferee has the practical ability to sell the transferred asset
if it is traded in an active market because the transferee could repurchase the
transferred asset in the market if it needs to return the asset to the entity. For
example, a transferee may have the practical ability to sell a transferred asset if the
transferred asset is subject to an option that allows the entity to repurchase it, but
the transferee can readily obtain the transferred asset in the market if the option is
exercised. A transferee does not have the practical ability to sell the transferred
asset if the entity retains such an option and the transferee cannot readily obtain
the transferred asset in the market if the entity exercises its option.
B3.2.8 The transferee has the practical ability to sell the transferred asset only if the
transferee can sell the transferred asset in its entirety to an unrelated third party
and is able to exercise that ability unilaterally and without imposing additional
restrictions on the transfer. The critical question is what the transferee is able to do
in practice, not what contractual rights the transferee has concerning what it can
do with the transferred asset or what contractual prohibitions exist. In particular:
(a) a contractual right to dispose of the transferred asset has little practical
effect if there is no market for the transferred asset, and
(b) an ability to dispose of the transferred asset has little practical effect if it
cannot be exercised freely. For that reason:
(i) the transferee's ability to dispose of the transferred asset must be
independent of the actions of others (ie it must be a unilateral ability),
and
(ii) the transferee must be able to dispose of the transferred asset without
needing to attach restrictive conditions or `strings' to the transfer (eg
conditions about how a loan asset is serviced or an option giving the
transferee the right to repurchase the asset).
B3.2.9 That the transferee is unlikely to sell the transferred asset does not, of itself, mean
that the transferor has retained control of the transferred asset. However, if a put
option or guarantee constrains the transferee from selling the transferred asset,
then the transferor has retained control of the transferred asset. For example, if a
put option or guarantee is sufficiently valuable it constrains the transferee from
selling the transferred asset because the transferee would, in practice, not sell the
transferred asset to a third party without attaching a similar option or other
restrictive conditions. Instead, the transferee would hold the transferred asset so as
to obtain payments under the guarantee or put option. Under these circumstances
the transferor has retained control of the transferred asset.
Transfers that qualify for derecognition
B3.2.10 An entity may retain the right to a part of the interest payments on transferred
assets as compensation for servicing those assets. The part of the interest
payments that the entity would give up upon termination or transfer of the
servicing contract is allocated to the servicing asset or servicing liability. The part
of the interest payments that the entity would not give up is an interest-only strip
receivable. For example, if the entity would not give up any interest upon
termination or transfer of the servicing contract, the entire interest spread is an
interest-only strip receivable. For the purposes of applying paragraph 3.2.13, the
fair values of the servicing asset and interest-only strip receivable are used to
allocate the carrying amount of the receivable between the part of the asset that is
derecognised and the part that continues to be recognised. If there is no servicing
fee specified or the fee to be received is not expected to compensate the entity
adequately for performing the servicing, a liability for the servicing obligation is
recognised at fair value.
B3.2.11 When measuring the fair values of the part that continues to be recognised and
the part that is derecognised for the purposes of applying paragraph 3.2.13, an
entity applies the fair value measurement requirements in Ind AS 113 in addition
to paragraph 3.2.14.
Transfers that do not qualify for derecognition
B3.2.12 The following is an application of the principle outlined in paragraph 3.2.15. If a
guarantee provided by the entity for default losses on the transferred asset
prevents a transferred asset from being derecognised because the entity has
retained substantially all the risks and rewards of ownership of the transferred
asset, the transferred asset continues to be recognised in its entirety and the
consideration received is recognised as a liability.
Continuing involvement in transferred assets
B3.2.13 The following are examples of how an entity measures a transferred asset and the
associated liability under paragraph 3.2.16.
All assets
(a) If a guarantee provided by an entity to pay for default losses on a transferred
asset prevents the transferred asset from being derecognised to the extent of
the continuing involvement, the transferred asset at the date of the transfer is
measured at the lower of (i) the carrying amount of the asset and (ii) the
maximum amount of the consideration received in the transfer that the
entity could be required to repay (`the guarantee amount'). The associated
liability is initially measured at the guarantee amount plus the fair value of
the guarantee (which is normally the consideration received for the
guarantee). Subsequently, the initial fair value of the guarantee is recognised
in profit or loss when (or as) the obligation is satisfied (in accordance with
the principles of Ind AS 115) and the carrying value of the asset is reduced
by any loss allowance.
Assets measured at amortised cost
(b) If a put option obligation written by an entity or call option right held by an
entity prevents a transferred asset from being derecognised and the entity
measures the transferred asset at amortised cost, the associated liability is
measured at its cost (ie the consideration received) adjusted for the
amortisation of any difference between that cost and the gross carrying
amount of the transferred asset at the expiration date of the option. For
example, assume that the gross carrying amount of the asset on the date of
the transfer is Rs.98 and that the consideration received is Rs.95. The gross
carrying amount of the asset on the option exercise date will be Rs.100. The
initial carrying amount of the associated liability is Rs.95 and the difference
between Rs.95 and Rs.100 is recognised in profit or loss using the effective
interest method. If the option is exercised, any difference between the
carrying amount of the associated liability and the exercise price is
recognised in profit or loss.
Assets measured at fair value
(c) If a call option right retained by an entity prevents a transferred asset from
being derecognised and the entity measures the transferred asset at fair
value, the asset continues to be measured at its fair value. The associated
liability is measured at (i) the option exercise price less the time value of the
option if the option is in or at the money, or (ii) the fair value of the
transferred asset less the time value of the option if the option is out of the
money. The adjustment to the measurement of the associated liability
ensures that the net carrying amount of the asset and the associated liability
is the fair value of the call option right. For example, if the fair value of the
underlying asset is Rs.80, the option exercise price is Rs.95 and the time
value of the option is Rs.5, the carrying amount of the associated liability is
Rs.75 (Rs.80 Rs.5) and the carrying amount of the transferred asset is
Rs.80 (ie its fair value).
(d) If a put option written by an entity prevents a transferred asset from being
derecognised and the entity measures the transferred asset at fair value, the
associated liability is measured at the option exercise price plus the time
value of the option. The measurement of the asset at fair value is limited to
the lower of the fair value and the option exercise price because the entity
has no right to increases in the fair value of the transferred asset above the
exercise price of the option. This ensures that the net carrying amount of the
asset and the associated liability is the fair value of the put option obligation.
For example, if the fair value of the underlying asset is Rs.120, the option
exercise price is Rs.100 and the time value of the option is Rs.5, the
carrying amount of the associated liability is Rs.105 (Rs.100 + Rs.5) and the
carrying amount of the asset is Rs.100 (in this case the option exercise
price).
(e) If a collar, in the form of a purchased call and written put, prevents a
transferred asset from being derecognised and the entity measures the asset
at fair value, it continues to measure the asset at fair value. The associated
liability is measured at (i) the sum of the call exercise price and fair value of
the put option less the time value of the call option, if the call option is in or
at the money, or (ii) the sum of the fair value of the asset and the fair value
of the put option less the time value of the call option if the call option is out
of the money. The adjustment to the associated liability ensures that the net
carrying amount of the asset and the associated liability is the fair value of
the options held and written by the entity. For example, assume an entity
transfers a financial asset that is measured at fair value while simultaneously
purchasing a call with an exercise price of Rs.120 and writing a put with an
exercise price of Rs.80. Assume also that the fair value of the asset is
Rs.100 at the date of the transfer. The time value of the put and call are Rs.1
and Rs.5 respectively. In this case, the entity recognises an asset of Rs.100
(the fair value of the asset) and a liability of Rs.96 [(RRs.100 + Rs.1)
Rs.5]. This gives a net asset value of Rs.4, which is the fair value of the
options held and written by the entity.
All transfers
B3.2.14 To the extent that a transfer of a financial asset does not qualify for derecognition,
the transferor's contractual rights or obligations related to the transfer are not
accounted for separately as derivatives if recognising both the derivative and
either the transferred asset or the liability arising from the transfer would result in
recognising the same rights or obligations twice. For example, a call option
retained by the transferor may prevent a transfer of financial assets from being
accounted for as a sale. In that case, the call option is not separately recognised as
a derivative asset.
B3.2.15 To the extent that a transfer of a financial asset does not qualify for derecognition,
the transferee does not recognise the transferred asset as its asset. The transferee
derecognises the cash or other consideration paid and recognises a receivable from
the transferor. If the transferor has both a right and an obligation to reacquire
control of the entire transferred asset for a fixed amount (such as under a
repurchase agreement), the transferee may measure its receivable at amortised
cost if it meets the criteria in paragraph 4.1.2.
Examples
B3.2.16 The following examples illustrate the application of the derecognition principles
of this Standard.
(a) Repurchase agreements and securities lending. If a financial asset is sold
under an agreement to repurchase it at a fixed price or at the sale price plus
a lender's return or if it is loaned under an agreement to return it to the
transferor, it is not derecognised because the transferor retains substantially
all the risks and rewards of ownership. If the transferee obtains the right to
sell or pledge the asset, the transferor reclassifies the asset in its statement of
balance sheet, for example, as a loaned asset or repurchase receivable.
(b) Repurchase agreements and securities lending--assets that are
substantially the same. If a financial asset is sold under an agreement to
repurchase the same or substantially the same asset at a fixed price or at the
sale price plus a lender's return or if a financial asset is borrowed or loaned
under an agreement to return the same or substantially the same asset to the
transferor, it is not derecognised because the transferor retains substantially
all the risks and rewards of ownership.
(c) Repurchase agreements and securities lending--right of substitution. If a
repurchase agreement at a fixed repurchase price or a price equal to the sale
price plus a lender's return, or a similar securities lending transaction,
provides the transferee with a right to substitute assets that are similar and
of equal fair value to the transferred asset at the repurchase date, the asset
sold or lent under a repurchase or securities lending transaction is not
derecognised because the transferor retains substantially all the risks and
rewards of ownership.
(d) Repurchase right of first refusal at fair value. If an entity sells a financial
asset and retains only a right of first refusal to repurchase the transferred
asset at fair value if the transferee subsequently sells it, the entity
derecognises the asset because it has transferred substantially all the risks
and rewards of ownership.
(e) Wash sale transaction. The repurchase of a financial asset shortly after it has
been sold is sometimes referred to as a wash sale. Such a repurchase does
not preclude derecognition provided that the original transaction met the
derecognition requirements. However, if an agreement to sell a financial
asset is entered into concurrently with an agreement to repurchase the same
asset at a fixed price or the sale price plus a lender's return, then the asset is
not derecognised.
(f) Put options and call options that are deeply in the money. If a transferred
financial asset can be called back by the transferor and the call option is
deeply in the money, the transfer does not qualify for derecognition because
the transferor has retained substantially all the risks and rewards of
ownership. Similarly, if the financial asset can be put back by the transferee
and the put option is deeply in the money, the transfer does not qualify for
derecognition because the transferor has retained substantially all the risks
and rewards of ownership.
(g) Put options and call options that are deeply out of the money. A financial
asset that is transferred subject only to a deep out-of-the-money put option
held by the transferee or a deep out-of-the-money call option held by the
transferor is derecognised. This is because the transferor has transferred
substantially all the risks and rewards of ownership.
(h) Readily obtainable assets subject to a call option that is neither deeply in
the money nor deeply out of the money. If an entity holds a call option on an
asset that is readily obtainable in the market and the option is neither deeply
in the money nor deeply out of the money, the asset is derecognised. This is
because the entity (i) has neither retained nor transferred substantially all the
risks and rewards of ownership, and (ii) has not retained control. However,
if the asset is not readily obtainable in the market, derecognition is
precluded to the extent of the amount of the asset that is subject to the call
option because the entity has retained control of the asset.
(i) A not readily obtainable asset subject to a put option written by an entity
that is neither deeply in the money nor deeply out of the money. If an entity
transfers a financial asset that is not readily obtainable in the market, and
writes a put option that is not deeply out of the money, the entity neither
retains nor transfers substantially all the risks and rewards of ownership
because of the written put option. The entity retains control of the asset
if the put option is sufficiently valuable to prevent the transferee from
selling the asset, in which case the asset continues to be recognised to the
extent of the transferor's continuing involvement (see paragraph B3.2.9).
The entity transfers control of the asset if the put option is not sufficiently
valuable to prevent the transferee from selling the asset, in which case the
asset is derecognised.
(j) Assets subject to a fair value put or call option or a forward repurchase
agreement. A transfer of a financial asset that is subject only to a put or call
option or a forward repurchase agreement that has an exercise or repurchase
price equal to the fair value of the financial asset at the time of repurchase
results in derecognition because of the transfer of substantially all the risks
and rewards of ownership.
(k) Cash-settled call or put options. An entity evaluates the transfer of a
financial asset that is subject to a put or call option or a forward repurchase
agreement that will be settled net in cash to determine whether it has
retained or transferred substantially all the risks and rewards of ownership.
If the entity has not retained substantially all the risks and rewards of
ownership of the transferred asset, it determines whether it has retained
control of the transferred asset. That the put or the call or the forward
repurchase agreement is settled net in cash does not automatically mean that
the entity has transferred control (see paragraphs B3.2.9 and (g), (h) and (i)
above).
(l) Removal of accounts provision. A removal of accounts provision is an
unconditional repurchase (call) option that gives an entity the right to
reclaim assets transferred subject to some restrictions. Provided that such an
option results in the entity neither retaining nor transferring substantially all
the risks and rewards of ownership, it precludes derecognition only to the
extent of the amount subject to repurchase (assuming that the transferee
cannot sell the assets). For example, if the carrying amount and proceeds
from the transfer of loan assets are Rs.100,000 and any individual loan
could be called back but the aggregate amount of loans that could be
repurchased could not exceed Rs.10,000, Rs.90,000 of the loans would
qualify for derecognition.
(m) Clean-up calls. An entity, which may be a transferor, that services
transferred assets may hold a clean-up call to purchase remaining
transferred assets when the amount of outstanding assets falls to a specified
level at which the cost of servicing those assets becomes burdensome in
relation to the benefits of servicing. Provided that such a clean-up call
results in the entity neither retaining nor transferring substantially all the
risks and rewards of ownership and the transferee cannot sell the assets, it
precludes derecognition only to the extent of the amount of the assets that is
subject to the call option.
(n) Subordinated retained interests and credit guarantees. An entity may
provide the transferee with credit enhancement by subordinating some or all
of its interest retained in the transferred asset. Alternatively, an entity may
provide the transferee with credit enhancement in the form of a credit
guarantee that could be unlimited or limited to a specified amount. If the
entity retains substantially all the risks and rewards of ownership of the
transferred asset, the asset continues to be recognised in its entirety. If the
entity retains some, but not substantially all, of the risks and rewards of
ownership and has retained control, derecognition is precluded to the extent
of the amount of cash or other assets that the entity could be required to pay.
(o) Total return swaps. An entity may sell a financial asset to a transferee and
enter into a total return swap with the transferee, whereby all of the interest
payment cash flows from the underlying asset are remitted to the entity in
exchange for a fixed payment or variable rate payment and any increases or
declines in the fair value of the underlying asset are absorbed by the entity.
In such a case, derecognition of all of the asset is prohibited.
(o) Interest rate swaps. An entity may transfer to a transferee a fixed rate
financial asset and enter into an interest rate swap with the transferee to
receive a fixed interest rate and pay a variable interest rate based on a
notional amount that is equal to the principal amount of the transferred
financial asset. The interest rate swap does not preclude derecognition of
the transferred asset provided the payments on the swap are not conditional
on payments being made on the transferred asset.
(p) Amortising interest rate swaps. An entity may transfer to a transferee a
fixed rate financial asset that is paid off over time, and enter into an
amortising interest rate swap with the transferee to receive a fixed interest
rate and pay a variable interest rate based on a notional amount. If the
notional amount of the swap amortises so that it equals the principal
amount of the transferred financial asset outstanding at any point in time,
the swap would generally result in the entity retaining substantial
prepayment risk, in which case the entity either continues to recognise all
of the transferred asset or continues to recognise the transferred asset to the
extent of its continuing involvement. Conversely, if the amortisation of the
notional amount of the swap is not linked to the principal amount
outstanding of the transferred asset, such a swap would not result in the
entity retaining prepayment risk on the asset. Hence, it would not preclude
derecognition of the transferred asset provided the payments on the swap
are not conditional on interest payments being made on the transferred asset
and the swap does not result in the entity retaining any other significant
risks and rewards of ownership on the transferred asset.
(q) Write-off. An entity has no reasonable expectations of recovering the
contractual cash flows on a financial asset in its entirety or a portion
thereof.
B3.2.17 This paragraph illustrates the application of the continuing involvement approach
when the entity's continuing involvement is in a part of a financial asset.
Assume an entity has a portfolio of prepayable loans whose coupon and effective
interest rate is 10 per cent and whose principal amount and amortised cost is
Rs.10,000. It enters into a transaction in which, in return for a payment of
Rs.9,115, the transferee obtains the right to Rs.9,000 of any collections of
principal plus interest thereon at 9.5 per cent. The entity retains rights to
Rs.1,000 of any collections of principal plus interest thereon at 10 per cent, plus
the excess spread of 0.5 per cent on the remaining Rs.9,000 of principal.
Collections from prepayments are allocated between the entity and the transferee
proportionately in the ratio of 1:9, but any defaults are deducted from the entity's
interest of Rs.1,000 until that interest is exhausted. The fair value of the loans at
the date of the transaction is Rs.10,100 and the fair value of the excess spread of
0.5 per cent is Rs.40.
The entity determines that it has transferred some significant risks and rewards
of ownership (for example, significant prepayment risk) but has also retained
some significant risks and rewards of ownership (because of its subordinated
retained interest) and has retained control. It therefore applies the continuing
involvement approach.
To apply this Standard, the entity analyses the transaction as (a) a retention of a
fully proportionate retained interest of Rs.1,000, plus (b) the subordination of
that retained interest to provide credit enhancement to the transferee for credit
losses.
The entity calculates that Rs.9,090 (90% × Rs.10,100) of the consideration
received of Rs.9,115 represents the consideration for a fully proportionate 90
per cent share. The remainder of the consideration received (Rs.25) represents
consideration received for subordinating its retained interest to provide credit
enhancement to the transferee for credit losses. In addition, the excess spread of
0.5 per cent represents consideration received for the credit enhancement.
Accordingly, the total consideration received for the credit enhancement is
Rs.65 (Rs.25 + Rs.40).
The entity calculates the gain or loss on the sale of the 90 per cent share of cash
flows. Assuming that separate fair values of the 90 per cent part transferred and
the 10 per cent part retained are not available at the date of the transfer, the
entity allocates the carrying amount of the asset in accordance with paragraph
3.2.14 of Ind AS 109 as follows:
Allocated carrying
Fair value Percentage amount
Portion transferred 9,090 90% 9,000
Portion retained 1,010 10% 1,000
Total 10,100 10,000
The entity computes its gain or loss on the sale of the 90 per cent share of the
cash flows by deducting the allocated carrying amount of the portion
transferred from the consideration received, ie Rs.90 (Rs.9,090 Rs.9,000).
The carrying amount of the portion retained by the entity is Rs.1,000.
In addition, the entity recognises the continuing involvement that results from the
subordination of its retained interest for credit losses. Accordingly, it recognises
an asset of Rs.1,000 (the maximum amount of the cash flows it would not receive
under the subordination), and an associated liability of Rs.1,065 (which is the
maximum amount of the cash flows it would not receive under the subordination,
ie Rs.1,000 plus the fair value of the subordination of Rs.65).
The entity uses all of the above information to account for the transaction as
follows:
Debit Credit
Original asset 9,000
Asset recognised for subordination or the
residual interest 1,000
Asset for the consideration received in the
form of excess spread 40
Profit or loss (gain on transfer) 90
Liability 1,065
Cash received 9,115
Total 10,155 10,155
Immediately following the transaction, the carrying amount of the asset is
Rs.2,040 comprising Rs.1,000, representing the allocated cost of the portion
retained, and Rs.1,040, representing the entity's additional continuing
involvement from the subordination of its retained interest for credit losses
(which includes the excess spread of Rs.40).
In subsequent periods, the entity recognises the consideration received for the
credit enhancement (Rs.65) on a time proportion basis, accrues interest on the
recognised asset using the effective interest method and recognises any
impairment losses on the recognised assets. As an example of the latter, assume
that in the following year there is an impairment loss on the underlying loans of
Rs.300. The entity reduces its recognised asset by Rs.600 (Rs.300 relating to its
retained interest and Rs.300 relating to the additional continuing involvement that
arises from the subordination of its retained interest for impairment losses), and
reduces its recognised liability by Rs.300. The net result is a charge to profit or
loss for impairment losses of Rs.300.
Derecognition of financial liabilities (Section 3.3)
B3.3.1 A financial liability (or part of it) is extinguished when the debtor either:
(a) discharges the liability (or part of it) by paying the creditor, normally with
cash, other financial assets, goods or services; or
(b) is legally released from primary responsibility for the liability (or part of it)
either by process of law or by the creditor. (If the debtor has given a
guarantee this condition may still be met.)
B3.3.2 If an issuer of a debt instrument repurchases that instrument, the debt is
extinguished even if the issuer is a market maker in that instrument or intends to
resell it in the near term.
B3.3.3 Payment to a third party, including a trust (sometimes called `in-substance
defeasance'), does not, by itself, relieve the debtor of its primary obligation to the
creditor, in the absence of legal release.
B3.3.4 If a debtor pays a third party to assume an obligation and notifies its creditor that
the third party has assumed its debt obligation, the debtor does not derecognise the
debt obligation unless the condition in paragraph B3.3.1(b) is met. If the debtor
pays a third party to assume an obligation and obtains a legal release from its
creditor, the debtor has extinguished the debt. However, if the debtor agrees to
make payments on the debt to the third party or direct to its original creditor, the
debtor recognises a new debt obligation to the third party.
B3.3.5 Although legal release, whether judicially or by the creditor, results in
derecognition of a liability, the entity may recognise a new liability if the
derecognition criteria in paragraphs 3.2.13.2.23 are not met for the financial
assets transferred. If those criteria are not met, the transferred assets are not
derecognised, and the entity recognises a new liability relating to the transferred
assets.
B3.3.6 For the purpose of paragraph 3.3.2, the terms are substantially different if the
discounted present value of the cash flows under the new terms, including any
fees paid net of any fees received and discounted using the original effective
interest rate, is at least 10 per cent different from the discounted present value of
the remaining cash flows of the original financial liability. If an exchange of debt
instruments or modification of terms is accounted for as an extinguishment, any
costs or fees incurred are recognised as part of the gain or loss on the
extinguishment. If the exchange or modification is not accounted for as an
extinguishment, any costs or fees incurred adjust the carrying amount of the
liability and are amortised over the remaining term of the modified liability.
B3.3.7 In some cases, a creditor releases a debtor from its present obligation to make
payments, but the debtor assumes a guarantee obligation to pay if the party
assuming primary responsibility defaults. In these circumstances the debtor:
(a) recognises a new financial liability based on the fair value of its obligation
for the guarantee, and
(b) recognises a gain or loss based on the difference between (i) any proceeds
paid and (ii) the carrying amount of the original financial liability less the
fair value of the new financial liability.
Classification (Chapter 4)
Classification of financial assets (Section 4.1)
The entity's business model for managing financial assets
B4.1.1 Paragraph 4.1.1(a) requires an entity to classify financial assets on the basis of the
entity's business model for managing the financial assets, unless paragraph 4.1.5
applies. An entity assesses whether its financial assets meet the condition in
paragraph 4.1.2(a) or the condition in paragraph 4.1.2A(a) on the basis of the
business model as determined by the entity's key management personnel (as
defined in Ind AS 24 Related Party Disclosures).
B4.1.2 An entity's business model is determined at a level that reflects how groups of
financial assets are managed together to achieve a particular business objective.
The entity's business model does not depend on management's intentions for an
individual instrument. Accordingly, this condition is not an instrument-by-
instrument approach to classification and should be determined on a higher level of
aggregation. However, a single entity may have more than one business model for
managing its financial instruments. Consequently, classification need not be
determined at the reporting entity level. For example, an entity may hold a
portfolio of investments that it manages in order to collect contractual cash flows
and another portfolio of investments that it manages in order to trade to realise fair
value changes. Similarly, in some circumstances, it may be appropriate to separate
a portfolio of financial assets into subportfolios in order to reflect the level at
which an entity manages those financial assets. For example, that may be the case
if an entity originates or purchases a portfolio of mortgage loans and manages
some of the loans with an objective of collecting contractual cash flows and
manages the other loans with an objective of selling them.
B4.1.2A An entity's business model refers to how an entity manages its financial assets in
order to generate cash flows. That is, the entity's business model determines
whether cash flows will result from collecting contractual cash flows, selling
financial assets or both. Consequently, this assessment is not performed on the
basis of scenarios that the entity does not reasonably expect to occur, such as so-
called `worst case' or `stress case' scenarios. For example, if an entity expects that
it will sell a particular portfolio of financial assets only in a stress case scenario,
that scenario would not affect the entity's assessment of the business model for
those assets if the entity reasonably expects that such a scenario will not occur. If
cash flows are realised in a way that is different from the entity's expectations at
the date that the entity assessed the business model (for example, if the entity sells
more or fewer financial assets than it expected when it classified the assets), that
does not give rise to a prior period error in the entity's financial statements (see Ind
AS 8) nor does it change the classification of the remaining financial assets held in
that business model (ie those assets that the entity recognised in prior periods and
still holds) as long as the entity considered all relevant information that was
available at the time that it made the business model assessment. However, when
an entity assesses the business model for newly originated or newly purchased
financial assets, it must consider information about how cash flows were realised
in the past, along with all other relevant information.
B4.1.2B An entity's business model for managing financial assets is a matter of fact and
not merely an assertion. It is typically observable through the activities that the
entity undertakes to achieve the objective of the business model. An entity will
need to use judgement when it assesses its business model 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:
(a) how the performance of the business model and the financial assets held
within that business model are evaluated and reported to the entity's key
management personnel;
(b) the risks that affect the performance of the business model (and the financial
assets held within that business model) and, in particular, the way in which
those risks are managed; and
(c) how managers of the business are compensated (for example, whether the
compensation is based on the fair value of the assets managed or on the
contractual cash flows collected).
A business model whose objective is to hold assets in order to collect contractual
cash flows
B4.1.2C Financial assets that are held within a business model whose objective is to hold
assets in order to collect contractual cash flows are managed to realise cash flows
by collecting contractual payments over the life of the instrument. That is, the
entity manages the assets held within the portfolio to collect those particular
contractual cash flows (instead of managing the overall return on the portfolio by
both holding and selling assets). In determining whether cash flows are going to
be realised by collecting the financial assets' contractual cash flows, it is
necessary to consider the frequency, value and timing of sales in prior periods, the
reasons for those sales and expectations about future sales activity. However sales
in themselves do not determine the business model and therefore cannot be
considered in isolation. Instead, information about past sales and expectations
about future sales provide evidence related to how the entity's stated objective for
managing the financial assets is achieved and, specifically, how cash flows are
realised. An entity must consider information about past sales within the context
of the reasons for those sales and the conditions that existed at that time as
compared to current conditions.
B4.1.3 Although the objective of an entity's business model may be to hold financial assets
in order to collect contractual cash flows, the entity need not hold all of those
instruments until maturity. Thus an entity's business model can be to hold
financial assets to collect contractual cash flows even when sales of financial
assets occur or are expected to occur in the future.
B4.1.3A The business model may be to hold assets to collect contractual cash flows even if
the entity sells financial assets when there is an increase in the assets' credit risk.
To determine whether there has been an increase in the assets' credit risk, the
entity considers reasonable and supportable information, including forward
looking information. Irrespective of their frequency and value, sales due to an
increase in the assets' credit risk are not inconsistent with a business model whose
objective is to hold financial assets to collect contractual cash flows because the
credit quality of financial assets is relevant to the entity's ability to collect
contractual cash flows. Credit risk management activities that are aimed at
minimising potential credit losses due to credit deterioration are integral to such a
business model. Selling a financial asset because it no longer meets the credit
criteria specified in the entity's documented investment policy is an example of a
sale that has occurred due to an increase in credit risk. However, in the absence of
such a policy, the entity may demonstrate in other ways that the sale occurred due
to an increase in credit risk.
B4.1.3B Sales that occur for other reasons, such as sales made to manage credit
concentration risk (without an increase in the assets' credit risk), may also be
consistent with a business model whose objective is to hold financial assets in
order to collect contractual cash flows. In particular, such sales may be consistent
with a business model whose objective is to hold financial assets in order to
collect contractual cash flows if those sales are infrequent (even if significant in
value) or insignificant in value both individually and in aggregate (even if
frequent). If more than an infrequent number of such sales are made out of a
portfolio and those sales are more than insignificant in value (either individually
or in aggregate), the entity needs to assess whether and how such sales are
consistent with an objective of collecting contractual cash flows. Whether a third
party imposes the requirement to sell the financial assets, or that activity is at the
entity's discretion, is not relevant to this assessment. An increase in the frequency
or value of sales in a particular period is not necessarily inconsistent with an
objective to hold financial assets in order to collect contractual cash flows, if an
entity can explain the reasons for those sales and demonstrate why those sales do
not reflect a change in the entity's business model. In addition, sales may be
consistent with the objective of holding financial assets in order to collect
contractual cash flows if the sales are made close to the maturity of the financial
assets and the proceeds from the sales approximate the collection of the remaining
contractual cash flows.
B4.1.4 The following are examples of when the objective of an entity's business model
may be to hold financial assets to collect the contractual cash flows. This list of
examples is not exhaustive. Furthermore, the examples are not intended to discuss
all factors that may be relevant to the assessment of the entity's business model
nor specify the relative importance of the factors.
Example Analysis
An entity holds investments to collect Although the entity considers, among
their contractual cash flows. The other information, the financial assets'
funding needs of the entity are fair values from a liquidity perspective
predictable and the maturity of its (ie the cash amount that would be
financial assets is matched to the realised if the entity needs to sell
entity's estimated funding needs. assets), the entity's objective is to hold
the financial assets in order to collect
The entity performs credit risk the contractual cash flows. Sales would
management activities with the not contradict that objective if they
objective of minimising credit losses. were in response to an increase in the
In the past, sales have typically assets' credit risk, for example if the
occurred when the financial assets' assets no longer meet the credit criteria
credit risk has increased such that the specified in the entity's documented
assets no longer meet the credit criteria investment policy. Infrequent sales
specified in the entity's documented resulting from unanticipated funding
investment policy. In addition, needs (eg in a stress case scenario) also
infrequent sales have occurred as a would not contradict that objective,
result of unanticipated funding needs. even if such sales are significant in
Reports to key management personnel value.
focus on the credit quality of the
financial assets and the contractual
return. The entity also monitors fair
values of the financial assets, among
other information.
Example 2 Analysis
An entity's business model is to The objective of the entity's business
purchase portfolios of financial assets, model is to hold the financial assets
such as loans. Those portfolios may or in order to collect the contractual
may not include financial assets that are cash flows.
credit impaired.
The same analysis would apply even
If payment on the loans is not made on if the entity does not expect to
a timely basis, the entity attempts to receive all of the contractual cash
realise the contractual cash flows flows (eg some of the financial
through various means--for example, assets are credit impaired at initial
by contacting the debtor by mail, recognition).
telephone or other methods. The
entity's objective is to collect the Moreover, the fact that the entity enters
contractual cash flows and the entity into derivatives to modify the cash
does not manage any of the loans in this flows of the portfolio does not in itself
portfolio with an objective of realising change the entity's business model
cash flows by selling them.
In some cases, the entity enters into
interest rate swaps to change the
interest rate on particular financial
assets in a portfolio from a floating
interest rate to a fixed interest rate.
Analysis
Example 3 The consolidated group originated the
loans with the objective of holding
An entity has a business model with them to collect the contractual cash
the objective of originating loans to flows.
customers and subsequently selling
those loans to a securitisation vehicle. However, the originating entity has an
The securitisation vehicle issues objective of realising cash flows on the
instruments to investors. loan portfolio by selling the loans to the
securitisation vehicle, so for the
The originating entity controls the purposes of its separate financial
securitisation vehicle and thus statements it would not be considered
consolidates it. to be managing this portfolio in order to
collect the contractual cash flows.
The securitisation vehicle collects the
contractual cash flows from the loans
and passes them on to its investors.
It is assumed for the purposes of this
example that the loans continue to be
recognised in the consolidated balance
sheet because they are not
derecognised by the securitisation
vehicle.
Example 4 Analysis
A financial institution holds financial The objective of the entity's business
assets to meet liquidity needs in a model is to hold the financial assets to
`stress case' scenario (eg, a run on the collect contractual cash flows.
bank's deposits). The entity does not
anticipate selling these assets except The analysis would not change even if
in such scenarios. during a previous stress case scenario
the entity had sales that were
The entity monitors the credit quality significant in value in order to meet its
of the financial assets and its objective liquidity needs. Similarly, recurring
in managing the financial assets is to sales activity that is insignificant in
collect the contractual cash flows. The value is not inconsistent with holding
entity evaluates the performance of the financial assets to collect contractual
assets on the basis of interest revenue cash flows.
earned and credit losses realised.
In contrast, if an entity holds financial
However, the entity also monitors the assets to meet its everyday liquidity
fair value of the financial assets from a needs and meeting that objective
liquidity perspective to ensure that the involves frequent sales that are
cash amount that would be realised if significant in value, the objective of
the entity needed to sell the assets in a the entity's business model is not to
stress case scenario would be sufficient hold the financial assets to collect
to meet the entity's liquidity needs. contractual cash flows.
Periodically, the entity makes sales that Similarly, if the entity is required by its
are insignificant in value to regulator to routinely sell financial
demonstrate liquidity. assets to demonstrate that the assets are
liquid, and the value of the assets sold
is significant, the entity's business
model is not to hold financial assets to
collect contractual cash flows. Whether
a third party imposes the requirement
to sell the financial assets, or that
activity is at the entity's discretion, is
not relevant to the analysis.
A business model whose objective is achieved by both collecting contractual cash
flows and selling financial assets
B4.1.4A An entity may hold financial assets in a business model whose objective is
achieved by both collecting contractual cash flows and selling financial assets. In
this type of business model, the entity's key management personnel have made a
decision that both collecting contractual cash flows and selling financial assets are
integral to achieving the objective of the business model. There are various
objectives that may be consistent with this type of business model. For example,
the objective of the business model may be to manage everyday liquidity needs, to
maintain a particular interest yield profile or to match the duration of the financial
assets to the duration of the liabilities that those assets are funding. To achieve
such an objective, the entity will both collect contractual cash flows and sell
financial assets.
B4.1.4B Compared to a business model whose objective is to hold financial assets to
collect contractual cash flows, this business model will typically involve greater
frequency and value of sales. This is because selling financial assets is integral to
achieving the business model's objective instead of being only incidental to it.
However, there is no threshold for the frequency or value of sales that must occur
in this business model because both collecting contractual cash flows and selling
financial assets are integral to achieving its objective.
B4.1.4C The following are examples of when the objective of the entity's business model
may be achieved by both collecting contractual cash flows and selling financial
assets. This list of examples is not exhaustive. Furthermore, the examples are not
intended to describe all the factors that may be relevant to the assessment of the
entity's business model nor specify the relative importance of the factors.
Example 5 Analysis
An entity anticipates capital The objective of the business model is
expenditure in a few years. The entity achieved by both collecting contractual
invests its excess cash in short and cash flows and selling financial assets.
long-term financial assets so that it can The entity will make decisions on an
fund the expenditure when the need ongoing basis about whether collecting
arises. Many of the financial assets contractual cash flows or selling
have contractual lives that exceed the financial assets will maximise the
entity's anticipated investment period. return on the portfolio until the need
arises for the invested cash.
The entity will hold financial assets to
collect the contractual cash flows and, In contrast, consider an entity that
when an opportunity arises, it will sell anticipates a cash outflow in five years
financial assets to re-invest the cash in to fund capital expenditure and invests
financial assets with a higher return. excess cash in short-term financial
assets. When the investments mature,
The managers responsible for the the entity reinvests the cash in new
portfolio are remunerated based on the short-term financial assets. The entity
overall return generated by the maintains this strategy until the funds
portfolio. are needed, at which time the entity
uses the proceeds from the maturing
financial assets to fund the capital
expenditure. Only sales that are
insignificant in value occur before
maturity (unless there is an increase in
credit risk). The objective of this
contrasting business model is to hold
financial assets to collect contractual
cash flows.
Example 6 Analysis
A financial institution holds financial The objective of the business model is
assets to meet its everyday liquidity to maximise the return on the portfolio
needs. The entity seeks to minimise the to meet everyday liquidity needs and
costs of managing those liquidity the entity achieves that objective by
needs and therefore actively manages both collecting contractual cash flows
the return on the portfolio. That return and selling financial assets. In other
consists of collecting contractual words, both collecting contractual cash
payments as well as gains and losses flows and selling financial assets are
from the sale of financial assets. integral to achieving the business
model's objective.
As a result, the entity holds financial
assets to collect contractual cash flows
and sells financial assets to reinvest in
higher yielding financial assets or to
better match the duration of its
liabilities. In the past, this strategy has
resulted in frequent sales activity and
such sales have been significant in
value. This activity is expected to
continue in the future.
Example 7 Analysis
An insurer holds financial assets in
order to fund insurance contract The objective of the business model is
liabilities. The insurer uses the to fund the insurance contract
proceeds from the contractual cash liabilities. To achieve this objective,
flows on the financial assets to settle the entity collects contractual cash
insurance contract liabilities as they flows as they come due and sells
come due. To ensure that the financial assets to maintain the desired
contractual cash flows from the profile of the asset portfolio.
financial assets are sufficient to settle
those liabilities, the insurer undertakes Thus both collecting contractual cash
significant buying and selling activity flows and selling financial assets are
on a regular basis to rebalance its integral to achieving the business
portfolio of assets and to meet cash model's objective.
flow needs as they arise.
Other business models
B4.1.5 Financial assets are measured at fair value through profit or loss if they are not
held within a business model whose objective is to hold assets to collect
contractual cash flows or within a business model whose objective is achieved by
both collecting contractual cash flows and selling financial assets (but see also
paragraph 5.7.5). One business model that results in measurement at fair value
through profit or loss is one in which an entity manages the financial assets with
the objective of realising cash flows through the sale of the assets. The entity
makes decisions based on the assets' fair values and manages the assets to realise
those fair values. In this case, the entity's objective will typically result in active
buying and selling. Even though the entity will collect contractual cash flows
while it holds the financial assets, the objective of such a business model is not
achieved by both collecting contractual cash flows and selling financial assets.
This is because the collection of contractual cash flows is not integral to achieving
the business model's objective; instead, it is incidental to it.
B4.1.6 A portfolio of financial assets that is managed and whose performance is
evaluated on a fair value basis (as described in paragraph 4.2.2(b)) is neither held
to collect contractual cash flows nor held both to collect contractual cash flows
and to sell financial assets. The entity is primarily focused on fair value
information and uses that information to assess the assets' performance and to
make decisions. In addition, a portfolio of financial assets that meets the definition
of held for trading is not held to collect contractual cash flows or held both to
collect contractual cash flows and to sell financial assets. For such portfolios, the
collection of contractual cash flows is only incidental to achieving the business
model's objective. Consequently, such portfolios of financial assets must be
measured at fair value through profit or loss.
Contractual cash flows that are solely payments of principal and interest on
the principal amount outstanding
B4.1.7 Paragraph 4.1.1(b) requires an entity to classify a financial on the basis of its
contractual cash flow characteristics if the financial asset is held within a business
model whose objective is to hold assets to collect contractual cash flows or within
a business model whose objective is achieved by both collecting contractual cash
flows and selling financial assets, unless paragraph 4.1.5 applies. To do so, the
condition in paragraphs 4.1.2(b) and 4.1.2A(b) requires an entity to determine
whether the asset's contractual cash flows are solely payments of principal and
interest on the principal amount outstanding.
B4.1.7A Contractual cash flows that are solely payments of principal and interest on the
principal amount outstanding are consistent with a basic lending arrangement. In a
basic lending arrangement, consideration for the time value of money (see
paragraphs B4.1.9AB4.1.9E) and credit risk are typically the most significant
elements of interest. However, in such an arrangement, interest can also include
consideration for other basic lending risks (for example, liquidity risk) and costs
(for example, administrative costs) associated with holding the financial asset for
a particular period of time. In addition, interest can include a profit margin that is
consistent with a basic lending arrangement. In extreme economic circumstances,
interest can be negative if, for example, the holder of a financial asset either
explicitly or implicitly pays for the deposit of its money for a particular period of
time (and that fee exceeds the consideration that the holder receives for the time
value of money, credit risk and other basic lending risks and costs). However,
contractual terms that introduce exposure to risks or volatility in the contractual
cash flows that is unrelated to a basic lending arrangement, such as exposure to
changes in equity prices or commodity prices, do not give rise to contractual cash
flows that are solely payments of principal and interest on the principal amount
outstanding. An originated or a purchased financial asset can be a basic lending
arrangement irrespective of whether it is a loan in its legal form.
B4.1.7B In accordance with paragraph 4.1.3(a), principal is the fair value of the financial
asset at initial recognition. However that principal amount may change over the
life of the financial asset (for example, if there are repayments of principal).
B4.1.8 An entity shall assess whether contractual cash flows are solely payments of
principal and interest on the principal amount outstanding for the currency in
which the financial asset is denominated.
B4.1.9 Leverage is a contractual cash flow characteristic of some financial assets.
Leverage increases the variability of the contractual cash flows with the result that
they do not have the economic characteristics of interest. Stand-alone option,
forward and swap contracts are examples of financial assets that include such
leverage. Thus, such contracts do not meet the condition in paragraphs 4.1.2(b)
and 4.1.2A(b) and cannot be subsequently measured at amortised cost or fair
value through other comprehensive income.
Consideration for the time value of money
B4.1.9A Time value of money is the element of interest that provides consideration for
only the passage of time. That is, the time value of money element does not
provide consideration for other risks or costs associated with holding the financial
asset. In order to assess whether the element provides consideration for only the
passage of time, an entity applies judgement and considers relevant factors such as
the currency in which the financial asset is denominated and the period for which
the interest rate is set.
B4.1.9B However, in some cases, the time value of money element may be modified (ie
imperfect). That would be the case, for example, if a financial asset's interest rate
is periodically reset but the frequency of that reset does not match the tenor of the
interest rate (for example, the interest rate resets every month to a one-year rate)
or if a financial asset's interest rate is periodically reset to an average of particular
short- and long-term interest rates. In such cases, an entity must assess the
modification to determine whether the contractual cash flows represent solely
payments of principal and interest on the principal amount outstanding. In some
circumstances, the entity may be able to make that determination by performing a
qualitative assessment of the time value of money element whereas, in other
circumstances, it may be necessary to perform a quantitative assessment.
B4.1.9C When assessing a modified time value of money element, the objective is to
determine how different the contractual (undiscounted) cash flows could be from
the (undiscounted) cash flows that would arise if the time value of money element
was not modified (the benchmark cash flows). For example, if the financial asset
under assessment contains a variable interest rate that is reset every month to a
one-year interest rate, the entity would compare that financial asset to a financial
instrument with identical contractual terms and the identical credit risk except the
variable interest rate is reset monthly to a one-month interest rate. If the modified
time value of money element could result in contractual (undiscounted) cash flows
that are significantly different from the (undiscounted) benchmark cash flows, the
financial asset does not meet the condition in paragraphs 4.1.2(b) and 4.1.2A(b).
To make this determination, the entity must consider the effect of the modified
time value of money element in each reporting period and cumulatively over the
life of the financial instrument. The reason for the interest rate being set in this
way is not relevant to the analysis. If it is clear, with little or no analysis, whether
the contractual (undiscounted) cash flows on the financial asset under the
assessment could (or could not) be significantly different from the (undiscounted)
benchmark cash flows, an entity need not perform a detailed assessment.
B4.1.9D When assessing a modified time value of money element, an entity must consider
factors that could affect future contractual cash flows. For example, if an entity is
assessing a bond with a five-year term and the variable interest rate is reset every
six months to a five-year rate, the entity cannot conclude that the contractual cash
flows are solely payments of principal and interest on the principal amount
outstanding simply because the interest rate curve at the time of the assessment is
such that the difference between a five-year interest rate and a six-month interest
rate is not significant. Instead, the entity must also consider whether the
relationship between the five-year interest rate and the six-month interest rate
could change over the life of the instrument such that the contractual
(undiscounted) cash flows over the life of the instrument could be significantly
different from the (undiscounted) benchmark cash flows. However, an entity must
consider only reasonably possible scenarios instead of every possible scenario. If
an entity concludes that the contractual (undiscounted) cash flows could be
significantly different from the (undiscounted) benchmark cash flows, the
financial asset does not meet the condition in paragraphs 4.1.2(b) and 4.1.2A(b)
and therefore cannot be measured at amortised cost or fair value through other
comprehensive income.
B4.1.9E In some jurisdictions, the government or a regulatory authority sets interest rates.
For example, such government regulation of interest rates may be part of a broad
macroeconomic policy or it may be introduced to encourage entities to invest in a
particular sector of the economy. In some of these cases, the objective of the time
value of money element is not to provide consideration for only the passage of
time. However, despite paragraphs B4.1.9AB4.1.9D, a regulated interest rate
shall be considered a proxy for the time value of money element for the purpose
of applying the condition in paragraphs 4.1.2(b) and 4.1.2A(b) if that regulated
interest rate provides consideration that is broadly consistent with the passage of
time and does not provide exposure to risks or volatility in the contractual cash
flows that are inconsistent with a basic lending arrangement.
Contractual terms that change the timing or amount of contractual cash
flows
B4.1.10 If a financial asset contains a contractual term that could change the timing or
amount of contractual cash flows (for example, if the asset can be prepaid before
maturity or its term can be extended), the entity must determine whether the
contractual cash flows that could arise over the life of the instrument due to that
contractual term are solely payments of principal and interest on the principal
amount outstanding. To make this determination, the entity must assess the
contractual cash flows that could arise both before, and after, the change in
contractual cash flows. The entity may also need to assess the nature of any
contingent event (ie the trigger) that would change the timing or amount of the
contractual cash flows. While the nature of the contingent event in itself is not a
determinative factor in assessing whether the contractual cash flows are solely
payments of principal and interest, it may be an indicator. For example, compare a
financial instrument with an interest rate that is reset to a higher rate if the debtor
misses a particular number of payments to a financial instrument with an interest
rate that is reset to a higher rate if a specified equity index reaches a particular
level. It is more likely in the former case that the contractual cash flows over the
life of the instrument will be solely payments of principal and interest on the
principal amount outstanding because of the relationship between missed
payments and an increase in credit risk. (See also paragraph B4.1.18.)
B4.1.11 The following are examples of contractual terms that result in contractual cash
flows that are solely payments of principal and interest on the principal amount
outstanding:
(a) a variable interest rate that consists of consideration for the time value of
money, the credit risk associated with the principal amount outstanding
during a particular period of time (the consideration for credit risk may be
determined at initial recognition only, and so may be fixed) and other basic
lending risks and costs, as well as a profit margin;
(b) a contractual term that permits the issuer (ie the debtor) to prepay a debt
instrument or permits the holder (ie the creditor) to put a debt instrument
back to the issuer before maturity and the prepayment amount substantially
represents unpaid amounts of principal and interest on the principal amount
outstanding, which may include reasonable additional compensation for the
early termination of the contract; and
(c) a contractual term that permits the issuer or the holder to extend the
contractual term of a debt instrument (ie an extension option) and the terms
of the extension option result in contractual cash flows during the extension
period that are solely payments of principal and interest on the principal
amount outstanding, which may include reasonable additional compensation
for the extension of the contract.
B4.1.12 Despite paragraph B4.1.10, a financial asset that would otherwise meet the
condition in paragraphs 4.1.2(b) and 4.1.2A(b) but does not do so only as a result
of a contractual term that permits (or requires) the issuer to prepay a debt
instrument or permits (or requires) the holder to put a debt instrument back to the
issuer before maturity is eligible to be measured at amortised cost or fair value
through other comprehensive income (subject to meeting the condition in
paragraph 4.1.2(a) or the condition in paragraph 4.1.2A(a)) if:
(a) the entity acquires or originates the financial asset at a premium or discount
to the contractual par amount;
(b) the prepayment amount substantially represents the contractual par amount
and accrued (but unpaid) contractual interest, which may include reasonable
additional compensation for the early termination of the contract; and
(c) when the entity initially recognises the financial asset, the fair value of the
prepayment feature is insignificant.
B4.1.13 The following examples illustrate contractual cash flows that are solely payments
of principal and interest on the principal amount outstanding. This list of
examples is not exhaustive.
Instrument A Analysis
Instrument A is a bond with a stated The contractual cash flows are solely
maturity date. Payments of principal payments of principal and interest on
and interest on the principal amount the principal amount outstanding.
outstanding are linked to an inflation Linking payments of principal and
index of the currency in which the interest on the principal amount
instrument is issued. The inflation outstanding to an unleveraged inflation
link is not leveraged and the principal index resets the time value of money to
is protected. a current level. In other words, the
interest rate on the instrument reflects
`real' interest. Thus, the interest
amounts are consideration for the time
value of money on the principal
amount outstanding.
However, if the interest payments were
indexed to another variable such as the
debtor's performance (eg the debtor's
net income) or an equity index, the
contractual cash flows are not payments
of principal and interest on the principal
amount outstanding (unless the
indexing to the debtor's performance
results in an adjustment that only
compensates the holder for changes in
the credit risk of the instrument, such
that contractual cash flows are solely
payments of principal and interest).
That is because the contractual cash
flows reflect a return that is inconsistent
with a basic lending arrangement (see
paragraph B4.1.7A).
Instrument B Analysis
Instrument B is a variable interest The contractual cash flows are solely
rate instrument with a stated maturity payments of principal and interest on
date that permits the borrower to the principal amount outstanding
choose the market interest rate on an as long as the interest paid over the life
ongoing basis. For example, at each of the instrument reflects consideration
interest rate reset date, the borrower for the time value of money, for the
can choose to pay three-month credit risk associated with the
LIBOR for a three-month term or instrument and for other basic lending
one-month LIBOR for a one-month risks and costs, as well as a profit
term. margin (see paragraph B4.1.7A). The
fact that the LIBOR interest rate is
reset during the life of the instrument
does not in itself disqualify the
instrument.
However, if the borrower is able to
choose to pay a one-month interest rate
that is reset every three months, the
interest rate is reset with a frequency
that does not match the tenor of the
interest rate. Consequently, the time
value of money element is modified.
Similarly, if an instrument has a
contractual interest rate that is based on
a term that can exceed the instrument's
remaining life (for example, if an
instrument with a five-year maturity
pays a variable rate that is reset
periodically but always reflects a five-
year maturity), the time value of
money element is modified. That is
because the interest payable in each
period is disconnected from the interest
period.
In such cases, the entity must
qualitatively or quantitatively assess
the contractual cash flows against
those on an instrument that is identical
in all respects except the tenor of the
interest rate matches the interest period
to determine if the cash flows are
solely payments of principal and
interest on the principal amount
outstanding. (But see paragraph
B4.1.9E for guidance on regulated
interest rates.)
For example, in assessing a bond with
a five-year term that pays a variable
rate that is reset every six months but
always reflects a five-year maturity, an
entity considers the contractual cash
flows on an instrument that resets
every
six months to a six-month interest rate
but is otherwise identical.
The same analysis would apply if the
borrower is able to choose between the
lender's various published interest rates
(eg the borrower can choose between
the lender's published one-month
variable interest rate and the lender's
published three-month variable interest
rate).
Instrument C Analysis
The contractual cash flows of both:
Instrument C is a bond with a stated
maturity date and pays a variable (a) an instrument that has a fixed
market interest rate. That variable interest rate and
interest rate is capped. (b) an instrument that has a variable
interest rate
are payments of principal and interest
on the principal amount outstanding as
long as the interest reflects
consideration for the time value of
money, for the credit risk associated
with the instrument during the term of
the instrument and for other basic
lending risks and costs, as well as a
profit margin. (See paragraph B4.1.7A)
Consequently, an instrument that is a
combination of (a) and (b) (eg a bond
with an interest rate cap) can have cash
flows that are solely payments of
principal and interest on the principal
amount outstanding. Such a contractual
term may reduce cash flow variability
by setting a limit on a variable interest
rate (eg an interest rate cap or floor) or
increase the cash flow variability
because a fixed rate becomes variable.
Instrument D Analysis
Instrument D is a full recourse loan The fact that a full recourse loan is
and is secured by collateral. collateralised does not in itself affect
the analysis of whether the contractual
cash flows are solely payments of
principal and interest on the principal
amount outstanding.
Instrument E Analysis
Instrument E is issued by a regulated
bank and has a stated maturity date. The holder would analyse the
The instrument pays a fixed interest contractual terms of the financial
rate and all contractual cash flows are instrument to determine whether they
non-discretionary. give rise to cash flows that are solely
payments of principal and interest on
However, the issuer is subject to the principal amount outstanding and
legislation that permits or requires a thus are consistent with a basic lending
national resolving authority to impose arrangement.
losses on holders of particular
instruments, including Instrument E, in That analysis would not consider the
particular circumstances. For example, payments that arise only as a result of
the national resolving authority has the the national resolving authority's
power to write down the par amount of power to impose losses on the holders
Instrument E or to convert it into a of Instrument E. That is because that
fixed number of the issuer's ordinary power, and the resulting payments, are
shares if the national resolving not contractual terms of the financial
authority determines that the issuer is instrument.
having severe financial difficulties,
needs additional regulatory capital or is In contrast, the contractual cash flows
`failing'. would not be solely payments of
principal and interest on the principal
amount outstanding if the contractual
terms of the financial instrument
permit or require the issuer or another
entity to impose losses on the holder
(eg by writing down the par amount or
by converting the instrument into a
fixed number of the issuer's ordinary
shares) as long as those contractual
terms are genuine, even if the
probability is remote that such a loss
will be imposed.
B4.1.14 The following examples illustrate contractual cash flows that are not solely
payments of principal and interest on the principal amount outstanding. This list
of examples is not exhaustive.
Instrument F Analysis
The holder would analyse the
Instrument F is a bond that is convertible bond in its entirety.
convertible into a fixed number of
equity instruments of the issuer. The contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
because they reflect a return that is
inconsistent with a basic lending
arrangement (see paragraph B4.1.7A);
ie the return is linked to the value of
the equity of the issuer.
Instrument G Analysis
Instrument G is a loan that pays an The contractual cash flows are not
inverse floating interest rate (ie the solely payments of principal and
interest rate has an inverse relationship interest on the principal amount
to market interest rates). outstanding.
The interest amounts are not
consideration for the time value of
money on the principal amount
outstanding.
Instrument H Analysis
Instrument H is a perpetual instrument The contractual cash flows are not
but the issuer may call the instrument payments of principal and interest on
at any point and pay the holder the par the principal amount outstanding. That
amount plus accrued interest due. is because the issuer may be required to
defer interest payments and additional
Instrument H pays a market interest interest does not accrue on those
rate but payment of interest cannot be deferred interest amounts. As a result,
made unless the issuer is able to interest amounts are not consideration
remain solvent immediately for the time value of money on the
afterwards. principal amount outstanding.
Deferred interest does not accrue If interest accrued on the deferred
additional interest. amounts, the contractual cash flows
could be payments of principal and
interest on the principal amount
outstanding.
The fact that Instrument H is perpetual
does not in itself mean that the
contractual cash flows are not
payments of principal and interest on
the principal amount outstanding. In
effect, a perpetual instrument has
continuous (multiple) extension
options. Such options may result in
contractual cash flows that are
payments of principal and interest on
the principal amount outstanding if
interest payments are mandatory and
must be paid in perpetuity.
Also, the fact that Instrument H is
callable does not mean that the
contractual cash flows are not
payments of principal and interest on
the principal amount outstanding
unless it is callable at an amount that
does not substantially reflect payment
of outstanding principal and interest on
that principal amount outstanding.
Even if the callable amount includes an
amount that reasonably compensates
the holder for the early termination of
the instrument, the contractual cash
flows could be payments of principal
and interest on the principal amount
outstanding. (See also Paragraph
B4.1.12.)
B4.1.15 In some cases a financial asset may have contractual cash flows that are described
as principal and interest but those cash flows do not represent the payment of
principal and interest on the principal amount outstanding as described in
paragraphs 4.1.2(b), 4.1.2A(b) and 4.1.3 of this Standard.
B4.1.16 This may be the case if the financial asset represents an investment in particular
assets or cash flows and hence the contractual cash flows are not solely payments
of principal and interest on the principal amount outstanding. For example, if the
contractual terms stipulate that the financial asset's cash flows increase as more
automobiles use a particular toll road, those contractual cash flows are
inconsistent with a basic lending arrangement. As a result, the instrument would
not satisfy the condition in paragraphs 4.1.2(b) and 4.1.2A(b). This could be the
case when a creditor's claim is limited to specified assets of the debtor or the cash
flows from specified assets (for example, a `non-recourse' financial asset).
B4.1.17 However, the fact that a financial asset is non-recourse does not in itself
necessarily preclude the financial asset from meeting the condition in paragraphs
4.1.2(b) and 4.1.2A(b). In such situations, the creditor is required to assess (`look
through to') the particular underlying assets or cash flows to determine whether
the contractual cash flows of the financial asset being classified are payments of
principal and interest on the principal amount outstanding. If the terms of the
financial asset give rise to any other cash flows or limit the cash flows in a manner
inconsistent with payments representing principal and interest, the financial asset
does not meet the condition in paragraphs 4.1.2(b) and 4.1.2A(b). Whether the
underlying assets are financial assets or non-financial assets does not in itself
affect this assessment.
B4.1.18 A contractual cash flow characteristic does not affect the classification of the
financial asset if it could have only a de minimis effect on the contractual cash
flows of the financial asset. To make this determination, an entity must consider
the possible effect of the contractual cash flow characteristic in each reporting
period and cumulatively over the life of the financial instrument. In addition, if a
contractual cash flow characteristic could have an effect on the contractual cash
flows that is more than de minimis (either in a single reporting period or
cumulatively) but that cash flow characteristic is not genuine, it does not affect the
classification of a financial asset. A cash flow characteristic is not genuine if it
affects the instrument's contractual cash flows only on the occurrence of an event
that is extremely rare, highly abnormal and very unlikely to occur.
B4.1.19 In almost every lending transaction the creditor's instrument is ranked relative to
the instruments of the debtor's other creditors. An instrument that is subordinated
to other instruments may have contractual cash flows that are payments of
principal and interest on the principal amount outstanding if the debtor's non-
payment is a breach of contract and the holder has a contractual right to unpaid
amounts of principal and interest on the principal amount outstanding even in the
event of the debtor's bankruptcy. For example, a trade receivable that ranks its
creditor as a general creditor would qualify as having payments of principal and
interest on the principal amount outstanding. This is the case even if the debtor
issued loans that are collateralised, which in the event of bankruptcy would give
that loan holder priority over the claims of the general creditor in respect of the
collateral but does not affect the contractual right of the general creditor to unpaid
principal and other amounts due.
Contractually linked instruments
B4.1.20 In some types of transactions, an issuer may prioritise payments to the holders of
financial assets using multiple contractually linked instruments that create
concentrations of credit risk (tranches). Each tranche has a subordination ranking
that specifies the order in which any cash flows generated by the issuer are
allocated to the tranche. In such situations, the holders of a tranche have the right
to payments of principal and interest on the principal amount outstanding only if
the issuer generates sufficient cash flows to satisfy higher-ranking tranches.
B4.1.21 In such transactions, a tranche has cash flow characteristics that are payments of
principal and interest on the principal amount outstanding only if:
(a) the contractual terms of the tranche being assessed for classification
(without looking through to the underlying pool of financial instruments)
give rise to cash flows that are solely payments of principal and interest on
the principal amount outstanding (eg the interest rate on the tranche is not
linked to a commodity index);
(b) the underlying pool of financial instruments has the cash flow
characteristics set out in paragraphs B4.1.23 and B4.1.24; and
(c) the exposure to credit risk in the underlying pool of financial instruments
inherent in the tranche is equal to or lower than the exposure to credit risk
of the underlying pool of financial instruments (for example, the credit
rating of the tranche being assessed for classification is equal to or higher
than the credit rating that would apply to a single tranche that funded the
underlying pool of financial instruments).
B4.1.22 An entity must look through until it can identify the underlying pool of
instruments that are creating (instead of passing through) the cash flows. This is
the underlying pool of financial instruments.
B4.1.23 The underlying pool must contain one or more instruments that have contractual
cash flows that are solely payments of principal and interest on the principal
amount outstanding.
B4.1.24 The underlying pool of instruments may also include instruments that:
(a) reduce the cash flow variability of the instruments in paragraph B4.1.23
and, when combined with the instruments in paragraph B4.1.23, result in
cash flows that are solely payments of principal and interest on the
principal amount outstanding (eg an interest rate cap or floor or a contract
that reduces the credit risk on some or all of the instruments in paragraph
B4.1.23); or
(b) align the cash flows of the tranches with the cash flows of the pool of
underlying instruments in paragraph B4.1.23 to address differences in and
only in:
(i) whether the interest rate is fixed or floating;
(ii) the currency in which the cash flows are denominated, including
inflation in that currency; or
(iii) the timing of the cash flows.
B4.1.25 If any instrument in the pool does not meet the conditions in either paragraph
B4.1.23 or paragraph B4.1.24, the condition in paragraph B4.1.21(b) is not met. In
performing this assessment, a detailed instrument-by-instrument analysis of the
pool may not be necessary. However, an entity must use judgement and perform
sufficient analysis to determine whether the instruments in the pool meet the
conditions in paragraphs B4.1.23B4.1.24. (See also paragraph B4.1.18 for
guidance on contractual cash flow characteristics that have only a de minimis
effect.)
B4.1.26 If the holder cannot assess the conditions in paragraph B4.1.21 at initial
recognition, the tranche must be measured at fair value through profit or loss. If
the underlying pool of instruments can change after initial recognition in such a
way that the pool may not meet the conditions in paragraphs B4.1.23B4.1.24, the
tranche does not meet the conditions in paragraph B4.1.21 and must be measured
at fair value through profit or loss. However, if the underlying pool includes
instruments that are collateralised by assets that do not meet the conditions in
paragraphs B4.1.23B4.1.24, the ability to take possession of such assets shall be
disregarded for the purposes of applying this paragraph unless the entity acquired
the tranche with the intention of controlling the collateral.
Option to designate a financial asset or financial liability as at fair value
through profit or loss (Sections 4.1
and 4.2)
B4.1.27 Subject to the conditions in paragraphs 4.1.5 and 4.2.2, this Standard allows an
entity to designate a financial asset, a financial liability, or a group of financial
instruments (financial assets, financial liabilities or both) as at fair value through
profit or loss provided that doing so results in more relevant information.
B4.1.28 The decision of an entity to designate a financial asset or financial liability as at
fair value through profit or loss is similar to an accounting policy choice
(although, unlike an accounting policy choice, it is not required to be applied
consistently to all similar transactions). When an entity has such a choice,
paragraph 14(b) of Ind AS 8 requires the chosen policy to result in the financial
statements providing reliable and more relevant information about the effects of
transactions, other events and conditions on the entity's financial position,
financial performance or cash flows. For example, in the case of designation of a
financial liability as at fair value through profit or loss, paragraph 4.2.2 sets out
the two circumstances when the requirement for more relevant information will be
met. Accordingly, to choose such designation in accordance with paragraph 4.2.2,
the entity needs to demonstrate that it falls within one (or both) of these two
circumstances.
Designation eliminates or significantly reduces an accounting mismatch
B4.1.29 Measurement of a financial asset or financial liability and classification of
recognised changes in its value are determined by the item's classification and
whether the item is part of a designated hedging relationship. Those requirements
can create a measurement or recognition inconsistency (sometimes referred to as
an `accounting mismatch') when, for example, in the absence of designation as at
fair value through profit or loss, a financial asset would be classified as
subsequently measured at fair value through profit or loss and a liability the entity
considers related would be subsequently measured at amortised cost (with
changes in fair value not recognised). In such circumstances, an entity may
conclude that its financial statements would provide more relevant information if
both the asset and the liability were measured as at fair value through profit or
loss.
B4.1.30 The following examples show when this condition could be met. In all cases, an
entity may use this condition to designate financial assets or financial liabilities as
at fair value through profit or loss only if it meets the principle in paragraph 4.1.5
or 4.2.2(a):
(a) an entity has liabilities under insurance contracts whose measurement
incorporates current information (as permitted by paragraph 24 of Ind AS
104) and financial assets that it considers to be related and that would
otherwise be measured at either fair value through other comprehensive
income or amortised cost.
(b) an entity has financial assets, financial liabilities or both that share a risk,
such as interest rate risk, and that gives rise to opposite changes in fair value
that tend to offset each other. However, only some of the instruments would
be measured at fair value through profit or loss (for example, those that are
derivatives, or are classified as held for trading). It may also be the case that
the requirements for hedge accounting are not met because, for example, the
requirements for hedge effectiveness in paragraph 6.4.1 are not met.
(c) an entity has financial assets, financial liabilities or both that share a risk,
such as interest rate risk, that gives rise to opposite changes in fair value that
tend to offset each other and none of the financial assets or financial
liabilities qualifies for designation as a hedging instrument because they are
not measured at fair value through profit or loss. Furthermore, in the
absence of hedge accounting there is a significant inconsistency in the
recognition of gains and losses. For example, the entity has financed a
specified group of loans by issuing traded bonds whose changes in fair value
tend to offset each other. If, in addition, the entity regularly buys and sells
the bonds but rarely, if ever, buys and sells the loans, reporting both the
loans and the bonds at fair value through profit or loss eliminates the
inconsistency in the timing of the recognition of the gains and losses that
would otherwise result from measuring them both at amortised cost and
recognising a gain or loss each time a bond is repurchased.
B4.1.31 In cases such as those described in the preceding paragraph, to designate, at initial
recognition, the financial assets and financial liabilities not otherwise so measured
as at fair value through profit or loss may eliminate or significantly reduce the
measurement or recognition inconsistency and produce more relevant information.
For practical purposes, the entity need not enter into all of the assets and liabilities
giving rise to the measurement or recognition inconsistency at exactly the same
time. A reasonable delay is permitted provided that each transaction is designated
as at fair value through profit or loss at its initial recognition and, at that time, any
remaining transactions are expected to occur.
B4.1.32 It would not be acceptable to designate only some of the financial assets and
financial liabilities giving rise to the inconsistency as at fair value through profit
or loss if to do so would not eliminate or significantly reduce the inconsistency
and would therefore not result in more relevant information. However, it would be
acceptable to designate only some of a number of similar financial assets or
similar financial liabilities if doing so achieves a significant reduction (and
possibly a greater reduction than other allowable designations) in the
inconsistency. For example, assume an entity has a number of similar financial
liabilities that sum to Rs.100 and a number of similar financial assets that sum to
Rs.50 but are measured on a different basis. The entity may significantly reduce
the measurement inconsistency by designating at initial recognition all of the
assets but only some of the liabilities (for example, individual liabilities with a
combined total of Rs.45) as at fair value through profit or loss. However, because
designation as at fair value through profit or loss can be applied only to the whole
of a financial instrument, the entity in this example must designate one or more
liabilities in their entirety. It could not designate either a component of a liability
(eg changes in value attributable to only one risk, such as changes in a benchmark
interest rate) or a proportion (ie percentage) of a liability.
A group of financial liabilities or financial assets and financial liabilities is
managed and its performance is evaluated on a fair value basis
B4.1.33 An entity may manage and evaluate the performance of a group of financial
liabilities or financial assets and financial liabilities in such a way that measuring
that group at fair value through profit or loss results in more relevant information.
The focus in this instance is on the way the entity manages and evaluates
performance, instead of on the nature of its financial instruments.
B4.1.34 For example, an entity may use this condition to designate financial liabilities as at
fair value through profit or loss if it meets the principle in paragraph 4.2.2(b) and
the entity has financial assets and financial liabilities that share one or more risks
and those risks are managed and evaluated on a fair value basis in accordance
with a documented policy of asset and liability management. An example could be
an entity that has issued `structured products' containing multiple embedded
derivatives and manages the resulting risks on a fair value basis using a mix of
derivative and non-derivative financial instruments.
B4.1.35 As noted above, this condition relies on the way the entity manages and evaluates
performance of the group of financial instruments under consideration.
Accordingly, (subject to the requirement of designation at initial recognition) an
entity that designates financial liabilities as at fair value through profit or loss on
the basis of this condition shall so designate all eligible financial liabilities that are
managed and evaluated together.
B4.1.36 Documentation of the entity's strategy need not be extensive but should be
sufficient to demonstrate compliance with paragraph 4.2.2(b). Such
documentation is not required for each individual item, but may be on a portfolio
basis. For example, if the performance management system for a department--as
approved by the entity's key management personnel--clearly demonstrates that its
performance is evaluated on this basis, no further documentation is required to
demonstrate compliance with paragraph 4.2.2(b).
Embedded derivatives (Section 4.3)
B4.3.1 When an entity becomes a party to a hybrid contract with a host that is not an asset
within the scope of this Standard, paragraph 4.3.3 requires the entity to identify
any embedded derivative, assess whether it is required to be separated from the
host contract and, for those that are required to be separated, measure the
derivatives at fair value at initial recognition and subsequently at fair value
through profit or loss.
B4.3.2 If a host contract has no stated or predetermined maturity and represents a residual
interest in the net assets of an entity, then its economic characteristics and risks
are those of an equity instrument, and an embedded derivative would need to
possess equity characteristics related to the same entity to be regarded as closely
related. If the host contract is not an equity instrument and meets the definition of
a financial instrument, then its economic characteristics and risks are those of a
debt instrument.
B4.3.3 An embedded non-option derivative (such as an embedded forward or swap) is
separated from its host contract on the basis of its stated or implied substantive
terms, so as to result in it having a fair value of zero at initial recognition. An
embedded option-based derivative (such as an embedded put, call, cap, floor or
swaption) is separated from its host contract on the basis of the stated terms of the
option feature. The initial carrying amount of the host instrument is the residual
amount after separating the embedded derivative.
B4.3.4 Generally, multiple embedded derivatives in a single hybrid contract are treated as a
single compound embedded derivative. However, embedded derivatives that are
classified as equity (see Ind AS 32) are accounted for separately from those
classified as assets or liabilities. In addition, if a hybrid contract has more than one
embedded derivative and those derivatives relate to different risk exposures and
are readily separable and independent of each other, they are accounted for
separately from each other.
B4.3.5 The economic characteristics and risks of an embedded derivative are not closely
related to the host contract (paragraph 4.3.3(a)) in the following examples. In
these examples, assuming the conditions in paragraph 4.3.3(b) and (c) are met, an
entity accounts for the embedded derivative separately from the host contract.
(a) A put option embedded in an instrument that enables the holder to require
the issuer to reacquire the instrument for an amount of cash or other assets
that varies on the basis of the change in an equity or commodity price or
index is not closely related to a host debt instrument.
(b) An option or automatic provision to extend the remaining term to maturity
of a debt instrument is not closely related to the host debt instrument unless
there is a concurrent adjustment to the approximate current market rate of
interest at the time of the extension. If an entity issues a debt instrument and
the holder of that debt instrument writes a call option on the debt instrument
to a third party, the issuer regards the call option as extending the term to
maturity of the debt instrument provided the issuer can be required to
participate in or facilitate the remarketing of the debt instrument as a result
of the call option being exercised.
(c) Equity-indexed interest or principal payments embedded in a host debt
instrument or insurance contract--by which the amount of interest or
principal is indexed to the value of equity instruments--are not closely
related to the host instrument because the risks inherent in the host and the
embedded derivative are dissimilar.
(d) Commodity-indexed interest or principal payments embedded in a host debt
instrument or insurance contract--by which the amount of interest or
principal is indexed to the price of a commodity (such as gold)--are not
closely related to the host instrument because the risks inherent in the host
and the embedded derivative are dissimilar.
(e) A call, put, or prepayment option embedded in a host debt contract or host
insurance contract is not closely related to the host contract unless:
(i) the option's exercise price is approximately equal on each exercise
date to the amortised cost of the host debt instrument or the carrying
amount of the host insurance contract; or
(ii) the exercise price of a prepayment option reimburses the lender for an
amount up to the approximate present value of lost interest for the
remaining term of the host contract. Lost interest is the product of the
principal amount prepaid multiplied by the interest rate differential.
The interest rate differential is the excess of the effective interest rate
of the host contract over the effective interest rate the entity would
receive at the prepayment date if it reinvested the principal amount
prepaid in a similar contract for the remaining term of the host
contract.
The assessment of whether the call or put option is closely related to the
host debt contract is made before separating the equity element of a
convertible debt instrument in accordance with Ind AS 32.
(f) Credit derivatives that are embedded in a host debt instrument and allow
one party (the `beneficiary') to transfer the credit risk of a particular
reference asset, which it may not own, to another party (the `guarantor') are
not closely related to the host debt instrument. Such credit derivatives allow
the guarantor to assume the credit risk associated with the reference asset
without directly owning it.
B4.3.6 An example of a hybrid contract is a financial instrument that gives the holder a
right to put the financial instrument back to the issuer in exchange for an amount
of cash or other financial assets that varies on the basis of the change in an equity
or commodity index that may increase or decrease (a `puttable instrument').
Unless the issuer on initial recognition designates the puttable instrument as a
financial liability at fair value through profit or loss, it is required to separate an
embedded derivative (ie the indexed principal payment) under paragraph 4.3.3
because the host contract is a debt instrument under paragraph B4.3.2 and the
indexed principal payment is not closely related to a host debt instrument under
paragraph B4.3.5(a). Because the principal payment can increase and decrease,
the embedded derivative is a non-option derivative whose value is indexed to the
underlying variable.
B4.3.7 In the case of a puttable instrument that can be put back at any time for cash equal
to a proportionate share of the net asset value of an entity (such as units of an
open-ended mutual fund or some unit-linked investment products), the effect of
separating an embedded derivative and accounting for each component is to
measure the hybrid contract at the redemption amount that is payable at the end of
the reporting period if the holder exercised its right to put the instrument back to
the issuer.
B4.3.8 The economic characteristics and risks of an embedded derivative are closely
related to the economic characteristics and risks of the host contract in the
following examples. In these examples, an entity does not account for the
embedded derivative separately from the host contract.
(a) An embedded derivative in which the underlying is an interest rate or
interest rate index that can change the amount of interest that would
otherwise be paid or received on an interest-bearing host debt contract or
insurance contract is closely related to the host contract unless the hybrid
contract can be settled in such a way that the holder would not recover
substantially all of its recognised investment or the embedded derivative
could at least double the holder's initial rate of return on the host contract
and could result in a rate of return that is at least twice what the market
return would be for a contract with the same terms as the host contract.
(b) An embedded floor or cap on the interest rate on a debt contract or insurance
contract is closely related to the host contract, provided the cap is at or
above the market rate of interest and the floor is at or below the market rate
of interest when the contract is issued, and the cap or floor is not leveraged
in relation to the host contract. Similarly, provisions included in a contract
to purchase or sell an asset (eg a commodity) that establish a cap and a floor
on the price to be paid or received for the asset are closely related to the host
contract if both the cap and floor were out of the money at inception and are
not leveraged.
(c) An embedded foreign currency derivative that provides a stream of principal
or interest payments that are denominated in a foreign currency and is
embedded in a host debt instrument (for example, a dual currency bond) is
closely related to the host debt instrument. Such a derivative is not separated
from the host instrument because Ind AS 21 The Effects of Changes in
Foreign Exchange Rates requires foreign currency gains and losses on
monetary items to be recognised in profit or loss.
(d) An embedded foreign currency derivative in a host contract that is an
insurance contract or not a financial instrument (such as a contract for the
purchase or sale of a non-financial item where the price is denominated in a
foreign currency) is closely related to the host contract provided it is not
leveraged, does not contain an option feature, and requires payments
denominated in one of the following currencies:
(i) the functional currency of any substantial party to that contract;
(ii) the currency in which the price of the related good or service that is
acquired or delivered is routinely denominated in commercial
transactions around the world (such as the US dollar for crude oil
transactions); or
(iii) a currency that is commonly used in contracts to purchase or sell non-
financial items in the economic environment in which the transaction
takes place (eg a relatively stable and liquid currency that is
commonly used in local business transactions or external trade).
(e) An embedded prepayment option in an interest-only or principal-only strip
is closely related to the host contract provided the host contract
(i) initially resulted from separating the right to receive contractual
cash flows of a financial instrument that, in and of itself, did not contain an
embedded derivative, and (ii) does not contain any terms not present in the
original host debt contract.
(f) An embedded derivative in a host lease contract is closely related to the host
contract if the embedded derivative is (i) an inflation-related index such as
an index of lease payments to a consumer price index (provided that the
lease is not leveraged and the index relates to inflation in the entity's own
economic environment), (ii) contingent rentals based on related sales or (iii)
contingent rentals based on variable interest rates.
(g) A unit-linking feature embedded in a host financial instrument or host
insurance contract is closely related to the host instrument or host contract if
the unit-denominated payments are measured at current unit values that
reflect the fair values of the assets of the fund. A unit-linking feature is a
contractual term that requires payments denominated in units of an internal
or external investment fund.
(h) A derivative embedded in an insurance contract is closely related to the host
insurance contract if the embedded derivative and host insurance contract
are so interdependent that an entity cannot measure the embedded derivative
separately (ie without considering the host contract).
Instruments containing embedded derivatives
B4.3.9 As noted in paragraph B4.3.1, when an entity becomes a party to a hybrid contract
with a host that is not an asset within the scope of this Standard and with one or
more embedded derivatives, paragraph 4.3.3 requires the entity to identify any
such embedded derivative, assess whether it is required to be separated from the
host contract and, for those that are required to be separated, measure the
derivatives at fair value at initial recognition and subsequently. These
requirements can be more complex, or result in less reliable measures, than
measuring the entire instrument at fair value through profit or loss. For that reason
this Standard permits the entire hybrid contract to be designated as at fair value
through profit or loss.
B4.3.10 Such designation may be used whether paragraph 4.3.3 requires the embedded
derivatives to be separated from the host contract or prohibits such separation.
However, paragraph 4.3.5 would not justify designating the hybrid contract as at
fair value through profit or loss in the cases set out in paragraph 4.3.5(a) and (b)
because doing so would not reduce complexity or increase reliability.
Reassessment of embedded derivatives
B4.3.11 In accordance with paragraph 4.3.3, an entity shall assess whether an embedded
derivative is required to be separated from the host contract and accounted for as a
derivative when the entity first becomes a party to the contract. Subsequent
reassessment is prohibited unless there is a change in the terms of the contract that
significantly modifies the cash flows that otherwise would be required under the
contract, in which case reassessment is required. An entity determines whether a
modification to cash flows is significant by considering the extent to which the
expected future cash flows associated with the embedded derivative, the host
contract or both have changed and whether the change is significant relative to the
previously expected cash flows on the contract.
B4.3.12 Paragraph B4.3.11 does not apply to embedded derivatives in contracts acquired
in:
(a) a business combination (as defined in Ind AS 103 Business Combinations);
(b) a combination of entities or businesses under common control as described
in paragraphs B1B4 of Ind AS 103; or
(c) the formation of a joint venture as defined in Ind AS 111 Joint
Arrangements or their possible reassessment at the date of acquisition.3
Reclassification of financial assets (Section 4.4)
Reclassification of financial assets
B4.4.1 Paragraph 4.4.1 requires an entity to reclassify financial assets if the entity
changes its business model for managing those financial assets. Such changes are
expected to be very infrequent. Such changes are determined by the entity's senior
management as a result of external or internal changes and must be significant to
the entity's operations and demonstrable to external parties. Accordingly, a
change in an entity's business model will occur only when an entity either begins
or ceases to perform an activity that is significant to its operations; for example,
when the entity has acquired, disposed of or terminated a business line. Examples
of a change in business model include the following:
(a) An entity has a portfolio of commercial loans that it holds to sell in the
short term. The entity acquires a company that manages commercial loans
and has a business model that holds the loans in order to collect the
contractual cash flows. The portfolio of commercial loans is no longer for
sale, and the portfolio is now managed together with the acquired
commercial loans and all are held to collect the contractual cash flows.
(b) A financial services firm decides to shut down its retail mortgage business.
That business no longer accepts new business and the financial services
firm is actively marketing its mortgage loan portfolio for sale.
B4.4.2 A change in the objective of the entity's business model must be effected before
the reclassification date. For example, if a financial services firm decides on 15
February to shut down its retail mortgage business and hence must reclassify all
affected financial assets on 1 April (ie the first day of the entity's next reporting
period), the entity must not accept new retail mortgage business or otherwise
3
Ind AS 103 addresses the acquisition of contracts with embedded derivatives in a business
combination.
engage in activities consistent with its former business model after 15 February.
B4.4.3 The following are not changes in business model:
(a) a change in intention related to particular financial assets (even in
circumstances of significant changes in market conditions).
(b) the temporary disappearance of a particular market for financial assets.
(c) a transfer of financial assets between parts of the entity with different
business models.
Measurement (Chapter 5)
Initial measurement (Section 5.1)
B5.1.1 The fair value of a financial instrument at initial recognition is normally
the transaction price (ie the fair value of the consideration given or
received, see also paragraph B5.1.2A and Ind AS 113). However, if part
of the consideration given or received is for something other than the
financial instrument, an entity shall measure the fair value of the financial
instrument. For example, the fair value of a long-term loan or receivable
that carries no interest can be measured as the present value of all future
cash receipts discounted using the prevailing market rate(s) of interest for
a similar instrument (similar as to currency, term, type of interest rate and
other factors) with a similar credit rating. Any additional amount lent is
an expense or a reduction of income unless it qualifies for recognition as
some other type of asset.
B5.1.2 If an entity originates a loan that bears an off-market interest rate (eg 5
per cent when the market rate for similar loans is 8 per cent), and receives
an upfront fee as compensation, the entity recognises the loan at its fair
value, ie net of the fee it receives.
B5.1.2AThe best evidence of the fair value of a financial instrument at initial
recognition is normally the transaction price (ie the fair value of the
consideration given or received, see also Ind AS 113). If an entity
determines that the fair value at initial recognition differs from the
transaction price as mentioned in paragraph 5.1.1A, the entity shall
account for that instrument at that date as follows:
(a) at the measurement required by paragraph 5.1.1 if that fair value is
evidenced by a quoted price in an active market for an identical
asset or liability (ie a Level 1 input) or based on a valuation
technique that uses only data from observable markets. An entity
shall recognise the difference between the fair value at initial
recognition and the transaction price as a gain or loss.
(b) in all other cases, at the measurement required by paragraph 5.1.1,
adjusted to defer the difference between the fair value at initial
recognition and the transaction price. After initial recognition, the
entity shall recognise that deferred difference as a gain or loss only
to the extent that it arises from a change in a factor (including time)
that market participants would take into account when pricing the
asset or liability.
Subsequent measurement (Sections 5.2 and 5.3)
B5.2.1 If a financial instrument that was previously recognised as a financial
asset is measured at fair value through profit or loss and its fair value
decreases below zero, it is a financial liability measured in accordance
with paragraph 4.2.1. However, hybrid contracts with hosts that are
assets within the scope of this Standard are always measured in
accordance with paragraph 4.3.2.
B5.2.2 The following example illustrates the accounting for transaction costs on
the initial and subsequent measurement of a financial asset measured at
fair value with changes through other comprehensive income in
accordance with either paragraph 5.7.5 or 4.1.2A. An entity acquires a
financial asset for Rs.100 plus a purchase commission of Rs.2. Initially,
the entity recognises the asset at Rs.102. The reporting period ends one
day later, when the quoted market price of the asset is Rs.100. If the asset
were sold, a commission of Rs.3 would be paid. On that date, the entity
measures the asset at Rs.100 (without regard to the possible commission
on sale) and recognises a loss of Rs.2 in other comprehensive income. If
the financial asset is measured at fair value through other comprehensive
income in accordance with paragraph 4.1.2A, the transaction costs are
amortised to profit or loss using the effective interest method.
B5.2.2A The subsequent measurement of a financial asset or financial liability and
the subsequent recognition of gains and losses described in paragraph
B5.1.2A shall be consistent with the requirements of this Standard.
Investments in equity instruments and contracts on those
investments
B5.2.3 All investments in equity instruments and contracts on those instruments
must be measured at fair value. However, in limited circumstances, cost
may be an appropriate estimate of fair value. That may be the case if
insufficient more recent information is available to measure fair value, or
if there is a wide range of possible fair value measurements and cost
represents the best estimate of fair value within that range.
B5.2.4 Indicators that cost might not be representative of fair value include:
(a) a significant change in the performance of the investee compared with
budgets, plans or milestones.
(b) changes in expectation that the investee's technical product milestones will
be achieved.
(c) a significant change in the market for the investee's equity or its products or
potential products.
(d) a significant change in the global economy or the economic environment in
which the investee operates.
(e) a significant change in the performance of comparable entities, or in the
valuations implied by the overall market.
(f) internal matters of the investee such as fraud, commercial disputes,
litigation, changes in management or strategy.
(g) evidence from external transactions in the investee's equity, either by the
investee (such as a fresh issue of equity), or by transfers of equity
instruments between third parties.
B5.2.5 The list in paragraph B5.2.4 is not exhaustive. An entity shall use all information
about the performance and operations of the investee that becomes available after
the date of initial recognition. To the extent that any such relevant factors exist,
they may indicate that cost might not be representative of fair value. In such cases,
the entity must measure fair value.
B5.2.6 Cost is never the best estimate of fair value for investments in quoted equity
instruments (or contracts on quoted equity instruments).
Amortised cost measurement (Section 5.4)
Effective interest method
B5.4.1 In applying the effective interest method, an entity identifies fees that are an
integral part of the effective interest rate of a financial instrument. The description
of fees for financial services may not be indicative of the nature and substance of
the services provided. Fees that are an integral part of the effective interest rate of
a financial instrument are treated as an adjustment to the effective interest rate,
unless the financial instrument is measured at fair value, with the change in fair
value being recognised in profit or loss. In those cases, the fees are recognised as
revenue or expense when the instrument is initially recognised.
B5.4.2 Fees that are an integral part of the effective interest rate of a financial instrument
include:
(a) origination fees received by the entity relating to the creation or acquisition
of a financial asset. Such fees may include compensation for activities such
as evaluating the borrower's financial condition, evaluating and recording
guarantees, collateral and other security arrangements, negotiating the terms
of the instrument, preparing and processing documents and closing the
transaction. These fees are an integral part of generating an involvement
with the resulting financial instrument.
(b) commitment fees received by the entity to originate a loan when the loan
commitment is not measured in accordance with paragraph 4.2.1(a) and it is
probable that the entity will enter into a specific lending arrangement. These
fees are regarded as compensation for an ongoing involvement with the
acquisition of a financial instrument. If the commitment expires without the
entity making the loan, the fee is recognised as revenue on expiry.
(c) origination fees paid on issuing financial liabilities measured at amortised
cost. These fees are an integral part of generating an involvement with a
financial liability. An entity distinguishes fees and costs that are an integral
part of the effective interest rate for the financial liability from origination
fees and transaction costs relating to the right to provide services, such as
investment management services.
B5.4.3 Fees that are not an integral part of the effective interest rate of a financial
instrument and are accounted for in accordance with Ind AS 115 include:
(a) fees charged for servicing a loan;
(b) commitment fees to originate a loan when the loan commitment is not
measured in accordance with paragraph 4.2.1(a) and it is unlikely that a
specific lending arrangement will be entered into; and
(c) loan syndication fees received by an entity that arranges a loan and retains
no part of the loan package for itself (or retains a part at the same effective
interest rate for comparable risk as other participants).
B5.4.4 When applying the effective interest method, an entity generally amortises any fees,
points paid or received, transaction costs and other premiums or discounts that are
included in the calculation of the effective interest rate over the expected life of
the financial instrument. However, a shorter period is used if this is the period to
which the fees, points paid or received, transaction costs, premiums or discounts
relate. This will be the case when the variable to which the fees, points paid or
received, transaction costs, premiums or discounts relate is repriced to market
rates before the expected maturity of the financial instrument. In such a case, the
appropriate amortisation period is the period to the next such repricing date. For
example, if a premium or discount on a floating-rate financial instrument reflects
the interest that has accrued on that financial instrument since the interest was last
paid, or changes in the market rates since the floating interest rate was reset to the
market rates, it will be amortised to the next date when the floating interest is reset
to market rates. This is because the premium or discount relates to the period to
the next interest reset date because, at that date, the variable to which the premium
or discount relates (ie interest rates) is reset to the market rates. If, however, the
premium or discount results from a change in the credit spread over the floating
rate specified in the financial instrument, or other variables that are not reset to the
market rates, it is amortised over the expected life of the financial instrument.
B5.4.5 For floating-rate financial assets and floating-rate financial liabilities, periodic re-
estimation of cash flows to reflect the movements in the market rates of interest
alters the effective interest rate. If a floating-rate financial asset or a floating-rate
financial liability is recognised initially at an amount equal to the principal
receivable or payable on maturity, re-estimating the future interest payments
normally has no significant effect on the carrying amount of the asset or the
liability.
B5.4.6 If an entity revises its estimates of payments or receipts (excluding modifications in
accordance with paragraph 5.4.3 and changes in estimates of expected credit
losses), it shall adjust the gross carrying amount of the financial asset or amortised
cost of a financial liability (or group of financial instruments) to reflect actual and
revised estimated contractual cash flows. The entity recalculates the gross
carrying amount of the financial asset or amortised cost of the financial liability as
the present value of the estimated future contractual cash flows that are discounted
at the financial instrument's original effective interest rate (or credit-adjusted
effective interest rate for purchased or originated credit-impaired financial assets)
or, when applicable, the revised effective interest rate calculated in accordance
with paragraph 6.5.10. The adjustment is recognised in profit or loss as income or
expense.
B5.4.7 In some cases a financial asset is considered credit-impaired at initial recognition
because the credit risk is very high, and in the case of a purchase it is acquired at a
deep discount. An entity is required to include the initial expected credit losses in
the estimated cash flows when calculating the credit-adjusted effective interest
rate for financial assets that are considered to be purchased or originated credit-
impaired at initial recognition. However, this does not mean that a credit-adjusted
effective interest rate should be applied solely because the financial asset has high
credit risk at initial recognition.
Transaction costs
B5.4.8 Transaction costs include fees and commission paid to agents (including employees
acting as selling agents), advisers, brokers and dealers, levies by regulatory
agencies and security exchanges, and transfer taxes and duties. Transaction costs
do not include debt premiums or discounts, financing costs or internal
administrative or holding costs.
Write-off
B5.4.9 Write-offs can relate to a financial asset in its entirety or to a portion of it. For
example, an entity plans to enforce the collateral on a financial asset and expects
to recover no more than 30 per cent of the financial asset from the collateral. If the
entity has no reasonable prospects of recovering any further cash flows from the
financial asset, it should write off the remaining 70 per cent of the financial asset.
Impairment (Section 5.5)
Collective and individual assessment basis
B5.5.1 In order to meet the objective of recognising lifetime expected credit losses for
significant increases in credit risk since initial recognition, it may be necessary to
perform the assessment of significant increases in credit risk on a collective basis
by considering information that is indicative of significant increases in credit risk
on, for example, a group or sub-group of financial instruments. This is to ensure
that an entity meets the objective of recognising lifetime expected credit losses
when there are significant increases in credit risk, even if evidence of such
significant increases in credit risk at the individual instrument level is not yet
available.
B5.5.2 Lifetime expected credit losses are generally expected to be recognised before a
financial instrument becomes past due. Typically, credit risk increases
significantly before a financial instrument becomes past due or other lagging
borrower-specific factors (for example, a modification or restructuring) are
observed. Consequently when reasonable and supportable information that is
more forward-looking than past due information is available without undue cost
or effort, it must be used to assess changes in credit risk.
B5.5.3 However, depending on the nature of the financial instruments and the credit risk
information available for particular groups of financial instruments, an entity may
not be able to identify significant changes in credit risk for individual financial
instruments before the financial instrument becomes past due. This may be the
case for financial instruments such as retail loans for which there is little or no
updated credit risk information that is routinely obtained and monitored on an
individual instrument until a customer breaches the contractual terms. If changes
in the credit risk for individual financial instruments are not captured before they
become past due, a loss allowance based only on credit information at an
individual financial instrument level would not faithfully represent the changes in
credit risk since initial recognition.
B5.5.4 In some circumstances an entity does not have reasonable and supportable
information that is available without undue cost or effort to measure lifetime
expected credit losses on an individual instrument basis. In that case, lifetime
expected credit losses shall be recognised on a collective basis that considers
comprehensive credit risk information. This comprehensive credit risk
information must incorporate not only past due information but also all relevant
credit information, including forward-looking macroeconomic information, in
order to approximate the result of recognising lifetime expected credit losses when
there has been a significant increase in credit risk since initial recognition on an
individual instrument level.
B5.5.5 For the purpose of determining significant increases in credit risk and recognising a
loss allowance on a collective basis, an entity can group financial instruments on
the basis of shared credit risk characteristics with the objective of facilitating an
analysis that is designed to enable significant increases in credit risk to be
identified on a timely basis. The entity should not obscure this information by
grouping financial instruments with different risk characteristics. Examples of
shared credit risk characteristics may include, but are not limited to, the:
(a) instrument type;
(b) credit risk ratings;
(c) collateral type;
(d) date of initial recognition;
(e) remaining term to maturity;
(f) industry;
(g) geographical location of the borrower; and
(h) the value of collateral relative to the financial asset if it has an impact on the
probability of a default occurring (for example, non-recourse loans in some
jurisdictions or loan-to-value ratios).
B5.5.6 Paragraph 5.5.4 requires that lifetime expected credit losses are recognised on all
financial instruments for which there has been significant increases in credit risk
since initial recognition. In order to meet this objective, if an entity is not able to
group financial instruments for which the credit risk is considered to have
increased significantly since initial recognition based on shared credit risk
characteristics, the entity should recognise lifetime expected credit losses on a
portion of the financial assets for which credit risk is deemed to have increased
significantly. The aggregation of financial instruments to assess whether there are
changes in credit risk on a collective basis may change over time as new
information becomes available on groups of, or individual, financial instruments.
Timing of recognising lifetime expected credit losses
B5.5.7 The assessment of whether lifetime expected credit losses should be recognised is
based on significant increases in the likelihood or risk of a default occurring since
initial recognition (irrespective of whether a financial instrument has been
repriced to reflect an increase in credit risk) instead of on evidence of a financial
asset being credit-impaired at the reporting date or an actual default occurring.
Generally, there will be a significant increase in credit risk before a financial asset
becomes credit-impaired or an actual default occurs.
B5.5.8 For loan commitments, an entity considers changes in the risk of a default occurring
on the loan to which a loan commitment relates. For financial guarantee contracts,
an entity considers the changes in the risk that the specified debtor will default on
the contract.
B5.5.9 The significance of a change in the credit risk since initial recognition depends on
the risk of a default occurring as at initial recognition. Thus, a given change, in
absolute terms, in the risk of a default occurring will be more significant for a
financial instrument with a lower initial risk of a default occurring compared to a
financial instrument with a higher initial risk of a default occurring.
B5.5.10 The risk of a default occurring on financial instruments that have comparable
credit risk is higher the longer the expected life of the instrument; for example, the
risk of a default occurring on an AAA-rated bond with an expected life of 10
years is higher than that on an AAA-rated bond with an expected life of five
years.
B5.5.11 Because of the relationship between the expected life and the risk of a default
occurring, the change in credit risk cannot be assessed simply by comparing the
change in the absolute risk of a default occurring over time. For example, if the
risk of a default occurring for a financial instrument with an expected life of 10
years at initial recognition is identical to the risk of a default occurring on that
financial instrument when its expected life in a subsequent period is only five
years, that may indicate an increase in credit risk. This is because the risk of a
default occurring over the expected life usually decreases as time passes if the
credit risk is unchanged and the financial instrument is closer to maturity.
However, for financial instruments that only have significant payment obligations
close to the maturity of the financial instrument the risk of a default occurring
may not necessarily decrease as time passes. In such a case, an entity should also
consider other qualitative factors that would demonstrate whether credit risk has
increased significantly since initial recognition.
B5.5.12 An entity may apply various approaches when assessing whether the credit risk on
a financial instrument has increased significantly since initial recognition or when
measuring expected credit losses. An entity may apply different approaches for
different financial instruments. An approach that does not include an explicit
probability of default as an input per se, such as a credit loss rate approach, can be
consistent with the requirements in this Standard, provided that an entity is able to
separate the changes in the risk of a default occurring from changes in other
drivers of expected credit losses, such as collateral, and considers the following
when making the assessment:
(a) the change in the risk of a default occurring since initial recognition;
(b) the expected life of the financial instrument; and
(c) reasonable and supportable information that is available without undue cost
or effort that may affect credit risk.
B5.5.13 The methods used to determine whether credit risk has increased significantly on a
financial instrument since initial recognition should consider the characteristics of
the financial instrument (or group of financial instruments) and the default
patterns in the past for comparable financial instruments. Despite the requirement
in paragraph 5.5.9, for financial instruments for which default patterns are not
concentrated at a specific point during the expected life of the financial
instrument, changes in the risk of a default occurring over the next 12 months may
be a reasonable approximation of the changes in the lifetime risk of a default
occurring. In such cases, an entity may use changes in the risk of a default
occurring over the next 12 months to determine whether credit risk has increased
significantly since initial recognition, unless circumstances indicate that a lifetime
assessment is necessary.
B5.5.14 However, for some financial instruments, or in some circumstances, it may not be
appropriate to use changes in the risk of a default occurring over the next 12
months to determine whether lifetime expected credit losses should be recognised.
For example, the change in the risk of a default occurring in the next 12 months
may not be a suitable basis for determining whether credit risk has increased on a
financial instrument with a maturity of more than 12 months when:
(a) the financial instrument only has significant payment obligations beyond the
next 12 months;
(b) changes in relevant macroeconomic or other credit-related factors occur that
are not adequately reflected in the risk of a default occurring in the next 12
months; or
(c) changes in credit-related factors only have an impact on the credit risk of
the financial instrument (or have a more pronounced effect) beyond 12
months.
Determining whether credit risk has increased significantly since initial
recognition
B5.5.15 When determining whether the recognition of lifetime expected credit losses is
required, an entity shall consider reasonable and supportable information that is
available without undue cost or effort and that may affect the credit risk on a
financial instrument in accordance with paragraph 5.5.17(c). An entity need not
undertake an exhaustive search for information when determining whether credit
risk has increased significantly since initial recognition.
B5.5.16 Credit risk analysis is a multifactor and holistic analysis; whether a specific factor
is relevant, and its weight compared to other factors, will depend on the type of
product, characteristics of the financial instruments and the borrower as well as
the geographical region. An entity shall consider reasonable and supportable
information that is available without undue cost or effort and that is relevant for
the particular financial instrument being assessed. However, some factors or
indicators may not be identifiable on an individual financial instrument level. In
such a case, the factors or indicators should be assessed for appropriate portfolios,
groups of portfolios or portions of a portfolio of financial instruments to
determine whether the requirement in paragraph 5.5.3 for the recognition of
lifetime expected credit losses has been met.
B5.5.17 The following non-exhaustive list of information may be relevant in assessing
changes in credit risk:
(a) significant changes in internal price indicators of credit risk as a result of a
change in credit risk since inception, including, but not limited to, the credit
spread that would result if a particular financial instrument or similar
financial instrument with the same terms and the same counterparty were
newly originated or issued at the reporting date.
(b) other changes in the rates or terms of an existing financial instrument that
would be significantly different if the instrument was newly originated or
issued at the reporting date (such as more stringent covenants, increased
amounts of collateral or guarantees, or higher income coverage) because of
changes in the credit risk of the financial instrument since initial
recognition.
(c) significant changes in external market indicators of credit risk for a
particular financial instrument or similar financial instruments with the
same expected life. Changes in market indicators of credit risk include, but
are not limited to:
(i) the credit spread;
(ii) the credit default swap prices for the borrower;
(iii) the length of time or the extent to which the fair value of a financial
asset has been less than its amortised cost; and
(iv) other market information related to the borrower, such as changes in
the price of a borrower's debt and equity instruments.
(d) an actual or expected significant change in the financial instrument's
external credit rating.
(e) an actual or expected internal credit rating downgrade for the borrower or
decrease in behavioural scoring used to assess credit risk internally. Internal
credit ratings and internal behavioural scoring are more reliable when they
are mapped to external ratings or supported by default studies.
(f) existing or forecast adverse changes in business, financial or economic
conditions that are expected to cause a significant change in the borrower's
ability to meet its debt obligations, such as an actual or expected increase in
interest rates or an actual or expected significant increase in unemployment
rates.
(g) an actual or expected significant change in the operating results of the
borrower. Examples include actual or expected declining revenues or
margins, increasing operating risks, working capital deficiencies, decreasing
asset quality, increased balance sheet leverage, liquidity, management
problems or changes in the scope of business or organisational structure
(such as the discontinuance of a segment of the business) that results in a
significant change in the borrower's ability to meet its debt obligations.
(h) significant increases in credit risk on other financial instruments of the same
borrower.
(i) an actual or expected significant adverse change in the regulatory,
economic, or technological environment of the borrower that results in a
significant change in the borrower's ability to meet its debt obligations, such
as a decline in the demand for the borrower's sales product because of a
shift in technology.
(j) significant changes in the value of the collateral supporting the obligation or
in the quality of third-party guarantees or credit enhancements, which are
expected to reduce the borrower's economic incentive to make scheduled
contractual payments or to otherwise have an effect on the probability of a
default occurring. For example, if the value of collateral declines because
house prices decline, borrowers in some jurisdictions have a greater
incentive to default on their mortgages.
(k) a significant change in the quality of the guarantee provided by a
shareholder (or an individual's parents) if the shareholder (or parents) have
an incentive and financial ability to prevent default by capital or cash
infusion.
(l) significant changes, such as reductions in financial support from a parent
entity or other affiliate or an actual or expected significant change in the
quality of credit enhancement, that are expected to reduce the borrower's
economic incentive to make scheduled contractual payments. Credit quality
enhancements or support include the consideration of the financial condition
of the guarantor and/or, for interests issued in securitisations, whether
subordinated interests are expected to be capable of absorbing expected
credit losses (for example, on the loans underlying the security).
(m) expected changes in the loan documentation including an expected breach
of contract that may lead to covenant waivers or amendments, interest
payment holidays, interest rate step-ups, requiring additional collateral or
guarantees, or other changes to the contractual framework of the instrument.
(n) significant changes in the expected performance and behaviour of the
borrower, including changes in the payment status of borrowers in the group
(for example, an increase in the expected number or extent of delayed
contractual payments or significant increases in the expected number of
credit card borrowers who are expected to approach or exceed their credit
limit or who are expected to be paying the minimum monthly amount).
(o) changes in the entity's credit management approach in relation to the
financial instrument; ie based on emerging indicators of changes in the
credit risk of the financial instrument, the entity's credit risk management
practice is expected to become more active or to be focused on managing
the instrument, including the instrument becoming more closely monitored
or controlled, or the entity specifically intervening with the borrower.
(p) past due information, including the rebuttable presumption as set out in
paragraph 5.5.11.
B5.5.18 In some cases, the qualitative and non-statistical quantitative information available
may be sufficient to determine that a financial instrument has met the criterion for
the recognition of a loss allowance at an amount equal to lifetime expected credit
losses. That is, the information does not need to flow through a statistical model
or credit ratings process in order to determine whether there has been a significant
increase in the credit risk of the financial instrument. In other cases, an entity may
need to consider other information, including information from its statistical
models or credit ratings processes. Alternatively, the entity may base the
assessment on both types of information, ie qualitative factors that are not
captured through the internal ratings process and a specific internal rating
category at the reporting date, taking into consideration the credit risk
characteristics at initial recognition, if both types of information are relevant.
More than 30 days past due rebuttable presumption
B5.5.19 The rebuttable presumption in paragraph 5.5.11 is not an absolute indicator that
lifetime expected credit losses should be recognised, but is presumed to be the
latest point at which lifetime expected credit losses should be recognised even
when using forward-looking information (including macroeconomic factors on a
portfolio level).
B5.5.20 An entity can rebut this presumption. However, it can do so only when it has
reasonable and supportable information available that demonstrates that even if
contractual payments become more than 30 days past due, this does not represent
a significant increase in the credit risk of a financial instrument. For example
when non-payment was an administrative oversight, instead of resulting from
financial difficulty of the borrower, or the entity has access to historical evidence
that demonstrates that there is no correlation between significant increases in the
risk of a default occurring and financial assets on which payments are more than
30 days past due, but that evidence does identify such a correlation when
payments are more than 60 days past due.
B5.5.21 An entity cannot align the timing of significant increases in credit risk and the
recognition of lifetime expected credit losses to when a financial asset is regarded
as credit-impaired or an entity's internal definition of default.
Financial instruments that have low credit risk at the reporting date
B5.5.22 The credit risk on a financial instrument is considered low for the purposes of
paragraph 5.5.10, if the financial instrument has a low risk of default, the
borrower has a strong capacity to meet its contractual cash flow obligations in the
near term and adverse changes in economic and business conditions in the longer
term may, but will not necessarily, reduce the ability of the borrower to fulfil its
contractual cash flow obligations. Financial instruments are not considered to
have low credit risk when they are regarded as having a low risk of loss simply
because of the value of collateral and the financial instrument without that
collateral would not be considered low credit risk. Financial instruments are also
not considered to have low credit risk simply because they have a lower risk of
default than the entity's other financial instruments or relative to the credit risk of
the jurisdiction within which an entity operates.
B5.5.23 To determine whether a financial instrument has low credit risk, an entity may use
its internal credit risk ratings or other methodologies that are consistent with a
globally understood definition of low credit risk and that consider the risks and
the type of financial instruments that are being assessed. An external rating of
`investment grade' is an example of a financial instrument that may be considered
as having low credit risk. However, financial instruments are not required to be
externally rated to be considered to have low credit risk. They should, however,
be considered to have low credit risk from a market participant perspective taking
into account all of the terms and conditions of the financial instrument.
B5.5.24 Lifetime expected credit losses are not recognised on a financial instrument simply
because it was considered to have low credit risk in the previous reporting period
and is not considered to have low credit risk at the reporting date. In such a case,
an entity shall determine whether there has been a significant increase in credit
risk since initial recognition and thus whether lifetime expected credit losses are
required to be recognised in accordance with paragraph 5.5.3.
Modifications
B5.5.25 In some circumstances, the renegotiation or modification of the contractual cash
flows of a financial asset can lead to the derecognition of the existing financial
asset in accordance with this Standard. When the modification of a financial asset
results in the derecognition of the existing financial asset and the subsequent
recognition of the modified financial asset, the modified asset is considered a
`new' financial asset for the purposes of this Standard.
B5.5.26 Accordingly the date of the modification shall be treated as the date of initial
recognition of that financial asset when applying the impairment requirements to
the modified financial asset. This typically means measuring the loss allowance at
an amount equal to 12-month expected credit losses until the requirements for the
recognition of lifetime expected credit losses in paragraph 5.5.3 are met.
However, in some unusual circumstances following a modification that results in
derecognition of the original financial asset, there may be evidence that the
modified financial asset is credit-impaired at initial recognition, and thus, the
financial asset should be recognised as an originated credit-impaired financial
asset. This might occur, for example, in a situation in which there was a
substantial modification of a distressed asset that resulted in the derecognition of
the original financial asset. In such a case, it may be possible for the modification
to result in a new financial asset which is credit-impaired at initial recognition.
B5.5.27 If the contractual cash flows on a financial asset have been renegotiated or
otherwise modified, but the financial asset is not derecognised, that financial asset
is not automatically considered to have lower credit risk. An entity shall assess
whether there has been a significant increase in credit risk since initial recognition
on the basis of all reasonable and supportable information that is available without
undue cost or effort. This includes historical and forward-looking information and
an assessment of the credit risk over the expected life of the financial asset, which
includes information about the circumstances that led to the modification.
Evidence that the criteria for the recognition of lifetime expected credit losses are
no longer met may include a history of up-to-date and timely payment
performance against the modified contractual terms. Typically a customer would
need to demonstrate consistently good payment behaviour over a period of time
before the credit risk is considered to have decreased. For example, a history of
missed or incomplete payments would not typically be erased by simply making
one payment on time following a modification of the contractual terms.
Measurement of expected credit losses
Expected credit losses
B5.5.28 Expected credit losses are a probability-weighted estimate of credit losses (ie the
present value of all cash shortfalls) over the expected life of the financial
instrument. A cash shortfall is the difference between the cash flows that are due
to an entity in accordance with the contract and the cash flows that the entity
expects to receive. Because expected credit losses consider the amount and timing
of payments, a credit loss arises even if the entity expects to be paid in full but
later than when contractually due.
B5.5.29 For financial assets, a credit loss is the present value of the difference between:
(a) the contractual cash flows that are due to an entity under the
contract; and
(b) the cash flows that the entity expects to receive.
B5.5.30 For undrawn loan commitments, a credit loss is the present value of the difference
between:
(a) the contractual cash flows that are due to the entity if the holder of
the loan commitment draws down the loan; and
(b) the cash flows that the entity expects to receive if the loan is drawn
down.
B5.5.31 An entity's estimate of expected credit losses on loan commitments shall be
consistent with its expectations of drawdowns on that loan commitment, ie it shall
consider the expected portion of the loan commitment that will be drawn down
within 12 months of the reporting date when estimating 12-month expected credit
losses, and the expected portion of the loan commitment that will be drawn down
over the expected life of the loan commitment when estimating lifetime expected
credit losses.
B5.5.32 For a financial guarantee contract, the entity is required to make payments only in
the event of a default by the debtor in accordance with the terms of the instrument
that is guaranteed. Accordingly, cash shortfalls are the expected payments to
reimburse the holder for a credit loss that it incurs less any amounts that the entity
expects to receive from the holder, the debtor or any other party. If the asset is
fully guaranteed, the estimation of cash shortfalls for a financial guarantee
contract would be consistent with the estimations of cash shortfalls for the asset
subject to the guarantee.
B5.5.33 For a financial asset that is credit-impaired at the reporting date, but that is not a
purchased or originated credit-impaired financial asset, an entity shall measure the
expected credit losses as the difference between the asset's gross carrying amount
and the present value of estimated future cash flows discounted at the financial
asset's original effective interest rate. Any adjustment is recognised in profit or
loss as an impairment gain or loss.
B5.5.34 When measuring a loss allowance for a lease receivable, the cash flows used for
determining the expected credit losses should be consistent with the cash flows
used in measuring the lease receivable in accordance with Ind AS 17 Leases.
B5.5.35 An entity may use practical expedients when measuring expected credit losses if
they are consistent with the principles in paragraph 5.5.17. An example of a
practical expedient is the calculation of the expected credit losses on trade
receivables using a provision matrix. The entity would use its historical credit loss
experience (adjusted as appropriate in accordance with paragraphs B5.5.51
B5.5.52) for trade receivables to estimate the 12-month expected credit losses or
the lifetime expected credit losses on the financial assets as relevant. A provision
matrix might, for example, specify fixed provision rates depending on the number
of days that a trade receivable is past due (for example, 1 per cent if not past due,
2 per cent if less than 30 days past due, 3 per cent if more than 30 days but less
than 90 days past due, 20 per cent if 90180 days past due etc). Depending on the
diversity of its customer base, the entity would use appropriate groupings if its
historical credit loss experience shows significantly different loss patterns for
different customer segments. Examples of criteria that might be used to group
assets include geographical region, product type, customer rating, collateral or
trade credit insurance and type of customer (such as wholesale or retail).
Definition of default
B5.5.36 Paragraph 5.5.9 requires that when determining whether the credit risk on a
financial instrument has increased significantly, an entity shall consider the
change in the risk of a default occurring since initial recognition.
B5.5.37 When defining default for the purposes of determining the risk of a default
occurring, an entity shall apply a default definition that is consistent with the
definition used for internal credit risk management purposes for the relevant
financial instrument and consider qualitative indicators (for example, financial
covenants) when appropriate. However, there is a rebuttable presumption that
default does not occur later than when a financial asset is 90 days past due unless
an entity has reasonable and supportable information to demonstrate that a more
lagging default criterion is more appropriate. The definition of default used for
these purposes shall be applied consistently to all financial instruments unless
information becomes available that demonstrates that another default definition is
more appropriate for a particular financial instrument.
Period over which to estimate expected credit losses
B5.5.38 In accordance with paragraph 5.5.19, the maximum period over which expected
credit losses shall be measured is the maximum contractual period over which the
entity is exposed to credit risk. For loan commitments and financial guarantee
contracts, this is the maximum contractual period over which an entity has a
present contractual obligation to extend credit.
B5.5.39 However, in accordance with paragraph 5.5.20, some financial instruments
include both a loan and an undrawn commitment component and the entity's
contractual ability to demand repayment and cancel the undrawn commitment
does not limit the entity's exposure to credit losses to the contractual notice
period. For example, revolving credit facilities, such as credit cards and overdraft
facilities, can be contractually withdrawn by the lender with as little as one day's
notice. However, in practice lenders continue to extend credit for a longer period
and may only withdraw the facility after the credit risk of the borrower increases,
which could be too late to prevent some or all of the expected credit losses. These
financial instruments generally have the following characteristics as a result of the
nature of the financial instrument, the way in which the financial instruments are
managed, and the nature of the available information about significant increases in
credit risk:
(a) the financial instruments do not have a fixed term or repayment structure
and usually have a short contractual cancellation period (for example, one
day);
(b) the contractual ability to cancel the contract is not enforced in the normal
day-to-day management of the financial instrument and the contract may
only be cancelled when the entity becomes aware of an increase in credit
risk at the facility level; and
(c) the financial instruments are managed on a collective basis.
B5.5.40 When determining the period over which the entity is expected to be exposed to
credit risk, but for which expected credit losses would not be mitigated by the
entity's normal credit risk management actions, an entity should consider factors
such as historical information and experience about:
(a) the period over which the entity was exposed to credit risk on similar
financial instruments;
(b) the length of time for related defaults to occur on similar financial
instruments following a significant increase in credit risk; and
(c) the credit risk management actions that an entity expects to take once the
credit risk on the financial instrument has increased, such as the reduction or
removal of undrawn limits.
Probability-weighted outcome
B5.5.41 The purpose of estimating expected credit losses is neither to estimate a worst-case
scenario nor to estimate the best-case scenario. Instead, an estimate of expected
credit losses shall always reflect the possibility that a credit loss occurs and the
possibility that no credit loss occurs even if the most likely outcome is no credit
loss.
B5.5.42 Paragraph 5.5.17(a) requires the estimate of expected credit losses to reflect an
unbiased and probability-weighted amount that is determined by evaluating a
range of possible outcomes. In practice, this may not need to be a complex
analysis. In some cases, relatively simple modelling may be sufficient, without the
need for a large number of detailed simulations of scenarios. For example, the
average credit losses of a large group of financial instruments with shared risk
characteristics may be a reasonable estimate of the probability-weighted amount.
In other situations, the identification of scenarios that specify the amount and
timing of the cash flows for particular outcomes and the estimated probability of
those outcomes will probably be needed. In those situations, the expected credit
losses shall reflect at least two outcomes in accordance with paragraph 5.5.18.
B5.5.43 For lifetime expected credit losses, an entity shall estimate the risk of a default
occurring on the financial instrument during its expected life. 12-month expected
credit losses are a portion of the lifetime expected credit losses and represent the
lifetime cash shortfalls that will result if a default occurs in the 12 months after the
reporting date (or a shorter period if the expected life of a financial instrument is
less than 12 months), weighted by the probability of that default occurring. Thus,
12-month expected credit losses are neither the lifetime expected credit losses that
an entity will incur on financial instruments that it predicts will default in the next
12 months nor the cash shortfalls that are predicted over the next 12 months.
Time value of money
B5.5.44 Expected credit losses shall be discounted to the reporting date, not to the
expected default or some other date, using the effective interest rate determined at
initial recognition or an approximation thereof. If a financial instrument has a
variable interest rate, expected credit losses shall be discounted using the current
effective interest rate determined in accordance with paragraph B5.4.5.
B5.5.45 For purchased or originated credit-impaired financial assets, expected credit losses
shall be discounted using the credit-adjusted effective interest rate determined at
initial recognition.
B5.5.46 Expected credit losses on lease receivables shall be discounted using the same
discount rate used in the measurement of the lease receivable in accordance with
Ind AS 17.
B5.5.47 The expected credit losses on a loan commitment shall be discounted using the
effective interest rate, or an approximation thereof, that will be applied when
recognising the financial asset resulting from the loan commitment. This is
because for the purpose of applying the impairment requirements, a financial asset
that is recognised following a draw down on a loan commitment shall be treated
as a continuation of that commitment instead of as a new financial instrument.
The expected credit losses on the financial asset shall therefore be measured
considering the initial credit risk of the loan commitment from the date that the
entity became a party to the irrevocable commitment.
B5.5.48 Expected credit losses on financial guarantee contracts or on loan commitments
for which the effective interest rate cannot be determined shall be discounted by
applying a discount rate that reflects the current market assessment of the time
value of money and the risks that are specific to the cash flows but only if, and to
the extent that, the risks are taken into account by adjusting the discount rate
instead of adjusting the cash shortfalls being discounted.
Reasonable and supportable information
B5.5.49 For the purpose of this Standard, reasonable and supportable information is that
which is reasonably available at the reporting date without undue cost or effort,
including information about past events, current conditions and forecasts of future
economic conditions. Information that is available for financial reporting purposes
is considered to be available without undue cost or effort.
B5.5.50 An entity is not required to incorporate forecasts of future conditions over the
entire expected life of a financial instrument. The degree of judgement that is
required to estimate expected credit losses depends on the availability of detailed
information. As the forecast horizon increases, the availability of detailed
information decreases and the degree of judgement required to estimate expected
credit losses increases. The estimate of expected credit losses does not require a
detailed estimate for periods that are far in the future--for such periods, an entity
may extrapolate projections from available, detailed information.
B5.5.51 An entity need not undertake an exhaustive search for information but shall
consider all reasonable and supportable information that is available without
undue cost or effort and that is relevant to the estimate of expected credit losses,
including the effect of expected prepayments. The information used shall include
factors that are specific to the borrower, general economic conditions and an
assessment of both the current as well as the forecast direction of conditions at the
reporting date. An entity may use various sources of data, that may be both
internal (entity-specific) and external. Possible data sources include internal
historical credit loss experience, internal ratings, credit loss experience of other
entities and external ratings, reports and statistics. Entities that have no, or
insufficient, sources of entity-specific data may use peer group experience for the
comparable financial instrument (or groups of financial instruments).
B5.5.52 Historical information is an important anchor or base from which to measure
expected credit losses. However, an entity shall adjust historical data, such as
credit loss experience, on the basis of current observable data to reflect the effects
of the current conditions and its forecasts of future conditions that did not affect
the period on which the historical data is based, and to remove the effects of the
conditions in the historical period that are not relevant to the future contractual
cash flows. In some cases, the best reasonable and supportable information could
be the unadjusted historical information, depending on the nature of the historical
information and when it was calculated, compared to circumstances at the
reporting date and the characteristics of the financial instrument being considered.
Estimates of changes in expected credit losses should reflect, and be directionally
consistent with, changes in related observable data from period to period (such as
changes in unemployment rates, property prices, commodity prices, payment
status or other factors that are indicative of credit losses on the financial
instrument or in the group of financial instruments and in the magnitude of those
changes). An entity shall regularly review the methodology and assumptions used
for estimating expected credit losses to reduce any differences between estimates
and actual credit loss experience.
B5.5.53 When using historical credit loss experience in estimating expected credit losses, it
is important that information about historical credit loss rates is applied to groups
that are defined in a manner that is consistent with the groups for which the
historical credit loss rates were observed. Consequently, the method used shall
enable each group of financial assets to be associated with information about past
credit loss experience in groups of financial assets with similar risk characteristics
and with relevant observable data that reflects current conditions.
B5.5.54 Expected credit losses reflect an entity's own expectations of credit losses.
However, when considering all reasonable and supportable information that is
available without undue cost or effort in estimating expected credit losses, an
entity should also consider observable market information about the credit risk of
the particular financial instrument or similar financial instruments.
Collateral
B5.5.55 For the purposes of measuring expected credit losses, the estimate of expected
cash shortfalls shall reflect the cash flows expected from collateral and other
credit enhancements that are part of the contractual terms and are not recognised
separately by the entity. The estimate of expected cash shortfalls on a
collateralised financial instrument reflects the amount and timing of cash flows
that are expected from foreclosure on the collateral less the costs of obtaining and
selling the collateral, irrespective of whether foreclosure is probable (ie the
estimate of expected cash flows considers the probability of a foreclosure and the
cash flows that would result from it). Consequently, any cash flows that are
expected from the realisation of the collateral beyond the contractual maturity of
the contract should be included in this analysis. Any collateral obtained as a result
of foreclosure is not recognised as an asset that is separate from the collateralised
financial instrument unless it meets the relevant recognition criteria for an asset in
this or other Standards.
Reclassification of financial assets (Section 5.6)
B5.6.1 If an entity reclassifies financial assets in accordance with paragraph 4.4.1,
paragraph 5.6.1 requires that the reclassification is applied prospectively from the
reclassification date. Both the amortised cost measurement category and the fair
value through other comprehensive income measurement category require that the
effective interest rate is determined at initial recognition. Both of those
measurement categories also require that the impairment requirements are applied
in the same way. Consequently, when an entity reclassifies a financial asset
between the amortised cost measurement category and the fair value through other
comprehensive income measurement category:
(a) the recognition of interest revenue will not change and therefore the entity
continues to use the same effective interest rate.
(b) the measurement of expected credit losses will not change because both
measurement categories apply the same impairment approach. However if a
financial asset is reclassified out of the fair value through other
comprehensive income measurement category and into the amortised cost
measurement category, a loss allowance would be recognised as an
adjustment to the gross carrying amount of the financial asset from the
reclassification date. If a financial asset is reclassified out of the amortised
cost measurement category and into the fair value through other
comprehensive income measurement category, the loss allowance would be
derecognised (and thus would no longer be recognised as an adjustment to
the gross carrying amount) but instead would be recognised as an
accumulated impairment amount (of an equal amount) in other
comprehensive income and would be disclosed from the reclassification
date.
B5.6.2 However, an entity is not required to separately recognise interest revenue or
impairment gains or losses for a financial asset measured at fair value through
profit or loss. Consequently, when an entity reclassifies a financial asset out of the
fair value through profit or loss measurement category, the effective interest rate
is determined on the basis of the fair value of the asset at the reclassification date.
In addition, for the purposes of applying Section 5.5 to the financial asset from the
reclassification date, the date of the reclassification is treated as the date of initial
recognition.
Gains and losses (Section 5.7)
B5.7.1 Paragraph 5.7.5 permits an entity to make an irrevocable election to present in other
comprehensive income changes in the fair value of an investment in an equity
instrument that is not held for trading. This election is made on an instrument-by-
instrument (ie share-by-share) basis. Amounts presented in other comprehensive
income shall not be subsequently transferred to profit or loss. However, the entity
may transfer the cumulative gain or loss within equity. Dividends on such
investments are recognised in profit or loss in accordance with paragraph 5.7.6
unless the dividend clearly represents a recovery of part of the cost of the
investment.
B5.7.1A Unless paragraph 4.1.5 applies, paragraph 4.1.2A requires that a financial asset is
measured at fair value through other comprehensive income if the contractual
terms of the financial asset give rise to cash flows that are solely payments of
principal and interest on the principal amount outstanding and the asset is held in
a business model whose objective is achieved by both collecting contractual cash
flows and selling financial assets. This measurement category recognises
information in profit or loss as if the financial asset is measured at amortised cost,
while the financial asset is measured in the balance sheet at fair value. Gains or
losses, other than those that are recognised in profit or loss in accordance with
paragraphs 5.7.105.7.11, are recognised in other comprehensive income. When
these financial assets are derecognised, cumulative gains or losses previously
recognised in other comprehensive income are reclassified to profit or loss. This
reflects the gain or loss that would have been recognised in profit or loss upon
derecognition if the financial asset had been measured at amortised cost.
B5.7.2 An entity applies Ind AS 21 to financial assets and financial liabilities that are
monetary items in accordance with Ind AS 21 and denominated in a foreign
currency. Ind AS 21 requires any foreign exchange gains and losses on monetary
assets and monetary liabilities to be recognised in profit or loss. An exception is a
monetary item that is designated as a hedging instrument in a cash flow hedge
(see paragraph 6.5.11), a hedge of a net investment (see paragraph 6.5.13) or a fair
value hedge of an equity instrument for which an entity has elected to present
changes in fair value in other comprehensive income in accordance with
paragraph 5.7.5 (see paragraph 6.5.8).
B5.7.2A For the purpose of recognising foreign exchange gains and losses under Ind AS
21, a financial asset measured at fair value through other comprehensive income
in accordance with paragraph 4.1.2A is treated as a monetary item. Accordingly,
such a financial asset is treated as an asset measured at amortised cost in the
foreign currency. Exchange differences on the amortised cost are recognised in
profit or loss and other changes in the carrying amount are recognised in
accordance with paragraph 5.7.10.
B5.7.3 Paragraph 5.7.5 permits an entity to make an irrevocable election to present in other
comprehensive income subsequent changes in the fair value of particular
investments in equity instruments. Such an investment is not a monetary item.
Accordingly, the gain or loss that is presented in other comprehensive income in
accordance with paragraph 5.7.5 includes any related foreign exchange
component.
B5.7.4 If there is a hedging relationship between a non-derivative monetary asset and a
non-derivative monetary liability, changes in the foreign currency component of
those financial instruments are presented in profit or loss.
Liabilities designated as at fair value through profit or loss
B5.7.5 When an entity designates a financial liability as at fair value through profit or loss,
it must determine whether presenting in other comprehensive income the effects
of changes in the liability's credit risk would create or enlarge an accounting
mismatch in profit or loss. An accounting mismatch would be created or enlarged
if presenting the effects of changes in the liability's credit risk in other
comprehensive income would result in a greater mismatch in profit or loss than if
those amounts were presented in profit or loss.
B5.7.6 To make that determination, an entity must assess whether it expects that the effects
of changes in the liability's credit risk will be offset in profit or loss by a change
in the fair value of another financial instrument measured at fair value through
profit or loss. Such an expectation must be based on an economic relationship
between the characteristics of the liability and the characteristics of the other
financial instrument.
B5.7.7 That determination is made at initial recognition and is not reassessed. For practical
purposes the entity need not enter into all of the assets and liabilities giving rise to
an accounting mismatch at exactly the same time. A reasonable delay is permitted
provided that any remaining transactions are expected to occur. An entity must
apply consistently its methodology for determining whether presenting in other
comprehensive income the effects of changes in the liability's credit risk would
create or enlarge an accounting mismatch in profit or loss. However, an entity
may use different methodologies when there are different economic relationships
between the characteristics of the liabilities designated as at fair value through
profit or loss and the characteristics of the other financial instruments. Ind AS 107
requires an entity to provide qualitative disclosures in the notes to the financial
statements about its methodology for making that determination.
B5.7.8 If such a mismatch would be created or enlarged, the entity is required to present all
changes in fair value (including the effects of changes in the credit risk of the
liability) in profit or loss. If such a mismatch would not be created or enlarged, the
entity is required to present the effects of changes in the liability's credit risk in
other comprehensive income.
B5.7.9 Amounts presented in other comprehensive income shall not be subsequently
transferred to profit or loss. However, the entity may transfer the cumulative gain
or loss within equity.
B5.7.10 The following example describes a situation in which an accounting mismatch
would be created in profit or loss if the effects of changes in the credit risk of the
liability were presented in other comprehensive income. A mortgage bank
provides loans to customers and funds those loans by selling bonds
withvmatching characteristics (eg amount outstanding, repayment profile, term
and currency) in the market. The contractual terms of the loan permit the
mortgage customer to prepay its loan (ie satisfy its obligation to the bank) by
buying the corresponding bond at fair value in the market and delivering that bond
to the mortgage bank. As a result of that contractual prepayment right, if the credit
quality of the bond worsens (and, thus, the fair value of the mortgage bank's
liability decreases), the fair value of the mortgage bank's loan asset also
decreases. The change in the fair value of the asset reflects the mortgage
customer's contractual right to prepay the mortgage loan by buying the underlying
bond at fair value (which, in this example, has decreased) and delivering the bond
to the mortgage bank. Consequently, the effects of changes in the credit risk of the
liability (the bond) will be offset in profit or loss by a corresponding change in the
fair value of a financial asset (the loan). If the effects of changes in the liability's
credit risk were presented in other comprehensive income there would be an
accounting mismatch in profit or loss. Consequently, the mortgage bank is
required to present all changes in fair value of the liability (including the effects of
changes in the liability's credit risk) in profit or loss.
B5.7.11 In the example in paragraph B5.7.10, there is a contractual linkage between the
effects of changes in the credit risk of the liability and changes in the fair value of
the financial asset (ie as a result of the mortgage customer's contractual right to
prepay the loan by buying the bond at fair value and delivering the bond to the
mortgage bank). However, an accounting mismatch may also occur in the absence
of a contractual linkage.
B5.7.12 For the purposes of applying the requirements in paragraphs 5.7.7 and 5.7.8, an
accounting mismatch is not caused solely by the measurement method that an
entity uses to determine the effects of changes in a liability's credit risk. An
accounting mismatch in profit or loss would arise only when the effects of
changes in the liability's credit risk (as defined in Ind AS 107) are expected to be
offset by changes in the fair value of another financial instrument. A mismatch
that arises solely as a result of the measurement method (ie because an entity does
not isolate changes in a liability's credit risk from some other changes in its fair
value) does not affect the determination required by paragraphs 5.7.7 and 5.7.8.
For example, an entity may not isolate changes in a liability's credit risk from
changes in liquidity risk. If the entity presents the combined effect of both factors
in other comprehensive income, a mismatch may occur because changes in
liquidity risk may be included in the fair value measurement of the entity's
financial assets and the entire fair value change of those assets is presented in
profit or loss. However, such a mismatch is caused by measurement imprecision,
not the offsetting relationship described in paragraph B5.7.6 and, therefore, does
not affect the determination required by paragraphs 5.7.7 and 5.7.8.
The meaning of `credit risk' (paragraphs 5.7.7 and 5.7.8)
B5.7.13 Ind AS 107 defines credit risk as `the risk that one party to a financial instrument
will cause a financial loss for the other party by failing to discharge an obligation'.
The requirement in paragraph 5.7.7(a) relates to the risk that the issuer will fail to
perform on that particular liability. It does not necessarily relate to the
creditworthiness of the issuer. For example, if an entity issues a collateralised
liability and a non-collateralised liability that are otherwise identical, the credit
risk of those two liabilities will be different, even though they are issued by the
same entity. The credit risk on the collateralised liability will be less than the
credit risk of the non-collateralised liability. The credit risk for a collateralised
liability may be close to zero.
B5.7.14 For the purposes of applying the requirement in paragraph 5.7.7(a), credit risk is
different from asset-specific performance risk. Asset-specific performance risk is
not related to the risk that an entity will fail to discharge a particular obligation but
instead it is related to the risk that a single asset or a group of assets will perform
poorly (or not at all).
B5.7.15 The following are examples of asset-specific performance risk:
(a) a liability with a unit-linking feature whereby the amount due to investors is
contractually determined on the basis of the performance of specified assets.
The effect of that unit-linking feature on the fair value of the liability is
asset-specific performance risk, not credit risk.
(b) a liability issued by a structured entity with the following characteristics.
The entity is legally isolated so the assets in the entity are ring-fenced solely
for the benefit of its investors, even in the event of bankruptcy. The entity
enters into no other transactions and the assets in the entity cannot be
hypothecated. Amounts are due to the entity's investors only if the ring-
fenced assets generate cash flows. Thus, changes in the fair value of the
liability primarily reflect changes in the fair value of the assets. The effect of
the performance of the assets on the fair value of the liability is asset-
specific performance risk, not credit risk.
Determining the effects of changes in credit risk
B5.7.16 For the purposes of applying the requirement in paragraph 5.7.7(a), an entity shall
determine the amount of change in the fair value of the financial liability that is
attributable to changes in the credit risk of that liability either:
(a) 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 paragraphs B5.7.17
and B5.7.18); or
(b) using an alternative method the entity believes more faithfully represents
the amount of change in the liability's fair value that is attributable to
changes in its credit risk.
B5.7.17 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 prices or rates.
B5.7.18 If the only significant relevant changes in market conditions for a liability are
changes in an observed (benchmark) interest rate, the amount in paragraph
B5.7.16(a) 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 fair value 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 fair value 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 presented in other comprehensive income in
accordance with paragraph 5.7.7(a).
B5.7.19 The example in paragraph B5.7.18 assumes that changes in fair value arising from
factors other than changes in the instrument's credit risk or changes in observed
(benchmark) interest rates are not significant. This method would not be
appropriate if changes in fair value arising from other factors are significant. In
those cases, an entity is required to use an alternative method that more faithfully
measures the effects of changes in the liability's credit risk (see paragraph
B5.7.16(b)). For example, 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 presented in other comprehensive income in
accordance with paragraph 5.7.7(a).
B5.7.20 As with all fair value measurements, an entity's measurement method for
determining the portion of the change in the liability's fair value that is
attributable to changes in its credit risk must make maximum use of relevant
observable inputs and minimum use of unobservable inputs.
Hedge accounting (Chapter 6)
Hedging instruments (Section 6.2)
Qualifying instruments
B6.2.1 Derivatives that are embedded in hybrid contracts, but that are not separately
accounted for, cannot be designated as separate hedging instruments.
B6.2.2 An entity's own equity instruments are not financial assets or financial liabilities
of the entity and therefore cannot be designated as hedging instruments.
B6.2.3 For hedges of foreign currency risk, the foreign currency risk component of a non-
derivative financial instrument is determined in accordance with Ind AS 21.
Written options
B6.2.4 This Standard does not restrict the circumstances in which a derivative that is
measured at fair value through profit or loss may be designated as a hedging
instrument, except for some written options. A written option does not qualify as a
hedging instrument unless it is designated as an offset to a purchased option,
including one that is embedded in another financial instrument (for example, a
written call option used to hedge a callable liability).
Designation of hedging instruments
B6.2.5 For hedges other than hedges of foreign currency risk, when an entity designates a
non-derivative financial asset or a non-derivative financial liability measured at
fair value through profit or loss as a hedging instrument, it may only designate the
non-derivative financial instrument in its entirety or a proportion of it.
B6.2.6 A single hedging instrument may be designated as a hedging instrument of more
than one type of risk, provided that there is a specific designation of the hedging
instrument and of the different risk positions as hedged items. Those hedged items
can be in different hedging relationships.
Hedged items (Section 6.3)
Qualifying items
B6.3.1 A firm commitment to acquire a business in a business combination cannot be a
hedged item, except for foreign currency risk, because the other risks being
hedged cannot be specifically identified and measured. Those other risks are
general business risks.
B6.3.2 An equity method investment cannot be a hedged item in a fair value hedge. This is
because the equity method recognises in profit or loss the investor's share of the
investee's profit or loss, instead of changes in the investment's fair value. For a
similar reason, an investment in a consolidated subsidiary cannot be a hedged item
in a fair value hedge. This is because consolidation recognises in profit or loss the
subsidiary's profit or loss, instead of changes in the investment's fair value. A
hedge of a net investment in a foreign operation is different because it is a hedge
of the foreign currency exposure, not a fair value hedge of the change in the value
of the investment.
B6.3.3 Paragraph 6.3.4 permits an entity to designate as hedged items aggregated
exposures that are a combination of an exposure and a derivative. When
designating such a hedged item, an entity assesses whether the aggregated
exposure combines an exposure with a derivative so that it creates a different
aggregated exposure that is managed as one exposure for a particular risk (or
risks). In that case, the entity may designate the hedged item on the basis of the
aggregated exposure. For example:
(a) an entity may hedge a given quantity of highly probable coffee purchases in
15 months' time against price risk (based on US dollars) using a 15-month
futures contract for coffee. The highly probable coffee purchases and the
futures contract for coffee in combination can be viewed as a 15-month
fixed-amount US dollar foreign currency risk exposure for risk management
purposes (ie like any fixed-amount US dollar cash outflow in 15 months'
time).
(b) an entity may hedge the foreign currency risk for the entire term of a 10-
year fixed-rate debt denominated in a foreign currency. However, the entity
requires fixed-rate exposure in its functional currency only for a short to
medium term (say two years) and floating rate exposure in its functional
currency for the remaining term to maturity. At the end of each of the two-
year intervals (ie on a two-year rolling basis) the entity fixes the next two
years' interest rate exposure (if the interest level is such that the entity wants
to fix interest rates). In such a situation an entity may enter into a 10-year
fixed-to-floating cross-currency interest rate swap that swaps the fixed-rate
foreign currency debt into a variable-rate functional currency exposure. This
is overlaid with a two-year interest rate swap that--on the basis of the
functional currency--swaps variable-rate debt into fixed-rate debt. In effect,
the fixed-rate foreign currency debt and the 10-year fixed-to-floating cross-
currency interest rate swap in combination are viewed as a 10-year variable-
rate debt functional currency exposure for risk management purposes.
B6.3.4 When designating the hedged item on the basis of the aggregated exposure, an
entity considers the combined effect of the items that constitute the aggregated
exposure for the purpose of assessing hedge effectiveness and measuring hedge
ineffectiveness. However, the items that constitute the aggregated exposure
remain accounted for separately. This means that, for example:
(a) derivatives that are part of an aggregated exposure are recognised as
separate assets or liabilities measured at fair value; and
(b) if a hedging relationship is designated between the items that constitute the
aggregated exposure, the way in which a derivative is included as part of an
aggregated exposure must be consistent with the designation of that
derivative as the hedging instrument at the level of the aggregated exposure.
For example, if an entity excludes the forward element of a derivative from
its designation as the hedging instrument for the hedging relationship
between the items that constitute the aggregated exposure, it must also
exclude the forward element when including that derivative as a hedged
item as part of the aggregated exposure. Otherwise, the aggregated exposure
shall include a derivative, either in its entirety or a proportion of it.
B6.3.5 Paragraph 6.3.6 states that in consolidated financial statements the foreign currency
risk of a highly probable forecast intragroup transaction may qualify as a hedged
item in a cash flow hedge, provided that the transaction is denominated in a
currency other than the functional currency of the entity entering into that
transaction and that the foreign currency risk will affect consolidated profit or
loss. For this purpose an entity can be a parent, subsidiary, associate, joint
arrangement or branch. If the foreign currency risk of a forecast intragroup
transaction does not affect consolidated profit or loss, the intragroup transaction
cannot qualify as a hedged item. This is usually the case for royalty payments,
interest payments or management charges between members of the same group,
unless there is a related external transaction. However, when the foreign currency
risk of a forecast intragroup transaction will affect consolidated profit or loss, the
intragroup transaction can qualify as a hedged item. An example is forecast sales
or purchases of inventories between members of the same group if there is an
onward sale of the inventory to a party external to the group. Similarly, a forecast
intragroup sale of plant and equipment from the group entity that manufactured it
to a group entity that will use the plant and equipment in its operations may affect
consolidated profit or loss. This could occur, for example, because the plant and
equipment will be depreciated by the purchasing entity and the amount initially
recognised for the plant and equipment may change if the forecast intragroup
transaction is denominated in a currency other than the functional currency of the
purchasing entity.
B6.3.6 If a hedge of a forecast intragroup transaction qualifies for hedge accounting, any
gain or loss is recognised in, and taken out of, other comprehensive income in
accordance with paragraph 6.5.11. The relevant period or periods during which
the foreign currency risk of the hedged transaction affects profit or loss is when it
affects consolidated profit or loss.
Designation of hedged items
B6.3.7 A component is a hedged item that is less than the entire item. Consequently, a
component reflects only some of the risks of the item of which it is a part or
reflects the risks only to some extent (for example, when designating a proportion
of an item).
Risk components
B6.3.8 To be eligible for designation as a hedged item, a risk component must be a
separately identifiable component of the financial or the non-financial item, and
the changes in the cash flows or the fair value of the item attributable to changes
in that risk component must be reliably measurable.
B6.3.9 When identifying what risk components qualify for designation as a hedged item,
an entity assesses such risk components within the context of the particular market
structure to which the risk or risks relate and in which the hedging activity takes
place. Such a determination requires an evaluation of the relevant facts and
circumstances, which differ by risk and market.
B6.3.10 When designating risk components as hedged items, an entity considers whether
the risk components are explicitly specified in a contract (contractually specified
risk components) or whether they are implicit in the fair value or the cash flows of
an item of which they are a part (non-contractually specified risk components).
Non-contractually specified risk components can relate to items that are not a
contract (for example, forecast transactions) or contracts that do not explicitly
specify the component (for example, a firm commitment that includes only one
single price instead of a pricing formula that references different underlyings). For
example:
(a) Entity A has a long-term supply contract for natural gas that is priced using
a contractually specified formula that references commodities and other
factors (for example, gas oil, fuel oil and other components such as transport
charges). Entity A hedges the gas oil component in that supply contract
using a gas oil forward contract. Because the gas oil component is specified
by the terms and conditions of the supply contract it is a contractually
specified risk component. Hence, because of the pricing formula, Entity A
concludes that the gas oil price exposure is separately identifiable. At the
same time, there is a market for gas oil forward contracts. Hence, Entity A
concludes that the gas oil price exposure is reliably measurable.
Consequently, the gas oil price exposure in the supply contract is a risk
component that is eligible for designation as a hedged item.
(b) Entity B hedges its future coffee purchases based on its production forecast.
Hedging starts up to 15 months before delivery for part of the forecast
purchase volume. Entity B increases the hedged volume over time (as the
delivery date approaches). Entity B uses two different types of contracts to
manage its coffee price risk:
(i) exchange-traded coffee futures contracts; and
(ii) coffee supply contracts for Arabica coffee from Colombia delivered to
a specific manufacturing site. These contracts price a tonne of coffee
based on the exchange-traded coffee futures contract price plus a fixed
price differential plus a variable logistics services charge using a
pricing formula. The coffee supply contract is an executory contract in
accordance with which Entity B takes actual delivery of coffee.
For deliveries that relate to the current harvest, entering into the coffee
supply contracts allows Entity B to fix the price differential between the
actual coffee quality purchased (Arabica coffee from Colombia) and the
benchmark quality that is the underlying of the exchange-traded futures
contract. However, for deliveries that relate to the next harvest, the coffee
supply contracts are not yet available, so the price differential cannot be
fixed. Entity B uses exchange-traded coffee futures contracts to hedge the
benchmark quality component of its coffee price risk for deliveries that
relate to the current harvest as well as the next harvest. Entity B determines
that it is exposed to three different risks: coffee price risk reflecting the
benchmark quality, coffee price risk reflecting the difference (spread)
between the price for the benchmark quality coffee and the particular
Arabica coffee from Colombia that it actually receives, and the variable
logistics costs. For deliveries related to the current harvest, after Entity B
enters into a coffee supply contract, the coffee price risk reflecting the
benchmark quality is a contractually specified risk component because the
pricing formula includes an indexation to the exchange-traded coffee futures
contract price. Entity B concludes that this risk component is separately
identifiable and reliably measurable. For deliveries related to the next
harvest, Entity B has not yet entered into any coffee supply contracts (ie
those deliveries are forecast transactions). Hence, the coffee price risk
reflecting the benchmark quality is a non-contractually specified risk
component. Entity B's analysis of the market structure takes into account
how eventual deliveries of the particular coffee that it receives are priced.
Hence, on the basis of this analysis of the market structure, Entity B
concludes that the forecast transactions also involve the coffee price risk that
reflects the benchmark quality as a risk component that is separately
identifiable and reliably measurable even though it is not contractually
specified. Consequently, Entity B may designate hedging relationships on a
risk components basis (for the coffee price risk that reflects the benchmark
quality) for coffee supply contracts as well as forecast transactions.
(c) Entity C hedges part of its future jet fuel purchases on the basis of its
consumption forecast up to 24 months before delivery and increases the
volume that it hedges over time. Entity C hedges this exposure using
different types of contracts depending on the time horizon of the hedge,
which affects the market liquidity of the derivatives. For the longer time
horizons (1224 months) Entity C uses crude oil contracts because only
these have sufficient market liquidity. For time horizons of 612 months
Entity C uses gas oil derivatives because they are sufficiently liquid. For
time horizons up to six months Entity C uses jet fuel contracts. Entity C's
analysis of the market structure for oil and oil products and its evaluation of
the relevant facts and circumstances is as follows:
(i) Entity C operates in a geographical area in which Brent is the crude oil
benchmark. Crude oil is a raw material benchmark that affects the
price of various refined oil products as their most basic input. Gas oil
is a benchmark for refined oil products, which is used as a pricing
reference for oil distillates more generally. This is also reflected in the
types of derivative financial instruments for the crude oil and refined
oil products markets of the environment in which Entity C operates,
such as:
the benchmark crude oil futures contract, which is for Brent
crude oil;
the benchmark gas oil futures contract, which is used as the
pricing reference for distillates--for example, jet fuel spread
derivatives cover the price differential between jet fuel and that
benchmark gas oil; and
the benchmark gas oil crack spread derivative (ie the derivative
for the price differential between crude oil and gas oil--a
refining margin), which is indexed to Brent crude oil.
(ii) the pricing of refined oil products does not depend on which particular
crude oil is processed by a particular refinery because those refined oil
products (such as gas oil or jet fuel) are standardised products.
Hence, Entity C concludes that the price risk of its jet fuel purchases
includes a crude oil price risk component based on Brent crude oil and a gas
oil price risk component, even though crude oil and gas oil are not specified
in any contractual arrangement. Entity C concludes that these two risk
components are separately identifiable and reliably measurable even though
they are not contractually specified. Consequently, Entity C may designate
hedging relationships for forecast jet fuel purchases on a risk components
basis (for crude oil or gas oil). This analysis also means that if, for example,
Entity C used crude oil derivatives based on West Texas Intermediate (WTI)
crude oil, changes in the price differential between Brent crude oil and WTI
crude oil would cause hedge ineffectiveness.
(d) Entity D holds a fixed-rate debt instrument. This instrument is issued in an
environment with a market in which a large variety of similar debt
instruments are compared by their spreads to a benchmark rate (for example,
LIBOR) and variable-rate instruments in that environment are typically
indexed to that benchmark rate. Interest rate swaps are frequently used to
manage interest rate risk on the basis of that benchmark rate, irrespective of
the spread of debt instruments to that benchmark rate. The price of fixed-
rate debt instruments varies directly in response to changes in the
benchmark rate as they happen. Entity D concludes that the benchmark rate
is a component that can be separately identified and reliably measured.
Consequently, Entity D may designate hedging relationships for the fixed-
rate debt instrument on a risk component basis for the benchmark interest
rate risk.
B6.3.11 When designating a risk component as a hedged item, the hedge accounting
requirements apply to that risk component in the same way as they apply to other
hedged items that are not risk components. For example, the qualifying criteria
apply, including that the hedging relationship must meet the hedge effectiveness
requirements, and any hedge ineffectiveness must be measured and recognised.
B6.3.12 An entity can also designate only changes in the cash flows or fair value of a
hedged item above or below a specified price or other variable (a `one-sided
risk'). The intrinsic value of a purchased option hedging instrument (assuming
that it has the same principal terms as the designated risk), but not its time value,
reflects a one-sided risk in a hedged item. For example, an entity can designate the
variability of future cash flow outcomes resulting from a price increase of a
forecast commodity purchase. In such a situation, the entity designates only cash
flow losses that result from an increase in the price above the specified level. The
hedged risk does not include the time value of a purchased option, because the
time value is not a component of the forecast transaction that affects profit or loss.
B6.3.13 There is a rebuttable presumption that unless inflation risk is contractually
specified, it is not separately identifiable and reliably measurable and hence
cannot be designated as a risk component of a financial instrument. However, in
limited cases, it is possible to identify a risk component for inflation risk that is
separately identifiable and reliably measurable because of the particular
circumstances of the inflation environment and the relevant debt market.
B6.3.14 For example, an entity issues debt in an environment in which inflation-linked
bonds have a volume and term structure that results in a sufficiently liquid market
that allows constructing a term structure of zero-coupon real interest rates. This
means that for the respective currency, inflation is a relevant factor that is
separately considered by the debt markets. In those circumstances the inflation
risk component could be determined by discounting the cash flows of the hedged
debt instrument using the term structure of zero-coupon real interest rates (ie in a
manner similar to how a risk-free (nominal) interest rate component can be
determined). Conversely, in many cases an inflation risk component is not
separately identifiable and reliably measurable. For example, an entity issues only
nominal interest rate debt in an environment with a market for inflation-linked
bonds that is not sufficiently liquid to allow a term structure of zero-coupon real
interest rates to be constructed. In this case the analysis of the market structure
and of the facts and circumstances does not support the entity concluding that
inflation is a relevant factor that is separately considered by the debt markets.
Hence, the entity cannot overcome the rebuttable presumption that inflation risk
that is not contractually specified is not separately identifiable and reliably
measurable. Consequently, an inflation risk component would not be eligible for
designation as the hedged item. This applies irrespective of any inflation hedging
instrument that the entity has actually entered into. In particular, the entity cannot
simply impute the terms and conditions of the actual inflation hedging instrument
by projecting its terms and conditions onto the nominal interest rate debt.
B6.3.15 A contractually specified inflation risk component of the cash flows of a
recognised inflation-linked bond (assuming that there is no requirement to account
for an embedded derivative separately) is separately identifiable and reliably
measurable, as long as other cash flows of the instrument are not affected by the
inflation risk component.
Components of a nominal amount
B6.3.16 There are two types of components of nominal amounts that can be designated as
the hedged item in a hedging relationship: a component that is a proportion of an
entire item or a layer component. The type of component changes the accounting
outcome. An entity shall designate the component for accounting purposes
consistently with its risk management objective.
B6.3.17 An example of a component that is a proportion is 50 per cent of the contractual
cash flows of a loan.
B6.3.18 A layer component may be specified from a defined, but open, population, or
from a defined nominal amount. Examples include:
(a) part of a monetary transaction volume, for example, the next FC10 cash
flows from sales denominated in a foreign currency after the first FC20 in
March 201X;4
(b) a part of a physical volume, for example, the bottom layer, measuring 5
million cubic metres, of the natural gas stored in location XYZ;
4
In this Standard monetary amounts are denominated in `Indian Rupees' (Rs.) and `foreign
currency units' (FC).
(c) a part of a physical or other transaction volume, for example, the first 100
barrels of the oil purchases in June 201X or the first 100 MWh of
electricity sales in June 201X; or
(d) a layer from the nominal amount of the hedged item, for example, the last
Rs.80 million of a Rs.100 million firm commitment, the bottom layer of
Rs.20 million of a Rs.100 million fixed-rate bond or the top layer of Rs.30
million from a total amount of Rs.100 million of fixed-rate debt that can be
prepaid at fair value (the defined nominal amount is Rs.100 million).
B6.3.19 If a layer component is designated in a fair value hedge, an entity shall specify it
from a defined nominal amount. To comply with the requirements for qualifying
fair value hedges, an entity shall remeasure the hedged item for fair value changes
(ie remeasure the item for fair value changes attributable to the hedged risk). The
fair value hedge adjustment must be recognised in profit or loss no later than
when the item is derecognised. Consequently, it is necessary to track the item to
which the fair value hedge adjustment relates. For a layer component in a fair
value hedge, this requires an entity to track the nominal amount from which it is
defined. For example, in paragraph B6.3.18(d), the total defined nominal amount
of Rs.100 million must be tracked in order to track the bottom layer of Rs.20
million or the top layer of Rs.30 million.
B6.3.20 A layer component that includes a prepayment option is not eligible to be
designated as a hedged item in a fair value hedge if the prepayment option's fair
value is affected by changes in the hedged risk, unless the designated layer
includes the effect of the related prepayment option when determining the change
in the fair value of the hedged item.
Relationship between components and the total cash flows of an item
B6.3.21 If a component of the cash flows of a financial or a non-financial item is
designated as the hedged item, that component must be less than or equal to the
total cash flows of the entire item. However, all of the cash flows of the entire
item may be designated as the hedged item and hedged for only one particular risk
(for example, only for those changes that are attributable to changes in LIBOR or
a benchmark commodity price).
B6.3.22 For example, in the case of a financial liability whose effective interest rate is
below LIBOR, an entity cannot designate:
(a) a component of the liability equal to interest at LIBOR (plus the principal
amount in case of a fair value hedge); and
(b) a negative residual component.
B6.3.23 However, in the case of a fixed-rate financial liability whose effective interest rate
is (for example) 100 basis points below LIBOR, an entity can designate as the
hedged item the change in the value of that entire liability (ie principal plus
interest at LIBOR minus 100 basis points) that is attributable to changes in
LIBOR. If a fixed-rate financial instrument is hedged some time after its
origination and interest rates have changed in the meantime, the entity can
designate a risk component equal to a benchmark rate that is higher than the
contractual rate paid on the item. The entity can do so provided that the
benchmark rate is less than the effective interest rate calculated on the assumption
that the entity had purchased the instrument on the day when it first designates the
hedged item. For example, assume that an entity originates a fixed-rate financial
asset of Rs.100 that has an effective interest rate of 6 per cent at a time when
LIBOR is 4 per cent. It begins to hedge that asset some time later when LIBOR
has increased to 8 per cent and the fair value of the asset has decreased to Rs.90.
The entity calculates that if it had purchased the asset on the date it first designates
the related LIBOR interest rate risk as the hedged item, the effective yield of the
asset based on its then fair value of Rs.90 would have been 9.5 per cent. Because
LIBOR is less than this effective yield, the entity can designate a LIBOR
component of 8 per cent that consists partly of the contractual interest cash flows
and partly of the difference between the current fair value (ie Rs.90) and the
amount repayable on maturity (ie Rs.100).
B6.3.24 If a variable-rate financial liability bears interest of (for example) three-month
LIBOR minus 20 basis points (with a floor at zero basis points), an entity can
designate as the hedged item the change in the cash flows of that entire liability (ie
three-month LIBOR minus 20 basis points--including the floor) that is
attributable to changes in LIBOR. Hence, as long as the three-month LIBOR
forward curve for the remaining life of that liability does not fall below 20 basis
points, the hedged item has the same cash flow variability as a liability that bears
interest at three-month LIBOR with a zero or positive spread. However, if the
three-month LIBOR forward curve for the remaining life of that liability (or a part
of it) falls below 20 basis points, the hedged item has a lower cash flow variability
than a liability that bears interest at three-month LIBOR with a zero or positive
spread.
B6.3.25 A similar example of a non-financial item is a specific type of crude oil from a
particular oil field that is priced off the relevant benchmark crude oil. If an entity
sells that crude oil under a contract using a contractual pricing formula that sets
the price per barrel at the benchmark crude oil price minus Rs.10 with a floor of
Rs.15, the entity can designate as the hedged item the entire cash flow variability
under the sales contract that is attributable to the change in the benchmark crude
oil price. However, the entity cannot designate a component that is equal to the
full change in the benchmark crude oil price. Hence, as long as the forward price
(for each delivery) does not fall below Rs.25, the hedged item has the same cash
flow variability as a crude oil sale at the benchmark crude oil price (or with a
positive spread). However, if the forward price for any delivery falls below Rs.25,
the hedged item has a lower cash flow variability than a crude oil sale at the
benchmark crude oil price (or with a positive spread).
Qualifying criteria for hedge accounting (Section 6.4)
Hedge effectiveness
B6.4.1 Hedge effectiveness is the extent to which changes in the fair value or the cash
flows of the hedging instrument offset changes in the fair value or the cash flows
of the hedged item (for example, when the hedged item is a risk component, the
relevant change in fair value or cash flows of an item is the one that is attributable
to the hedged risk). Hedge ineffectiveness is the extent to which the changes in the
fair value or the cash flows of the hedging instrument are greater or less than those
on the hedged item.
B6.4.2 When designating a hedging relationship and on an ongoing basis, an entity shall
analyse the sources of hedge ineffectiveness that are expected to affect the
hedging relationship during its term. This analysis (including any updates in
accordance with paragraph B6.5.21 arising from rebalancing a hedging
relationship) is the basis for the entity's assessment of meeting the hedge
effectiveness requirements.
B6.4.3 For the avoidance of doubt, the effects of replacing the original counterparty with a
clearing counterparty and making the associated changes as described in
paragraph 6.5.6 shall be reflected in the measurement of the hedging instrument
and therefore in the assessment of hedge effectiveness and the measurement of
hedge effectiveness.
Economic relationship between the hedged item and the hedging instrument
B6.4.4 The requirement that an economic relationship exists means that the hedging
instrument and the hedged item have values that generally move in the opposite
direction because of the same risk, which is the hedged risk. Hence, there must be
an expectation that the value of the hedging instrument and the value of the
hedged item will systematically change in response to movements in either the
same underlying or underlyings that are economically related in such a way that
they respond in a similar way to the risk that is being hedged (for example, Brent
and WTI crude oil).
B6.4.5 If the underlyings are not the same but are economically related, there can be
situations in which the values of the hedging instrument and the hedged item
move in the same direction, for example, because the price differential between
the two related underlyings changes while the underlyings themselves do not
move significantly. That is still consistent with an economic relationship between
the hedging instrument and the hedged item if the values of the hedging
instrument and the hedged item are still expected to typically move in the opposite
direction when the underlyings move.
B6.4.6 The assessment of whether an economic relationship exists includes an analysis of
the possible behaviour of the hedging relationship during its term to ascertain
whether it can be expected to meet the risk management objective. The mere
existence of a statistical correlation between two variables does not, by itself,
support a valid conclusion that an economic relationship exists.
The effect of credit risk
B6.4.7 Because the hedge accounting model is based on a general notion of offset between
gains and losses on the hedging instrument and the hedged item, hedge
effectiveness is determined not only by the economic relationship between those
items (ie the changes in their underlyings) but also by the effect of credit risk on
the value of both the hedging instrument and the hedged item. The effect of credit
risk means that even if there is an economic relationship between the hedging
instrument and the hedged item, the level of offset might become erratic. This can
result from a change in the credit risk of either the hedging instrument or the
hedged item that is of such a magnitude that the credit risk dominates the value
changes that result from the economic relationship (ie the effect of the changes in
the underlyings). A level of magnitude that gives rise to dominance is one that
would result in the loss (or gain) from credit risk frustrating the effect of changes
in the underlyings on the value of the hedging instrument or the hedged item, even
if those changes were significant. Conversely, if during a particular period there is
little change in the underlyings, the fact that even small credit risk-related changes
in the value of the hedging instrument or the hedged item might affect the value
more than the underlyings does not create dominance.
B6.4.8 An example of credit risk dominating a hedging relationship is when an entity
hedges an exposure to commodity price risk using an uncollateralised derivative.
If the counterparty to that derivative experiences a severe deterioration in its credit
standing, the effect of the changes in the counterparty's credit standing might
outweigh the effect of changes in the commodity price on the fair value of the
hedging instrument, whereas changes in the value of the hedged item depend
largely on the commodity price changes.
Hedge ratio
B6.4.9 In accordance with the hedge effectiveness requirements, the hedge ratio of the
hedging relationship must be the same as that resulting from the quantity of the
hedged item that the entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge that quantity of hedged item.
Hence, if an entity hedges less than 100 per cent of the exposure on an item, such
as 85 per cent, it shall designate the hedging relationship using a hedge ratio that
is the same as that resulting from 85 per cent of the exposure and the quantity of
the hedging instrument that the entity actually uses to hedge those 85 per cent.
Similarly, if, for example, an entity hedges an exposure using a nominal amount
of 40 units of a financial instrument, it shall designate the hedging relationship
using a hedge ratio that is the same as that resulting from that quantity of 40 units
(ie the entity must not use a hedge ratio based on a higher quantity of units that it
might hold in total or a lower quantity of units) and the quantity of the hedged
item that it actually hedges with those 40 units.
B6.4.10 However, the designation of the hedging relationship using the same hedge ratio
as that resulting from the quantities of the hedged item and the hedging instrument
that the entity actually uses shall not reflect an imbalance between the weightings
of the hedged item and the hedging instrument that would in turn create hedge
ineffectiveness (irrespective of whether recognised or not) that could result in an
accounting outcome that would be inconsistent with the purpose of hedge
accounting. Hence, for the purpose of designating a hedging relationship, an entity
must adjust the hedge ratio that results from the quantities of the hedged item and
the hedging instrument that the entity actually uses if that is needed to avoid such
an imbalance.
B6.4.11 Examples of relevant considerations in assessing whether an accounting outcome
is inconsistent with the purpose of hedge accounting are:
(a) whether the intended hedge ratio is established to avoid recognising hedge
ineffectiveness for cash flow hedges, or to achieve fair value hedge
adjustments for more hedged items with the aim of increasing the use of fair
value accounting, but without offsetting fair value changes of the hedging
instrument; and
(b) whether there is a commercial reason for the particular weightings of the
hedged item and the hedging instrument, even though that creates hedge
ineffectiveness. For example, an entity enters into and designates a quantity
of the hedging instrument that is not the quantity that it determined as the
best hedge of the hedged item because the standard volume of the hedging
instruments does not allow it to enter into that exact quantity of hedging
instrument (a `lot size issue'). An example is an entity that hedges 100
tonnes of coffee purchases with standard coffee futures contracts that have a
contract size of 37,500 lbs (pounds). The entity could only use either five or
six contracts (equivalent to 85.0 and 102.1 tonnes respectively) to hedge the
purchase volume of 100 tonnes. In that case, the entity designates the
hedging relationship using the hedge ratio that results from the number of
coffee futures contracts that it actually uses, because the hedge
ineffectiveness resulting from the mismatch in the weightings of the hedged
item and the hedging instrument would not result in an accounting outcome
that is inconsistent with the purpose of hedge accounting.
Frequency of assessing whether the hedge effectiveness requirements
are met
B6.4.12 An entity shall assess at the inception of the hedging relationship, and on an
ongoing basis, whether a hedging relationship meets the hedge effectiveness
requirements. At a minimum, an entity shall perform the ongoing assessment at
each reporting date or upon a significant change in the circumstances affecting the
hedge effectiveness requirements, whichever comes first. The assessment relates
to expectations about hedge effectiveness and is therefore only forward-looking.
Methods for assessing whether the hedge effectiveness requirements
are met
B6.4.13 This Standard does not specify a method for assessing whether a hedging
relationship meets the hedge effectiveness requirements. However, an entity shall
use a method that captures the relevant characteristics of the hedging relationship
including the sources of hedge ineffectiveness. Depending on those factors, the
method can be a qualitative or a quantitative assessment.
B6.4.14 For example, when the critical terms (such as the nominal amount, maturity and
underlying) of the hedging instrument and the hedged item match or are closely
aligned, it might be possible for an entity to conclude on the basis of a qualitative
assessment of those critical terms that the hedging instrument and the hedged item
have values that will generally move in the opposite direction because of the same
risk and hence that an economic relationship exists between the hedged item and
the hedging instrument (see paragraphs B6.4.4B6.4.6).
B6.4.15 The fact that a derivative is in or out of the money when it is designated as a
hedging instrument does not in itself mean that a qualitative assessment is
inappropriate. It depends on the circumstances whether hedge ineffectiveness
arising from that fact could have a magnitude that a qualitative assessment would
not adequately capture.
B6.4.16 Conversely, if the critical terms of the hedging instrument and the hedged item are
not closely aligned, there is an increased level of uncertainty about the extent of
offset. Consequently, the hedge effectiveness during the term of the hedging
relationship is more difficult to predict. In such a situation it might only be
possible for an entity to conclude on the basis of a quantitative assessment that an
economic relationship exists between the hedged item and the hedging instrument
(see paragraphs B6.4.4B6.4.6). In some situations a quantitative assessment
might also be needed to assess whether the hedge ratio used for designating the
hedging relationship meets the hedge effectiveness requirements (see paragraphs
B6.4.9B6.4.11). An entity can use the same or different methods for those two
different purposes.
B6.4.17 If there are changes in circumstances that affect hedge effectiveness, an entity may
have to change the method for assessing whether a hedging relationship meets the
hedge effectiveness requirements in order to ensure that the relevant
characteristics of the hedging relationship, including the sources of hedge
ineffectiveness, are still captured.
B6.4.18 An entity's risk management is the main source of information to perform the
assessment of whether a hedging relationship meets the hedge effectiveness
requirements. This means that the management information (or analysis) used for
decision-making purposes can be used as a basis for assessing whether a hedging
relationship meets the hedge effectiveness requirements.
B6.4.19 An entity's documentation of the hedging relationship includes how it will assess
the hedge effectiveness requirements, including the method or methods used. The
documentation of the hedging relationship shall be updated for any changes to the
methods (see paragraph B6.4.17).
Accounting for qualifying hedging relationships (Section 6.5)
B6.5.1 An example of a fair value hedge is a hedge of exposure to changes in the fair value
of a fixed-rate debt instrument arising from changes in interest rates. Such a hedge
could be entered into by the issuer or by the holder.
B6.5.2 The purpose of a cash flow hedge is to defer the gain or loss on the hedging
instrument to a period or periods in which the hedged expected future cash flows
affect profit or loss. An example of a cash flow hedge is the use of a swap to
change floating rate debt (whether measured at amortised cost or fair value) to
fixed-rate debt (ie a hedge of a future transaction in which the future cash flows
being hedged are the future interest payments). Conversely, a forecast purchase of
an equity instrument that, once acquired, will be accounted for at fair value
through profit or loss, is an example of an item that cannot be the hedged item in a
cash flow hedge, because any gain or loss on the hedging instrument that would
be deferred could not be appropriately reclassified to profit or loss during a period
in which it would achieve offset. For the same reason, a forecast purchase of an
equity instrument that, once acquired, will be accounted for at fair value with
changes in fair value presented in other comprehensive income also cannot be the
hedged item in a cash flow hedge.
B6.5.3 A hedge of a firm commitment (for example, a hedge of the change in fuel price
relating to an unrecognised contractual commitment by an electric utility to
purchase fuel at a fixed price) is a hedge of an exposure to a change in fair value.
Accordingly, such a hedge is a fair value hedge. However, in accordance with
paragraph 6.5.4, a hedge of the foreign currency risk of a firm commitment could
alternatively be accounted for as a cash flow hedge.
Measurement of hedge ineffectiveness
B6.5.4 When measuring hedge ineffectiveness, an entity shall consider the time value of
money. Consequently, the entity determines the value of the hedged item on a
present value basis and therefore the change in the value of the hedged item also
includes the effect of the time value of money.
B6.5.5 To calculate the change in the value of the hedged item for the purpose of
measuring hedge ineffectiveness, an entity may use a derivative that would have
terms that match the critical terms of the hedged item (this is commonly referred
to as a `hypothetical derivative'), and, for example for a hedge of a forecast
transaction, would be calibrated using the hedged price (or rate) level. For
example, if the hedge was for a two-sided risk at the current market level, the
hypothetical derivative would represent a hypothetical forward contract that is
calibrated to a value of nil at the time of designation of the hedging relationship. If
the hedge was for example for a one-sided risk, the hypothetical derivative would
represent the intrinsic value of a hypothetical option that at the time of designation
of the hedging relationship is at the money if the hedged price level is the current
market level, or out of the money if the hedged price level is above (or, for a
hedge of a long position, below) the current market level. Using a hypothetical
derivative is one possible way of calculating the change in the value of the hedged
item. The hypothetical derivative replicates the hedged item and hence results in
the same outcome as if that change in value was determined by a different
approach. Hence, using a `hypothetical derivative' is not a method in its own right
but a mathematical expedient that can only be used to calculate the value of the
hedged item. Consequently, a `hypothetical derivative' cannot be used to include
features in the value of the hedged item that only exist in the hedging instrument
(but not in the hedged item). An example is debt denominated in a foreign
currency (irrespective of whether it is fixed-rate or variable-rate debt). When
using a hypothetical derivative to calculate the change in the value of such debt or
the present value of the cumulative change in its cash flows, the hypothetical
derivative cannot simply impute a charge for exchanging different currencies even
though actual derivatives under which different currencies are exchanged might
include such a charge (for example, cross-currency interest rate swaps).
B6.5.6 The change in the value of the hedged item determined using a hypothetical
derivative may also be used for the purpose of assessing whether a hedging
relationship meets the hedge effectiveness requirements.
Rebalancing the hedging relationship and changes to the hedge ratio
B6.5.7 Rebalancing refers to the adjustments made to the designated quantities of the
hedged item or the hedging instrument of an already existing hedging relationship
for the purpose of maintaining a hedge ratio that complies with the hedge
effectiveness requirements. Changes to designated quantities of a hedged item or
of a hedging instrument for a different purpose do not constitute rebalancing for
the purpose of this Standard.
B6.5.8 Rebalancing is accounted for as a continuation of the hedging relationship in
accordance with paragraphs B6.5.9B6.5.21. On rebalancing, the hedge
ineffectiveness of the hedging relationship is determined and recognised
immediately before adjusting the hedging relationship.
B6.5.9 Adjusting the hedge ratio allows an entity to respond to changes in the relationship
between the hedging instrument and the hedged item that arise from their
underlyings or risk variables. For example, a hedging relationship in which the
hedging instrument and the hedged item have different but related underlyings
changes in response to a change in the relationship between those two underlyings
(for example, different but related reference indices, rates or prices). Hence,
rebalancing allows the continuation of a hedging relationship in situations in
which the relationship between the hedging instrument and the hedged item
changes in a way that can be compensated for by adjusting the hedge ratio.
B6.5.10 For example, an entity hedges an exposure to Foreign Currency A using a
currency derivative that references Foreign Currency B and Foreign Currencies A
and B are pegged (ie their exchange rate is maintained within a band or at an
exchange rate set by a central bank or other authority). If the exchange rate
between Foreign Currency A and Foreign Currency B were changed (ie a new
band or rate was set), rebalancing the hedging relationship to reflect the new
exchange rate would ensure that the hedging relationship would continue to meet
the hedge effectiveness requirement for the hedge ratio in the new circumstances.
In contrast, if there was a default on the currency derivative, changing the hedge
ratio could not ensure that the hedging relationship would continue to meet that
hedge effectiveness requirement. Hence, rebalancing does not facilitate the
continuation of a hedging relationship in situations in which the relationship
between the hedging instrument and the hedged item changes in a way that cannot
be compensated for by adjusting the hedge ratio.
B6.5.11 Not every change in the extent of offset between the changes in the fair value of
the hedging instrument and the hedged item's fair value or cash flows constitutes
a change in the relationship between the hedging instrument and the hedged item.
An entity analyses the sources of hedge ineffectiveness that it expected to affect
the hedging relationship during its term and evaluates whether changes in the
extent of offset are:
(a) fluctuations around the hedge ratio, which remains valid (ie continues to
appropriately reflect the relationship between the hedging instrument and
the hedged item); or
(b) an indication that the hedge ratio no longer appropriately reflects the
relationship between the hedging instrument and the hedged item.
An entity performs this evaluation against the hedge effectiveness requirement for
the hedge ratio, ie to ensure that the hedging relationship does not reflect an
imbalance between the weightings of the hedged item and the hedging instrument
that would create hedge ineffectiveness (irrespective of whether recognised or
not) that could result in an accounting outcome that would be inconsistent with
the purpose of hedge accounting. Hence, this evaluation requires judgement.
B6.5.12 Fluctuation around a constant hedge ratio (and hence the related hedge
ineffectiveness) cannot be reduced by adjusting the hedge ratio in response to
each particular outcome. Hence, in such circumstances, the change in the extent of
offset is a matter of measuring and recognising hedge ineffectiveness but does not
require rebalancing.
B6.5.13 Conversely, if changes in the extent of offset indicate that the fluctuation is around
a hedge ratio that is different from the hedge ratio that is currently used for that
hedging relationship, or that there is a trend leading away from that hedge ratio,
hedge ineffectiveness can be reduced by adjusting the hedge ratio, whereas
retaining the hedge ratio would increasingly produce hedge ineffectiveness.
Hence, in such circumstances, an entity must evaluate whether the hedging
relationship reflects an imbalance between the weightings of the hedged item and
the hedging instrument that would create hedge ineffectiveness (irrespective of
whether recognised or not) that could result in an accounting outcome that would
be inconsistent with the purpose of hedge accounting. If the hedge ratio is
adjusted, it also affects the measurement and recognition of hedge ineffectiveness
because, on rebalancing, the hedge ineffectiveness of the hedging relationship
must be determined and recognised immediately before adjusting the hedging
relationship in accordance with paragraph B6.5.8.
B6.5.14 Rebalancing means that, for hedge accounting purposes, after the start of a
hedging relationship an entity adjusts the quantities of the hedging instrument or
the hedged item in response to changes in circumstances that affect the hedge ratio
of that hedging relationship. Typically, that adjustment should reflect adjustments
in the quantities of the hedging instrument and the hedged item that it actually
uses. However, an entity must adjust the hedge ratio that results from the
quantities of the hedged item or the hedging instrument that it actually uses if:
(a) the hedge ratio that results from changes to the quantities of the hedging
instrument or the hedged item that the entity actually uses would reflect an
imbalance that would create hedge ineffectiveness that could result in an
accounting outcome that would be inconsistent with the purpose of hedge
accounting; or
(b) an entity would retain quantities of the hedging instrument and the hedged
item that it actually uses, resulting in a hedge ratio that, in new
circumstances, would reflect an imbalance that would create hedge
ineffectiveness that could result in an accounting outcome that would be
inconsistent with the purpose of hedge accounting (ie an entity must not
create an imbalance by omitting to adjust the hedge ratio).
B6.5.15 Rebalancing does not apply if the risk management objective for a hedging
relationship has changed. Instead, hedge accounting for that hedging relationship
shall be discontinued (despite that an entity might designate a new hedging
relationship that involves the hedging instrument or hedged item of the previous
hedging relationship as described in paragraph B6.5.28).
B6.5.16 If a hedging relationship is rebalanced, the adjustment to the hedge ratio can be
effected in different ways:
(a) the weighting of the hedged item can be increased (which at the same time
reduces the weighting of the hedging instrument) by:
(i) increasing the volume of the hedged item; or
(ii) decreasing the volume of the hedging instrument.
(b) the weighting of the hedging instrument can be increased (which at the same
time reduces the weighting of the hedged item) by:
(i) increasing the volume of the hedging instrument; or
(ii) decreasing the volume of the hedged item.
Changes in volume refer to the quantities that are part of the hedging relationship.
Hence, decreases in volumes do not necessarily mean that the items or
transactions no longer exist, or are no longer expected to occur, but that they are
not part of the hedging relationship. For example, decreasing the volume of the
hedging instrument can result in the entity retaining a derivative, but only part of
it might remain a hedging instrument of the hedging relationship. This could
occur if the rebalancing could be effected only by reducing the volume of the
hedging instrument in the hedging relationship, but with the entity retaining the
volume that is no longer needed. In that case, the undesignated part of the
derivative would be accounted for at fair value through profit or loss (unless it
was designated as a hedging instrument in a different hedging relationship).
B6.5.17 Adjusting the hedge ratio by increasing the volume of the hedged item does not
affect how the changes in the fair value of the hedging instrument are measured.
The measurement of the changes in the value of the hedged item related to the
previously designated volume also remains unaffected. However, from the date of
rebalancing, the changes in the value of the hedged item also include the change
in the value of the additional volume of the hedged item. These changes are
measured starting from, and by reference to, the date of rebalancing instead of the
date on which the hedging relationship was designated. For example, if an entity
originally hedged a volume of 100 tonnes of a commodity at a forward price of
Rs.80 (the forward price at inception of the hedging relationship) and added a
volume of 10 tonnes on rebalancing when the forward price was Rs.90, the
hedged item after rebalancing would comprise two layers: 100 tonnes hedged at
Rs.80 and 10 tonnes hedged at Rs.90.
B6.5.18 Adjusting the hedge ratio by decreasing the volume of the hedging instrument
does not affect how the changes in the value of the hedged item are measured. The
measurement of the changes in the fair value of the hedging instrument related to
the volume that continues to be designated also remains unaffected. However,
from the date of rebalancing, the volume by which the hedging instrument was
decreased is no longer part of the hedging relationship. For example, if an entity
originally hedged the price risk of a commodity using a derivative volume of 100
tonnes as the hedging instrument and reduces that volume by 10 tonnes on
rebalancing, a nominal amount of 90 tonnes of the hedging instrument volume
would remain (see paragraph B6.5.16 for the consequences for the derivative
volume (ie the 10 tonnes) that is no longer a part of the hedging relationship).
B6.5.19 Adjusting the hedge ratio by increasing the volume of the hedging instrument does
not affect how the changes in the value of the hedged item are measured. The
measurement of the changes in the fair value of the hedging instrument related to
the previously designated volume also remains unaffected. However, from the
date of rebalancing, the changes in the fair value of the hedging instrument also
include the changes in the value of the additional volume of the hedging
instrument. The changes are measured starting from, and by reference to, the date
of rebalancing instead of the date on which the hedging relationship was
designated. For example, if an entity originally hedged the price risk of a
commodity using a derivative volume of 100 tonnes as the hedging instrument
and added a volume of 10 tonnes on rebalancing, the hedging instrument after
rebalancing would comprise a total derivative volume of 110 tonnes. The change
in the fair value of the hedging instrument is the total change in the fair value of
the derivatives that make up the total volume of 110 tonnes. These derivatives
could (and probably would) have different critical terms, such as their forward
rates, because they were entered into at different points in time (including the
possibility of designating derivatives into hedging relationships after their initial
recognition).
B6.5.20 Adjusting the hedge ratio by decreasing the volume of the hedged item does not
affect how the changes in the fair value of the hedging instrument are measured.
The measurement of the changes in the value of the hedged item related to the
volume that continues to be designated also remains unaffected. However, from
the date of rebalancing, the volume by which the hedged item was decreased is no
longer part of the hedging relationship. For example, if an entity originally hedged
a volume of 100 tonnes of a commodity at a forward price of Rs.80 and reduces
that volume by 10 tonnes on rebalancing, the hedged item after rebalancing would
be 90 tonnes hedged at Rs.80. The 10 tonnes of the hedged item that are no longer
part of the hedging relationship would be accounted for in accordance with the
requirements for the discontinuation of hedge accounting (see paragraphs 6.5.6
6.5.7 and B6.5.22B6.5.28).
B6.5.21 When rebalancing a hedging relationship, an entity shall update its analysis of the
sources of hedge ineffectiveness that are expected to affect the hedging
relationship during its (remaining) term (see paragraph B6.4.2). The
documentation of the hedging relationship shall be updated accordingly.
Discontinuation of hedge accounting
B6.5.22 Discontinuation of hedge accounting applies prospectively from the date on which
the qualifying criteria are no longer met.
B6.5.23 An entity shall not de-designate and thereby discontinue a hedging relationship
that:
(a) still meets the risk management objective on the basis of which it qualified
for hedge accounting (ie the entity still pursues that risk management
objective); and
(b) continues to meet all other qualifying criteria (after taking into account any
rebalancing of the hedging relationship, if applicable).
B6.5.24 For the purposes of this Standard, an entity's risk management strategy is
distinguished from its risk management objectives. The risk management strategy
is established at the highest level at which an entity determines how it manages its
risk. Risk management strategies typically identify the risks to which the entity is
exposed and set out how the entity responds to them. A risk management strategy
is typically in place for a longer period and may include some flexibility to react
to changes in circumstances that occur while that strategy is in place (for example,
different interest rate or commodity price levels that result in a different extent of
hedging). This is normally set out in a general document that is cascaded down
through an entity through policies containing more specific guidelines. In contrast,
the risk management objective for a hedging relationship applies at the level of a
particular hedging relationship. It relates to how the particular hedging instrument
that has been designated is used to hedge the particular exposure that has been
designated as the hedged item. Hence, a risk management strategy can involve
many different hedging relationships whose risk management objectives relate to
executing that overall risk management strategy. For example:
(a) an entity has a strategy of managing its interest rate exposure on debt
funding that sets ranges for the overall entity for the mix between variable-
rate and fixed-rate funding. The strategy is to maintain between 20 per cent
and 40 per cent of the debt at fixed rates. The entity decides from time to
time how to execute this strategy (ie where it positions itself within the 20
per cent to 40 per cent range for fixed-rate interest exposure) depending on
the level of interest rates. If interest rates are low the entity fixes the interest
for more debt than when interest rates are high. The entity's debt is Rs.100
of variable-rate debt of which Rs.30 is swapped into a fixed-rate exposure.
The entity takes advantage of low interest rates to issue an additional Rs.50
of debt to finance a major investment, which the entity does by issuing a
fixed-rate bond. In the light of the low interest rates, the entity decides to set
its fixed interest-rate exposure to 40 per cent of the total debt by reducing by
Rs.20 the extent to which it previously hedged its variable-rate exposure,
resulting in Rs.60 of fixed-rate exposure. In this situation the risk
management strategy itself remains unchanged. However, in contrast the
entity's execution of that strategy has changed and this means that, for Rs.20
of variable-rate exposure that was previously hedged, the risk management
objective has changed (ie at the hedging relationship level). Consequently,
in this situation hedge accounting must be discontinued for Rs.20 of the
previously hedged variable-rate exposure. This could involve reducing the
swap position by a Rs.20 nominal amount but, depending on the
circumstances, an entity might retain that swap volume and, for example,
use it for hedging a different exposure or it might become part of a trading
book. Conversely, if an entity instead swapped a part of its new fixed-rate
debt into a variable-rate exposure, hedge accounting would have to be
continued for its previously hedged variable-rate exposure.
(b) some exposures result from positions that frequently change, for example,
the interest rate risk of an open portfolio of debt instruments. The addition
of new debt instruments and the derecognition of debt instruments
continuously change that exposure (ie it is different from simply running off
a position that matures). This is a dynamic process in which both the
exposure and the hedging instruments used to manage it do not remain the
same for long. Consequently, an entity with such an exposure frequently
adjusts the hedging instruments used to manage the interest rate risk as the
exposure changes. For example, debt instruments with 24 months'
remaining maturity are designated as the hedged item for interest rate risk
for 24 months. The same procedure is applied to other time buckets or
maturity periods. After a short period of time, the entity discontinues all,
some or a part of the previously designated hedging relationships for
maturity periods and designates new hedging relationships for maturity
periods on the basis of their size and the hedging instruments that exist at
that time. The discontinuation of hedge accounting in this situation reflects
that those hedging relationships are established in such a way that the entity
looks at a new hedging instrument and a new hedged item instead of the
hedging instrument and the hedged item that were designated previously.
The risk management strategy remains the same, but there is no risk
management objective that continues for those previously designated
hedging relationships, which as such no longer exist. In such a situation, the
discontinuation of hedge accounting applies to the extent to which the risk
management objective has changed. This depends on the situation of an
entity and could, for example, affect all or only some hedging relationships
of a maturity period, or only part of a hedging relationship.
(c) an entity has a risk management strategy whereby it manages the foreign
currency risk of forecast sales and the resulting receivables. Within that
strategy the entity manages the foreign currency risk as a particular hedging
relationship only up to the point of the recognition of the receivable.
Thereafter, the entity no longer manages the foreign currency risk on the
basis of that particular hedging relationship. Instead, it manages together the
foreign currency risk from receivables, payables and derivatives (that do not
relate to forecast transactions that are still pending) denominated in the same
foreign currency. For accounting purposes, this works as a `natural' hedge
because the gains and losses from the foreign currency risk on all of those
items are immediately recognised in profit or loss. Consequently, for
accounting purposes, if the hedging relationship is designated for the period
up to the payment date, it must be discontinued when the receivable is
recognised, because the risk management objective of the original hedging
relationship no longer applies. The foreign currency risk is now managed
within the same strategy but on a different basis. Conversely, if an entity
had a different risk management objective and managed the foreign
currency risk as one continuous hedging relationship specifically for that
forecast sales amount and the resulting receivable until the settlement date,
hedge accounting would continue until that date.
B6.5.25 The discontinuation of hedge accounting can affect:
(a) a hedging relationship in its entirety; or
(b) a part of a hedging relationship (which means that hedge accounting
continues for the remainder of the hedging relationship).
B6.5.26 A hedging relationship is discontinued in its entirety when, as a whole, it ceases to
meet the qualifying criteria. For example:
(a) the hedging relationship no longer meets the risk management objective on
the basis of which it qualified for hedge accounting (ie the entity no longer
pursues that risk management objective);
(b) the hedging instrument or instruments have been sold or terminated (in
relation to the entire volume that was part of the hedging relationship); or
(c) there is no longer an economic relationship between the hedged item and
the hedging instrument or the effect of credit risk starts to dominate the
value changes that result from that economic relationship.
B6.5.27 A part of a hedging relationship is discontinued (and hedge accounting continues
for its remainder) when only a part of the hedging relationship ceases to meet the
qualifying criteria. For example:
(a) on rebalancing of the hedging relationship, the hedge ratio might be
adjusted in such a way that some of the volume of the hedged item is no
longer part of the hedging relationship (see paragraph B6.5.20); hence,
hedge accounting is discontinued only for the volume of the hedged item
that is no longer part of the hedging relationship; or
(b) when the occurrence of some of the volume of the hedged item that is (or is
a component of) a forecast transaction is no longer highly probable, hedge
accounting is discontinued only for the volume of the hedged item whose
occurrence is no longer highly probable. However, if an entity has a history
of having designated hedges of forecast transactions and having
subsequently determined that the forecast transactions are no longer
expected to occur, the entity's ability to predict forecast transactions
accurately is called into question when predicting similar forecast
transactions. This affects the assessment of whether similar forecast
transactions are highly probable (see paragraph 6.3.3) and hence whether
they are eligible as hedged items.
B6.5.28 An entity can designate a new hedging relationship that involves the hedging
instrument or hedged item of a previous hedging relationship for which hedge
accounting was (in part or in its entirety) discontinued. This does not constitute a
continuation of a hedging relationship but is a restart. For example:
(a) a hedging instrument experiences such a severe credit deterioration that the
entity replaces it with a new hedging instrument. This means that the
original hedging relationship failed to achieve the risk management
objective and is hence discontinued in its entirety. The new hedging
instrument is designated as the hedge of the same exposure that was hedged
previously and forms a new hedging relationship. Hence, the changes in the
fair value or the cash flows of the hedged item are measured starting from,
and by reference to, the date of designation of the new hedging relationship
instead of the date on which the original hedging relationship was
designated.
(b) a hedging relationship is discontinued before the end of its term. The
hedging instrument in that hedging relationship can be designated as the
hedging instrument in another hedging relationship (for example, when
adjusting the hedge ratio on rebalancing by increasing the volume of the
hedging instrument or when designating a whole new hedging relationship).
Accounting for the time value of options
B6.5.29 An option can be considered as being related to a time period because its time
value represents a charge for providing protection for the option holder over a
period of time. However, the relevant aspect for the purpose of assessing whether
an option hedges a transaction or time-period related hedged item are the
characteristics of that hedged item, including how and when it affects profit or
loss. Hence, an entity shall assess the type of hedged item (see paragraph
6.5.15(a)) on the basis of the nature of the hedged item (regardless of whether the
hedging relationship is a cash flow hedge or a fair value hedge):
(a) the time value of an option relates to a transaction related hedged item if the
nature of the hedged item is a transaction for which the time value has the
character of costs of that transaction. An example is when the time value of
an option relates to a hedged item that results in the recognition of an item
whose initial measurement includes transaction costs (for example, an entity
hedges a commodity purchase, whether it is a forecast transaction or a firm
commitment, against the commodity price risk and includes the transaction
costs in the initial measurement of the inventory). As a consequence of
including the time value of the option in the initial measurement of the
particular hedged item, the time value affects profit or loss at the same time
as that hedged item. Similarly, an entity that hedges a sale of a commodity,
whether it is a forecast transaction or a firm commitment, would include the
time value of the option as part of the cost related to that sale (hence, the
time value would be recognised in profit or loss in the same period as the
revenue from the hedged sale).
(b) the time value of an option relates to a time-period related hedged item if the
nature of the hedged item is such that the time value has the character of a
cost for obtaining protection against a risk over a particular period of time
(but the hedged item does not result in a transaction that involves the notion
of a transaction cost in accordance with (a)). For example, if commodity
inventory is hedged against a fair value decrease for six months using a
commodity option with a corresponding life, the time value of the option
would be allocated to profit or loss (ie amortised on a systematic and
rational basis) over that six-month period. Another example is a hedge of a
net investment in a foreign operation that is hedged for 18 months using a
foreign-exchange option, which would result in allocating the time value of
the option over that 18-month period.
B6.5.30 The characteristics of the hedged item, including how and when the hedged item
affects profit or loss, also affect the period over which the time value of an option
that hedges a time-period related hedged item is amortised, which is consistent
with the period over which the option's intrinsic value can affect profit or loss in
accordance with hedge accounting. For example, if an interest rate option (a cap)
is used to provide protection against increases in the interest expense on a floating
rate bond, the time value of that cap is amortised to profit or loss over the same
period over which any intrinsic value of the cap would affect profit or loss:
(a) if the cap hedges increases in interest rates for the first three years out of a
total life of the floating rate bond of five years, the time value of that cap is
amortised over the first three years; or
(b) if the cap is a forward start option that hedges increases in interest rates for
years two and three out of a total life of the floating rate bond of five years,
the time value of that cap is amortised during years two and three.
B6.5.31 The accounting for the time value of options in accordance with paragraph 6.5.15
also applies to a combination of a purchased and a written option (one being a put
option and one being a call option) that at the date of designation as a hedging
instrument has a net nil time value (commonly referred to as a `zero-cost collar').
In that case, an entity shall recognise any changes in time value in other
comprehensive income, even though the cumulative change in time value over the
total period of the hedging relationship is nil. Hence, if the time value of the
option relates to:
(a) a transaction related hedged item, the amount of time value at the end of the
hedging relationship that adjusts the hedged item or that is reclassified to
profit or loss (see paragraph 6.5.15(b)) would be nil.
(b) a time-period related hedged item, the amortisation expense related to the
time value is nil.
B6.5.32 The accounting for the time value of options in accordance with paragraph 6.5.15
applies only to the extent that the time value relates to the hedged item (aligned
time value). The time value of an option relates to the hedged item if the critical
terms of the option (such as the nominal amount, life and underlying) are aligned
with the hedged item. Hence, if the critical terms of the option and the hedged
item are not fully aligned, an entity shall determine the aligned time value, ie how
much of the time value included in the premium (actual time value) relates to the
hedged item (and therefore should be treated in accordance with paragraph
6.5.15). An entity determines the aligned time value using the valuation of the
option that would have critical terms that perfectly match the hedged item.
B6.5.33 If the actual time value and the aligned time value differ, an entity shall determine
the amount that is accumulated in a separate component of equity in accordance
with paragraph 6.5.15 as follows:
(a) if, at inception of the hedging relationship, the actual time value is higher
than the aligned time value, the entity shall:
(i) determine the amount that is accumulated in a separate component of
equity on the basis of the aligned time value; and
(ii) account for the differences in the fair value changes between the two
time values in profit or loss.
(b) if, at inception of the hedging relationship, the actual time value is lower
than the aligned time value, the entity shall determine the amount that is
accumulated in a separate component of equity by reference to the lower of
the cumulative change in fair value of:
(i) the actual time value; and
(ii) the aligned time value.
Any remainder of the change in fair value of the actual time value shall be
recognised in profit or loss.
Accounting for the forward element of forward contracts and foreign
currency basis spreads of financial instruments
B6.5.34 A forward contract can be considered as being related to a time period because its
forward element represents charges for a period of time (which is the tenor for
which it is determined). However, the relevant aspect for the purpose of assessing
whether a hedging instrument hedges a transaction or time-period related hedged
item are the characteristics of that hedged item, including how and when it affects
profit or loss. Hence, an entity shall assess the type of hedged item (see
paragraphs 6.5.16 and 6.5.15(a)) on the basis of the nature of the hedged item
(regardless of whether the hedging relationship is a cash flow hedge or a fair value
hedge):
(a) the forward element of a forward contract relates to a transaction related
hedged item if the nature of the hedged item is a transaction for which the
forward element has the character of costs of that transaction. An example is
when the forward element relates to a hedged item that results in the
recognition of an item whose initial measurement includes transaction costs
(for example, an entity hedges an inventory purchase denominated in a
foreign currency, whether it is a forecast transaction or a firm commitment,
against foreign currency risk and includes the transaction costs in the initial
measurement of the inventory). As a consequence of including the forward
element in the initial measurement of the particular hedged item, the
forward element affects profit or loss at the same time as that hedged item.
Similarly, an entity that hedges a sale of a commodity denominated in a
foreign currency against foreign currency risk, whether it is a forecast
transaction or a firm commitment, would include the forward element as
part of the cost that is related to that sale (hence, the forward element would
be recognised in profit or loss in the same period as the revenue from the
hedged sale).
(b) the forward element of a forward contract relates to a time-period related
hedged item if the nature of the hedged item is such that the forward
element has the character of a cost for obtaining protection against a risk
over a particular period of time (but the hedged item does not result in a
transaction that involves the notion of a transaction cost in accordance with
(a)). For example, if commodity inventory is hedged against changes in fair
value for six months using a commodity forward contract with a
corresponding life, the forward element of the forward contract would be
allocated to profit or loss (ie amortised on a systematic and rational basis)
over that six-month period. Another example is a hedge of a net investment
in a foreign operation that is hedged for 18 months using a foreign-exchange
forward contract, which would result in allocating the forward element of
the forward contract over that 18-month period.
B6.5.35 The characteristics of the hedged item, including how and when the hedged item
affects profit or loss, also affect the period over which the forward element of a
forward contract that hedges a time-period related hedged item is amortised,
which is over the period to which the forward element relates. For example, if a
forward contract hedges the exposure to variability in three-month interest rates
for a three-month period that starts in six months' time, the forward element is
amortised during the period that spans months seven to nine.
B6.5.36 The accounting for the forward element of a forward contract in accordance with
paragraph 6.5.16 also applies if, at the date on which the forward contract is
designated as a hedging instrument, the forward element is nil. In that case, an
entity shall recognise any fair value changes attributable to the forward element in
other comprehensive income, even though the cumulative fair value change
attributable to the forward element over the total period of the hedging
relationship is nil. Hence, if the forward element of a forward contract relates to:
(a) a transaction related hedged item, the amount in respect of the forward
element at the end of the hedging relationship that adjusts the hedged item
or that is reclassified to profit or loss (see paragraphs 6.5.15(b) and 6.5.16)
would be nil.
(b) a time-period related hedged item, the amortisation amount related to the
forward element is nil.
B6.5.37 The accounting for the forward element of forward contracts in accordance with
paragraph 6.5.16 applies only to the extent that the forward element relates to the
hedged item (aligned forward element). The forward element of a forward
contract relates to the hedged item if the critical terms of the forward contract
(such as the nominal amount, life and underlying) are aligned with the hedged
item. Hence, if the critical terms of the forward contract and the hedged item are
not fully aligned, an entity shall determine the aligned forward element, ie how
much of the forward element included in the forward contract (actual forward
element) relates to the hedged item (and therefore should be treated in accordance
with paragraph 6.5.16). An entity determines the aligned forward element using
the valuation of the forward contract that would have critical terms that perfectly
match the hedged item.
B6.5.38 If the actual forward element and the aligned forward element differ, an entity
shall determine the amount that is accumulated in a separate component of equity
in accordance with paragraph 6.5.16 as follows:
(a) if, at inception of the hedging relationship, the absolute amount of the actual
forward element is higher than that of the aligned forward element the entity
shall:
(i) determine the amount that is accumulated in a separate component of
equity on the basis of the aligned forward element; and
(ii) account for the differences in the fair value changes between the two
forward elements in profit or loss.
(b) if, at inception of the hedging relationship, the absolute amount of the actual
forward element is lower than that of the aligned forward element, the entity
shall determine the amount that is accumulated in a separate component of
equity by reference to the lower of the cumulative change in fair value of:
(i) the absolute amount of the actual forward element; and
(ii) the absolute amount of the aligned forward element.
Any remainder of the change in fair value of the actual forward element shall be
recognised in profit or loss.
B6.5.39 When an entity separates the foreign currency basis spread from a financial
instrument and excludes it from the designation of that financial instrument as the
hedging instrument (see paragraph 6.2.4(b)), the application guidance in
paragraphs B6.5.34B6.5.38 applies to the foreign currency basis spread in the
same manner as it is applied to the forward element of a forward contract.
Hedge of a group of items (Section 6.6)
Hedge of a net position
Eligibility for hedge accounting and designation of a net position
B6.6.1 A net position is eligible for hedge accounting only if an entity hedges on a net
basis for risk management purposes. Whether an entity hedges in this way is a
matter of fact (not merely of assertion or documentation). Hence, an entity cannot
apply hedge accounting on a net basis solely to achieve a particular accounting
outcome if that would not reflect its risk management approach. Net position
hedging must form part of an established risk management strategy. Normally this
would be approved by key management personnel as defined in Ind AS 24.
B6.6.2 For example, Entity A, whose functional currency is its local currency, has a firm
commitment to pay FC150,000 for advertising expenses in nine months' time and
a firm commitment to sell finished goods for FC150,000 in 15 months' time.
Entity A enters into a foreign currency derivative that settles in nine months' time
under which it receives FC100 and pays Rs.70. Entity A has no other exposures to
FC. Entity A does not manage foreign currency risk on a net basis. Hence, Entity
A cannot apply hedge accounting for a hedging relationship between the foreign
currency derivative and a net position of FC100 (consisting of FC150,000 of the
firm purchase commitment--ie advertising services--and FC149,900 (of the
FC150,000) of the firm sale commitment) for a nine-month period.
B6.6.3 If Entity A did manage foreign currency risk on a net basis and did not enter into
the foreign currency derivative (because it increases its foreign currency risk
exposure instead of reducing it), then the entity would be in a natural hedged
position for nine months. Normally, this hedged position would not be reflected in
the financial statements because the transactions are recognised in different
reporting periods in the future. The nil net position would be eligible for hedge
accounting only if the conditions in paragraph 6.6.6 are met.
B6.6.4 When a group of items that constitute a net position is designated as a hedged
item, an entity shall designate the overall group of items that includes the items
that can make up the net position. An entity is not permitted to designate a non-
specific abstract amount of a net position. For example, an entity has a group of
firm sale commitments in nine months' time for FC100 and a group of firm
purchase commitments in 18 months' time for FC120. The entity cannot designate
an abstract amount of a net position up to FC20. Instead, it must designate a gross
amount of purchases and a gross amount of sales that together give rise to the
hedged net position. An entity shall designate gross positions that give rise to the
net position so that the entity is able to comply with the requirements for the
accounting for qualifying hedging relationships.
Application of the hedge effectiveness requirements to a hedge of a net position
B6.6.5 When an entity determines whether the hedge effectiveness requirements of
paragraph 6.4.1(c) are met when it hedges a net position, it shall consider the
changes in the value of the items in the net position that have a similar effect as
the hedging instrument in conjunction with the fair value change on the hedging
instrument. For example, an entity has a group of firm sale commitments in nine
months' time for FC100 and a group of firm purchase commitments in 18 months'
time for FC120. It hedges the foreign currency risk of the net position of FC20
using a forward exchange contract for FC20. When determining whether the
hedge effectiveness requirements of paragraph 6.4.1(c) are met, the entity shall
consider the relationship between:
(a) the fair value change on the forward exchange contract together with the
foreign currency risk related changes in the value of the firm sale
commitments; and
(b) the foreign currency risk related changes in the value of the firm purchase
commitments.
B6.6.6 Similarly, if in the example in paragraph B6.6.5 the entity had a nil net position it
would consider the relationship between the foreign currency risk related changes
in the value of the firm sale commitments and the foreign currency risk related
changes in the value of the firm purchase commitments when determining
whether the hedge effectiveness requirements of paragraph 6.4.1(c) are met.
Cash flow hedges that constitute a net position
B6.6.7 When an entity hedges a group of items with offsetting risk positions (ie a net
position), the eligibility for hedge accounting depends on the type of hedge. If the
hedge is a fair value hedge, then the net position may be eligible as a hedged item.
If, however, the hedge is a cash flow hedge, then the net position can only be
eligible as a hedged item if it is a hedge of foreign currency risk and the
designation of that net position specifies the reporting period in which the forecast
transactions are expected to affect profit or loss and also specifies their nature and
volume.
B6.6.8 For example, an entity has a net position that consists of a bottom layer of FC100 of
sales and a bottom layer of FC150 of purchases. Both sales and purchases are
denominated in the same foreign currency. In order to sufficiently specify the
designation of the hedged net position, the entity specifies in the original
documentation of the hedging relationship that sales can be of Product A or
Product B and purchases can be of Machinery Type A, Machinery Type B and
Raw Material A. The entity also specifies the volumes of the transactions by each
nature. The entity documents that the bottom layer of sales (FC100) is made up of
a forecast sales volume of the first FC70 of Product A and the first FC30 of
Product B. If those sales volumes are expected to affect profit or loss in different
reporting periods, the entity would include that in the documentation, for example,
the first FC70 from sales of Product A that are expected to affect profit or loss in
the first reporting period and the first FC30 from sales of Product B that are
expected to affect profit or loss in the second reporting period. The entity also
documents that the bottom layer of the purchases (FC150) is made up of
purchases of the first FC60 of Machinery Type A, the first FC40 of Machinery
Type B and the first FC50 of Raw Material A. If those purchase volumes are
expected to affect profit or loss in different reporting periods, the entity would
include in the documentation a disaggregation of the purchase volumes by the
reporting periods in which they are expected to affect profit or loss (similarly to
how it documents the sales volumes). For example, the forecast transaction would
be specified as:
(a) the first FC60 of purchases of Machinery Type A that are expected to affect
profit or loss from the third reporting period over the next ten reporting
periods;
(b) the first FC40 of purchases of Machinery Type B that are expected to affect
profit or loss from the fourth reporting period over the next 20 reporting
periods; and
(c) the first FC50 of purchases of Raw Material A that are expected to be
received in the third reporting period and sold, ie affect profit or loss, in that
and the next reporting period.
Specifying the nature of the forecast transaction volumes would include aspects
such as the depreciation pattern for items of property, plant and equipment of the
same kind, if the nature of those items is such that the depreciation pattern could
vary depending on how the entity uses those items. For example, if the entity uses
items of Machinery Type A in two different production processes that result in
straight-line depreciation over ten reporting periods and the units of production
method respectively, its documentation of the forecast purchase volume for
Machinery Type A would disaggregate that volume by which of those
depreciation patterns will apply.
B6.6.9 For a cash flow hedge of a net position, the amounts determined in accordance with
paragraph 6.5.11 shall include the changes in the value of the items in the net
position that have a similar effect as the hedging instrument in conjunction with
the fair value change on the hedging instrument. However, the changes in the
value of the items in the net position that have a similar effect as the hedging
instrument are recognised only once the transactions that they relate to are
recognised, such as when a forecast sale is recognised as revenue. For example, an
entity has a group of highly probable forecast sales in nine months' time for
FC100 and a group of highly probable forecast purchases in 18 months' time for
FC120. It hedges the foreign currency risk of the net position of FC20 using a
forward exchange contract for FC20. When determining the amounts that are
recognised in the cash flow hedge reserve in accordance with paragraph
6.5.11(a)6.5.11(b), the entity compares:
(a) the fair value change on the forward exchange contract together with the
foreign currency risk related changes in the value of the highly probable
forecast sales; with
(b) the foreign currency risk related changes in the value of the highly probable
forecast purchases.
However, the entity recognises only amounts related to the forward exchange
contract until the highly probable forecast sales transactions are recognised in the
financial statements, at which time the gains or losses on those forecast
transactions are recognised (ie the change in the value attributable to the change in
the foreign exchange rate between the designation of the hedging relationship and
the recognition of revenue).
B6.6.10 Similarly, if in the example the entity had a nil net position it would compare the
foreign currency risk related changes in the value of the highly probable forecast
sales with the foreign currency risk related changes in the value of the highly
probable forecast purchases. However, those amounts are recognised only once
the related forecast transactions are recognised in the financial statements.
Layers of groups of items designated as the hedged item
B6.6.11 For the same reasons noted in paragraph B6.3.19, designating layer components of
groups of existing items requires the specific identification of the nominal amount
of the group of items from which the hedged layer component is defined.
B6.6.12 A hedging relationship can include layers from several different groups of items.
For example, in a hedge of a net position of a group of assets and a group of
liabilities, the hedging relationship can comprise, in combination, a layer
component of the group of assets and a layer component of the group of liabilities.
Presentation of hedging instrument gains or losses
B6.6.13 If items are hedged together as a group in a cash flow hedge, they might affect
different line items in the statement of profit and loss . The presentation of
hedging gains or losses in that statement depends on the group of items.
B6.6.14 If the group of items does not have any offsetting risk positions (for example, a
group of foreign currency expenses that affect different line items in the statement
of profit and loss that are hedged for foreign currency risk) then the reclassified
hedging instrument gains or losses shall be apportioned to the line items affected
by the hedged items. This apportionment shall be done on a systematic and
rational basis and shall not result in the grossing up of the net gains or losses
arising from a single hedging instrument.
B6.6.15 If the group of items does have offsetting risk positions (for example, a group of
sales and expenses denominated in a foreign currency hedged together for foreign
currency risk) then an entity shall present the hedging gains or losses in a separate
line item in the statement of profit and loss.Consider, for example, a hedge of the
foreign currency risk of a net position of foreign currency sales of FC100 and
foreign currency expenses of FC80 using a forward exchange contract for FC20.
The gain or loss on the forward exchange contract that is reclassified from the
cash flow hedge reserve to profit or loss (when the net position affects profit or
loss) shall be presented in a separate line item from the hedged sales and
expenses. Moreover, if the sales occur in an earlier period than the expenses, the
sales revenue is still measured at the spot exchange rate in accordance with Ind
AS 21. The related hedging gain or loss is presented in a separate line item, so that
profit or loss reflects the effect of hedging the net position, with a corresponding
adjustment to the cash flow hedge reserve. When the hedged expenses affect
profit or loss in a later period, the hedging gain or loss previously recognised in
the cash flow hedge reserve on the sales is reclassified to profit or loss and
presented as a separate line item from those that include the hedged expenses,
which are measured at the spot exchange rate in accordance with Ind AS 21.
B6.6.16 For some types of fair value hedges, the objective of the hedge is not primarily to
offset the fair value change of the hedged item but instead to transform the cash
flows of the hedged item. For example, an entity hedges the fair value interest rate
risk of a fixed-rate debt instrument using an interest rate swap. The entity's hedge
objective is to transform the fixed-interest cash flows into floating interest cash
flows. This objective is reflected in the accounting for the hedging relationship by
accruing the net interest accrual on the interest rate swap in profit or loss. In the
case of a hedge of a net position (for example, a net position of a fixed-rate asset
and a fixed-rate liability), this net interest accrual must be presented in a separate
line item in the statement of profit and loss. This is to avoid the grossing up of a
single instrument's net gains or losses into offsetting gross amounts and
recognising them in different line items (for example, this avoids grossing up a net
interest receipt on a single interest rate swap into gross interest revenue and gross
interest expense).
Effective date and transition (Chapter 7)
Transition (Section 7.2)
Financial assets held for trading
B7.2.1 At the date of initial application of this Standard, an entity must determine
whether the objective of the entity's business model for managing any of its
financial assets meets the condition in paragraph 4.1.2(a) or the condition in
paragraph 4.1.2A(a) or if a financial asset is eligible for the election in paragraph
5.7.5. For that purpose, an entity shall determine whether financial assets meet the
definition of held for trading as if the entity had purchased the assets at the date of
initial application.
Impairment
B7.2.2 On transition, an entity should seek to approximate the credit risk on initial
recognition by considering all reasonable and supportable information that is
available without undue cost or effort. An entity is not required to undertake an
exhaustive search for information when determining, at the date of transition,
whether there have been significant increases in credit risk since initial
recognition. If an entity is unable to make this determination without undue cost
or effort paragraph 7.2.20 applies.
B7.2.3 In order to determine the loss allowance on financial instruments initially
recognised (or loan commitments or financial guarantee contracts to which the
entity became a party to the contract) prior to the date of initial application, both
on transition and until the derecognition of those items an entity shall consider
information that is relevant in determining or approximating the credit risk at
initial recognition. In order to determine or approximate the initial credit risk, an
entity may consider internal and external information, including portfolio
information, in accordance with paragraphs B5.5.1B5.5.6.
B7.2.4 An entity with little historical information may use information from internal
reports and statistics (that may have been generated when deciding whether to
launch a new product), information about similar products or peer group
experience for comparable financial instruments, if relevant.
Definitions (Appendix A)
Derivatives
BA.1 Typical examples of derivatives are futures and forward, swap and option
contracts. A derivative usually has a notional amount, which is an amount of
currency, a number of shares, a number of units of weight or volume or other units
specified in the contract. However, a derivative instrument does not require the
holder or writer to invest or receive the notional amount at the inception of the
contract. Alternatively, a derivative could require a fixed payment or payment of
an amount that can change (but not proportionally with a change in the
underlying) as a result of some future event that is unrelated to a notional amount.
For example, a contract may require a fixed payment of Rs.1,000 if six-month
LIBOR increases by 100 basis points. Such a contract is a derivative even though
a notional amount is not specified.
BA.2 The definition of a derivative in this Standard includes contracts that are settled
gross by delivery of the underlying item (eg a forward contract to purchase a fixed
rate debt instrument). An entity may have a contract to buy or sell a non-financial
item that can be settled net in cash or another financial instrument or by
exchanging financial instruments (eg a contract to buy or sell a commodity at a
fixed price at a future date). Such a contract is within the scope of this Standard
unless it was entered into and continues to be held for the purpose of delivery of a
non-financial item in accordance with the entity's expected purchase, sale or
usage requirements. However, this Standard applies to such contracts for an
entity's expected purchase, sale or usage requirements if the entity makes a
designation in accordance with paragraph 2.5 (see paragraphs 2.42.7).
BA.3 One of the defining characteristics of a derivative is that it has an initial net
investment that is smaller than would be required for other types of contracts that
would be expected to have a similar response to changes in market factors. An
option contract meets that definition because the premium is less than the
investment that would be required to obtain the underlying financial instrument to
which the option is linked. A currency swap that requires an initial exchange of
different currencies of equal fair values meets the definition because it has a zero
initial net investment.
BA.4 A regular way purchase or sale gives rise to a fixed price commitment between
trade date and settlement date that meets the definition of a derivative. However,
because of the short duration of the commitment it is not recognised as a
derivative financial instrument. Instead, this Standard provides for special
accounting for such regular way contracts (see paragraphs 3.1.2 and B3.1.3
B3.1.6).
BA.5 The definition of a derivative refers to non-financial variables that are not specific
to a party to the contract. These include an index of earthquake losses in a
particular region and an index of temperatures in a particular city. Non-financial
variables specific to a party to the contract include the occurrence or non-
occurrence of a fire that damages or destroys an asset of a party to the contract. A
change in the fair value of a non-financial asset is specific to the owner if the fair
value reflects not only changes in market prices for such assets (a financial
variable) but also the condition of the specific non-financial asset held (a non-
financial variable). For example, if a guarantee of the residual value of a specific
car exposes the guarantor to the risk of changes in the car's physical condition, the
change in that residual value is specific to the owner of the car.
Financial assets and liabilities held for trading
BA.6 Trading generally reflects active and frequent buying and selling, and financial
instruments held for trading generally are used with the objective of generating a
profit from short-term fluctuations in price or dealer's margin.
BA.7 Financial liabilities held for trading include:
(a) derivative liabilities that are not accounted for as hedging instruments;
(b) obligations to deliver financial assets borrowed by a short seller (ie an
entity that sells financial assets it has borrowed and does not yet own);
(c) financial liabilities that are incurred with an intention to repurchase them
in the near term (eg a quoted debt instrument that the issuer may buy back
in the near term depending on changes in its fair value); and
(d) financial liabilities that are part of a portfolio of identified financial
instruments that are managed together and for which there is evidence of a
recent pattern of short-term profit-taking.
BA.8 The fact that a liability is used to fund trading activities does not in itself make
that liability one that is held for trading.
Appendix C
Amendments to other Standards
Ind AS 101 First-time Adoption of International Financial Reporting
Standards
Ind AS 101, First-time Adoption of Indian Accounting Standards is being revised
and finalised by the Accounting Standards Board of the Institute of Chartered
Accountants of India. Amendments consequential to issuance of this Ind AS. i.e.,
Ind AS 109 Financial Instruments will be incorporated in the Exposure Draft of
revised Ind AS 101.
C1 Deleted [Refer Appendix 1]
C2 Deleted [Refer Appendix 1]
C3 Deleted [Refer Appendix 1]
C4 Deleted [Refer Appendix 1]
Ind AS 102 Share-based Payment
C5 Paragraph 6 is amended to read as follows
6 This Ind AS does not apply to share-based payment transactions in which
the entity receives or acquires goods or services under a contract within
the scope of paragraphs 810 of Ind AS 32 Financial Instruments:
Presentation or paragraphs 2.42.7 of Ind AS 109 Financial Instruments.
Ind AS 103 Business Combinations
C6 Paragraphs 16, 42, 53, 56 and 58 are amended to read as follows
16 In some situations, Ind ASs provide for different accounting depending on
how an entity classifies or designates a particular asset or liability.
Examples of classifications or designations that the acquirer shall make on
the basis of the pertinent conditions as they exist at the acquisition date
include but are not limited to:
(a) classification of particular financial assets and liabilities as
measured at fair value through profit or loss or at amortised cost, or
as a financial asset measured at fair value through other
comprehensive income in accordance with Ind AS 109 Financial
Instruments;
(b) designation of a derivative instrument as a hedging instrument in
accordance with Ind AS 109; and
(c) assessment of whether an embedded derivative should be separated
from a host contract in accordance with Ind AS 109 (which is a
matter of `classification' as this Ind AS uses that term).
42 In a business combination achieved in stages, the acquirer shall remeasure
its previously held equity interest in the acquiree at its acquisition-date fair
value and recognise the resulting gain or loss, if any, in profit or loss or
other comprehensive income, as appropriate. In prior reporting periods, the
acquirer may have recognised changes in the value of its equity interest in
the acquiree in other comprehensive income. If so, the amount that was
recognised in other comprehensive income shall be recognised on the same
basis as would be required if the acquirer had disposed directly of the
previously held equity interest.
53 Acquisition-related costs are costs the acquirer incurs to effect a business
combination. Those costs include finder's fees; advisory, legal,
accounting, valuation and other professional or consulting fees; general
administrative costs, including the costs of maintaining an internal
acquisitions department; and costs of registering and issuing debt and
equity securities. The acquirer shall account for acquisition-related costs as
expenses in the periods in which the costs are incurred and the services are
received, with one exception. The costs to issue debt or equity securities
shall be recognised in accordance with Ind AS 32 and Ind AS 109.
56 After initial recognition and until the liability is settled, cancelled or
expires, the acquirer shall measure a contingent liability recognised in a
business combination at the higher of:
(a) the amount that would be recognised in accordance with Ind AS
37; and
(b) the amount initially recognised less, if appropriate, the cumulative
amount of income recognised in accordance with the principles of
Ind AS 115 Revenue from Contracts with Customers.
This requirement does not apply to contracts accounted for in accordance
with Ind AS 109.
58 Some changes in the fair value of contingent consideration that the
acquirer recognises after the acquisition date may be the result of
additional information that the acquirer obtained after that date about facts
and circumstances that existed at the acquisition date. Such changes are
measurement period adjustments in accordance with paragraphs 4549.
However, changes resulting from events after the acquisition date, such as
meeting an earnings target, reaching a specified share price or reaching a
milestone on a research and development project, are not measurement
period adjustments. The acquirer shall account for changes in the fair value
of contingent consideration that are not measurement period adjustments
as follows:
(a) ...
(b) Other contingent consideration that:
(i) is within the scope of Ind AS 109 shall be measured at fair
value at each reporting date and changes in fair value
shall be recognised in profit or loss in accordance with
Ind AS 109.
(ii) is not within the scope of Ind AS 109 shall be measured at
fair value at each reporting date and changes in fair
value shall be recognised in profit or loss.
C7 In Appendix B, paragraph B41 is amended to read as follows:
B41 The acquirer shall not recognise a separate valuation allowance as of the
acquisition date for assets acquired in a business combination that are
measured at their acquisition-date fair values because the effects of
uncertainty about future cash flows are included in the fair value
measure. For example, because this Ind AS requires the acquirer to
measure acquired receivables, including loans, at their acquisition-date
fair values in accounting for a business combination, the acquirer does
not recognise a separate valuation allowance for the contractual cash
flows that are deemed to be uncollectible at that date or a loss allowance
for expected credit losses.
Ind AS 104 Insurance Contracts
C8 Deleted [Refer Appendix 1]
C9 Paragraphs 3, 4, 7, 8, 12, 34 and 35 are amended to read as follows:
3 This Ind AS does not address other aspects of accounting by insurers,
such as accounting for financial assets held by insurers and financial
liabilities issued by insurers (see Ind AS 32 Financial Instruments: Presentation,
Ind AS 107 and Ind AS 109 Financial Instruments).
4 An entity shall not apply this Ind AS to:
(a)
(d) financial guarantee contracts unless the issuer has previously
asserted explicitly that it regards such contracts as insurance
contracts and has used accounting applicable to insurance
contracts, in which case the issuer may elect to apply either Ind AS
32, Ind AS 107 and Ind AS 109 or this Ind AS to such financial
guarantee contracts. The issuer may make that election contract by
contract, but the election for each contract is irrevocable.
(e) ...
7 Ind AS 109 requires an entity to separate some embedded derivatives from
their host contract, measure them at fair value and include changes in their
fair value in profit or loss. Ind AS 109 applies to derivatives embedded in
an insurance contract unless the embedded derivative is itself an insurance
contract.
8 As an exception to the requirements in Ind AS 109, an insurer need not
separate, and measure at fair value, a policyholder's option to surrender an
insurance contract for a fixed amount (or for an amount based on a fixed
amount and an interest rate), even if the exercise price differs from the
carrying amount of the host insurance liability. However, the requirements
in Ind AS 109 do apply to a put option or cash surrender option embedded
in an insurance contract if the surrender value varies in response to the
change in a financial variable (such as an equity or commodity price or
index), or a non-financial variable that is not specific to a party to the
contract. Furthermore, those requirements also apply if the holder's ability
to exercise a put option or cash surrender option is triggered by a change in
such a variable (for example, a put option that can be exercised if a stock
market index reaches a specified level).
12 To unbundle a contract, an insurer shall:
(a) apply this Ind AS to the insurance component.
(b) apply Ind AS 109 to the deposit component.
34 Some insurance contracts contain a discretionary participation feature as
well as a guaranteed element. The issuer of such a contract:
(a) ...
(d) shall, if the contract contains an embedded derivative within the scope
of Ind AS 109, apply Ind AS 109 to that embedded derivative.
(e) ...
Discretionary participation features in financial instruments
35 The requirements in paragraph 34 also apply to a financial instrument that
contains a discretionary participation feature. In addition:
(a) if the issuer classifies the entire discretionary participation feature as a
liability, it shall apply the liability adequacy test in paragraphs 1519
to the whole contract (ie both the guaranteed element and the
discretionary participation feature). The issuer need not determine the
amount that would result from applying Ind AS 109 to the guaranteed
element.
(b) if the issuer classifies part or all of that feature as a separate
component of equity, the liability recognised for the whole contract
shall not be less than the amount that would result from applying Ind
AS 109 to the guaranteed element. That amount shall include the
intrinsic value of an option to surrender the contract, but need not
include its time value if paragraph 9 exempts that option from
measurement at fair value. The issuer need not disclose the amount
that would result from applying Ind AS 109 to the guaranteed
element, nor need it present that amount separately. Furthermore, the
issuer need not determine that amount if the total liability recognised
is clearly higher.
(c) ...
C10 In Appendix A the defined term `deposit component' is amended to read
as follows:
deposit component A contractual component that is not accounted for
as a derivative under Ind AS 109 and would be
within the scope of Ind AS 109 if it were a separate
instrument.
C11 In Appendix B, paragraphs B18B20 are amended to read as follows:
B18 The following are examples of contracts that are insurance
contracts, if the transfer of insurance risk is significant:
(a) ...
(g) credit insurance that provides for specified payments to be
made to reimburse the holder for a loss it incurs because a
specified debtor fails to make payment when due under the
original or modified terms of a debt instrument. These
contracts could have various legal forms, such as that of a
guarantee, some types of letter of credit, a credit derivative
default contract or an insurance contract. However, although
these contracts meet the definition of an insurance contract,
they also meet the definition of a financial guarantee contract
in Ind AS 109 and are within the scope of Ind AS 107 and
Ind AS 109, not this Ind AS (see paragraph 4(d)).
Nevertheless, if an issuer of financial guarantee contracts has
previously asserted explicitly that it regards such contracts as
insurance contracts and has used accounting applicable to
insurance contracts, the issuer may elect to apply either Ind
AS 107 and Ind AS 109 or this Ind AS to such financial
guarantee contracts.
(h) ...
B19 The following are examples of items that are not insurance
contracts:
(a) ...
(e) derivatives that expose one party to financial risk but not
insurance risk, because they require that party to make
payment based solely on changes in one or more of a
specified interest rate, financial instrument price, commodity
price, foreign exchange rate, index of prices or rates, credit
rating or credit index or other variable, provided in the case
of a non-financial variable that the variable is not specific to
a party to the contract (see Ind AS 109).
(f) a credit-related guarantee (or letter of credit, credit derivative
default contract or credit insurance contract) that requires
payments even if the holder has not incurred a loss on the
failure of the debtor to make payments when due (see Ind AS
109).
(g) ...
B20 If the contracts described in paragraph B19 create financial assets
or financial liabilities, they are within the scope of Ind AS 109.
Among other things, this means that the parties to the contract use
what is sometimes called deposit accounting, which involves the
following:
(a) ...
Ind AS 105 Non-current Assets Held for Sale and Discontinued
Operations
C12 Paragraph 5 is amended to read as follows:
5 The measurement provisions of this Ind AS*5 do not apply to the
following assets, which are covered by the Ind ASs listed, either as
individual assets or as part of a disposal group:
(a) ...
(c) financial assets within the scope of Ind AS 109 Financial
Instruments.
(d) ...
Ind AS 107 Financial Instruments: Disclosures
C13 In the rubric, the reference to `Appendices AD' is amended to `Appendices A
C'. Paragraphs 25, 811, 14, 20, 2830, 36 and 42C42E are amended to read as
follows, paragraphs 12, 12A, 16, 22, 23, 24, 37 are deleted and several headings
*
Other than paragraphs 18 and 19, which require the assets in question to be measured in
accordance with other applicable Accounting Standards
and paragraphs 5A, 10A, 11A, 11B, 12B12D, 16A, 20A, 21A21D, 22A22C,
23A23F, 24A24G and 35A35N are added.
2 The principles in this Ind AS complement the principles for recognising,
measuring and presenting financial assets and financial liabilities in Ind AS
32 Financial Instruments: Presentation and Ind AS 109 Financial
Instruments.
Scope
3 This Ind AS shall be applied by all entities to all types of financial
instruments, except:
(a) those interests in subsidiaries, associates or joint ventures that are
accounted for in accordance with Ind AS 110 Consolidated Financial
Statements, Ind AS 27 Separate Financial Statements or Ind AS 28
Investments in Associates and Joint Ventures. However, in some
cases, Ind AS 110, Ind AS 27 or Ind AS 28 require or permit an entity
to account for an interest in a subsidiary, associate or joint venture
using Ind AS 109; in those cases, entities shall apply the requirements
of this Ind AS. Entities shall also apply this Ind AS to all derivatives
linked to interests in subsidiaries, associates or joint ventures unless
the derivative meets the definition of an equity instrument in Ind AS
32.
(b) ...
(d) insurance contracts as defined in Ind AS 104 Insurance Contracts.
However, this Ind AS applies to derivatives that are embedded in
insurance contracts if Ind AS 109 requires the entity to account for
them separately. Moreover, an issuer shall apply this Ind AS to
financial guarantee contracts if the issuer applies Ind AS 109 in
recognising and measuring the contracts, but shall apply Ind AS 104 if
the issuer elects, in accordance with paragraph 4(d) of Ind AS 104, to
apply Ind AS 104 in recognising and measuring them.
(e) financial instruments, contracts and obligations under share-based
payment transactions to which Ind AS 102 Share-based Payment
applies, except that this Ind AS applies to contracts within the scope
of Ind AS 109.
(f) ...
4 This Ind AS applies to recognised and unrecognised financial instruments.
Recognised financial instruments include financial assets and financial
liabilities that are within the scope of Ind AS 109. Unrecognised financial
instruments include some financial instruments that, although outside the
scope of Ind AS 109, are within the scope of this Ind AS.
5 This Ind AS applies to contracts to buy or sell a non-financial item that are
within the scope of Ind AS 109.
5A The credit risk disclosure requirements in paragraph 35A35N apply to
those rights that Ind AS 115 Revenue from Contracts with Customers
specifies are accounted for in accordance with Ind AS 109 for the purposes
of recognising impairment gains or losses. Any reference to financial assets
or financial instruments in these paragraphs shall include those rights unless
otherwise specified.
8 The carrying amounts of each of the following categories, as specified in Ind
AS 109, shall be disclosed either in the balance sheet or in the notes:
(a) financial assets measured at fair value through profit or loss, showing
separately (i) those designated as such upon initial recognition or
subsequently in accordance with paragraph 6.7.1 of Ind AS 109 and
(ii) those mandatorily measured at fair value through profit or loss in
accordance with Ind AS 109.
(b)(d) [deleted]
(e) financial liabilities at fair value through profit or loss, showing
separately (i) those designated as such upon initial recognition or
subsequently in accordance with paragraph 6.7.1 of Ind AS 109 and
(ii)those that meet the definition of held for trading in Ind AS 109.
(f) financial assets measured at amortised cost.
(g) financial liabilities measured at amortised cost.
(h) financial assets measured at fair value through other comprehensive
income, showing separately (i) financial assets that are measured at
fair value through other comprehensive income in accordance with
paragraph 4.1.2A of Ind AS 109; and
(ii)investments in equity instruments designated as such upon initial
recognition in accordance with paragraph 5.7.5 of Ind AS 109.
Financial assets or financial liabilities at fair value through profit or loss
9 If the entity has designated as measured at fair value through profit or loss a
financial asset (or group of financial assets) that would otherwise be
measured at fair value through other comprehensive income or amortised
cost, it shall disclose:
(a) the maximum exposure to credit risk (see paragraph 36(a)) of the
financial asset (or group of financial assets) at the end of the reporting
period.
(b) the amount by which any related credit derivatives or similar
instruments mitigate that maximum exposure to credit risk (see
paragraph 36(b)).
(c) the amount of change, during the period and cumulatively, in the fair
value of the financial asset (or group of financial assets) that is
attributable to changes in the credit risk of the financial asset
determined either:
(i) ...
(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 financial asset was designated.
10 If the entity has designated a financial liability as at fair value through profit
or loss in accordance with paragraph 4.2.2 of Ind AS 109 and is required to
present the effects of changes in that liability's credit risk in other
comprehensive income (see paragraph 5.7.7 of Ind AS 109), it shall
disclose:
(a) the amount of change, cumulatively, in the fair value of the financial
liability that is attributable to changes in the credit risk of that liability
(see paragraphs B5.7.13B5.7.20 of Ind AS 109 for guidance on
determining the effects of changes in a liability's credit risk).
(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.
(c) any transfers of the cumulative gain or loss within equity during the
period including the reason for such transfers.
(d) if a liability is derecognised during the period, the amount (if any)
presented in other comprehensive income that was realised at
derecognition.
10A If an entity has designated a financial liability as at fair value through profit
or loss in accordance with paragraph 4.2.2 of Ind AS 109 and is required to
present all changes in the fair value of that liability (including the effects of
changes in the credit risk of the liability) in profit or loss (see paragraphs
5.7.7 and 5.7.8 of Ind AS 109), it shall 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 (see paragraphs B5.7.13
B5.7.20 of Ind AS 109 for guidance on determining the effects of
changes in a liability's credit risk); and
(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 shall also disclose:
(a) a detailed description of the methods used to comply with the
requirements in paragraphs 9(c), 10(a) and 10A(a) and paragraph
5.7.7(a) of Ind AS 109, including an explanation of why the method is
appropriate.
(b) if the entity believes that the disclosure it has given, either in the
balance sheet or in the notes, to comply with the requirements in
paragraph 9(c), 10(a) or 10A(a) or paragraph 5.7.7(a) of Ind AS 109
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.
(c) a detailed description of the methodology or methodologies used to
determine whether presenting the effects of changes in a liability's
credit risk in other comprehensive income would create or enlarge an
accounting mismatch in profit or loss (see paragraphs 5.7.7 and 5.7.8
of Ind AS 109). If an entity is required to present the effects of
changes in a liability's credit risk in profit or loss (see paragraph 5.7.8
of Ind AS 109), the disclosure must include a detailed description of
the economic relationship described in paragraph B5.7.6 of Ind AS
109.
Investments in equity instruments designated at fair value through
other comprehensive income
11A If an entity has designated investments in equity instruments to be measured
at fair value through other comprehensive income, as permitted by
paragraph 5.7.5 of Ind AS 109, it shall disclose:
(a) which investments in equity instruments have been designated to be
measured at fair value through other comprehensive income.
(b) the reasons for using this presentation alternative.
(c) the fair value of each such investment at the end of the reporting
period.
(d) dividends recognised during the period, showing separately those
related to investments derecognised during the reporting period and
those related to investments held at the end of the reporting period.
(e) any transfers of the cumulative gain or loss within equity during the
period including the reason for such transfers.
11B If an entity derecognised investments in equity instruments measured at fair
value through other comprehensive income during the reporting period, it
shall disclose:
(a) the reasons for disposing of the investments.
(b) the fair value of the investments at the date of derecognition.
(c) the cumulative gain or loss on disposal.
1212A [Deleted]
12B An entity shall disclose if, in the current or previous reporting periods, it has
reclassified any financial assets in accordance with paragraph 4.4.1 of Ind
AS 109. For each such event, an entity shall disclose:
(a) the date of reclassification.
(b) a detailed explanation of the change in business model and a
qualitative description of its effect on the entity's financial statements.
(c) the amount reclassified into and out of each category.
12C For each reporting period following reclassification until derecognition, an
entity shall disclose for assets reclassified out of the fair value through profit
or loss category so that they are measured at amortised cost or fair value
through other comprehensive income in accordance with paragraph 4.4.1 of
Ind AS 109:
(a) the effective interest rate determined on the date of reclassification;
and
(b) the interest revenue recognised.
12D If, since its last annual reporting date, an entity has reclassified financial
assets out of the fair value through other comprehensive income category so
that they are measured at amortised cost or out of the fair value through
profit or loss category so that they are measured at amortised cost or fair
value through other comprehensive income it shall disclose:
(a) the fair value of the financial assets at the end of the reporting period;
and
(b) the fair value gain or loss that would have been recognised in profit or
loss or other comprehensive income during the reporting period if the
financial assets had not been reclassified.
14 An entity shall 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 paragraph 3.2.23(a) of Ind AS 109;
and
(b) the terms and conditions relating to its pledge.
16 [Deleted]
16A The carrying amount of financial assets measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A of Ind AS 109
is not reduced by a loss allowance and an entity shall not present the loss
allowance separately in the balance sheet as a reduction of the carrying
amount of the financial asset. However, an entity shall disclose the loss
allowance in the notes to the financial statements.
20 An entity shall disclose the following items of income, expense, gains or
losses either in the statement of profit and loss or in the notes:
(a) net gains or net losses on:
(i) financial assets or financial liabilities measured at fair value
through profit or loss, showing separately those on financial
assets or financial liabilities designated as such upon initial
recognition or subsequently in accordance with paragraph 6.7.1
of Ind AS 109, and those on financial assets or financial
liabilities that are mandatorily measured at fair value through
profit or loss in accordance with Ind AS 109 (eg financial
liabilities that meet the definition of held for trading in Ind AS
109). For financial liabilities designated as at fair value through
profit or loss, an entity shall show separately the amount of gain
or loss recognised in other comprehensive income and the
amount recognised in profit or loss.
(ii)(iv) [deleted]
(v) financial liabilities measured at amortised cost.
(vi) financial assets measured at amortised cost.
(vii) investments in equity instruments designated at fair value
through other comprehensive income in accordance with
paragraph 5.7.5 of Ind AS 109.
(viii) financial assets measured at fair value through other
comprehensive income in accordance with
paragraph 4.1.2A of Ind AS 109, showing separately the amount
of gain or loss recognised in other comprehensive income
during the period and the amount reclassified upon
derecognition from accumulated other comprehensive income to
profit or loss for the period.
(b) total interest revenue and total interest expense (calculated using the
effective interest method) for financial assets that are measured at
amortised cost or that are measured at fair value through other
comprehensive income in accordance with paragraph 4.1.2A of Ind
AS 109 (showing these amounts separately); or financial liabilities
that are not measured at fair value through profit or loss.
(c) fee income and expense (other than amounts included in determining
the effective interest rate) arising from:
(i) financial assets and 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) [deleted]
(e) [deleted]
20A An entity shall disclose an analysis of the gain or loss recognised in the
statement of profit and loss arising from the derecognition of financial
assets measured at amortised cost, showing separately gains and losses
arising from derecognition of those financial assets. This disclosure shall
include the reasons for derecognising those financial assets.
Hedge accounting
21A An entity shall apply the disclosure requirements in paragraphs 21B24F 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) an entity's risk management strategy and how it is applied to manage
risk;
(b) how the entity's hedging activities may affect the amount, timing and
uncertainty of its future cash flows; and
(c) the effect that hedge accounting has had on the entity's balance sheet,
statement of profit and loss and statement of changes in equity.
21B An entity shall present the required disclosures in a single note or separate
section in its financial statements. However, an entity need not duplicate
information that is already presented elsewhere, provided that the
information is 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.
21C When paragraphs 22A24F require the entity to separate by risk category
the information disclosed, the entity shall determine each risk category on
the basis of the risk exposures an entity decides to hedge and for which
hedge accounting is applied. An entity shall determine risk categories
consistently for all hedge accounting disclosures.
21D To meet the objectives in paragraph 21A, an entity shall (except as
otherwise specified below) determine how much detail to disclose, how
much emphasis to place on different aspects of the disclosure requirements,
the appropriate level of aggregation or disaggregation, and whether users of
financial statements need additional explanations to evaluate the quantitative
information disclosed. However, an entity shall use the same level of
aggregation or disaggregation it uses for disclosure requirements of related
information in this Ind AS and Ind AS 113 Fair Value Measurement.
The risk management strategy
22 [Deleted]
22A An entity shall explain its risk management strategy for each risk category of
risk exposures that it decides to hedge and for which hedge accounting is
applied. This explanation should enable users of financial statements to
evaluate (for example):
(a) how each risk arises.
(b) how the entity manages each risk; this includes whether the entity
hedges an item in its entirety for all risks or hedges a risk component
(or components) of an item and why.
(c) the extent of risk exposures that the entity manages.
22B To meet the requirements in paragraph 22A, the information should include
(but is not limited to) a description of:
(a) the hedging instruments that are used (and how they are used) to
hedge risk exposures;
(b) how the entity determines the economic relationship between the
hedged item and the hedging instrument for the purpose of assessing
hedge effectiveness; and
(c) how the entity establishes the hedge ratio and what the sources of
hedge ineffectiveness are.
22C When an entity designates a specific risk component as a hedged item (see
paragraph 6.3.7 of Ind AS 109) it shall provide, in addition to the
disclosures required by paragraphs 22A and 22B, qualitative or quantitative
information about:
(a) how the entity determined the risk component that is designated as the
hedged item (including a description of the nature of the relationship
between the risk component and the item as a whole); and
(b) how the risk component relates to the item in its entirety (for example,
the designated risk component historically covered on average 80 per
cent of the changes in fair value of the item as a whole).
The amount, timing and uncertainty of future cash flows
23 [Deleted]
23A Unless exempted by paragraph 23C, an entity shall disclose by risk category
quantitative information to allow users of its financial statements to evaluate
the terms and conditions of hedging instruments and how they affect the
amount, timing and uncertainty of future cash flows of the entity.
23B To meet the requirement in paragraph 23A, an entity shall provide a
breakdown that discloses:
(a) a profile of the timing of the nominal amount of the hedging
instrument; and
(b) if applicable, the average price or rate (for example strike or forward
prices etc) of the hedging instrument.
23C In situations in which an entity frequently resets (ie discontinues and
restarts) hedging relationships because both the hedging instrument and the
hedged item frequently change (ie the entity uses a dynamic process in
which both the exposure and the hedging instruments used to manage that
exposure do not remain the same for long--such as in the example in
paragraph B6.5.24(b) of Ind AS 109) the entity:
(a) is exempt from providing the disclosures required by paragraphs 23A
and 23B.
(b) shall disclose:
(i) information about what the ultimate risk management strategy is
in relation to those hedging relationships;
(ii) a description of how it reflects its risk management strategy by
using hedge accounting and designating those particular
hedging relationships; and
(iii) an indication of how frequently the hedging relationships are
discontinued and restarted as part of the entity's process in
relation to those hedging relationships.
23D An entity shall disclose by risk category a description of the sources of
hedge ineffectiveness that are expected to affect the hedging relationship
during its term.
23E If other sources of hedge ineffectiveness emerge in a hedging relationship,
an entity shall disclose those sources by risk category and explain the
resulting hedge ineffectiveness.
23F For cash flow hedges, an entity shall disclose a description of any forecast
transaction for which hedge accounting had been used in the previous
period, but which is no longer expected to occur.
The effects of hedge accounting on financial position and performance
24 [Deleted]
24A An entity shall disclose, in a tabular format, the following amounts related to
items designated as hedging instruments separately by risk category for each
type of hedge (fair value hedge, cash flow hedge or hedge of a net
investment in a foreign operation):
(a) the carrying amount of the hedging instruments (financial assets
separately from financial liabilities);
(b) the line item in the balance sheet that includes the hedging instrument;
(c) the change in fair value of the hedging instrument used as the basis for
recognising hedge ineffectiveness for the period; and
(d) the nominal amounts (including quantities such as tonnes or cubic
metres) of the hedging instruments.
24B An entity shall disclose, in a tabular format, the following amounts related to
hedged items separately by risk category for the types of hedges as follows:
(a) for fair value hedges:
(i) the carrying amount of the hedged item recognised in the
balance sheet (presenting assets separately from liabilities);
(ii) the accumulated amount of fair value hedge adjustments on the
hedged item included in the carrying amount of the hedged item
recognised in the balance sheet (presenting assets separately
from liabilities);
(iii) the line item in the balance sheet that includes the hedged item;
(iv) the change in value of the hedged item used as the basis for
recognising hedge ineffectiveness for the period; and
(c) the accumulated amount of fair value hedge adjustments remaining in
the balance sheet for any hedged items that have ceased to be adjusted
for hedging gains and losses in accordance with paragraph 6.5.10 of
Ind AS 109.
(b) for cash flow hedges and hedges of a net investment in a foreign operation:
(i) the change in value of the hedged item used as the basis for
recognising hedge ineffectiveness for the period (ie for cash flow
hedges the change in value used to determine the recognised hedge
ineffectiveness in accordance with paragraph 6.5.11(c) of Ind AS
109);
(ii) the balances in the cash flow hedge reserve and the foreign currency
translation reserve for continuing hedges that are accounted for in
accordance with paragraphs 6.5.11 and 6.5.13(a) of Ind AS 109; and
(iii) the balances remaining in the cash flow hedge reserve and the foreign
currency translation reserve from any hedging relationships for which
hedge accounting is no longer applied.
24C An entity shall disclose, in a tabular format, the following amounts separately by
risk category for the types of hedges as follows:
(a) for fair value hedges:
(i) hedge ineffectiveness--ie the difference between the hedging gains or
losses of the hedging instrument and the hedged item--recognised in
profit or loss (or other comprehensive income for hedges of an equity
instrument for which an entity has elected to present changes in fair
value in other comprehensive income in accordance with paragraph
5.7.5 of Ind AS 109); and
(ii) the line item in the statement of profit and loss that includes the
recognised hedge ineffectiveness.
(b) for cash flow hedges and hedges of a net investment in a foreign operation:
(i) hedging gains or losses of the reporting period that were recognised in
other comprehensive income;
(ii) hedge ineffectiveness recognised in profit or loss;
(iii) the line item in the statement of profit and loss that includes the
recognised hedge ineffectiveness;
(iv) the amount reclassified from the cash flow hedge reserve or the
foreign currency translation reserve into profit or loss as a
reclassification adjustment (see Ind AS 1) (differentiating
between amounts for which hedge accounting had previously
been used, but for which the hedged future cash flows are no
longer expected to occur, and amounts that have been
transferred because the hedged item has affected profit or loss);
(v) the line item in the statement of profit and loss that includes the
reclassification adjustment (see Ind AS 1); and
(vi) for hedges of net positions, the hedging gains or losses
recognised in a separate line item in the statement of profit and
loss (see paragraph 6.6.4 of Ind AS 109).
24D When the volume of hedging relationships to which the exemption in
paragraph 23C applies is unrepresentative of normal volumes during the
period (ie the volume at the reporting date does not reflect the volumes
during the period) an entity shall disclose that fact and the reason it believes
the volumes are unrepresentative.
24E An entity shall provide a reconciliation of each component of equity and an
analysis of other comprehensive income in accordance with Ind AS 1 that,
taken together:
(a) differentiates, at a minimum, between the amounts that relate to the
disclosures in paragraph 24C(b)(i) and (b)(iv) as well as the amounts
accounted for in accordance with paragraph 6.5.11(d)(i) and (d)(iii) of
Ind AS 109;
(b) differentiates between the amounts associated with the time value of
options that hedge transaction related hedged items and the amounts
associated with the time value of options that hedge time-period
related hedged items when an entity accounts for the time value of an
option in accordance with paragraph 6.5.15 of Ind AS 109; and
(c) differentiates between the amounts associated with forward elements
of forward contracts and the foreign currency basis spreads of
financial instruments that hedge transaction related hedged items, and
the amounts associated with forward elements of forward contracts
and the foreign currency basis spreads of financial instruments that
hedge time-period related hedged items when an entity accounts for
those amounts in accordance with paragraph 6.5.16 of Ind AS 109.
24F An entity shall disclose the information required in paragraph 24E separately
by risk category. This disaggregation by risk may be provided in the notes to
the financial statements.
Option to designate a credit exposure as measured at fair value through
profit or loss
24G If an entity designated a financial instrument, or a proportion of it, as
measured at fair value through profit or loss because it uses a credit
derivative to manage the credit risk of that financial instrument it shall
disclose:
(a) for credit derivatives that have been used to manage the credit risk of
financial instruments designated as measured at fair value through
profit or loss in accordance with paragraph 6.7.1 of Ind AS 109, a
reconciliation of each of the nominal amount and the fair value at the
beginning and at the end of the period;
(b) the gain or loss recognised in profit or loss on designation of a
financial instrument, or a proportion of it, as measured at fair value
through profit or loss in accordance with paragraph 6.7.1 of Ind AS
109; and
(c) on discontinuation of measuring a financial instrument, or a
proportion of it, at fair value through profit or loss, that financial
instrument's fair value that has become the new carrying amount in
accordance with paragraph 6.7.4(b) of Ind AS 109 and the related
nominal or principal amount (except for providing comparative
information in accordance with Ind AS 1, an entity does not need to
continue this disclosure in subsequent periods).
28 In some cases, an entity does not recognise a gain or loss on initial
recognition of a financial asset or financial liability because the fair value is
neither evidenced by a quoted price in an active market for an identical asset
or liability (ie a Level 1 input) nor based on a valuation technique that uses
only data from observable markets (see paragraph B5.1.2A of Ind AS 109).
In such cases, the entity shall disclose by class of financial asset or financial
liability:
(a) its accounting policy for recognising in profit or loss the difference
between the fair value at initial recognition and the transaction price to
reflect a change in factors (including time) that market participants
would take into account when pricing the asset or liability (see
paragraph B5.1.2A(b) of Ind AS 109).
(b) the aggregate difference yet to be recognised in profit or loss at the
beginning and end of the period and a reconciliation of changes in the
balance of this difference.
(c) why the entity concluded that the transaction price was not the best
evidence of fair value, including a description of the evidence that
supports the fair value.
29 Disclosures of fair value are not required:
(a) ...
(b) [deleted]
(c) ...
30 In the case described in paragraph 29(c), an entity shall disclose information
to help users of the financial statements make their own judgements about
the extent of possible differences between the carrying amount of those
contracts and their fair value, including:
(a) ...
Credit risk
Scope and objectives
35A An entity shall apply the disclosure requirements in paragraphs 35F35N to
financial instruments to which the impairment requirements in Ind AS 109
are applied. However:
(a) for trade receivables, contract assets and lease receivables, paragraph
35J applies to those trade receivables, contract assets or lease
receivables on which lifetime expected credit losses are recognised in
accordance with paragraph 5.5.15 of Ind AS 109, if those financial
assets are modified while more than 30 days past due; and
(b) paragraph 35K(b) does not apply to lease receivables.
35B The credit risk disclosures made in accordance with paragraphs 35F35N
shall enable users of financial statements to understand the effect of credit
risk on the amount, timing and uncertainty of future cash flows. To achieve
this objective, credit risk disclosures shall provide:
(a) information about an entity's credit risk management practices and
how they relate to the recognition and measurement of expected credit
losses, including the methods, assumptions and information used to
measure expected credit losses;
(b) quantitative and qualitative information that allows users of financial
statements to evaluate the amounts in the financial statements arising
from expected credit losses, including changes in the amount of
expected credit losses and the reasons for those changes; and
(c) information about an entity's credit risk exposure (ie the credit risk
inherent in an entity's financial assets and commitments to extend
credit) including significant credit risk concentrations.
35C An entity need not duplicate information that is already presented elsewhere,
provided that the information is incorporated by cross-reference from the
financial statements to other statements, 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.
35D To meet the objectives in paragraph 35B, an entity shall (except as otherwise
specified) consider how much detail to disclose, how much emphasis to
place on different aspects of the disclosure requirements, the appropriate
level of aggregation or disaggregation, and whether users of financial
statements need additional explanations to evaluate the quantitative
information disclosed.
35E If the disclosures provided in accordance with paragraphs 35F35N are
insufficient to meet the objectives in paragraph 35B, an entity shall disclose
additional information that is necessary to meet those objectives.
The credit risk management practices
35F An entity shall explain its credit risk management practices and how they
relate to the recognition and measurement of expected credit losses. To meet
this objective an entity shall disclose information that enables users of
financial statements to understand and evaluate:
(a) how an entity determined whether the credit risk of financial
instruments has increased significantly since initial recognition,
including, if and how:
(i) financial instruments are considered to have low credit risk in
accordance with paragraph 5.5.10 of Ind AS 109, including the
classes of financial instruments to which it applies; and
(ii) the presumption in paragraph 5.5.11 of Ind AS 109, that there
have been significant increases in credit risk since initial
recognition when financial assets are more than 30 days past
due, has been rebutted;
(b) an entity's definitions of default, including the reasons for selecting
those definitions;
(c) how the instruments were grouped if expected credit losses were
measured on a collective basis;
(d) how an entity determined that financial assets are credit-impaired
financial assets;
(e) an entity's write-off policy, including the indicators that there is no
reasonable expectation of recovery and information about the policy
for financial assets that are written-off but are still subject to
enforcement activity; and
(f) how the requirements in paragraph 5.5.12 of Ind AS 109 for the
modification of contractual cash flows of financial assets have been
applied, including how an entity:
(i) determines whether the credit risk on a financial asset that has
been modified while the loss allowance was measured at an
amount equal to lifetime expected credit losses, has improved to
the extent that the loss allowance reverts to being measured at
an amount equal to 12-month expected credit losses in
accordance with paragraph 5.5.5 of Ind AS 109; and
(ii) monitors the extent to which the loss allowance on financial
assets meeting the criteria in (i) is subsequently remeasured at
an amount equal to lifetime expected credit losses in accordance
with paragraph 5.5.3 of Ind AS 109.
35G An entity shall explain the inputs, assumptions and estimation techniques
used to apply the requirements in Section 5.5 of Ind AS 109. For this
purpose an entity shall disclose:
(a) the basis of inputs and assumptions and the estimation techniques
used to:
(i) measure the 12-month and lifetime expected credit losses;
(ii) determine whether the credit risk of financial instruments have
increased significantly since initial recognition; and
(iii) determine whether a financial asset is a credit-impaired financial
asset.
(b) how forward-looking information has been incorporated into the
determination of expected credit losses, including the use of
macroeconomic information; and
(c) changes in the estimation techniques or significant assumptions made
during the reporting period and the reasons for those changes.
Quantitative and qualitative information about amounts arising from expected
credit losses
35H To explain the changes in the loss allowance and the reasons for those
changes, an entity shall provide, by class of financial instrument, a
reconciliation from the opening balance to the closing balance of the loss
allowance, in a table, showing separately the changes during the period for:
(a) the loss allowance measured at an amount equal to 12-month expected
credit losses;
(b) the loss allowance measured at an amount equal to lifetime expected
credit losses for:
(i) financial instruments for which credit risk has increased
significantly since initial recognition but that are not credit-
impaired financial assets;
(ii) financial assets that are credit-impaired at the reporting date (but
that are not purchased or originated credit-impaired); and
(iii) trade receivables, contract assets or lease receivables for which
the loss allowances are measured in accordance with paragraph
5.5.15 of Ind AS 109.
(c) financial assets that are purchased or originated credit-impaired. In
addition to the reconciliation, an entity shall disclose the total amount
of undiscounted expected credit losses at initial recognition on
financial assets initially recognised during the reporting period.
35I To enable users of financial statements to understand the changes in the loss
allowance disclosed in accordance with paragraph 35H, an entity shall provide an
explanation of how significant changes in the gross carrying amount of financial
instruments during the period contributed to changes in the loss allowance. The
information shall be provided separately for financial instruments that represent
the loss allowance as listed in paragraph 35H(a)(c) and shall include relevant
qualitative and quantitative information. Examples of changes in the gross
carrying amount of financial instruments that contributed to the changes in the
loss allowance may include:
(a) changes because of financial instruments originated or acquired during the
reporting period;
(b) the modification of contractual cash flows on financial assets that do not
result in a derecognition of those financial assets in accordance with Ind AS
109;
(c) changes because of financial instruments that were derecognised (including
those that were written-off) during the reporting period; and
(d) changes arising from whether the loss allowance is measured at an amount
equal to 12-month or lifetime expected credit losses.
35J To enable users of financial statements to understand the nature and effect of
modifications of contractual cash flows on financial assets that have not resulted
in derecognition and the effect of such modifications on the measurement of
expected credit losses, an entity shall disclose:
(a) the amortised cost before the modification and the net modification gain or
loss recognised for financial assets for which the contractual cash flows
have been modified during the reporting period while they had a loss
allowance measured at an amount equal to lifetime expected credit losses;
and
(b) the gross carrying amount at the end of the reporting period of financial
assets that have been modified since initial recognition at a time when the
loss allowance was measured at an amount equal to lifetime expected credit
losses and for which the loss allowance has changed during the reporting
period to an amount equal to 12-month expected credit losses.
35K To enable users of financial statements to understand the effect of collateral and
other credit enhancements on the amounts arising from expected credit losses, an
entity shall disclose by class of financial instrument:
(a) the amount that best represents its maximum exposure to credit risk at the
end of the reporting period without taking account of any collateral held or
other credit enhancements (eg netting agreements that do not qualify for
offset in accordance with Ind AS 32).
(b) a narrative description of collateral held as security and other credit
enhancements, including:
(i) a description of the nature and quality of the collateral held;
(ii) an explanation of any significant changes in the quality of that
collateral or credit enhancements as a result of deterioration or
changes in the collateral policies of the entity during the
reporting period; and
(iii) information about financial instruments for which an entity has
not recognised a loss allowance because of the collateral.
(c) quantitative information about the collateral held as security and other
credit enhancements (for example, quantification of the extent to
which collateral and other credit enhancements mitigate credit risk)
for financial assets that are credit-impaired at the reporting date.
35L An entity shall disclose the contractual amount outstanding on financial
assets that were written off during the reporting period and are still subject
to enforcement activity.
Credit risk exposure
35M To enable users of financial statements to assess an entity's credit risk
exposure and understand its significant credit risk concentrations, an entity
shall disclose, by credit risk rating grades, the gross carrying amount of
financial assets and the exposure to credit risk on loan commitments and
financial guarantee contracts. This information shall be provided separately
for financial instruments:
(a) for which the loss allowance is measured at an amount equal to 12-
month expected credit losses;
(b) for which the loss allowance is measured at an amount equal to
lifetime expected credit losses and that are:
(i) financial instruments for which credit risk has increased
significantly since initial recognition but that are not credit-
impaired financial assets;
(ii) financial assets that are credit-impaired at the reporting date (but
that are not purchased or originated credit-impaired); and
(iii) trade receivables, contract assets or lease receivables for which
the loss allowances are measured in accordance with paragraph
5.5.15 of Ind AS 109.
(c) that are purchased or originated credit-impaired financial assets.
35N For trade receivables, contract assets and lease receivables to which an
entity applies paragraph 5.5.15 of Ind AS 109, the information provided in
accordance with paragraph 35M may be based on a provision matrix (see
paragraph B5.5.35 of Ind AS 109).
36 For all financial instruments within the scope of this Ind AS, but to which
the impairment requirements in Ind AS 109 are not applied, an entity shall
disclose by class of financial instrument:
(a) the amount that best represents its maximum exposure to credit risk at
the end of the reporting period without taking account of any
collateral held or other credit enhancements (eg netting agreements
that do not quality for offset in accordance with Ind AS 32); this
disclosure is not required for financial instruments whose carrying
amount best represents the maximum exposure to credit risk.
(b) a description of collateral held as security and other credit
enhancements, and their financial effect (eg quantification of the
extent to which collateral and other credit enhancements mitigate
credit risk) in respect of the amount that best represents the maximum
exposure to credit risk (whether disclosed in accordance with (a) or
represented by the carrying amount of a financial instrument).
(c) [deleted]
(d) ...
37 [Deleted]
42C For the purposes of applying the disclosure requirements in paragraphs
42E42H, an entity has continuing involvement in a transferred financial
asset if, as part of the transfer, the entity retains any of the contractual rights
or obligations inherent in the transferred financial asset or obtains any new
contractual rights or obligations relating to the transferred financial asset.
For the purposes of applying the disclosure requirements in paragraphs
42E42H, the following do not constitute continuing involvement:
(a) ...
(b) an arrangement whereby an entity retains the contractual rights to
receive the cash flows of a financial asset but assumes a contractual
obligation to pay the cash flows to one or more entities and the
conditions in paragraph 3.2.5(a)(c) of Ind AS 109 are met.
Transferred financial assets that are not derecognised in their entirety
42D An entity may have transferred financial assets in such a way that part or all
of the transferred financial assets do not qualify for derecognition. To meet
the objectives set out in paragraph 42B(a), the entity shall disclose at each
reporting date for each class of transferred financial assets that are not
derecognised in their entirety:
(a) ...
(f) when the entity continues to recognise the assets to the extent of its
continuing involvement (see paragraphs 3.2.6(c)(ii) and 3.2.16 of Ind
AS 109), the total carrying amount of the original assets before the
transfer, the carrying amount of the assets that the entity continues to
recognise, and the carrying amount of the associated liabilities.
Transferred financial assets that are derecognised in their entirety
42E To meet the objectives set out in paragraph 42B(b), when an entity
derecognises transferred financial assets in their entirety (see paragraph
3.2.6(a) and (c)(i) of Ind AS 109) but has continuing involvement in them,
the entity shall disclose, as a minimum, for each type of continuing
involvement at each reporting date:
(a) ...
C14 In Appendix A, the definition of `credit risk rating grades' is added, the definition of
`past due' is deleted and the last paragraph is amended to read as follows:
credit risk Rating of credit risk based on the risk of a default occurring rating
grades on the financial instrument.
The following terms are defined in paragraph 11 of Ind AS 32, Appendix A of
Ind AS 109 or Appendix A of Ind AS 113 and are used in this Ind AS with the
meaning specified in Ind AS 32, Ind AS 109 and Ind AS 113.
amortised cost of a financial asset or financial liability
contract asset
credit-impaired financial assets
derecognition
derivative
dividends
effective interest method
equity instrument
expected credit losses
fair value
financial asset
financial guarantee contract
financial instrument
financial liability
financial liability at fair value through profit or loss
forecast transaction
gross carrying amount
hedging instrument
held for trading
impairment gains or losses
loss allowance
purchased or originated credit-impaired financial assets
reclassification date
regular way purchase or sale.
C15 In Appendix B, paragraphs B1, B5, B9, B10, B22 and B27 are amended to read as
follows, the heading above paragraph B4 and paragraph B4 are deleted and the
heading above paragraph B8A and paragraphs B8AB8J are added:
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 Ind AS 109 (which
determine how financial instruments are measured and where changes in
fair value are recognised).
B4 [Deleted]
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 liabilities designated as at fair value through profit or
loss:
(i) the nature of the financial liabilities the entity has designated as
at fair value through profit or loss;
(ii) the criteria for so designating such financial liabilities on initial
recognition; and
(iii) how the entity has satisfied the conditions in paragraph 4.2.2 of
Ind AS 109 for such designation.
(aa) for financial assets designated as measured at fair value through profit
or loss:
(i) the nature of the financial assets the entity has designated as
measured at fair value through profit or loss; and
(ii) how the entity has satisfied the criteria in paragraph 4.1.5 of Ind
AS 109 for such designation.
(b) [deleted]
(c) whether regular way purchases and sales of financial assets are
accounted for at trade date or at settlement date (see paragraph 3.1.2
of Ind AS 109).
(d) [deleted]
(e) ...
(f) [deleted]
(g) [deleted]
Credit risk management practices (paragraphs 35F35G)
B8A Paragraph 35F(b) requires the disclosure of information about how an entity has
defined default for different financial instruments and the reasons for selecting
those definitions. In accordance with paragraph 5.5.9 of Ind AS 109, the
determination of whether lifetime expected credit losses should be recognised is
based on the increase in the risk of a default occurring since initial recognition.
Information about an entity's definitions of default that will assist users of
financial statements in understanding how an entity has applied the expected
credit loss requirements in Ind AS 109 may include:
(a) the qualitative and quantitative factors considered in defining default;
(b) whether different definitions have been applied to different types of financial
instruments; and
(c) assumptions about the cure rate (ie the number of financial assets that return to
a performing status) after a default occurred on the financial asset.
B8B To assist users of financial statements in evaluating an entity's restructuring and
modification policies, paragraph 35F(f)(i) requires the disclosure of information
about how an entity monitors the extent to which the loss allowance on financial
assets previously disclosed in accordance with paragraph 35F(f)(i) are
subsequently measured at an amount equal to lifetime expected credit losses in
accordance with paragraph 5.5.3 of Ind AS 109. Quantitative information that will
assist users in understanding the subsequent increase in credit risk of modified
financial assets may include information about modified financial assets meeting
the criteria in paragraph 35F(f)(i) for which the loss allowance has reverted to
being measured at an amount equal to lifetime expected credit losses (ie a
deterioration rate).
B8C Paragraph 35G(a) requires the disclosure of information about the basis of inputs
and assumptions and the estimation techniques used to apply the impairment
requirements in Ind AS 109. An entity's assumptions and inputs used to measure
expected credit losses or determine the extent of increases in credit risk since
initial recognition may include information obtained from internal historical
information or rating reports and assumptions about the expected life of financial
instruments and the timing of the sale of collateral.
Changes in the loss allowance (paragraph 35H)
B8D In accordance with paragraph 35H, an entity is required to explain the
reasons for the changes in the loss allowance during the period. In addition
to the reconciliation from the opening balance to the closing balance of the
loss allowance, it may be necessary to provide a narrative explanation of the
changes. This narrative explanation may include an analysis of the reasons
for changes in the loss allowance during the period, including:
(a) the portfolio composition;
(b) the volume of financial instruments purchased or originated; and
(c) the severity of the expected credit losses
B8E For loan commitments and financial guarantee contracts the loss allowance
is recognised as a provision. An entity should disclose information about the
changes in the loss allowance for financial assets separately from those for
loan commitments and financial guarantee contracts. However, if a financial
instrument includes both a loan (ie financial asset) and an undrawn
commitment (ie loan commitment) component and the entity cannot
separately identify the expected credit losses on the loan commitment
component from those on the financial asset component, the expected credit
losses on the loan commitment should be recognised together with the loss
allowance for the financial asset. To the extent that the combined expected
credit losses exceed the gross carrying amount of the financial asset, the
expected credit losses should be recognised as a provision.
Collateral (paragraph 35K)
B8F Paragraph 35K requires the disclosure of information that will enable users
of financial statements to understand the effect of collateral and other credit
enhancements on the amount of expected credit losses. An entity is neither
required to disclose information about the fair value of collateral and other
credit enhancements nor is it required to quantify the exact value of the
collateral that was included in the calculation of expected credit losses (ie
the loss given default).
B8G A narrative description of collateral and its effect on amounts of expected
credit losses might include information about:
(a) the main types of collateral held as security and other credit
enhancements (examples of the latter being guarantees, credit
derivatives and netting agreements that do not qualify for offset in
accordance with Ind AS 32);
(b) the volume of collateral held and other credit enhancements and its
significance in terms of the loss allowance;
(c) the policies and processes for valuing and managing collateral and other
credit enhancements;
(d) the main types of counterparties to collateral and other credit
enhancements and their creditworthiness; and
(e) information about risk concentrations within the collateral and other
credit enhancements.
Credit risk exposure (paragraphs 35M35N)
B8H Paragraph 35M requires the disclosure of information about an entity's
credit risk exposure and significant concentrations of credit risk at the
reporting date. A concentration of credit risk exists when a number of
counterparties are located in a geographical region or are engaged in similar
activities and have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in
economic or other conditions. An entity should provide information that
enables users of financial statements to understand whether there are groups
or portfolios of financial instruments with particular features that could
affect a large portion of that group of financial instruments such as
concentration to particular risks. This could include, for example, loan-to-
value groupings, geographical, industry or issuer-type concentrations.
B8I The number of credit risk rating grades used to disclose the information in
accordance with paragraph 35M shall be consistent with the number that the
entity reports to key management personnel for credit risk management
purposes. If past due information is the only borrower-specific information
available and an entity uses past due information to assess whether credit
risk has increased significantly since initial recognition in accordance with
paragraph 5.5.10 of Ind AS 109, an entity shall provide an analysis by past
due status for those financial assets.
B8J When an entity has measured expected credit losses on a collective basis, the
entity may not be able to allocate the gross carrying amount of individual
financial assets or the exposure to credit risk on loan commitments and
financial guarantee contracts to the credit risk rating grades for which
lifetime expected credit losses are recognised. In that case, an entity should
apply the requirement in paragraph 35M to those financial instruments that
can be directly allocated to a credit risk rating grade and disclose separately
the gross carrying amount of financial instruments for which lifetime
expected credit losses have been measured on a collective basis.
B9 Paragraphs 35K(a) and 36(a) require 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) ...
(b) any loss allowance recognised in accordance with Ind AS 109.
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 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) ...
B22 Interest rate risk arises on interest-bearing financial instruments recognised
in the balance sheet (eg debt instruments acquired or issued) and on some
financial instruments not recognised in the balance sheet (eg some loan
commitments).
B27 In accordance with paragraph 40(a), the sensitivity of profit or loss (that
arises, for example, from instruments measured at fair value through profit
or loss) is disclosed separately from the sensitivity of other comprehensive
income (that arises, for example, from investments in equity instruments
whose changes in fair value are presented in other comprehensive income).
C16 Deleted [Refer Appendix 1]
Ind AS 113 Fair Value Measurement
C20 Paragraph 52 is amended to read as follows:
52 The exception in paragraph 48 applies only to financial assets,
financial liabilities and other contracts within the scope of Ind AS
109 Financial Instruments . The references to financial assets and
financial liabilities in paragraphs 4851 and 5356 should be read
as applying to all contracts within the scope of, and accounted for
in accordance with, Ind AS 109 , regardless of whether they meet
the definitions of financial assets or financial liabilities in Ind AS
32 Financial Instruments: Presentation.
Ind AS 1 Presentation of Financial Statements
C22 In paragraph 7, the definition of `other comprehensive income' and
paragraphs 68, 71, 82, 93, 95, 96, 106 and 123 are amended to read as
follows:,
7 The following terms are used in this Standard with the
meanings specified:
...
Other comprehensive income comprises items of income and
expense (including reclassification adjustments) that are not
recognised in profit or loss as required or permitted by other
Ind ASs.
The components of other comprehensive income include:
(a) ...
(d) gains and losses from investments in equity instruments
designated at fair value through other comprehensive income
in accordance with paragraph 5.7.5 of Ind AS 109 Financial
Instruments;
(da) gains and losses on financial assets measured at fair value
through other comprehensive income in accordance with
paragraph 4.1.2A of Ind AS 109.
(e) the effective portion of gains and losses on hedging instruments in a
cash flow hedge and the gains and losses on hedging instruments that
hedge investments in equity instruments measured at fair value
through other comprehensive income in accordance with paragraph
5.7.5 of Ind AS 109 (see Chapter 6 of Ind AS 109);
(f) for particular liabilities designated as at fair value through profit or
loss, the amount of the change in fair value that is attributable to
changes in the liability's credit risk (see paragraph 5.7.7 of Ind AS
109);
(g) changes in the value of the time value of options when separating the
intrinsic value and time value of an option contract and designating as
the hedging instrument only the changes in the intrinsic value (see
Chapter 6 of Ind AS 109);
(h) changes in the value of the forward elements of forward contracts
when separating the forward element and spot element of a forward
contract and designating as the hedging instrument only the changes
in the spot element, and changes in the value of the foreign currency
basis spread of a financial instrument when excluding it from the
designation of that financial instrument as the hedging instrument (see
Chapter 6 of Ind AS 109);
...
68 The operating cycle of an entity is the time between the acquisition of assets
for processing and their realisation in cash or cash equivalents. When the
entity's normal operating cycle is not clearly identifiable, it is assumed to be
twelve months. Current assets include assets (such as inventories and trade
receivables) that are sold, consumed or realised as part of the normal
operating cycle even when they are not expected to be realised within
twelve months after the reporting period. Current assets also include assets
held primarily for the purpose of trading (examples include some financial
assets that meet the definition of held for trading in Ind AS 109) and the
current portion of non-current financial assets.
71 Other current liabilities are not settled as part of the normal operating cycle,
but are due for settlement within twelve months after the reporting period or
held primarily for the purpose of trading. Examples are some financial
liabilities that meet the definition of held for trading in Ind AS 109, bank
overdrafts, and the current portion of non-current financial liabilities,
dividends payable, income taxes and other non-trade payables. Financial
liabilities that provide financing on a long-term basis (ie are not part of the
working capital used in the entity's normal operating cycle) and are not due
for settlement within twelve months after the reporting period are non-
current liabilities, subject to paragraphs 74 and 75.
82 In addition to items required by other Ind ASs, the statement of profit
or loss shall include line items that present the following amounts for
the period:
(a) revenue, presenting separately interest revenue calculated using
the effective interest method;
(aa) gains and losses arising from the derecognition of financial assets
measured at amortised cost;
(b) finance costs;
(ba) impairment losses (including reversals of impairment losses or
impairment gains) determined in accordance with Section 5.5 of
Ind AS 109;
(c) share of the profit or loss of associates and joint ventures
accounted for using the equity method;
(ca) if a financial asset is reclassified out of the amortised cost
measurement category so that it is measured at fair value through
profit or loss, any gain or loss arising from a difference between
the previous amortised cost of the financial asset and its fair value
at the reclassification date (as defined in Ind AS 109);
(cb) if a financial asset is reclassified out of the fair value through
other comprehensive income measurement category so that it is
measured at fair value through profit or loss, any cumulative gain
or loss previously recognised in other comprehensive income that
is reclassified to profit or loss;
(d) ...
93 Other Ind ASs specify whether and when amounts previously recognised in
other comprehensive income are reclassified to profit or loss. Such
reclassifications are referred to in this Standard as reclassification
adjustments. A reclassification adjustment is included with the related
component of other comprehensive income in the period that the adjustment
is reclassified to profit or loss. These amounts may have been recognised in
other comprehensive income as unrealised gains in the current or previous
periods. Those unrealised gains must be deducted from other comprehensive
income in the period in which the realised gains are reclassified to profit or
loss to avoid including them in total comprehensive income twice.
95 Reclassification adjustments arise, for example, on disposal of a foreign
operation (see Ind AS 21) and when some hedged forecast cash flow affect
profit or loss (see paragraph 6.5.11(d) of Ind AS 109 in relation to cash flow
hedges).
96 Reclassification adjustments do not arise on changes in revaluation surplus
recognised in accordance with Ind AS 16 or Ind AS 38 or on
remeasurements of defined benefit plans recognised in accordance with Ind
AS 19. These components are recognised in other comprehensive income
and are not reclassified to profit or loss in subsequent periods. Changes in
revaluation surplus may be transferred to retained earnings in subsequent
periods as the asset is used or when it is derecognised (see Ind AS 16 and
Ind AS 38). In accordance with Ind AS 109, reclassification adjustments do
not arise if a cash flow hedge or the accounting for the time value of an
option (or the forward element of a forward contract or the foreign currency
basis spread of a financial instrument) result in amounts that are removed
from the cash flow hedge reserve or a separate component of equity,
respectively, and included directly in the initial cost or other carrying
amount of an asset or a liability. These amounts are directly transferred to
assets or liabilities.
106 An entity shall present a statement of changes in equity as required by
paragraph 10. The statement of changes in equity includes the following
information:
(a) ...
(c) [deleted]
(d) for each component of equity, a reconciliation between the
carrying amount at the beginning and the end of the period,
separately (as a minimum) disclosing changes resulting from:
(i) profit or loss;
(ii) other comprehensive income; and
(iii) transactions with owners in their capacity as owners,
showing separately contributions by and distributions to
owners and changes in ownership interests in subsidiaries
that do not result in a loss of control.
....
123 In the process of applying the entity's accounting policies, management
makes various judgements, apart from those involving estimations, that can
significantly affect the amounts it recognises in the financial statements. For
example, management makes judgements in determining:
(a) [deleted]
(b) when substantially all the significant risks and rewards of ownership
of financial assets and lease assets are transferred to other entities;
(c) whether, in substance, particular sales of goods are financing
arrangements and therefore do not give rise to revenue; and
(d) whether the contractual terms of a financial asset give rise on
specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
Ind AS 2 Inventories
C23 Paragraph 2 is amended to read as follows:
2 This Standard applies to all inventories, except:
(a) [deleted]
(b) financial instruments (see Ind AS 32 Financial
Instruments: Presentation and Ind AS 109 Financial
Instruments); and
(c) ...
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and
Errors
C24 Paragraph 53 is amended to read as follows:
53 Hindsight should not be used when applying a new accounting
policy to, or correcting amounts for, a prior period, either in
making assumptions about what management's intentions would
have been in a prior period or estimating the amounts recognised,
measured or disclosed in a prior period. For example, when an
entity corrects a prior period error in calculating its liability for
employees' accumulated sick leave in accordance with Ind AS 19
Employee Benefits, it disregards information about an unusually
severe influenza season during the next period that became
available after the financial statements for the prior period were
authorised for issue. The fact that significant estimates are
frequently required when amending comparative information
presented for prior periods does not prevent reliable adjustment or
correction of the comparative information.
Ind AS 10 Events after the Reporting Period
C25 Paragraph 9 is amended to read as follows:
9 The following are examples of adjusting events after the reporting
period that require an entity to adjust the amounts recognised in its
financial statements, or to recognise items that were not previously
recognised:
(a) ...
(b) the receipt of information after the reporting period
indicating that an asset was impaired at the end of the
reporting period, or that the amount of a previously
recognised impairment loss for that asset needs to be
adjusted. For example:
(i) the bankruptcy of a customer that occurs after the
reporting period usually confirms that the customer was
credit-impaired at the end of the reporting period;
Ind AS 12 Income Taxes
C26 Paragraph 20 is amended to read as follows:
20 Ind ASs permit or require certain assets to be carried at fair value
or to be revalued (see, for example, Ind AS 16 Property, Plant and
Equipment, Ind AS 38 Intangible Assets, and Ind AS 109 Financial
Instruments). In some jurisdictions, the revaluation or other
restatement of an asset to fair value affects taxable profit (tax loss)
for the current period. As a result, the tax base of the asset is
adjusted and no temporary difference arises. In other jurisdictions,
the revaluation or restatement of an asset does not affect taxable
profit in the period of the revaluation or restatement and,
consequently, the tax base of the asset is not adjusted.
Nevertheless, the future recovery of the carrying amount will result
in a taxable flow of economic benefits to the entity and the amount
that will be deductible for tax purposes will differ from the amount
of those economic benefits. The difference between the carrying
amount of a revalued asset and its tax base is a temporary
difference and gives rise to a deferred tax liability or asset. This is
true even if:
(a) ...
Ind AS 17 Leases
Appendix B
Evaluating the Substance of Transactions Involving the Legal Form of a
Lease
C57 Paragraph 7 is amended to read as follows:
7 Other obligations of an arrangement, including any guarantees
provided and obligations incurred upon early termination, shall be
accounted for under Ind AS 37 Provisions, Contingent Liabilities
and Contingent Assets, Ind AS 104 Insurance Contracts or Ind AS
109 Financial Instruments, depending on the terms.
Ind AS 20 Accounting for Government Grants and Disclosure of
Government Assistance
C27 Paragraph 10A is amended to read as follows:
10A The benefit of a government loan at a below-market rate of interest
is treated as a government grant. The loan shall be recognised and
measured in accordance with Ind AS 109 Financial Instruments.
The benefit of the below-market rate of interest shall be measured
as the difference between the initial carrying value of the loan
determined in accordance with Ind AS 109 and the proceeds
received. The benefit is accounted for in accordance with this
Standard. The entity shall consider the conditions and obligations
that have been, or must be, met when identifying the costs for
which the benefit of the loan is intended to compensate.
Ind AS 21 The Effects of Changes in Foreign Exchange Rates
C28
C29 Paragraphs 3, 4, 5, 27 and 52 are amended to read as follows:
3 This Standard shall be applied:
(a) in accounting for transactions and balances in foreign
currencies, except for those derivative transactions and
balances that are within the scope of Ind AS 109
Financial Instruments;
(b) ...
4 Ind AS 109 applies to many foreign currency derivatives and,
accordingly, these are excluded from the scope of this Standard.
However, those foreign currency derivatives that are not within the
scope of Ind AS 109 (eg some foreign currency derivatives that are
embedded in other contracts) are within the scope of this Standard.
In addition, this Standard applies when an entity translates amounts
relating to derivatives from its functional currency to its
presentation currency.
5 This Standard does not apply to hedge accounting for foreign
currency items, including the hedging of a net investment in a
foreign operation. Ind AS 109 applies to hedge accounting.
27 As noted in paragraphs 3(a) and 5, Ind AS 109 applies to hedge
accounting for foreign currency items. The application of hedge
accounting requires an entity to account for some exchange
differences differently from the treatment of exchange differences
required by this Standard. For example, Ind AS 109 requires that
exchange differences on monetary items that qualify as hedging
instruments in a cash flow hedge are recognised initially in other
comprehensive income to the extent that the hedge is effective.
52 An entity shall disclose:
(a) the amount of exchange differences recognised in profit
or loss except for those arising on financial instruments
measured at fair value through profit or loss in
accordance with Ind AS 109; and
(b) ...
(c) ...
Ind AS 23 Borrowing Costs
C30 Paragraph 6 is amended to read as follows:
6 Borrowing costs may include:
(a) interest expense calculated using the effective interest
method as described in Ind AS 109;
(b) ...
Ind AS 28 Investments in Associates and Joint Ventures
C31 Paragraphs 4042 are amended to read as follows, and paragraphs 41A 41C
are added:
40 After application of the equity method, including recognising the associate's
or joint venture's losses in accordance with paragraph 38, the entity applies
paragraphs 41A41C to determine whether there is any objective evidence
that its net investment in the associate or joint venture is impaired.
41 The entity applies the impairment requirements in Ind AS 109 to its other
interests in the associate or joint venture that are in the scope of Ind AS 109
and that do not constitute part of the net investment.
41A The net investment in an associate or joint venture is impaired and
impairment losses are incurred if, and only if, there is objective evidence of
impairment as a result of one or more events that occurred after the initial
recognition of the net investment (a `loss event') and that loss event (or
events) has an impact on the estimated future cash flows from the net
investment that can be reliably estimated. It may not be possible to identify
a single, discrete event that caused the impairment. Rather the combined
effect of several events may have caused the impairment. Losses expected
as a result of future events, no matter how likely, are not recognised.
Objective evidence that the net investment is impaired includes observable
data that comes to the attention of the entity about the following loss events:
(a) significant financial difficulty of the associate or joint venture;
(b) a breach of contract, such as a default or delinquency in payments by
the associate or joint venture;
(c) the entity, for economic or legal reasons relating to its associate's or
joint venture's financial difficulty, granting to the associate or joint
venture a concession that the entity would not otherwise consider;
(d) it becoming probable that the associate or joint venture will enter
bankruptcy or other financial reorganisation; or
(e) the disappearance of an active market for the net investment because
of financial difficulties of the associate or joint venture.
41B The disappearance of an active market because the associate's or joint
venture's equity or financial instruments are no longer publicly traded is not
evidence of impairment. A downgrade of an associate's or joint venture's
credit rating or a decline in the fair value of the associate or joint venture, is
not of itself, evidence of impairment, although it may be evidence of
impairment when considered with other available information.
41C In addition to the types of events in paragraph 41A, objective evidence of
impairment for the net investment in the equity instruments of the associate
or joint venture includes information about significant changes with an
adverse effect that have taken place in the technological, market, economic
or legal environment in which the associate or joint venture operates, and
indicates that the cost of the investment in the equity instrument may not be
recovered. A significant or prolonged decline in the fair value of an
investment in an equity instrument below its cost is also objective evidence
of impairment.
42 Because goodwill that forms part of the carrying amount of the net
investment in an associate or a joint venture is not separately recognised, it
is not tested for impairment separately by applying the requirements for
impairment testing goodwill in Ind AS 36 Impairment of Assets. Instead,
the entire carrying amount of the investment is tested for impairment in
accordance with Ind AS 36 as a single asset, by comparing its recoverable
amount (higher of value in use and fair value less costs to sell) with its
carrying amount whenever application of paragraphs 41A41C indicates
that the net investment may be impaired. An impairment loss recognised in
those circumstances is not allocated to any asset, including goodwill, that
forms part of the carrying amount of the net investment in the associate or
joint venture. Accordingly, any reversal of that impairment loss is
recognised in accordance with Ind AS 36 to the extent that the recoverable
amount of the net investment subsequently increases. In determining the
value in use of the net investment, an entity estimates:
(a) its share of the present value of the estimated future cash flows
expected to be generated by the associate or joint venture, including
the cash flows from the operations of the associate or joint venture
and the proceeds from the ultimate disposal of the investment; or
(b) the present value of the estimated future cash flows expected to arise
from dividends to be received from the investment and from its
ultimate disposal.
Using appropriate assumptions, both methods give the same result.
Ind AS 32 Financial Instruments: Presentation
C32 Deleted [Refer Appendix 1]
C33 Paragraphs 3, 4, 8, 12, 23, 31 and 42 are amended to read as follows:
3 The principles in this Standard complement the principles for recognising
and measuring financial assets and financial liabilities in Ind AS 109
Financial Instruments, and for disclosing information about them in Ind AS
107 Financial Instruments: Disclosures.
Scope
4 This Standard shall be applied by all entities to all types of financial
instruments except:
(a) those interests in subsidiaries, associates or joint ventures that are
accounted for in accordance with Ind AS 110
Consolidated Financial Statements, Ind AS 27 Separate Financial
Statements or Ind AS 28 Investments in Associates and Joint
Ventures. However, in some cases, Ind AS 110, Ind AS 27 or Ind
AS 28 require or permit an entity to account for an interest in a
subsidiary, associate or joint venture using Ind AS 109; in those
cases, entities shall apply the requirements of this Standard.
Entities shall also apply this Standard to all derivatives linked to
interests in subsidiaries, associates or joint ventures.
(b) ...
(d) insurance contracts as defined in Ind AS 104 Insurance Contracts.
However, this Standard applies to derivatives that are embedded
in insurance contracts if Ind AS 109 requires the entity to account
for them separately. Moreover, an issuer shall apply this Standard
to financial guarantee contracts if the issuer applies Ind AS 109 in
recognising and measuring the contracts, but shall apply Ind AS
104 if the issuer elects, in accordance with paragraph 4(d) of Ind
AS 104, to apply Ind AS 104 in recognising and measuring them.
(e) financial instruments that are within the scope of Ind AS 104
because they contain a discretionary participation feature. The
issuer of these instruments is exempt from applying to these
features paragraphs 1532 and AG25AG35 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
Ind AS 109).
(f) ...
8 This Standard shall 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 non-financial item in accordance with the entity's expected
purchase, sale or usage requirements. However, this Standard shall be
applied to those contracts that an entity designates as measured at fair
value through profit or loss in accordance with paragraph 2.5 of Ind AS
109
Financial Instruments.
12 The following terms are defined in Appendix A of Ind AS 109 and are used
in this Standard with the meaning specified in Ind AS 109.
amortised cost of a financial asset or financial liability
derecognition
derivative
effective interest method
financial guarantee contract
financial liability at fair value through profit or loss
firm commitment
forecast transaction
hedge effectiveness
hedged item
hedging instrument
held for trading
regular way purchase or sale
transaction costs.
23 With the exception of the circumstances described in paragraphs 16A and
16B or paragraphs 16C and 16D, 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. The financial liability is recognised initially at the
present value of the redemption amount, and is reclassified from equity.
Subsequently, the financial liability is measured in accordance with Ind AS
109. 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).
31 Ind AS 109 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 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.
42 A financial asset and a financial liability shall be offset and the net
amount presented in the balance sheet when, and only when, an entity:
(a) ...
In accounting for a transfer of a financial asset that does not qualify
for derecognition, the entity shall not offset the transferred asset and
the associated liability (see Ind AS 109, paragraph 3.2.22).
C34 In the Appendix, paragraphs AG2 and AG30 are amended to read as follows:
AG2 The Standard does not deal with the recognition or measurement of
financial instruments. Requirements about the recognition and
measurement of financial assets and financial liabilities are set out
in Ind AS 109.
AG30 Paragraph 28 applies only to issuers of non-derivative
compound financial instruments. Paragraph 28 does not deal with
compound financial instruments from the perspective of holders.
Ind AS 109 deals with the classification and measurement of
financial assets that are compound financial instruments from the
holder's perspective.
Ind AS 33 Earnings per Share
C35 Paragraph 34 is amended to read as follows:
34 After the potential ordinary shares are converted into ordinary
shares, the items identified in paragraph 33(a)(c) no longer arise.
Instead, the new ordinary shares are entitled to participate in profit
or loss attributable to ordinary equity holders of the parent entity.
Therefore, profit or loss attributable to ordinary equity holders of
the parent entity calculated in accordance with paragraph 12 is
adjusted for the items identified in paragraph 33(a)(c) and any
related taxes. The expenses associated with potential ordinary
shares include transaction costs and discounts accounted for in
accordance with the effective interest method (see Ind AS 109).
Ind AS 34 Interim Financial Reporting
Appendix A Interim Financial Reporting and Impairment
C51 Paragraphs 1, 2, 7 and 8 are amended to read as follows, paragraphs 5
and 6are deleted:
1 An entity is required to assess goodwill for impairment at the end
of each reporting period, and, if required, to recognise an
impairment loss at that date in accordance with Ind AS 36.
However, at the end of a subsequent reporting period, conditions
may have so changed that the impairment loss would have been
reduced or avoided had the impairment assessment been made only
at that date. This Interpretation provides guidance on whether such
impairment losses should ever be reversed.
2 The Interpretation addresses the interaction between the
requirements of Ind AS 34 and the recognition of impairment
losses on goodwill in Ind AS 36, and the effect of that interaction
on subsequent interim and annual financial statements.
5 [Deleted]
6 [Deleted]
7 The Interpretation addresses the following issue:
Should an entity reverse impairment losses recognised in an interim
period on goodwill if a loss would not have been recognised, or a
smaller loss would have been recognised, had an impairment
assessment been made only at the end of a subsequent reporting
period?
Consensus
8 An entity shall not reverse an impairment loss recognised in a
previous interim period in respect of goodwill.
Ind AS 36 Impairment of Assets
C36 Paragraphs 2, 4 and 5 are amended to read as follows:
2 This Standard shall be applied in accounting for the
impairment of all assets, other than:
(a) ...
(e) financial assets that are within the scope of Ind AS 109
Financial Instruments;
(f) ...
4 This Standard applies to financial assets classified as:
(a) subsidiaries, as defined in Ind AS 110 Consolidated
Financial Statements;
(b) associates, as defined in Ind AS 28 Investments in Associates
and Joint Ventures; and
(c) joint ventures, as defined in Ind AS 111 Joint Arrangements.
For impairment of other financial assets, refer to Ind AS 109.
5 This Standard does not apply to financial assets within the scope of
Ind AS 109, investment property measured at fair value within the
scope of Ind AS 40, or biological assets related to agricultural
activity measured at fair value less costs to sell within the scope of
Ind AS 41. However, this Standard applies to assets that are carried
at revalued amount (ie fair value at the date of the revaluation less
any subsequent accumulated depreciation and subsequent
accumulated impairment losses) in accordance with other Ind ASs,
such as the revaluation model in Ind AS 16 Property, Plant and
Equipment and Ind AS 38 Intangible Assets. The only difference
between an asset's fair value and its fair value less costs of disposal
is the direct incremental costs attributable to the disposal of the
asset.
(a) ...
Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
C37 Paragraph 2 is amended to read as follows:
2 This Standard does not apply to financial instruments (including
guarantees) that are within the scope of Ind AS 109 Financial
Instruments.
Appendix A
Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
C50 Paragraph 5 is amended to read as follows:
5 A residual interest in a fund that extends beyond a right to
reimbursement, such as a contractual right to distributions once all
the decommissioning has been completed or on winding up the
fund, may be an equity instrument within the scope of Ind AS 109
and is not within the scope of this Interpretation.
IAS 39 Financial Instruments: Recognition and Measurement
Appendix D Hedges of a Net Investment in a Foreign Operation6
C53 A reference to Ind AS 109 Financial Instruments is added under the
heading `References'.
C54 Paragraphs 3, 57, 14 and 16 are amended to read as follows, paragraph
18A is deleted and paragraph 18B is added:
3 Ind AS 109 requires the designation of an eligible hedged item and eligible
hedging instruments in a hedge accounting relationship. If there is a
designated hedging relationship, in the case of a net investment hedge, the
gain or loss on the hedging instrument that is determined to be an effective
hedge of the net investment is recognised in other comprehensive income
and is included with the foreign exchange differences arising on translation
of the results and financial position of the foreign operation.
5 Ind AS 109 allows an entity to designate either a derivative or a non-
derivative financial instrument (or a combination of derivative and non-
derivative financial instruments) as hedging instruments for foreign
currency risk. This Interpretation provides guidance on where, within a
group, hedging instruments that are hedges of a net investment in a foreign
operation can be held to qualify for hedge accounting.
6
Appendix D Hedges of a Net Investment in a Foreign Operation will be shifted to Ind AS 109 as
appendix D
6 Ind AS 21 and Ind AS 109 require cumulative amounts recognised in other
comprehensive income relating to both the foreign exchange differences
arising on translation of the results and financial position of the foreign
operation and the gain or loss on the hedging instrument that is determined
to be an effective hedge of the net investment to be reclassified from equity
to profit or loss as a reclassification adjustment when the parent disposes of
the foreign operation. This Interpretation provides guidance on how an
entity should determine the amounts to be reclassified from equity to profit
or loss for both the hedging instrument and the hedged item.
7 This Interpretation applies to an entity that hedges the foreign currency risk
arising from its net investments in foreign operations and wishes to qualify
for hedge accounting in accordance with Ind AS 9. For convenience this
Interpretation refers to such an entity as a parent entity and to the financial
statements in which the net assets of foreign operations are included as
consolidated financial statements. All references to a parent entity apply
equally to an entity that has a net investment in a foreign operation that is a
joint venture, an associate or a branch.
14 A derivative or a non-derivative instrument (or a combination of derivative
and non-derivative instruments) may be designated as a hedging instrument
in a hedge of a net investment in a foreign operation. The hedging
instrument(s) may be held by any entity or entities within the group, as long
as the designation, documentation and effectiveness requirements of Ind AS
9 paragraph 6.4.1 that relate to a net investment hedge are satisfied. In
particular, the hedging strategy of the group should be clearly documented
because of the possibility of different designations at different levels of the
group.
16 When a foreign operation that was hedged is disposed of, the amount
reclassified to profit or loss as a reclassification adjustment from the foreign
currency translation reserve in the consolidated financial statements of the
parent in respect of the hedging instrument is the amount that Ind AS 109
paragraph 6.5.14 requires to be identified. That amount is the cumulative
gain or loss on the hedging instrument that was determined to be an
effective hedge.
18A [Deleted]
18B Ind AS 109, as issued in July 2014, amended paragraphs 3, 57, 14,
16, AG1 and AG8 and deleted paragraph 18A. An entity shall
apply those amendments when it applies Ind AS 109.
C55 In the Appendix, paragraphs AG1 and AG8 are amended to read as follows:
AG1 This appendix illustrates the application of the Interpretation using
the corporate structure illustrated below. In all cases the hedging
relationships described would be tested for effectiveness in accordance
with Ind AS 109, although this testing is not discussed in this
appendix. Parent, being the ultimate parent entity, presents its consolidated
financial statements in its functional currency of euro (EUR). Each of the
subsidiaries is wholly owned. Parent's £500 million net investment in
Subsidiary B (functional currency pounds sterling (GBP)) includes the
£159 million equivalent of Subsidiary B's US$300 million net investment
in Subsidiary C (functional currency US dollars (USD)). In other words,
Subsidiary B's net assets other than its investment in Subsidiary C are
£341 million.
AG8 When Subsidiary C is disposed of, the amounts reclassified to profit or
loss in Parent's consolidated financial statements from its foreign currency
translation reserve (FCTR) are:
(a) in respect of the US$300 million external borrowing of Subsidiary
A, the amount that Ind AS 109 requires to be identified, ie the total
change in value in respect of foreign exchange risk that was
recognised in other comprehensive income as the effective portion
of the hedge; and
(b) ...
Appendix E Extinguishing Financial Liabilities with Equity
Instruments7
C56 Paragraphs 4, 5, 7, 9 and 10 are amended to read as follows:
4 This Interpretation addresses the following issues:
(a) Are an entity's equity instruments issued to extinguish all or
part of a financial liability `consideration paid' in accordance
with paragraph 3.3.3 of Ind AS 109?
(b) ...
Consensus
7
Appendix E Extinguishing Financial Liabilities with Equity Instruments will be shifted to Ind AS
109 as appendix D
5 The issue of an entity's equity instruments to a creditor to
extinguish all or part of a financial liability is consideration paid in
accordance with paragraph 3.3.3 of Ind AS 109. An entity shall
remove a financial liability (or part of a financial liability) from its
balance sheet when, and only when, it is extinguished in
accordance with paragraph 3.3.1 of Ind AS 109.
7 If the fair value of the equity instruments issued cannot be reliably
measured then the equity instruments shall be measured to reflect
the fair value of the financial liability extinguished. In measuring
the fair value of a financial liability extinguished that includes a
demand feature (eg a demand deposit), paragraph 47 of Ind AS 113
is not applied.
9 The difference between the carrying amount of the financial
liability (or part of a financial liability) extinguished, and the
consideration paid, shall be recognised in profit or loss, in
accordance with paragraph 3.3.3 of Ind AS 109. The equity
instruments issued shall be recognised initially and measured at the
date the financial liability (or part of that liability) is extinguished.
10 When only part of the financial liability is extinguished,
consideration shall be allocated in accordance with paragraph 8.
The consideration allocated to the remaining liability shall form
part of the assessment of whether the terms of that remaining
liability have been substantially modified. If the remaining liability
has been substantially modified, the entity shall account for the
modification as the extinguishment of the original liability and the
recognition of a new liability as required by paragraph 3.3.2 of Ind
AS 109.
14 [Deleted]
Ind AS 1Construction Contracts8
Appendix A Service Concession Arrangements
C52 Paragraphs 2325 are amended to read as follows, paragraphs 28A28C
are deleted and paragraph 28E is added:
23 Ind AS 32 and IFRSs 107 and 109 apply to the financial asset
8
Ind AS 11 will be superseded by Ind AS 115, Revenue from Contracts with Costumers. Ind AS 115
is under formulation. Appendix A to Ind AS 11 is proposed to be moved to Ind AS 115 as Appendix
C.
recognised under paragraphs 16 and 18.
24 The amount due from or at the direction of the grantor is accounted
for in accordance with Ind AS 109 as measured at:
(a) amortised cost;
(b) fair value through other comprehensive income; or
(c) fair value through profit or loss.
25 If the amount due from the grantor is measured at amortised cost
or fair value through other comprehensive income, Ind AS 109
requires interest calculated using the effective interest method to
be recognised in profit or loss.
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