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Exposure Draft of Accounting Standard (AS) 109, Financial Instruments (Comments to be received by June 30, 2018)
May, 17th 2018
                                          ED/AS109/2018/02




               Exposure Draft

        Accounting Standard (AS) 109

            Financial Instruments




  Last date for the comments: June 30, 2018




                  Issued by

         Accounting Standards Board

The Institute of Chartered Accountants of India



                         1
                                                                              ED/AS109/2018/02




                      Exposure Draft Accounting Standard (AS) 109
                                 Financial Instruments

 The Indian Accounting Standards (Ind AS), as notified by the Ministry of Corporate Affairs in
 February, 2015, have been applicable to the specified class of companies. For other class of
 companies, i.e., primarily the unlisted companies having net worth less than Rs. 250 crores,
 Accounting Standards, as notified under Companies (Accounting Standards) Rules, 2006, have
 been applicable. However, the Ministry of Corporate Affairs has requested the Accounting
 Standards Board of the Institute of Chartered Accountants of India (ICAI) to upgrade
 Accounting Standards, as notified under Companies (Accounting Standards) Rules, 2006, to
 bring them nearer to Indian Accounting Standards. Accordingly, the Accounting Standards
 Board of ICAI has initiated the process of upgradation of these standards which will be
 applicable to all companies having net-worth less than Rs. 250 crores. Further, there are set of
 Accounting Standards issued by ICAI, which are broadly consistent with ASs notified under
 Companies (Accounting Standards) Rules, 2006, and these ASs are applicable for non-
 corporate entities. This set of ASs issued by ICAI are also part of the upgradation process
 mentioned above.

Brief Synopsis of draft AS 109, Financial Instruments

 Currently, under existing Accounting Standards (AS) there is no comprehensive robust standard
 on financial instruments. However, certain guidance with regard to financial instruments exist
 which is provided under:
     AS 11, The Effects of Changes in Foreign Exchange Rates
     AS 13, Accounting for Investments
     Guidance Note on Accounting for Derivative Contracts

 However, , under Ind ASs, comprehensive standards and guidance is given on the subject under
 following 3 Ind AS:
      Ind AS 32, Financial Instruments: Presentation
      Ind AS 107, Financial Instruments: Disclosures
      Ind AS 109, Financial Instruments
  It may also be noted that a separate standards viz. Ind AS 113, Fair Value Measurement
  prescribes elaborate principles and requirements regarding fair value measurement for financial
  instruments and non financial items.

 While, this draft standard is primarily based on IFRSs for SMEs, which are simplified versions
 of IFRS Standards (which form the basis of Ind ASs), the draft also substantially carries forward
 provisions of existing pronouncement of ICAI, `Guidance Note on Accounting
 for Derivative Contracts' applicable for entities not covered by Ind AS roadmap. Efforts are
 made to keep the standard simple, appropriate balance between fair presentation and prudence is
 maintained. Following are relevant sections in IFRS for SMEs, corresponding to which this
 draft standard comprises of 3 sections:


          Sections in IFRS for SMEs              Sections in upgraded AS 109
 Section 11, Basic Financial Instruments Section A, Basic Financial Instruments
 Section 12, Other Financial Instruments Section B, Other Financial Instruments
 Issues
 Section 22, Liabilities and Equity      Section C, Liabilities and Equity

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                                                                              ED/AS109/2018/02



 Section A applies to basic financial instruments (those that are commonly used and have simple
 features) and is relevant to all entities. Section B applies to other, more complex financial
 instruments and transactions. Section C Liabilities and Equity establishes principles for
 classifying financial instruments as either liabilities or equity and addresses accounting for
 equity instruments issued to individuals or other parties acting in their capacity as investors in
 equity instruments (ie in their capacity as owners).
 Similar to IFRS for SMEs, no separate AS equivalent to Ind AS 113, Fair Value Measurement
 is currently proposed, rather fair value measurement principles are incorporated in individual
 standards based on `entry price' concept.


 Appendix 1 covering major differences between draft AS 109 and existing GAAP is included in
 the draft Standard. Similarly, major differences between draft AS 109 and Ind AS 109 are given
 in Appendix 2 of this draft Standard.

 Following is the Exposure Draft of the Accounting Standard (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 aspect of this 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.

 How to Comment

 Comments can be submitted using one of the following methods so as to receive not later than
 June 30, 2018:

  1. Electronically:        Visit the following link
                            http://www.icai.org/comments/asb/

  2. Email:                 Comments can be sent at commentsasb@icai.in


  3. Postal:                Secretary, Accounting Standards Board,
                            The Institute of Chartered Accountants of India,
                            ICAI Bhawan, Post Box No. 7100, Indraprastha Marg,
                            New Delhi ­ 110 002



Further clarifications on any aspect of this Exposure Draft may be sought by email to
asb@icai.in.




                                                  3
                                                                                   ED/AS109/2018/02



Accounting Standard (AS) 109, Financial Instruments
Scope

1       Section A Basic Financial Instrument and Section B Other Financial Instruments together
        deal with recognising, presenting, derecognising, measuring and disclosing financial
        instruments (financial assets and financial liabilities). Section A applies to basic financial
        instruments and is relevant to all entities. Section B applies to other, more complex financial
        instruments and transactions. If an entity enters into only basic financial instrument
        transactions then Section B is not applicable. However, even entities with only basic financial
        instruments shall consider the scope of Section B to ensure they are exempt. Section C
        Liabilities and Equity establishes principles for classifying financial instruments as either
        liabilities or equity and addresses accounting for equity instruments issued to individuals or
        other parties acting in their capacity as investors in equity instruments (ie in their capacity as
        owners).


                          Section A Basic Financial Instrument
Introduction

2       A financial instrument is a contract that gives rise to a financial asset of one entity and a
        financial liability or equity instrument of another entity.

3       Section A requires an amortised cost method for all basic financial instruments except for
        Investments in Equity Instruments, Non-convertible Preference Shares and Units of Mutual
        Funds. Investments in Equity Instruments, Non-convertible Preference Shares and Units of
        Mutual Funds held for trading are measured at Fair Value through Profit or Loss and said
        instruments not held for trading are measured at Cost less Impairment.

4       Basic financial instruments within the scope of Section A are those that satisfy the conditions
        in paragraph 7 of this section. Examples of financial instruments that normally satisfy those
        conditions include:

        (a)     cash;
        (b)     demand and fixed-term deposits when the entity is the depositor, for example bank
                accounts;
        (c)     commercial paper and commercial bills held;
        (d)     accounts, notes and loans receivable and payable;
        (e)     bonds and similar debt instruments;
        (f)     investments in non-convertible preference shares and non-puttable ordinary and
                preference shares; and
        (g)     commitment fees paid to receive a loan if the commitment cannot be net settled in
                cash.

5       Examples of financial instruments that do not normally satisfy the conditions in paragraph 7
        of this section, and are therefore within the scope of Section B, include:
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                                                                               ED/AS109/2018/02


      (a)     asset-backed securities with complex features, such as collateralised mortgage
              obligations, repurchase agreements and securitised packages of receivables;
      (b)     options, rights, warrants, futures contracts, forward contracts and interest rate swaps
              that can be settled in cash or by exchanging another financial instrument;
      (c)     financial instruments that qualify and are designated as hedging instruments in
              accordance with the requirements in Section B;
      (d)     commitments to make a loan to another entity; and
      (e)     commitment fees paid to receive a loan if the commitment can be net settled in cash.

      (f)     contracts for contingent consideration in a business combination.


Scope of Section A

6     Section A applies to all financial instruments meeting the conditions of paragraph 7 of this
      section except for the following:
      (a)     investments in subsidiaries, associates and joint ventures that are accounted for in
              accordance with AS 110,Consolidated Financial Statements , AS 28, Investments in
              Associates and Joint Ventures or AS 111, Joint Arrangements.
      (b)     financial instruments that meet the definition of an entity's own equity, including the
              equity component of compound financial instruments issued by the entity (see
              Section C Liabilities and Equity ).
      (c)     leases, to which AS 17, Leases or paragraph 1(e) of section B apply. However, the
              derecognition requirements in paragraphs 40-45 of this section apply to the
              derecognition of lease receivables recognised by a lessor and lease payables
              recognised by a lessee, and the impairment requirements in paragraphs 27-33 of this
              section apply to lease receivables recognised by a lessor.
      (d)     employers' rights and obligations under employee benefit plans, to which AS 19,
              Employee Benefits, applies.
      (e)     financial instruments, contracts and obligations under share-based payment
              transactions to which AS 102, Share-based Payment, applies.
      (f)     reimbursement assets that are accounted for in accordance with AS 37, Provisions,
              Contingent liabilities and Contingent Assets.


Basic financial instruments

7   An entity shall account for the following financial instruments as basic financial instruments in
    accordance with Section A:
      (a)     cash;
      (b)     a debt instrument (such as an account, note or loan receivable or payable) that meets
              the conditions in paragraph 8 of this section;
      (c)     a commitment fees paid to receive a loan that:
              (i)     cannot be settled net in cash; and

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                                                                              ED/AS109/2018/02


             (ii)    when the commitment is executed, is expected to meet the conditions in
                     paragraph 8 of this section.
     (d)     Investments in Equity Instruments, Non-convertible Preference Shares and Units of
             Mutual Funds.
8    A debt instrument that satisfies all of the conditions in (a) ­(d) shall be accounted for in
     accordance with Section A:
     (a)     returns to the holder (the lender/creditor) assessed in the currency in which the debt
             instrument is denominated are either:
             (i)     a fixed amount;
             (ii)    a fixed rate of return over the life of the instrument;
             (iii)   a variable return that, throughout the life of the instrument, is equal to a
                     single referenced quoted or observable interest rate (such as London
                     Interbank Offered Rate (LIBOR), Mumbai Interbank Offered Rate (MIBOR)
                     etc); or
             (iv)    some combination of such fixed and variable rates, provided that both the
                     fixed and variable rates are positive.
             For fixed and variable rate interest returns, interest is calculated by multiplying the
             rate for the applicable period by the principal amount outstanding during the period.
     (b)     there is no contractual term or condition that could, by its terms, result in the holder
             (the lender/creditor) losing the principal amount or any interest attributable to the
             current period or prior periods. The fact that a debt instrument is subordinated to
             other debt instruments is not an example of such a contractual term or condition.

     (c)     contractual terms and conditions that permit or require the issuer (the borrower) to
             prepay a debt instrument or permit or require the holder (the lender/creditor) to put it
             back to the issuer (ie to demand repayment) before maturity are not contingent on
             future events other than to protect:

             (i)     the holder against a change in the credit risk of the issuer or the instrument
                     (for example, defaults, credit downgrades or loan covenant violations) or a
                     change in control of the issuer; or
             (ii)    the holder or issuer against changes in relevant taxation or law.

     (d)     there are no conditional returns or repayment provisions except for the variable rate
             return described in (a) and prepayment provisions described in (c).

9    Examples of debt instruments that would normally satisfy the conditions in paragraph 8(a)(iv)
     of this section include:
     (a)    a bank loan that has a fixed interest rate for an initial period that then reverts to a
            quoted or observable variable interest rate after that period; and

     (b)     a bank loan with interest payable at a quoted or observable variable interest rate plus
             a fixed rate throughout the life of the loan, for example LIBOR plus 200 basis points.
10    An example of a debt instrument that would normally satisfy the conditions set out in
     paragraph 8(c) of this section would be a bank loan that permits the borrower to terminate the

                                                6
                                                                                  ED/AS109/2018/02


      arrangement early, ie making premature payment even though the borrower may be required
      to pay a penalty to compensate the bank for its costs of the borrower terminating the
      arrangement early.


11    Other examples of financial instruments that would normally satisfy the conditions in
      paragraph 8 of this section are:
      (a)     trade accounts and notes receivable and payable, and loans from banks or other third
              parties.
      (b)     accounts payable in a foreign currency. However, any change in the account payable
              because of a change in the exchange rate is recognised in profit or loss as required by
              AS 21, The Effects of Changes in Foreign Exchange Rates.
      (c)     loans to or from subsidiaries or associates that are due on demand.

      (d)     a debt instrument that would become immediately receivable if the issuer defaults on
              an interest or principal payment (such a provision does not violate the conditions in
              paragraph 8 of this section).
12    Examples of financial instruments that do not satisfy the conditions in paragraph 8 of this
      section (and are therefore within the scope of Section B) include:
      (a)     an interest rate swap that returns a cash flow that is positive or negative, or a forward
              commitment to purchase a commodity or financial instrument that is capable of being
              cash-settled and that, on settlement, could have positive or negative cash flow,
              because such swaps and forwards do not meet the condition in paragraph 8(a) of this
              section; options and forward contracts, because returns to the holder are not fixed and
              the condition in paragraph 8(a) of this section is not met; and
      (b)     investments in debt convertible into equity instruments of the debt issuer, because the
              return to the holder can vary with the price of the issuer's equity shares instead of just
              with market interest rates.



Initial recognition of financial assets and liabilities

13    An entity shall recognise a financial asset or a financial liability only when the entity becomes
      a party to the contractual terms and conditions of the instrument.


Initial measurement

14    When a financial asset or financial liability is recognised initially, an entity shall measure it at
      the transaction price (including transaction costs except in the initial measurement of financial
      assets and liabilities that are subsequently measured at Fair Value through Profit or Loss)
      unless the arrangement constitutes, in effect, a financing transaction for either the entity (for a
      financial liability) or the counterparty (for a financial asset) to the arrangement. An
      arrangement constitutes a financing transaction if payment is deferred beyond normal
      business terms, for example, providing interest-free credit to a buyer for the sale of goods, or
      is financed at a rate of interest that is not a market rate, for example, an interest-free or below
      market interest rate loan made to an employee. If the arrangement constitutes a financing
                                                  7
                                                                                ED/AS109/2018/02


     transaction, the entity shall measure the financial asset or financial liability at the present
     value of the future payments discounted at a market rate of interest for a similar debt
     instrument as determined at initial recognition.

      Examples--financial assets
      1      For a long-term loan made to another entity, a receivable is recognised at the present
             value of cash receivable (including interest payments and repayment of principal)
             from that entity.
      2      For goods sold to a customer on short-term credit, a receivable is recognised at the
             undiscounted amount of cash receivable from that entity, which is normally the
             invoice price.
      3      For an item sold to a customer on two-year interest-free credit, a receivable is
             recognised at the current cash sale price for that item. If the current cash sale price is
             not known, it may be estimated as the present value of the cash receivable discounted
             using the prevailing market rate(s) of interest for a similar receivable.

      4      For a cash purchase of another entity's ordinary shares, the investment is recognised
             at the amount of cash paid to acquire the shares.

       Examples--financial liabilities
       1     For a loan received from a bank, a payable is recognised initially at the present value
             of cash payable to the bank (for example, including interest payments and repayment
             of principal).
       2     For goods purchased from a supplier on short-term credit, a payable is recognised at
             the undiscounted amount owed to the supplier, which is normally the invoice price.


Subsequent measurement

15   At the end of each reporting period, an entity shall measure basic financial instruments as
     follows, without any deduction for transaction costs the entity may incur on sale or other
     disposal:
     (a)     Investments in Equity Instruments, Non-convertible Preference Shares and Units of
             Mutual Funds:
             (i)    Held for trading, are measured at Fair Value through Profit or Loss.
             (ii)   Not held for trading, are measured at Cost less Impairment.

     (b)     debt instruments that meet the conditions in paragraph 7(b) of this section shall be
             measured at amortised cost using the effective interest method. Paragraphs 16-21 of
             this section provide guidance on determining amortised cost using the effective
             interest method. Debt instruments that are classified as current assets or current
             liabilities shall be measured at the undiscounted amount of the cash or other
             consideration expected to be paid or received (net of impairment--see paragraphs 27-
             33 of this section) unless the arrangement constitutes, in effect, a financing
             transaction (see paragraph 14 of this section).


                                                8
                                                                                    ED/AS109/2018/02


      (c)      Commitment fees paid to receive a loan that meet the conditions in paragraph 7(c) of
               this section shall be measured at Cost less Impairment, if any.

               Impairment must be assessed for financial assets in (a) (ii) and (b). Paragraphs 27-33
               of this section provide guidance.

      Amortised cost and effective interest method
16    The amortised cost of a financial asset or financial liability at each reporting date is the net of
      the following amounts:
      (a)      the amount at which the financial asset or financial liability is measured at initial
               recognition;
      (b)      minus any repayments of the principal;

      (c)      plus or minus the cumulative amortisation using the effective interest method of any
               difference between the amount at initial recognition and the maturity amount;
      (d)      minus, in the case of a financial asset, any reduction (directly or through the use of an
               allowance account) for impairment.
      Financial assets and financial liabilities may have no explicit stated interest rate, such as zero-
      coupon bonds where interest is receivable/payable via accretion of discount on such bonds.

     Example of determining amortised cost and application of effective interest method for
     investment in zero coupon bonds
     Entity A purchases zero coupon bonds for 1,000.The instrument has a contractual par
     amount of 1,250. The contractual period of bond is 5 years.
     The effective interest rate works out to 4.6 per cent annually. The table below provides
     information about the carrying amount and cash flows from zero coupon bonds.
                                                                                 Amount in 
       Year ending     Carrying           Interest        Cash flow Carrying amount at
                       amount at the      income                       the end of the year
                       beginning of the accumulated (c)                (d = a+b-c)
                       year (a)           using EIR
                                          (b)
       20x1            1,000                46                0             1,046
       20x2            1,046                48                0             1,094
       20x3            1,094                50                0             1,144
       20x4            1,144                52                0             1,196
       20x5            1,196                54                1250          0

     The investor of the bonds makes the following journal entry at issue on 1 April 20X0:
     Dr Investment - Bond                              1,000
     Cr Cash                                                             1,000
     At the end of each reporting period, the issuer would make the following journal entry:

                                   20X1    20x2    20x3    20x4    20x5
       Dr       Cash               -       -       -       -       1,250
       Dr       Investment -Bond 46        48      50      52      54
       Cr       Interest income         46      48      50      52        54
                (opening balance x
                EIR)
       Cr       Investment -Bond         -       -       -       -     1,250



                                                  9
                                                                                    ED/AS109/2018/02


17     The effective interest method is a method of calculating the amortised cost of a financial asset
       or a financial liability (or a group of financial assets or financial liabilities) and of allocating
       the interest income or interest expense over the relevant period. The effective interest rate is
       the rate that discounts estimated future cash payments or receipts through the contractual
       period of the financial instrument or, when appropriate, a shorter period, to the carrying
       amount of the financial asset or financial liability. The effective interest rate is determined on
       the basis of the carrying amount of the financial asset or liability at initial recognition. Under
       the effective interest method:

       (a)      the amortised cost of a financial asset (liability) is the present value of future cash
                receipts (payments) discounted at the effective interest rate; and

       (b)      the interest expense (income) in a period equals the carrying amount of the financial
                liability (asset) at the beginning of a period multiplied by the effective interest rate for
                the period.

18     When calculating the effective interest rate, an entity shall estimate cash flows considering all
       contractual terms of the financial instrument (for example prepayment, call and similar
       options) and known credit losses that have been incurred, but it shall not consider possible
       future credit losses not yet incurred.

19     When calculating the effective interest rate, an entity shall amortise any related fees,
       brokerage, finance charges paid or received (such as `points'), transaction costs and other
       premiums or discounts over the contractual period of the instrument, except as follows.
       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, financing costs or
       internal administrative or holding costs.The entity shall use a shorter period if that is the
       period to which the fees, finance charges paid or received, transaction costs, premiums or
       discounts relate. This will be the case when the variable to which the fees, finance charges
       paid or received, transaction costs, premiums or discounts relate is repriced to market rates
       before the expected maturity of the instrument. In such a case, the appropriate amortisation
       period is the period to the next such repricing date.

     Example of determining amortised cost and application of effective interest method for
     financial asset ­ Investment

      Entity A purchases a debt instrument for 1,000 (including transaction costs of 50).The
      instrument has a contractual par amount of 1,250 and carries fixed interest of 4.7 per cent
      that is paid annually (1,250 × 4.7% = 59 per year). The contractual period of debt
      instrument is 5 years.

      It can be shown that in order to allocate interest receipts, the initial discount and transaction
      costs over the term of the debt instrument entity has to compute effective interest rate which
      works out to 10 per cent annually. The table below provides information about the carrying
      amount, interest revenue and cash flows of the debt instrument in each reporting period.
                                                                                        Amount in 
         Year ending        Carrying            Interest      Cash flow Carrying amount at
                          amount at the         income                        the end of the year
                         beginning of the     calculated           (c)             (d = a+b-c)
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                                                                                    ED/AS109/2018/02


                             year (a)        using EIR
                                            (b= a x 10%)

       20x1                         1,000               100            59                       1,041
       20x2                         1,041               104            59                       1,086
       20x3                         1,086               109            59                       1,136
       20x4                         1,136               113            59                       1,190
       20x5                         1,190               119       1250+59                           0


      The investor of the bonds makes the following journal entry at issue on 1 April 20X0:
      Dr Investment - Bond                              1,000
      Cr Cash                                                             1,000
      At the end of each reporting period, the issuer would make the following journal entry:

                                     20X1            20x2           20x3          20x4         20x5
       Dr       Cash               59              59             59            59           1,309
       Dr       Investment       ­ 41              45             50            54           60
                Bond               (1,041-         (1,086-        (1,136-       (1,190-      (1,250-
                                   1,000)          1,041)         1,086)        1,136)       1,190)
       Cr       Interest   income       100             104            109           113           119
                (opening balance x
                10% EIR)
       Cr       Investment -Bond           -                  -          -             -        1,250


20    For variable rate financial assets and variable rate financial liabilities, periodic re-estimation
      of cash flows to reflect changes in market rates of interest alters the effective interest rate. As
      a result, operational complexities may arise to apply the effective interest method by
      including elements such as related fees, transactions costs, premium, discounts. Accordingly,
      such elements may be amortised on straight-line basis over contractual period of the financial
      instrument.


     Example of determining amortised cost and application of effective interest method for
     debt investments with variable coupon rate
     Entity A purchases a debt instrument for 1,000 (including transaction costs of 50).The
     instrument has a contractual par amount of 1,200 and carries interest rate based on 12 months
     MIBOR plus 1%. At the time of issue, MIBOR is 4.5%, and subsequently, has increased by 0.5
     percent each year. The contractual period of debt instrument is 5 years. Transaction cost and
     bond discount amounts to 250 (1200-950) for this variable rate financial instruments.
     Effective interest rate (EIR) at the time of issue of debt instrument works out to 10 per cent
     annually. Subsequently due to change in the MIBOR rate , the EIR will change which entails
     recomputation of EIR at each reset date and adjustment of carrying amount of the financial
     asset. In order to avoid this complexity, transactions costs and bond discount may be amortised
     on straight-line basis over contractual period, ie 50 each year (250/5 years)
     The table below provides information about the carrying amount, transaction cost and discount,
     EIR, interest revenue and cash flows of the debt instrument in each reporting period.
     these elements
                                                                                               Amount in 
       Year   Gross    Transaction Variable           Interest income for the       Cash          Net
      ending Carrying costs/discoun Coupon                     period              inflows      Carrying

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                                                                                        ED/AS109/2018/02


                amount      t at start of        Rate    Contractual         Txn                  amount at
                  at the      the year                      rate        cost/discount             the end of
                 start of                                               amortisation               the year
                the year
                   (a)       (b= b-e)            (c)      (d=a x c)          (e)        (f)     (g=a+b+d-e-
                                                                                                     f)
        20x1     1200           250          5.50%            66             50         66          1,400
        20x2     1200           200          6.00%            72             50         72             1,350
        20x3     1200           150          6.50%            78             50         78             1,108
        20x4     1200           100          7.00%            84             50         84             1,250
        20x5     1200           50           7.50%            90             50         1290            0

     The investor of the bonds makes the following journal entry at issue on 1 April 20X0:
     Dr Investment - Bond                            1,200
     Cr Cash                                                           1,200

     At the end of each reporting period, the issuer would make the following journal entries:
                                       20X1          20x2      20x3        20x4        20x5
      Dr       Investment ­          50           50         50          50         50
               transaction cost
               and Bond discount
      Cr       Profit or loss                50          50         50          50          50


       Dr       Cash                        66           72            78          84          1,290
       Dr       Investment -Bond            50           50            50          50          50
                Txn cost/discount
                amortisation
       Cr       Interest income                    116         122          128         134        140
       Cr       Investment -Bond                                                                  1,200



21     If an entity revises its estimates of payments or receipts, the entity shall adjust the carrying
       amount of the financial asset or financial liability (or group of financial instruments) to reflect
       actual and revised estimated cash flows. The entity shall recalculate the carrying amount by
       computing the present value of estimated future cash flows at the financial i nstrument's
       original effective interest rate. The entity shall recognise the adjustment as income or expense
       in profit or loss at the date of the revision.


       Example of adjustment required in amortised cost when an entity revises its estimates of
       cash flows:

       In continuance of the preceding example, On 1 April 20X2 the entity revises its estimate of
       cash flows. It now expects that 50 per cent of the contractual par amount will be prepaid on
       31 March 20X3 and the remaining 50 per cent on 31 March 20X4. In accordance with
       paragraph 21 of this section of the standard, the carrying amount of the debt instrument in the
       beginning of 20X2 is adjusted. The carrying amount is recalculated by discounting the
       amount the entity expects to receive in 20X2-20X3 and subsequent years using the original
       effective interest rate (10 per cent). This results in the new carrying amount in 20X2-20X3 of
       1,138. The adjustment of 52 (1,138 ­ 1,086) is recorded in profit and loss in 20X2-20X3.
       The table below provides information about the carrying amount, interest revenue and cash
       flows as they would be adjusted taking into account the change in estimate.
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       Year                 carrying             Interest             Cash flow          Carrying
                            amount at the        revenue                                 amount at the
                            beginning of the                                             end of the
                            year                                      (c)                year
                            (a)                  (b= a x 10%)                            (d = a+b+c)

       20x0                 1,000                100                  59                 1,041
       20x1                 1,041                104                  59                 1,086
       20x2                 1,086+52=1,138       114                  625+59             568
       20x3                 568                  57                   30                 595
       20x4                 595                  60                   625+30             0

      The investor of the bonds makes the following adjustment journal entry as of on 1 April
      20X2:
      Dr Investment ­ Bond Discount/Txn Costs             52
      Cr Interest income                                         52

      At the end of each reporting period starting from 31 March 20x3, the issuer would make the
      following journal entry:
                                     20X1            20X2      20X3          20X4       20X5
       Dr Cash                    59             59          684         30            655
       Dr Investment ­ Bond 41                   45          55          27            30
       Cr Interest income                 100            104       114             57       60
       Cr Investment -Bond                   -             -       625              -      625




Reclassification

22    If there is a change in the underlying objective and intention to hold the asset held for
      trading,an entity may reclassify financial assets into and out of the Fair Value through Profit
      or Loss category. A financial asset no longer held for trading may be reclassified from Fair
      Value through Profit or Loss category to Cost less Impairment category in accordance with
      paragraph 24 of this section. Similarly, a financial asset that was not held for trading earlier
      can be reclassified in accordance with paragraph 25 of this section to Fair Value through
      Profit or Loss category when subsequently it is held for trading.

23    Unlike assets, reclassification is not applicable for financial liabilities.

24    A financial asset that is reclassified out of the Fair Value through Profit or Loss category shall
      be reclassified at its fair value on the date of reclassification. Any gain or loss already
      recognised in profit or loss shall not be reversed. The fair value of the financial asset on the
      date of reclassification becomes its new cost. Any gain or loss arising at the time of
      reclassification, is recognised in profit or loss.

25    A financial asset that is reclassified into Fair Value through Profit or Loss category shall be
      reclassified at its fair value on the date of reclassification. Any previously recognised
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     amortisation shall not be reversed. The fair value as on the date of reclassification becomes
     its new carrying amount. Any gain or loss arising from a difference between the carrying
     amount of the financial asset and fair value at the time of reclassification, is recognised in
     profit or loss.







26   If an entity reclassifies financial assets in accordance with paragraphs 22-25 of this section, 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.




     Impairment of financial assets measured at cost or amortised cost
     Recognition
27   At the end of each reporting period, an entity shall assess whether there is any indication of
     impairment of any financial assets that are measured at cost or amortised cost. If there is
     indication of impairment, the entity shall recognise an impairment loss in profit or loss
     immediately.

28   Indication that a financial asset or group of assets is impaired includes observable indication
     that come to the attention of the holder of the asset about the following loss events:
     (a)     significant financial difficulty of the issuer;
     (b)     a breach of contract, such as a default or delinquency in interest or principal
             payments;
     (c)     the creditor, for economic or legal reasons relating to the debtor's financial difficulty,
             granting to the debtor a concession that the creditor would not otherwise consider;
     (d)     it has become probable that the debtor will enter bankruptcy or other financial
             reorganisation; or
     (e)     evidence indicating that there has been a measurable decrease in the estimated future
             cash flows from a group of financial assets since the initial recognition of those
             assets, even though the decrease cannot yet be identified with the individual financial
             assets in the group, such as adverse national or local economic conditions or adverse
             changes in industry conditions.

29   Other factors may also be indicators of impairment, including significant changes with an
     adverse effect that have taken place in the technological, market, economic or legal
     environment in which the issuer operates.
30   An entity shall assess the following financial assets individually for impairment:

             (a)    all equity instruments regardless of significance; and
             (b)    other financial assets that are individually significant.
31   An entity shall assess other financial assets (refer paragraph 30(a) of this section either
     individually or grouped on the basis of similar credit risk characteristics.

     Measurement

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32   An entity shall measure an impairment loss on the following financial assets measured at cost
     or amortised cost as follows:
             (a)    for a financial asset measured at amortised cost in accordance with paragraph
                    15(b) of this section, the impairment loss is the difference between the asset's
                    carrying amount and the present value of estimated cash flows discounted at
                    the asset's original effective interest rate. If such a financial asset has a variable
                    interest rate, the discount rate for measuring any impairment loss is the current
                    effective interest rate determined under the contract.

             (b)    for a financial asset measured at cost less impairment in accordance with
                    paragraph 15(c) of this section the impairment loss is the difference between
                    the asset's carrying amount and the best estimate (which will necessarily be an
                    approximation) of the amount (which might be zero) that the entity would
                    receive for the asset if it were to be sold at the reporting date.


     Reversal
33   If, in a subsequent period, the amount of an impairment loss decreases and the decrease can
     be related objectively to an event occurring after the impairment was recognised (such as an
     improvement in the debtor's credit rating), the entity shall reverse the previously recognised
     impairment loss either directly or by adjusting an allowance account. The reversal shall not
     result in a carrying amount of the financial asset (net of any allowance account) that exceeds
     what the carrying amount would have been had the impairment not previously been
     recognised. The entity shall recognise the amount of the reversal in profit or loss immediately.

     Fair Value
34   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).

35   An entity shall use the following hierarchy to estimate the fair value of an asset:
     (a)      the best evidence of fair value is a quoted price for an identical asset (or similar asset)
              in an active market. This is usually the current bid price.
     (b)      when quoted prices are unavailable, the price in a binding sale agreement or a recent
              transaction for an identical asset (or similar asset) in an arm's length transaction
              between knowledgeable, willing parties provides evidence of fair value. However this
              price may not be a good estimate of fair value if there has been a significant change
              in economic circumstances or a significant period of time between the date of the
              binding sale agreement, or the transaction, and the measurement date. If the entity can
              demonstrate that the last transaction price is not a good estimate of fair value (for
              example, because it reflects the amount that an entity would receive or pay in a forced
              transaction, involuntary liquidation or distress sale), then that price is adjusted.
     (c)      if the market for the asset is not active and any binding sale agreements or recent
              transactions of an identical asset (or similar asset) on their own are not a good
              estimate of fair value, an entity estimates the fair value by using another valuation
              technique. The objective of using a valuation technique is to estimate what the
              transaction price would have been on the measurement date in an arm's length
              exchange motivated by normal business considerations.
     Other sections of this Standard make reference to the fair value guidance in paragraphs 34-39
     of this section.
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      Valuation technique
36    Valuation techniques include using recent arm's length market transactions for an identical
      asset between knowledgeable, willing parties, if available, reference to the current fair value
      of another asset that is substantially the same as the asset being measured, discounted cash
      flow analysis and option pricing models. If there is a valuation technique commonly used by
      market participants to price the asset and that technique has been demonstrated to provide
      reliable estimates of prices obtained in actual market transactions, the entity uses that
      technique.

37    The objective of using a valuation technique is to establish what the transaction price would
      have been on the measurement date in an arm's length exchange motivated by normal
      business considerations. Fair value is estimated on the basis of the results of a valuation
      technique that makes maximum use of market inputs, and relies as little as possible on entity-
      determined inputs. A valuation technique would be expected to arrive at a reliable estimate of
      the fair value if
      (a)      it reasonably reflects how the market could be expected to price the asset; and
      (b)      the inputs to the valuation technique reasonably represent market expectations and
               measures of the risk return factors inherent in the asset.

      No active market
38    The fair value of investments in assets that do not have a quoted market price in an active
      market is reliably measurable if
      (a)     the variability in the range of reasonable fair value estimates is not significant for that
              asset; or
      (b)     the probabilities of the various estimates within the range can be reasonably assessed
              and used in estimating fair value.

39    There are many situations in which the variability in the range of reasonable fair value
      estimates of assets that do not have a quoted market price is likely not to be significant.
      Normally it is possible to estimate the fair value of an asset that an entity has acquired from
      an outside party. However, if the range of reasonable fair value estimates is significant and
      the probabilities of the various estimates cannot be reasonably assessed, an entity is precluded
      from measuring the asset at fair value.


Derecognition of a financial asset

40    An entity shall derecognise a financial asset only when either:

      (a)     the contractual rights to the cash flows from the financial asset expire or are settled;
      (b)     the entity transfers to another party substantially all of the risks and rewards of
              ownership of the financial asset; or
      (c)     the entity, despite having retained some significant risks and rewards of ownership,
              has transferred control of the asset to another party and the other party 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--in this case, the entity shall:

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             (i)     derecognise the asset; and
             (ii)    recognise separately any rights and obligations retained or created in the
                     transfer.

     The carrying amount of the transferred asset shall be allocated between the rights or
     obligations retained and those transferred on the basis of their relative fair values at the
     transfer date. Newly created rights and obligations shall be measured at their fair values at
     that date. Any difference between the consideration received and the amounts recognised and
     derecognised in accordance with this paragraph shall be recognised in profit or loss in the
     period of the transfer.
41   If a transfer does not result in derecognition because the entity has retained significant 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. The asset and liability shall not be offset. In subsequent periods, the entity shall
     recognise any income on the transferred asset and any expense incurred on the financial
     liability.


42   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,
             the transferor shall reclassify that asset in its Balance Sheet (for example, 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; and
     (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.




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               Example--transfer that qualifies for derecognition
               An entity sells a group of its accounts receivable to a bank at less than their face
               amount. The entity continues to handle collections from the debtors on behalf of the
               bank, including sending monthly statements, and the bank pays the entity a market-
               rate fee for servicing the receivables. The entity is obliged to remit promptly to the
               bank any and all amounts collected, but it has no obligation to the bank for slow
               payment or non-payment by the debtors. In this case, the entity has transferred to the
               bank substantially all of the risks and rewards of ownership of the receivables.
               Accordingly, it removes the receivables from its Balance Sheet (ie derecognises
               them) and it shows no liability in respect of the proceeds received from the bank. The
               entity recognises a loss calculated as the difference between the carrying amount of
               the receivables at the time of sale and the proceeds received from the bank. The
               entity recognises a liability to the extent that it has collected funds from the debtors
               but has not yet remitted them to the bank.
               Example--transfer that does not qualify for derecognition
               The facts are the same as the preceding example except that the entity has agreed to
               buy back from the bank any receivables for which the debtor is in arrears as to
               principal or interest for more than 120 days. In this case, the entity has retained the
               risk of slow payment or non-payment by the debtors--a significant risk with respect
               to receivables. Accordingly, the entity does not treat the receivables as having been
               sold to the bank, and it does not derecognise them. Instead, it treats the proceeds
               from the bank as a loan secured by the receivables. The entity continues to recognise
               the receivables as an asset until they are collected or written off as uncollectable.




Derecognition of a financial liability

43    An entity shall derecognise a financial liability (or a part of a financial liability) only when it
      is extinguished--ie when the obligation specified in the contract is discharged, is cancelled or
      expires.

44    If an existing borrower and lender exchange financial instruments with substantially different
      terms, the entities shall account for the transaction as an extinguishment of the original
      financial liability and the recognition of a new financial liability. Similarly, an entity shall
      account for 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) as an extinguishment of
      the original financial liability and the recognition of a new financial liability.

45    The entity shall recognise in profit or loss any difference between the carrying amount of the
      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.


       Example--transfer that qualifies for derecognition

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       A financial liability will be extinguished if the entity is released from settling the liability by
       process of law. Some jurisdictions have a `statute of limitations' which is a statute that sets
       out the maximum period of time, after certain events have taken place, that legal
       proceedings based on those events may be initiated. For example, if such a period was five
       years, a supplier would no longer be able to legally enforce payment by a customer if the
       supplier did not claim payment within five years from the date the goods were provided.

       Example--transfer that does not qualify for derecognition

       Payment to a third party, including a trust, where the payment is to be used solely for
       satisfying scheduled payments of both interest and principal of the outstanding debt
       (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.

       Also, if an entity pays a third party to assume an obligation and notifies its creditor that the
       third party has assumed its debt obligation, the entity does not derecognise the debt
       obligation unless is legally released from primary responsibility for the liability.




Disclosures

46    The following disclosures make reference to disclosures for financial liabilities measured at
      Fair Value through Profit or Loss. Entities that have only basic financial instruments (and
      therefore do not apply Section B) will not have any financial liabilities measured at Fair
      Value through Profit or Loss and hence will not need to provide such disclosures.


     Disclosure of accounting policies for financial instruments
47    In accordance with AS 1, Presentation of Financial Statements, an entity shall disclose, in the
      significant accounting policies, the measurement basis (or bases) used for financial
      instruments and the other accounting policies used for financial instruments that are relevant
      to an understanding of the financial statements.

     Balance Sheet--categories of financial assets and financial liabilities
48    An entity shall disclose the carrying amounts of each of the following categories of financial
      assets and financial liabilities at the reporting date, in total, either in the Balance Sheet or in
      the notes:
      (a)     financial assets measured at Fair Value through Profit or Loss (paragraph 15(a)(i) of
              this section and paragraphs 6-7 of Section B);
      (b)     financial assets that are debt instruments measured at amortised cost (paragraph 15(b)
              of this section);
      (c)     financial assets that are investments in Equity Instruments, Non-convertible
              Preference Shares and Units of Mutual Funds measured at Cost less Impairment
              (paragraph 15(a)(ii) of this section and paragraphs 6-7 of Section B);
      (d)     financial liabilities measured at Fair Value through Profit or Loss (paragraphs 6-7 of
              Section B);
      (e)     financial liabilities measured at Amortised Cost (paragraph 15(b) of this section); and


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                                                                                    ED/AS109/2018/02


      (f)     loan commitments measured at Cost less Impairment (paragraph 15(c) of this
              section).


49    An entity shall disclose information that enables users of its financial statements to evaluate
      the significance of financial instruments for its financial position and performance. For
      example, for long-term debt such information would normally include the terms and
      conditions of the debt instrument (such as interest rate, maturity, repayment schedule, and
      restrictions that the debt instrument imposes on the entity).


     Derecognition
50    If an entity has transferred financial assets to another party in a transaction that does not
      qualify for derecognition (see 40-42 of this section), the entity shall disclose the following for
      each class of such financial assets:
      (a)     the nature of the assets;
      (b)     the nature of the risks and rewards of ownership to which the entity remains exposed;
              and
      (c)     the carrying amounts of the assets and of any associated liabilities that the entity
              continues to recognise.

     Collateral
51    An entity shall disclose:
      (a)     the carrying amount of the financial assets it has pledged as collateral for liabilities or
              contingent liabilities, and
      (b)     the terms and conditions relating to its pledge.
52    When an entity holds collateral (of financial or non-financial assets) and is permitted to sell or
      repledge the collateral in the absence of default by the owner of the collateral, it shall
      disclose:
      (a)     the fair value of the collateral held;
      (b)     the fair value of any such collateral sold or repledged, and whether the entity has an
              obligation to return it; and
      (c)     the terms and conditions associated with its use of the collateral.


     Defaults and breaches on loans payable
53    For loans payable recognised at the reporting date for which there is a breach of terms or a
      default of principal, interest, sinking fund or redemption terms that have not been remedied
      by the reporting date, an entity shall disclose the following:

      (a)     details of that breach or default;
      (b)     the carrying amount of the related loans payable at the reporting date; and

      (c)     whether the breach or default was remedied, or the terms of the loans payable were
              renegotiated, before the financial statements were authorised for issue.


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     Items of income, expense, gains or losses
54    An entity shall disclose the following items of income, expense, gains or losses:

      (a)     income, expense, gains or losses, including changes in fair value, recognised on:

               (i)    financial assets measured at Fair Value through Profit or Loss;
               (ii)   financial liabilities measured at Fair Value through Profit or Loss;
               (iii) financial assets measured at Amortised Cost; and

               (iv)   financial liabilities measured at Amortised Cost.
      (b)     total interest income and total interest expense (calculated using the effective interest
              method) for financial assets or financial liabilities that are not measured at Fair Value
              through Profit or Loss; and
      (c)     the amount of any impairment loss for each class of financial asset.



Reclassification
55    An entity shall disclose if, in the current or previous reporting periods, it has reclassified any
      financial assets. For each such event, an entity shall disclose:

      (a)     the date of reclassification.

      (b)     a qualitative description of its effect on the entity's financial statements.

      (c)     the amount reclassified into and out of each category.

      (d)     for each reporting period until derecognition, the carrying amounts and fair values of
              all financial assets that have been reclassified in the current and previous reporting
              periods;




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                   Section B Other Financial Instruments


Scope of this Section

1   Section B applies to all financial instruments except the following:

      (a) Basic Financial Instruments covered by Section A.
      (b) investments in subsidiaries, associates and joint ventures that are accounted for in
          accordance with AS 110, Consolidated Financial Statements, AS 111, Joint
          Arrangements or AS 28 Investments in Associates and Joint Ventures.
      (c) employers' rights and obligations under employee benefit plans (see AS 19, Employee
          Benefits).

      (d) financial instruments that meet the definition of an entity's own equity, including the
          equity component of compound financial instruments issued by the entity (see Section C
          Liabilities and Equity).
      (e) leases within the scope of AS 17, Leases. However, Section B applies to leases that could
          result in a loss to the lessor or the lessee as a result of contractual terms that are unrelated
          to:
           (i)      changes in the price of the leased asset;
           (ii)     changes in foreign exchange rates;
           (iii)    changes in lease payments based on variable market interest rates; or

           (iv)     a default by one of the counterparties.
      (f) contracts for contingent consideration in a business combination (see AS 103 Business
          Combinations). This exemption applies only to the acquirer.
      (g) financial instruments, contracts and obligations under share-based payment transactions
          to which AS 102, Share-based Payment applies.
      (h) reimbursement assets that are accounted for in accordance with AS 37, Provisions,
          Contingent Liabilities and Contingent Assets.
2     Most contracts to buy or sell a non-financial item such as a commodity, inventory or property,
      plant and equipment are excluded from this section because they are not financial
      instruments. However, this section applies to all contracts that impose risks on the buyer or
      seller that are not typical of contracts to buy or sell non-financial items. For example, this
      section applies to contracts that could result in a loss to the buyer or seller as a result of
      contractual terms that are unrelated to changes in the price of the non-financial item, changes
      in foreign exchange rates or a default by one of the counterparties.

3     In addition to the contracts described in paragraph 2 of this section, this section applies to
      contracts to buy or sell non-financial items if the contract 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

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       expected purchase, sale or usage requirements are not financial instruments for the purposes
       of this section.


Initial recognition of financial assets and liabilities

4      An entity shall recognise a financial asset or a financial liability only when the entity becomes
       a party to the contractual terms and conditions of the instrument.

Initial measurement

5      When a financial asset or financial liability is recognised initially, an entity shall measure it at
       its fair value.


Subsequent measurement

6      At the end of each reporting period, an entity shall measure all financial instruments within
       the scope of this section at fair value and recognise changes in fair value in profit or loss.


7      If a reliable measure of fair value is no longer available without undue cost or effort, financial
       instruments within the scope of this section shall be measured at cost less impairment until it
       is able to determine a reliable measure of fair value without undue cost or effort. Its carrying
       amount at the last date the asset was reliably measurable becomes its new cost.


Fair value
[Paragraph 34-39 of Section A provides prescriptions and guidance on Fair Value Measurement]

Impairment of financial assets measured at cost

8      An entity shall apply the guidance on impairment in paragraphs 27-33 of Section A to
       financial assets measured at cost less impairment in accordance with this section. Its carrying
       amount at the last date the asset was reliably measurable becomes its new cost.



Derecognition of a financial asset or financial liability

9      An entity shall apply the derecognition requirements in paragraphs 40-45 of Section A to
       financial assets and financial liabilities to which this section applies.


Accounting for derivatives

10     The accounting for derivatives covered by this Section is based on the following key
       principles:
       (i)     (a)An entity recognises a derivate contract as per Paragraph 4 of this Section.




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         (b)A derivative contract is always measured at Fair Value through Profit or Loss
         except a derivative that is financial guarantee contract or a designated and
         effective hedging instrument.
 (ii)    If any entity decides not to use hedge accounting as described in this Section, it
         should account for its derivatives at fair value with changes in fair value being
         recognised in the profit or loss.
 (iii)   If an entity decides to apply hedge accounting as described in this Section, it
         should be able to clearly identify its risk management objective, the risk that it is
         hedging, how it will measure the derivative instrument if its risk management
         objective is being met and document this adequately at the inception of the hedge
         relationship and on an ongoing basis.
 (iv)    An entity may decide to use hedge accounting for certain derivative contracts and
         for derivatives not included as part of hedge accounting, it will apply the
         principles at (i) and (ii) above.
 (v)     Adequate disclosures of accounting policies, risk management objectives and
         hedging activities should be made in its financial statements.
 Examples of Derivatives

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 1,000 if six-month London Interbank
Offered Rate (LIBOR) or Mumbai Interbank Offered Rate (MIBOR) increases by 100 basis
points. Such a contract is a derivative even though a notional amount is not specified.

 Type of contract                              Main pricing-settlement variable
                                               (underlying variable)
 Interest rate swap                            Interest rates
 Currency swap (foreign exchange swap)         Currency rates
 Commodity swap                                Commodity prices
 Equity swap                                   Equity prices (equity of another entity)
 Credit swap                                   Credit rating, credit index or credit price
 Total return swap                             Total fair value of the reference asset and
                                               interest rates
 Purchased or written treasury bond            Interest rates
 option
 (call or put)
 Purchased or written currency option          Currency rates
 (call or put)
 Purchased or written commodity option         Commodity prices
 (call or put)
 Purchased or written stock option             Equity prices (equity of another entity)
 (call or put)
 Interest rate futures linked to government    Interest rates
 debt (treasury futures)
 Currency futures                              Currency rates

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     Commodity futures                          Commodity prices
     Interest rate forward        linked    to Interest rates
     government
     debt (treasury forward)
     Currency forward                           Currency rates
     Commodity forward                          Commodity prices
     Equity forward                             Equity prices (equity of another entity)


11   This Section does not permit synthetic accounting, i.e. combining a derivative and the
     underlying together as a single package. For instance, if any entity has a foreign currency
     borrowing that it has hedged by entering into a cross currency interest rate swap, it would
     require the entity to recognise the loan liability separately from the cross currency interest
     rate swap and not treat them as a package (synthetic accounting) as INR loan.
     Alternatively, if any entity has borrowed in terms of INR which it swaps with foreign
     currency borrowing it would not treat such a loan as a foreign currency borrowing.



Hedge Accounting
Need for hedge accounting
12   Hedge accounting may be required due to accounting mismatches in:
     (i)Measurement ­ some financial instruments (non-derivative) are not measured at fair
     value with changes being recognised in the profit or loss whereas all derivatives, which
     commonly are used as hedging instruments, are measured at fair value.
     (ii)Recognition ­ unsettled or forecast transactions that may be hedged are not recognised
     on the balance sheet or are included in the profit or loss only in a future accounting
     period, whereas all derivatives are recognised at inception.

13   An example of measurement mismatch is the hedge of interest rate risk on fixed rate debt
     instruments that are not held with the intention of trading. Another example of a
     measurement mismatch could be a derivative undertaken to hedge the price risk
     associated with recognised inventory.

14   Recognition mismatches include the hedge of a contracted or expected but not yet
     recognised sale, purchase or financing transaction in a foreign currency and future
     committed variable interest payments.

15   In order that the profit or loss reflects the effect of the hedge properly, it is necessary to
     match the recognition of gains and losses on the hedging instrument and those on the
     hedged item. Matching can be achieved in principle by delaying the recording of certain
     gains or losses on the hedging instrument or by accelerating the recording of certain gains
     and losses on the hedged item in the profit or loss. Both of these techniques are used
     while applying hedge accounting, depending on the nature of the hedging relationship.



Designation of a derivative contract as a hedging instrument



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16   An entity is permitted but not required to designate a derivative contract as a hedging
     instrument. Where it designates a derivative contract as a hedging instrument, it needs to
     document the following, as a minimum:

     (i)     identify its risk management objective;
     (ii)    demonstrate how the derivative contract helps meet that risk management
             objective;
     (iii)   specify how it plans to measure the fair value of the derivative instrument if the
             derivative contract is effective in meeting its risk management objective
             (including the relevant hedge ratio);
     (iv)    document this assessment (of points (i), (ii), (v) and (vi) of this paragraph) at
             inception of the hedging relationship and subsequently at every reporting period;
     (v)     demonstrate in cases of hedging a future cash flow that the cash flows are highly
             probable of occurring; and
     (vi)    conclude that the risk that is being hedged could impact the profit or loss.
17   In India, for a large number of derivative contracts that are undertaken in the Over The
     Counter (OTC) market, authorised dealers (generally banks) are required by the
     concerned regulator (e.g. the Reserve Bank of India (RBI)) to determine whether all or
     some of the above criteria are met before permitting an entity to enter into suc h a
     contract. The permissibility of a contract under RBI regulations, whilst persuasive, is not
     a sufficient condition to assert that it qualifies for hedge accounting under this Section.
     Certain derivative instruments that are traded on stock exchanges such as foreign
     exchange futures contracts or equity options / equity futures do not have such
     requirements and in those cases, in particular, it will be important to demonstrate
     compliance with the above criteria before hedge accounting can be applied.

18   In case a derivative contract is not classified as a hedging instrument because it does not
     meet the required criteria or an entity decides against such designation, it will be
     measured at fair value and changes in fair value will be recognised immediately in the
     profit or loss.

19   It is clarified that derivatives cannot be designated for a partial term of the derivative
     instrument. A derivative may be used in a hedging relationship relating to a portion of a
     non-financial item as long as the hedged portion is clearly identifiable and capable of
     being measured reliably. Examples of such non-financial components include exchange
     (for instance London Metal Exchange) traded prices components of metal inventory and
     crude oil components of aviation turbine fuel (ATF).

Types of hedge accounting
20   This Section recognises the following three types of hedging;
     (i) the fair value hedge accounting model is applied when hedging the risk of a fair
          value change of assets and liabilities already recognised in the balance sheet, or a
          firm commitment that is not yet recognised.
     (ii) the cash flow hedge accounting model is applied when hedging the risk of changes in
          highly probable future cash flows or a firm commitment in a foreign currency.
     (iii) the hedge of a net investment in a foreign operation.

Fair value hedge accounting model

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21   A fair value hedge seeks to offset the risk of changes in the fair value of an existing asset
     or liability or an unrecognised firm commitment that may give rise to a gain or loss being
     recognised in the profit or loss. A fair value hedge is a hedge of the exposure to changes
     in fair value of a recognised asset or liability or an unrecognised firm commitment, or an
     identified portion of such an asset, liability or firm commitment, that is attributable to a
     particular risk and could affect the profit or loss.

22   When applying fair value hedge accounting, the hedging instrument is measured at fair
     value with changes in fair value recognised in the profit or loss. The hedged item is
     remeasured to fair value in respect of the hedged risk even if normally it is measured at
     amortised cost, e.g., a fixed rate borrowing measured at amortised cost needs to be
     measured at fair value if any risk element say foreign exchange risk is designated as part
     of qualifying hedge. Any resulting adjustment to the carrying amount of the hedged item
     related to the hedged risk is recognised in the profit or loss even if normally such a
     change may not be recognised.

23   The fair value changes of the hedged item and the hedging instrument will offset and
     result in no net impact in the profit or loss except for the impact of ineffectiveness.

24   An example of a fair value hedge is the hedge of a fixed rate bond with an interest rate
     swap, changing the interest rate from fixed to floating. Another example is the hedge of
     the changes in value of inventory using commodity futures contracts.

25   The adjusted carrying amounts of the hedged assets in a fair value hedging relationship
     are subject to impairment testing under other applicable Accounting Standards such as AS
     36, Impairment of Assets, AS 2, Inventories etc.

Cash flow hedge accounting model
26   A cash flow hedge seeks to offset certain risks of the variability of cash flows in respect
     of an existing asset or liability or a highly probable forecast transaction that may be
     reflected in the profit or loss in a future period.

27   A cash flow hedge is a hedge of the exposure to variability in cash flows that (i) is
     attributable to a particular risk associated with a recognised asset or liability (such as all
     or some future interest payments on variable rate debt) or a highly probable forecast
     transaction or a firm commitment in respect of foreign currency and (ii) could affect the
     profit or loss. An example of a cash flow hedge is the hedge of future highly probable
     sales in a foreign currency using a forward exchange contract. Another example of a cas h
     flow hedge is the use of a swap to change the future floating interest payments on a
     recognised liability to fixed rate payments.

28   Under a cash flow hedge, the hedging instrument is measured at fair value, but any gain
     or loss that is determined to be an effective hedge is recognised in other comprehensive
     income as cash flow hedge reserve. This is intended to avoid volatility in the profit or loss
     in a period when the gains or losses on the hedged item are not recognised therein.

29   In order to match the gains and losses of the hedged item and the hedging instrument in
     the profit or loss, the changes in fair value of the hedging instrument recognised in other
     comprehensive income must be reclassified from other comprehensive income and
     recognised in the profit or loss at the same time that the impact from the hedged item is
     recognised (reclassified) in the profit or loss. The manner in which this is done depends
     on the nature of the hedged item:

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     (a)       if the hedged forecast transaction results in a financial asset or a financial liability
               being recognised, the gains or losses are reclassified from other comprehensive
               income as and when the asset acquired or liability incurred affects the profit or
               loss, e.g., when interest income or expense is recognised.
     (b)    if the hedged forecast transaction results in a non-financial asset or non-financial
            liability being recognised, the gains or losses are reclassified from other
            comprehensive income and included as a separate adjustment that is clubbed for
            financial statement presentation purposes with carrying amount of the asset
            acquired or liability incurred (referred to as the "basis adjustment").
     Note that in Paragraph 30(a) and (b) above, any gain or loss (or portions thereof) that is
     not expected to be recovered in future periods are reclassified from other comprehensive
     income as soon as an entity becomes aware of the fact that those amounts are not
     expected to be recovered.

30   An example of a forecast transaction that results in the recognition of a financial liability
     is a forecast issuance of a bond, which is hedged for interest rate risk using a forward -
     starting interest rate swap. The fair value gains or losses on the swap would be deferred in
     equity until the bond is issued and the swap starts, after which date they would remain in
     equity until amortised into the profit or loss over the life of the bond.

31   The basis adjustment is relevant for hedges of forecast purchases of non-financial assets
     such as inventory or property, plant and equipment. Any basis adjustment or accumulated
     balance in the hedging reserve (referred as cash flow hedge reserve) will require to be
     tested at least at every reporting date for impairment. For the purposes of this impairment
     assessment, the basis adjustment / relevant portion of the hedging reserve may be
     combined with the carrying amount of the hedged item and compared to its current
     realisable value.

Net investment hedging
32   An investor in a non-integral operation is exposed to changes in the carrying amount of
     the net assets of the foreign operation (the net investment) arising from the translation of
     those assets into the reporting currency of the investor.
33   Principles relating to the hedge of a net investment in a foreign operation are:
        (a) foreign exchange gains or losses on a net investment in a non-integral foreign
             operation are recognised in other comprehensive income. This occurs through the
             translation of the non-integral foreign operatio n's net assets for purposes of
             consolidation;
           (b) gains or losses on foreign currency derivatives used as hedging instruments are
               recognised in other comprehensive income to the extent that the hedge is
               considered to be effective;
           (c) the ineffective portion of the gains or losses on the hedging instruments (and any
               proportion not designated in the hedging relationship) is recognised in the profit
               or loss immediately;
           (d) any net deferred foreign currency gains or losses, i.e., arising from both the net
               investment and the hedging instruments are recognised in the profit or loss at the
               time of disposal of the foreign operation.
34   When the net investment is disposed off, the cumulative amount in the foreign currency
     translation reserve in other comprehensive income is transferred to the profit or loss as
     reclassification adjustment. Therefore, it is necessary for an entity to keep track of the
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      amount recognised in other comprehensive income separately in respect of each foreign
      operation, in order to identify the amounts to be transferred to the profit or loss on
      disposal.

Formal documentation at inception
35    At inception of a hedge, formal documentation of the hedge relationship must be
      established. The hedge documentation prepared at inception of the hedge must include a
      description of the following:
      (i) the entity's risk management objective and strategy for undertaking the hedge;
      (ii)    the nature of the risk being hedged;
      (iii)   clear identification of the hedged item (asset, liability or cash flows) and the
              hedging instrument;
      (iv)    demonstrate how the derivative contract helps meet that risk management
              objective;
      (v)     indentify how it plans to measure the derivative if the derivative contract is
              effective in meeting its risk management objective;
      (vi)    demonstrate in cases of hedging a future cash flow that the cash flows are highly
              probable of occurring; and
      (vii)   conclude that the risk that is being hedged could impact the profit or loss.



36    A hedging relationship is effective if it meets all of the following requirements:

      (i)     There is an economic relationship between the hedged item and the hedging
              instrument.
      (ii)    The effect of credit risk does not dominate the value changes that result from that
              economic relationship.
37     The hedging relationship is expected to be highly effective in achieving the stated risk
      management objective and the entity is in a position to reliably measure the achievement
      of this objective both at inception and on an ongoing basis during the tenure of the
      hedging relationship.

Hedge effectiveness testing and measurement of ineffectiveness
38    There is normally a single fair value measure for a hedging instrument in its entirety, and
      the factors that cause changes in fair value are co-dependent. Thus, a hedging relationship
      is designated by an entity for a hedging instrument in its entirety. 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
              excluding change in its time value; and
      (b)     separating the interest element and the spot price of a forward contract.
39    An entity may consider the costs associated with a hedging instrument e.g. forward
      premium or time value of an option contract as a period cost (for example akin to interest
      costs when hedging an interest bearing asset or liability) or at a point in time (for example
      when hedging a forecasted sale or purchase) depending on the manner of designation and
      how the hedged item impacts the profit or loss.
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40   This Section does not prescribe any specific method for how hedge effectiveness testing
     and ineffectiveness measurement should be conducted. The appropriate method for each
     entity will depend on the facts and circumstances relevant to each hedging programme
     and be driven by the risk management objective of the entity. Entities may apply
     commonly used measures such as critical terms match, dollar offset or regression
     methods as appropriate to assess hedge effectiveness.

41   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. This Section does
     not prescribe bright line tests for effectiveness assessments but instead requires disclosure
     of the entity's risk management objectives and measures for assessing if these objectives
     are met.

42   When designating a hedging relationship, and on an ongoing basis, an entity will analyse
     the sources of hedge ineffectiveness that are expected to affect the hedging relationship
     during its term. This analysis will serve as the basis for the entity's assessment of meetin g
     the hedge effectiveness requirements.

43   A hedging relationship will meet the hedge effectiveness requirements if:
     (i)    there is an economic relationship between the hedged item and the hedging
            instrument.
     (ii)    the effect of credit risk does not dominate the value changes that result from the
             economic relationship.
     (iii)   the hedge ratio of the hedging relationship is the same as that resulting from the
             quantities of:
                     the hedged item that the entity actually hedges; and
                     the hedging instrument that the entity actually uses to hedge that quantity
                     of hedged item; and
             For example - 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.
     (iv)    the hedged item and the hedging instrument are not intentionally weighted to
             create hedge ineffectiveness - whether or not it is recognised - to achieve an
             accounting outcome that would be inconsistent with the purpose of hedge
             accounting.
44   An entity will assess at the inception of the hedging relationship, and on an ongoing
     basis, whether a hedging relationship meets the hedge effectiveness requirements. At a

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      minimum, an entity should 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.

45    If the critical terms of the hedging instrument and the hedged item - e.g. the nominal
      amount, maturity and underlying - match or are closely aligned, then it may be possible to
      use a qualitative methodology to determine that an economic relationship exists between
      the hedged item and the hedging instrument.

46    If a hedging relationship ceases to meet the hedge effectiveness requirement relating to
      the hedge ratio but the risk management objective for that designated hedging
      relationship remains the same, an entity should adjust the hedge ratio of the hedging
      relationship so that it meets the qualifying criteria again.

47    This Section does not also prescribe a single method of how ineffectiveness measurement
      should be conducted other than to require an entity to consider how ineffectiveness could
      affect a hedging relationship and require immediate recognition of such ineffectiveness.

48    Hedge ineffectiveness is measured based on the actual performance of the hedging
      instrument and the hedged item, by comparing the changes in their values in currency unit
      amounts.

49    When measuring hedge ineffectiveness, an entity is required to 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.

50    In certain situations, ineffectiveness is required to be recognised. These in clude
      (a) in a cash flow hedge, when the forecasted hedged transaction is no longer probable of
          occurring;
      (b) in a fair value hedge, when the hedging instrument is no longer considered to be an
          effective hedge of the hedging instrument; and
      (c) in any hedge relationship, if the risk management objective is changed or no longer
          expected to be met.
      The recognition of ineffectiveness does not necessarily require hedge accounting to be
      discontinued if the risk management objective and criteria set out by the entity for th e
      specific hedge relationship continues to be met.



Termination of hedge accounting / reclassification of hedge reserves
51    An entity is not permitted to stop applying hedge accounting voluntarily unless the risk
      management objective of the entity, as was originally defined by the entity when first
      applying hedge accounting, is no longer met.

52    If an entity terminates a hedging instrument prior to its maturity / contractual term, hedge
      accounting is discontinued prospectively. Any amount previously recognised in the hedge
      reserve (in the case of cash flow or net investment hedges) is reclassified into the profit or
      loss only in the period when the hedged item impacts earnings, e.g., when a forecasted
      purchase / sale actually impacts earnings or when a net investment is disposed off in the
      case of a net investment hedge.
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53   In case of hedges of highly probable forecast transactions or commitments, if the
     forecasted transaction is no longer highly probable of occurring, (but still probable of
     occurring) then hedge accounting is discontinued prospectively but the amount
     recognised previously in the hedge reserve is reclassified into the profit or loss only in the
     period when the hedged item impacts earnings (as specified in paragraph 30). `Probable'
     for the purpose of this assessment is based on whether the forecasted transaction is `more
     likely than not' of occurring.

54   In case of hedges of forecast transactions, if the forecasted transaction is no longer
     probable of occurring, then hedge accounting is discontinued and all amounts recognised
     in the hedge reserve are recognised immediately in the profit or loss . `Probable' for the
     purpose of this assessment is based on whether the forecasted transaction is `more likely
     than not' of occurring. Judgment may need to be exercised in situations where a
     forecasted transaction is delayed to determine if the delayed transaction is the one that
     was subject to the original hedging designation or not. This Section does not provide a
     bright line test in this context but recognises that judgment is required and an entity
     should disclose the manner in which such determinations are made in its financial
     statements.



Disclosures

55   An entity applying this section shall make all of the disclosures required in Section A
     incorporating in those disclosures financial instruments that are within the scope of this
     section as well as those within the scope of Section A.

56   An entity should disclose the methodology used to arrive at the fair value of financial
     instruments measured at fair value in the profit or loss.


Hedge Accounting and Financial Risk Management

57   An entity should satisfy the broader disclosure requirements by describing its overall
     financial risk management objectives, including its approach towards managing financial
     risks. Disclosures should explain what the financial risks are, how the entity manages the
     risk and why the entity enters into various derivative contracts to hedge the risks.

58   The entity should disclose its risk management policies. This would include the hedging
     strategies used to mitigate financial risks. This may include a discussion of:
     (a)     how specific financial risks are identified, monitored and measured;
     (b)      what specific types of hedging instruments are entered into and how these
              instruments modify or eliminate risk; and
     (c)      details of the extent of transactions that are hedged.

59   An entity is also required to make specific disclosures about its outstanding hedge
     accounting relationships. The following disclosures are made separately for fair value
     hedges, cash flow hedges and hedges of net investments in foreign operations:
     (a) a description of the hedge;
     (b) a description of the financial instruments designated as hedging instruments for the
         hedge and their fair values at the balance sheet date;
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     (c) the nature of the risks being hedged;
     (d) for hedges of forecast transactions, the periods in which the transactions are expected
         to occur, when they are expected to affect the profit or loss, and a description of any
         forecast transactions that were originally hedged but now are no longer expected to
         occur. This Section does not specify the future time bands for which the disclosures
         should be made. Entities should decide on appropriate groupings based on the
         characteristics of the forecast transactions;
     (e) if a gain or loss on derivative or non-derivative financial assets and liabilities
         designated as hedging instruments in cash flow hedges has been directly recognised
         in the hedge reserve: -
          (i) the amount recognised in hedge reserve during the period.
          (ii) the amount reclassified from the hedge reserve and reported in profit or loss.
          (iii) the amount reclassified from hedge reserve and added to the initial measurement
                of the acquisition cost or other carrying amount of a non-financial asset or non-
                financial liability in a hedged forecast transaction.
     (f) a breakup of the balance in the hedge reserve between realised and unrealised
         components and a reconciliation of the opening balance to the closing balance for
         each reporting period.


60   Insofar as disclosure of derivatives designated for hedging foreign currency risks are
     concerned, the same should be disclosed in the Format attached as Appendix B to this
     standard, which also requires disclosure of all foreign exchange assets and liabilit ies
     including contingent liabilities, both hedged and unhedged.

61   The Appendix C to this Standard contains examples illustrating the principles contained
     in this Section.




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                              Section C Liabilities and Equity
Scope of this section

1     This section establishes principles for classifying financial instruments as either liabilities or
      equity and addresses accounting for equity instruments issued to individuals or other parties
      acting in their capacity as investors in equity instruments (ie in their capacity as owners).


2     This section shall be applied when classifying all types of financial instruments except:


      (a)    those interests in subsidiaries, associates and joint ventures that are accounted for in
             accordance with AS 110, Consolidated Financial Statements, AS 28, Investments in
             Associates and Joint Ventures or AS 111, Joint Arrangements.
      (b)    employers' rights and obligations under employee benefit plans, to which AS 19,
             Employee Benefits applies.
      (c)    contracts for contingent consideration in a business combination (see AS 103,
             Business Combinations). This exemption applies only to the acquirer.
      (d)    financial instruments, contracts and obligations under share-based payment
             transactions to which AS 102 applies, except that paragraphs 6-9 of this section shall
             be applied to treasury shares purchased, sold, issued or cancelled in connection with
             employee share option plans, employee share purchase plans and all other share-based
             payment arrangements.




Classification of a financial instrument as liability or equity

3     Equity is the residual interest in the assets of an entity after deducting all its liabilities. A
      liability is a present obligation of the entity arising from past events, the settlement of which
      is expected to result in an outflow from the entity of resources embodying economic benefits.
      Equity includes investments by the owners of the entity, plus additions to those investments
      earned through profitable operations and retained for use in the entity's operations, minus
      reductions to owners' investments as a result of unprofitable operations and distributions to
      owners.


4     An entity shall classify a financial instrument as a financial liability or as equity in
      accordance with the substance of the contractual arrangement, not merely its legal form, and
      in accordance with the definitions of a financial liability and an equity instrument. Unless an
      entity has an unconditional right to avoid delivering cash or another financial asset to settle a
      contractual obligation, the obligation meets the definition of a financial liability, and is
      classified as such, except for those instruments classified as equity instruments in accordance
      with paragraph 5.




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5   Some financial instruments that meet the definition of a liability are classified as equity
    because they represent the residual interest in the net assets of the entity:

    (a)   a puttable instrument is a financial instrument that gives the holder the right to sell that
          instrument back to the issuer for cash or another financial asset or is automatically
          redeemed or repurchased by the issuer on the occurrence of an uncertain future event or
          the death or retirement of the instrument holder. A puttable instrument that has all of
          the following features is classified as an equity instrument:
          (i)     it entitles the holder to a pro rata share of the entity's net assets in the event of
                  the entity's liquidation. The entity's net assets are those assets that remain after
                  deducting all other claims on its assets.

          (ii)    the instrument is in the class of instruments that is subordinate to all other
                  classes of instruments.
          (iii)   all financial instruments in the class of instruments that is subordinate to all
                  other classes of instruments have identical features.

          (iv)    apart from the contractual obligation for the issuer to repurchase or redeem the
                  instrument for cash or another financial asset, the instrument does not include
                  any contractual obligation to deliver cash or another financial asset to another
                  entity, or to exchange financial assets or financial liabilities with another entity
                  under conditions that are potentially unfavourable to the entity, and it is not a
                  contract that will or may be settled in the entity's own equity instruments.

          (v)     the total expected cash flows attributable to the instrument over the life of the
                  instrument are based substantially on the profit or loss, the change in the
                  recognised net assets or the change in the fair value of the recognised and
                  unrecognised net assets of the entity over the life of the instrument (excluding
                  any effects of the instrument).

    (b)   instruments, or components of instruments, that are subordinate to all other classes of
          instruments are classified as equity if they impose on the entity an obligation to deliver
          to another party a pro rata share of the net assets of the entity only on liquidation.

6   The following are examples of instruments that are classified as liabilities instead of equity:
    (a)   an instrument is classified as a liability if the distribution of net assets on liquidation is
          subject to a maximum amount (a ceiling). For example, if on liquidation the holders of
          the instrument receive a pro rata share of the net assets, but this amount is limited to a
          ceiling and the excess net assets are distributed to a charity organisation or the
          government, the instrument is not classified as equity.
    (b)   a puttable instrument is classified as equity if, when the put option is exercised, the
          holder receives a pro rata share of the net assets of the entity measured in accordance
          with this Standard. However, if the holder is entitled to an amount measured on some
          other basis, the instrument is classified as a liability.


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      (c)     an instrument is classified as a liability if it obliges the entity to make payments to the
              holder before liquidation, such as a mandatory dividend.

      (d)     a puttable instrument that is classified as equity in a subsidiary's financial statements is
              classified as a liability in its parent entity's consolidated financial statements.
      (e)     a preference share that provides for mandatory redemption by the issuer for a fixed or
              determinable amount at a fixed or determinable future date, or gives the holder the right
              to require the issuer to redeem the instrument at or after a particular date for a fixed or
              determinable amount, is a financial liability.



7     Interest, dividends and other returns relating to financial instruments classified as financial
      liabilities are expenses. Distributions to holders of equity instruments are recognised directly
      in equity.


Members' shares in co-operative entities and similar instruments
8     Members' shares in co-operative entities and similar instruments are equity if:

            (a)   the entity has an unconditional right to refuse redemption of the members' shares;
                  or
            (b)   redemption is unconditionally prohibited by local law, regulation or the entity's
                  governing charter. However, provisions in local law, regulation or the entity's
                  governing charter that prohibit redemption only if conditions--such as liquidity
                  constraints--are met (or are not met) do not result in members' shares being equity.


9     An unconditional prohibition may be partial if redemption would cause the number of
      members' shares or amount of paid-in capital from members' shares to fall below a specified
      level. Members' shares in excess of the prohibition against redemption are liabilities, unless
      the entity has the unconditional right to refuse redemption. In some cases, the number of
      shares or the amount of paid-in capital subject to a redemption prohibition may change from
      time to time. Such a change in the redemption prohibition leads to a transfer between
      financial liabilities and equity.


Original issue of shares or other equity instruments

10    An entity shall recognise the issue of shares or other equity instruments as equity when it
      issues those instruments and another party is obliged to provide cash or other resources to the
      entity in exchange for the instruments:
     (a)      if the equity instruments are issued before the entity receives the cash or other
              resources, the entity shall present the amount receivable as an offset to equity in its
              Balance Sheet, not as an asset. Eg, subscriber to Memorandum of Association (MoA);




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     (b)    if the entity receives the cash or other resources before the equity instruments are
            issued, and the entity cannot be required to repay the cash or other resources received,
            the entity shall recognise the corresponding increase in equity to the extent of
            consideration received; and

     (c)    to the extent that the equity instruments have been subscribed for but not issued, and the
            entity has not yet received the cash or other resources, the entity shall not recognise an
            increase in equity.
11    An entity shall measure equity instruments, other than those issued as part of a business
      combination or those accounted for in accordance with paragraphs 15-16 of this section, at
      the fair value of the cash or other resources received or receivable, net of transaction costs.

12    An entity shall account for the transaction costs of an equity transaction as a deduction from
      equity. Income tax relating to the transaction costs shall be accounted for in accordance with
      AS 12, Income Taxes.


Sale of options, rights and warrants

13    An entity shall apply the principles in paragraphs 10-12 of this section to equity issued by
      means of sales of options, rights, warrants and similar equity instruments.

Capitalisation or bonus issues of shares and share splits

14    A capitalisation or bonus issue (sometimes referred to as a stock dividend) is the issue of new
      shares to shareholders in proportion to their existing holdings. For example, an entity may
      give its shareholders one dividend or bonus share for every five shares held. A share split
      (sometimes referred to as a stock split) is the dividing of an entity's existing shares into
      multiple shares. For example, in a share split, each shareholder may receive one additional
      share for each share held. In some cases, the previously outstanding shares are consolidated or
      cancelled and replaced by new shares. Share consolidation is combining entity's multiple
      shares into fewer number of shares. Capitalisation and bonus issues and share splits do not
      change total equity. An entity shall reclassify amounts within equity as required by applicable
      laws.


Convertible debt or similar compound financial instruments

15    On issuing convertible debt or similar compound financial instruments that contain both a
      liability and an equity component, an entity shall allocate the proceeds between the liability
      component and the equity component. To make the allocation, the entity shall first determine
      the amount of the liability component as the fair value of a similar liability that does not have
      a conversion feature or similar associated equity component. The entity shall allocate the
      residual amount as the equity component. Transaction costs shall be allocated between the
      debt component and the equity component on the basis of their relative proceeds.



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16    The entity shall not revise the allocation in a subsequent period.

17    In periods after the instruments were issued, the entity shall account for the liability
      component:

      (a)    in accordance with Section A Basic Financial Instrument if the liability component
             meets the conditions in paragraph 8 of section A, the entity shall systematically
             recognise any difference between the liability component and the principal amount
             payable at maturity as additional interest expense using the effective interest method
             (see paragraphs 16-21 of section A).

      (b)    in accordance with Section B Other Financial Instruments if the liability component
             does not meet the conditions in paragraph 8 of section A.

Extinguishing financial liabilities with equity instruments

18    An entity may renegotiate the terms of a financial liability with a creditor of the entity with
      the result that the entity extinguishes the liability fully or partially by issuing equity
      instruments to the creditor. Issuing equity instruments constitutes consideration paid in
      accordance with paragraph 45 of section A. An entity shall measure the equity instruments
      issued at their fair value. However, if the fair value of the equity instruments issued cannot be
      measured reliably without undue cost or effort, the equity instruments shall be measured at
      the fair value of the financial liability extinguished. An entity shall derecognise the financial
      liability, or part of the financial liability, in accordance with paragraphs 43-45 of section A.


19    If part of the consideration paid relates to a modification of the terms of the remaining part of
      the liability, the entity shall allocate the consideration paid between the part of the liability
      extinguished and the part that remains outstanding. This allocation should be made on a
      reasonable basis. 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 44 of section A.


20    An entity shall not apply paragraphs 18-19 of this section to transactions in situations in
      which:
       (a)      the creditor is also a direct or indirect shareholder and is acting in its capacity as a
                direct or indirect existing shareholder;
       (b)      the creditor and the entity are controlled by the same party or parties before and
                after the transaction and the substance of the transaction includes an equity
                distribution by, or contribution to, the entity; or
       (c)      extinguishing the financial liability by issuing equity instruments is in accordance
                with the original terms of the financial liability (see paragraphs 15-17 of this
                section).




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Treasury shares

21   Treasury shares are the equity instruments of an entity that have been issued and subsequently
     reacquired by the entity. An entity shall deduct from equity the fair value of the consideration
     given for the treasury shares. The entity shall not recognise a gain or loss in profit or loss on
     the purchase, sale, issue or cancellation of treasury shares.


Distributions to owners

22   An entity shall reduce equity for the amount of distributions to its owners (holders of its
     equity instruments). Income tax relating to distributions to owners shall be accounted for in
     accordance with AS 12.

23   Sometimes an entity distributes assets other than cash to its owners (`non-cash distributions').
     When an entity declares such a distribution and has an obligation to distribute non-cash assets
     to its owners, it shall recognise a liability. It shall measure the liability at the fair value of the
     assets to be distributed unless it meets the conditions in paragraph 24 of this section. At the
     end of each reporting period and at the date of settlement, the entity shall review and adjust
     the carrying amount of the dividend payable to reflect changes in the fair value of the assets
     to be distributed, with any changes recognised in equity as adjustments to the amount of the
     distribution. When an entity settles the dividend payable, it shall recognise in profit or loss
     any difference between the carrying amount of the assets distributed and the carrying amount
     of the dividend payable.

24   If the fair value of the assets to be distributed cannot be measured reliably without undue cost
     or effort, the liability shall be measured at the carrying amount of the assets to be distributed.
     If prior to settlement the fair value of the assets to be distributed can be measured reliably
     without undue cost or effort, the liability is remeasured at fair value with a corresponding
     adjustment made to the amount of the distribution and accounted for in accordance with
     paragraph 23 of this section.


25   Paragraphs 23-24 of this section do not apply to the distribution of a non-cash asset that is
     ultimately controlled by the same party or parties before and after the distribution. This
     exclusion applies to the separate, individual and consolidated financial statements of an entity
     that makes the distribution.

Non-controlling interest and transactions in shares of a consolidated
subsidiary

26   In consolidated financial statements, a non-controlling interest in the net assets of a subsidiary
     is included in equity. An entity shall treat changes in a parent's controlling interest in a
     subsidiary that do not result in a loss of control as transactions with owners in their capacity
     as owners. Accordingly, the carrying amount of the non-controlling interest shall be adjusted
     to reflect the change in the parent's interest in the subsidiary's net assets. Any difference
     between the amount by which the non-controlling interest is so adjusted and the fair value of


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     the consideration paid or received, if any, shall be recognised directly in equity and attributed
     to owners of the parent. An entity shall not recognise gain or loss on these changes. Also, an
     entity shall not recognise any change in the carrying amounts of assets (including goodwill)
     or liabilities as a result of such transactions.







Disclosures

27   If the fair value of the assets to be distributed as described in paragraphs 23-24 of this section
     cannot be measured reliably without undue cost or effort, the entity shall disclose that fact and
     the reasons why a reliable fair value measurement would involve undue cost or effort.


28   In case of Members' Shares in Co-operative Entities and Similar Instruments, when a change
     in the redemption prohibition leads to a transfer between financial liabilities and equity, the
     entity shall disclose separately the amount, timing and reason for the transfer.




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Appendix to Section C
Example of the issuer's accounting for convertible debt
The Appendix accompanies, but is not part of, Section C. It provides guidance for applying
the requirements of paragraphs 15-17 of section C.


On 1 April 20X5 an entity issues 500 convertible bonds. The bonds are issued at par with a
face value of 100 per bond and are for a five-year term, with no transaction costs. The total
proceeds from the issue are 50,000. Interest is payable annually in arrears at an annual
interest rate of 4 per cent. Each bond is convertible, at the holder's discretion, into 25
ordinary shares at any time up to maturity. At the time the bonds are issued, the market
interest rate for similar debt that does not have the conversion option is 6 per cent.


When the instrument is issued, the liability component must be valued first, and the difference
between the total proceeds on issue (which is the fair value of the instrument in its entirety)
and the fair value of the liability component is assigned to the equity component. The fair
value of the liability component is calculated by determining its present value using the
discount rate of 6 per cent. These calculations and journal entries are illustrated:


                                                                            
    Proceeds from the bond issue (A)                                       50,000

    Present value of principal at the end of five years
    (see calculations)                                                     37,363
    Present value of interest payable annually in arrears for five
    years                                                                   8,425
    Present value of liability, which is the fair value of liability
    component (B)                                                          45,788
    Residual, which is the fair value of the equity component (A) ­
    (B)                                                                     4,212

The issuer of the bonds makes the following journal entry at issue on 1 April 20X5:

               Dr Cash                                                 50,000
               Cr Financial Liability ­ Convertible bond                        45,788
               Cr Equity                                                        4,212

The 4,212 represents a discount on issue of the bonds, so the entry could also be shown
`gross':

               Dr Cash                                                 50,000
               Dr Bond discount                                        4,212
               Cr Financial Liability ­ Convertible bond                         50,000
               Cr Equity                                                         4,212


After issue, the issuer will amortise the bond discount according to the following table:



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                          (a)          (b)             (c)           (d)            (e)
                     Interest               Amortisation          Bond
                    payment Total interest              of    discount Net liability
                                                    bond     ( ) = (d) ­ ( ) = 50,000 ­
                         ( )      expense       discount             (c)            (d)
                              ( ) = 6% ×
                                       (e) ( ) = (b) ­ (a)
1/1/20X5                                                          4,212         45,788
31/12/20X5             2,000         2,747            747         3,465         46,535
31/12/20X6             2,000         2,792            792         2,673         47,327
31/12/20X7             2,000         2,840            840         1,833         48,167
31/12/20X8             2,000         2,890            890           943         49,057
31/12/20X9             2,000         2,943            943             0         50,000
Totals                10,000        14,212          4,212


At the end of 20X5, the issuer would make the following journal entry:

          Dr Interest expense                                                2,747
          Cr Bond discount                                                            747
          Cr Cash                                                                    2,000

Calculations
Present value of principal of  50,000 at 6 per cent
 50,000/(1.06)^5 =  37,363
Present value of the interest annuity of  2,000 (=  50,000 × 4 per cent) payable at the end
of each of five years
The  2,000 annual interest payments are an annuity--a cash flow stream with a limited
number (n) of periodic payments (C), receivable at dates 1 to n. To calculate the present value
of this annuity, future payments are discounted by the periodic rate of interest (i) using the
following formula:

 PV= C x [1- 1             ]
    i     (1+i)^n

Therefore, the present value of the  2,000 interest payments is
(2,000/.06) × [1 ­ [(1/1.06)^5] =  8,425

This is equivalent to the sum of the present values of the five individual  2,000 payments, as
follows:

                                                                                          
         Present value of interest payment at 31 March 20X5 = 2,000/1.06              1,887
         Present value of interest payment at 31 March 20X6 = 2,000/1.06^2            1,780
         Present value of interest payment at 31 March 20X7 = 2,000/1.06^3            1,679
         Present value of interest payment at 31 March 20X8 = 2,000/1.06^4            1,584
         Present value of interest payment at 31 March 20X9 = 2,000/1.06^5            1,495
         Total                                                                        8,425


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Yet another way to calculate this is to use a table of present value of an ordinary annuity in
arrears, five periods, interest rate of 6 per cent per period. (Such tables are easily found on the
Internet.) The present value factor is 4.2124. Multiplying this by the annuity payment of 
2,000 determines the present value of  8,425.




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Appendix A
Defined terms

This appendix is an integral part of the Standard.



Amortised cost of a financial        The amortised cost of a financial asset or financial liability is the amount
asset or financial liability         at which the financial asset or financial liability is measured at initial
                                     recognition minus 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 minus any
                                     reduction (directly or through the use of an allowance account) for
                                     impairment.



Compound financial instrument       A financial instrument that, from the issuer's perspective, contains both a
                                    liability and an equity element.

Derivative                          A derivative is a financial instrument or other contract with all three of the
                                    following characteristics:

                                    · its value changes in response to the change in 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 (sometimes called the "underlying");
                                    · it requires no initial net investment or an initial 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; and
                                    · it is settled at a future date.


Effective interest method           A method of calculating the amortised cost of a financial asset or a financial
                                    liability (or a group of financial assets or financial liabilities) and of
                                    allocating the interest income or interest expense over the relevant period.

Effective interest rate             The rate that discounts estimated future cash payments or receipts through
                                    the expected life of the financial instrument or, when appropriate, a shorter
                                    period to the net carrying amount of the financial asset or financial liability.

Equity instrument                   An equity instrument is any contract that evidences a residual interest in the
                                    assets of an entity after deducting all of its liabilities.

Fair Value                          The amount for which an asset could be exchanged, a liability settled, or an
                                    equity instrument granted could be exchanged, between knowledgeable,
                                    willing parties in an arm's length transaction.

Financial Asset                     A financial asset is any asset that is:

                                    (a) cash;
                                    (b) an equity instrument of another entity;
                                    (c) a contractual right:
                                         (i) to receive cash or another financial asset from another entity; or




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                            (ii) to exchange financial assets or financial liabilities with another
                                 entity under conditions that are potentially favourable to the entity;
                                 or
                       (d) a contract that will or may be settled in the entity's own equity
                           instruments and is:
                            (i) a non-derivative for which the entity is or may be obliged to
                                receive a variable number of the entity's own equity instruments;
                                or
                            (ii) a derivative that will or may be settled other than by the exchange
                                 of a fixed amount of cash or another financial asset for a fixed
                                 number of the entity's own equity instruments. For this purpose the
                                 entity's own equity instruments do not include puttable financial
                                 instruments classified as equity instruments in accordance with
                                 paragraphs 5-6 of section C, instruments that impose on the entity
                                 an obligation to deliver to another party a pro rata share of the net
                                 assets of the entity only on liquidation and are classified as equity
                                 instruments in accordance with paragraphs 5-6 of section C, or
                                 instruments that are contracts for the future receipt or delivery of
                                 the entity's own equity instruments.
Financial Instrument   A financial instrument is any contract that gives rise to a financial asset of
                       one entity and a financial liability or equity instrument of another entity.

Financial Liability    A financial liability is any liability that is:

                       (a) a contractual obligation :
                            (i) to deliver cash or another financial asset to another entity; or
                            (ii) to exchange financial assets or financial liabilities with another
                                 entity under conditions that are potentially unfavourable to the
                                 entity; or
                       (b) a contract that will or may be settled in the entity's own equity
                           instruments and is:
                            (i) a non-derivative for which the entity is or may be obliged to deliver
                                a variable number of the entity's own equity instruments; or
                            (ii) a derivative that will or may be settled other than by the exchange
                                 of a fixed amount of cash or another financial asset for a fixed
                                 number of the entity's own equity instruments. For this purpose,
                                 rights, options or warrants to acquire a fixed number of the entity's
                                 own equity instruments for a fixed amount of any currency are
                                 equity instruments if the entity offers the rights, options or warrants
                                 pro rata to all of its existing owners of the same class of its own
                                 non-derivative equity instruments. Apart from the aforesaid, the
                                 equity conversion option embedded in a convertible bond
                                 denominated in foreign currency to acquire a fixed number of the
                                 entity's own equity instruments is an equity instrument if the
                                 exercise price is fixed in any currency. Also, for these purposes the
                                 entity's own equity instruments do not include puttable financial
                                 instruments that are classified as equity instruments in accordance
                                 with paragraphs 5-6 of section C, instruments that impose on the
                                 entity an obligation to deliver to another party a pro rata share of
                                 the net assets of the entity only on liquidation and are classified as
                                 equity instruments in accordance with paragraphs 5-6 of section C,
                                 or instruments that are contracts for the future receipt or delivery of
                                 the entity's own equity instruments.




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                           As an exception, an instrument that meets the definition of a financial
                           liability is classified as an equity instrument if it has all the features and
                           meets the conditions in paragraphs 5-6 of section C.
Firm Commitment        A firm commitment is a binding agreement for the exchange of a specified
                       quantity of resources at a specified future date or dates.

Forecast transaction   A forecast transaction is an uncommitted but anticipated future transaction.

Hedge Effectiveness    Hedge effectiveness is the degree to which changes in the fair value or cash
                       flows of the hedged item that are attributable to a hedged risk are offset by
                       changes in the fair value or cash flows of the hedging instrument.

Hedging Instrument     A hedging instrument is a designated derivative whose fair value or cash
                       flows are expected to offset changes in the fair value or cash flows, of a
                       designated hedged item. For the purposes of applying hedging in
                       consolidated financial statements, the counterparty of a derivative
                       instrument needs to be outside the consolidated group.

Hedged Item            A hedged item is an asset, liability, firm commitment, highly probable
                       forecast transaction or net investment in a foreign operation that (a) exposes
                       the entity to risk of changes in fair value or future cash flows and (b) is
                       designated as being hedged. A hedged item could also be a portfolio or
                       group of identified assets, liabilities, firm commitments, highly probable
                       forecast transactions or net investments in foreign operations.

Hedge Ratio            The ratio between the hedging instrument(s) and the hedged item(s) that is
                       maintained during the course of a hedging relationship.

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).
Puttable instrument    A puttable instrument is a financial instrument that gives the holder the right
                       to put the instrument back to the issuer for cash or another financial asset or
                       is automatically put back to the issuer on the occurrence of an uncertain
                       future event or the death or retirement of the instrument holder.




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 Appendix B
 Format for Disclosure of Foreign Currency Exposures
 Exposures in Foreign Currency:
I. Assets             Foreign              Current Year                       Previous Year
                     Currency   Exchange     Amount in    Amount   Exchange     Amount in     Amount
                                  Rate         Foreign     in `      Rate         Foreign      in `
                                              currency                           currency


Receivables (trade
& other)
Other Monetary
assets (e.g.
ICDs/Loans given
in FC)
Total Receivables
(A)
Hedges by
derivative
contracts (B)
Unhedged
receivables
(C=A-B)


II. Liabilities       Foreign              Current Year                       Previous Year
                     Currency   Exchange     Amount in    Amount   Exchange     Amount in     Amount
                                  Rate         Foreign     in `      Rate         Foreign      in `
                                              currency                           currency
Payables (trade &
other)
Borrowings (ECB
and Others)
Total Payables
(D)
Hedges by
derivative
contracts (E)
Unhedged
Payables
F=D-E)




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III. Contingent     Foreign              Current Year                       Previous Year
Liabilities and    Currency   Exchange     Amount in    Amount   Exchange     Amount in     Amount
Commitments                     Rate         Foreign     in `      Rate         Foreign      in `
                                            currency                           currency
Contingent
Liabilities
Commitments
Total (G)
Hedges by
derivative
contracts (H)
Unhedged
Payables (I=G-H)


Total unhedged
FC Exposures
(J=C+F+I)

 Explanatory notes:
 Note 1: Exposures in Assets and Liabilities to be presented currency wise.
 Note 2: Exposure in any foreign currency(s) which are not material may be aggregated.
         However, any currency in which exposure is more than 10% of the total
         exposure should be reported separately; at least 75% of total exposure should
         be reported currency wise.
 Note 3: Additional disclosures of any foreign currency exposure in an asset not hedged
         by an entity on the ground that the same is covered by a corresponding foreign
         currency exposure in a liability and vice versa, to the extent having same
         maturity date and the amount (known as `natural hedge') may be made in the
         notes.




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Appendix C
Illustrative examples of application of AS 109
1.    Application of cash flow hedge
ABC Ltd. is an exporter of goods. In the month of July 2013, it receives the order for
supply of goods to US customers in the month of January 2014 and as per the payment
cycle with the customers, it expects to realise USD 100,000 in April 2014.
ABC Ltd has decided to fully hedge the sales from foreign currency risk. Immediately
after getting the order, to hedge the firm commitment in foreign currency it enters into a
derivative transaction with XYZ Bank, for future sale of USD 100,000 in the month of
April 2014 @  65 per USD (Spot Rate was  64.50 per USD).
For this purpose, it is assumed that the company has entered into a cash flow hedge,
which is generally the case for hedging foreign currency risk.
Further, it is assumed that:
      At the time of booking of sale in January 2014, the USD rate was  61, and forward
      rate for delivery on April 30, 2014 was  61.20.
      On the reporting date on March 31, 2014, the USD rate was  60.50, and forward
      rate for delivery on April 30, 2014 was  60.60.
      At the time of realisation USD rate was  60 on April 30, 2014.
The above transaction should be accounted in the following manner (impact of
discounting of MTM of the hedging instrument has been ignored in this simplified
illustration).
                  ABC Limited entered to sell a forward
                  exchange contract for USD 100,000
                  having ten months maturity on April 30,
                  2014
                  Forward Exchange Rate                                65.00
                  Spot Rate as at July 01, 2013                        64.50
                  No entry in the books
Upto January      ABC Limited accounts the MTM effect in
31, 2014          the books
                  Forward Contract Rate Entered                        65.00
                  Forward Contract Available in the market             61.20
                  with similar maturity
                  Forward Contract Receivable                     3,80,000
                  To Cash Flow Hedge Reserve- OCI                                3,80,000




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January 31,      ABC Limited recognises the revenue by
2014             booking an invoice for USD 100,000,
                 having credited period of 90 days (i.e. due
                 date ­ April 30, 2014)
                 Spot rate as at January 31, 2014                 61.00
                 Forward Contract Available in the Market         61.20
                 with similar maturity
                 Recognition of Revenue
                 Accounts Receivable                           61,00,000
                 To Revenue                                                61,00,000
                 Recognition of Hedge gain
                 Cash Flow hedge reserve-OCI                    3,80,000
                 To Profit or Loss                                          3,80,000
March 31,        Spot Rate                                        60.50
2014
                 Forward Contract Available in the Market         60.60
                 with similar maturity
                 Restatement of Accounts Receivable
                 Forex Gain/Loss (P&L)                           50,000
                      To Accounts Receivable                                 50,000

                 MTM Effect of Forward Cover
                 Forward Contract Receivable                     60,000
                 To Forex Gain/Loss (P&L)                                    60,000
April 30, 2014   Spot rate                                        60.00
                 Realisation of Accounts Receivable
                 Bank                                          60,00,000
                 Forex Gain/Loss (P&L)                            50,000
                       To Accounts Receivable                              60,50,000

                 Maturity of Forward Contract
                 Bank                                           5,00,000
                 To Forward Contract Receivable                             4,40,000
                 To Forex Gain/Loss (P&L)                                     60,000



2.   Cash flow hedge of the repayment of a loan




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                                                                       ED/AS109/2018/02


Company X is an Indian company with annual reporting period ending on March 31 each
year. On January 1, 2014, Company X borrows from a bank USD 1 million six month
debt carrying a floating interest rate of three month LIBOR plus 50 basis points. As per
the Company's risk management policies, it enters into a Cross Currency Interest Rate
Swap (CCIRS) with a bank to swap the above floating interest bearing USD debt into a
fixed interest bearing INR debt.
According to AS 109, Company X will record the following on March 31, 2014:
(i)    Translate the USD loan at closing rate and record the foreign exchange gain/ loss i n
       the profit or loss.
(ii)   Record a derivative asset/ liability based on the fair value (Mark To Market `MTM'
       value) of the CCIRS with a corresponding credit/debit in Cash Flow Hedge
       Reserve.
(iii) Record the net interest expense in profit or loss, i.e., the USD floating interest
      expense adjusted for the settlement of the interest rate swap for the period.
(iv) Reclassify from the Cash Flow Hedeg Reserve to profit or loss the amount by
     which the hedged item, i.e., the debt has impacted the profit or loss. (In this case,
     the amount of translation foreign exchange gain/ loss that has been recorded for the
     loan).
As at March 31, 2014, the Balance Sheet of Company X will carry the following items:
       Loan ­ Translated at the closing USD ­ INR conversion rate.
       Derivative asset/ liability ­ MTM of the CCIRS.
       Cash Flow Hedge Reserve - MTM of the CCIRS less amount reclassified to the
       profit or loss.
3a. Commodity contract ­ cash flow hedge of a forecasted sale
with an exchange traded future
Company Z is a producer and wholesaler of copper with annual reporting period ending
on March 31 each year. On January 1, 2014, Company Z forecasts sales of 100 tonnes of
copper expected to occur in September 2014. It is highly probable that the sales will
occur based on historical and expected sales. In order to hedge its exposure on the
variability of copper prices, Company Z enters into a `sell' futures contract on the
Commodity Exchange to sell 100 tonnes of copper (same grade) with maturity of
September 30, 2014. As per its risk management policies, Company Z designates this
futures contract as a cash flow hedge of highly probable forecasted sales of 100 tonnes of
copper inventory in September 2014.
According to AS 109, Company Z will record the following on March 31, 2014
Record a derivative asset/ liability based on the fair value (MTM) of the commodity
future contract with a corresponding credit/ debit to Cash Flow Hedge Reserve.




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As at March 31, 2014, the Balance Sheet of Company Z will carry the following items:
       Derivative asset/ liability ­ MTM of the commodity future contract.
       Cash Flow Hedge Reserve - MTM of the commodity future contract.
Assuming that the sales in future occur as expected, the MTM carried in the Cash Flow
Hedge Reserve will be reclassified to the profit or loss when the sales are booked in the
profit or loss. In this case, this will happen in September 2014, along with the maturity of
the commodity futures contract. Such reclassification can be made in the sales line item
in the statement of profit and loss , which potentially records the sales at the hedged
price.
3b. Commodity contract ­ fair value hedge of forecasted sales
with an exchange traded future
Continuing the above example, consider that Company Z designates the commodity
futures contract as a fair value hedge of a portion of its inventory, i.e., 100 tonnes of
copper. The Company documents it as a hedge of the exposure to changes in fair value of
the inventory due to commodity price risk. As at March 31, 2014, the price of copper
increases thereby resulting in an increase in the fair value of inventory and MTM loss on
the derivative.
According to AS 109, Company Z will record the following on March 31, 2014:
(i)    Record a derivative liability based on the fair value (MTM) of the commodity
       future contract with a corresponding debit to the profit or loss.
(ii)   Record an increase in inventories for the change in fair value as a hedge accounting
       adjustment through profit or loss. Accounting Standard (AS) 2, Inventories,
       requires inventories to be carried at the lower of cost and net realisable value.
       Hence, this will be recorded as a separate hedge accounting adjustment
       distinguished from the valuation of inventories under AS 2.
As at March 31, 2014, the Balance Sheet of Company Z will carry the following items:
       Derivative asset/liability ­ MTM of the commodity future contract.
       Inventory ­ valued as per AS 2 at cost.
       Inventory hedge accounting adjustment ­ basis adjustment to record change in fair
       value.
When sales of the hedged inventory occur in the future, the hedging rela ted fair value
adjustment to inventory will be released to the profit or loss and can be classified as part
of `cost of goods sold'.
4.     Hedging a portion of a non-financial item ­ Commodity future
Company X is a producer and wholesaler of steel with annual reporting period ending on
March 31 each year. On January 1, 2014, Company X forecasts sales of 200 tonnes of




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steel expected to occur in September 2014. It is highly probable that the sales will occur
based on historical and expected sales. In order to hedge its exposure on the variability of
expected cash flows from forecasted sales of steel, as per its risk management policies,
Company X enters into a `sell' futures contract on the commodity exchange for 200
tonnes of iron ore which is one of the significant components of the steel making process
and significantly impacts the price of steel.
This will not result into a perfect hedge since the hedged commodity, i.e., steel and the
hedging instrument used, i.e., iron ore futures, are not perfectly correlated. The AS
permits such designation if it is as per the company's risk management policies and
strategy.
According to AS 109, Company X will record the following on March 31, 2014:
Record a derivative asset/ liability based on the fair value (MTM) of the iron ore future
contract with a corresponding credit/ debit to Cash Flow Hedge Reserve.
As at March 31, 2014, the Balance Sheet of Company X will carry the following items:
       Derivative asset/liability ­ MTM of the iron ore future contract.
       Cash Flow Hedge Reserve - MTM of the iron ore future contract.
Assuming that the sales in future occur as expected, the MTM carried in the Cash Flow
Hedge Reserve will be reclassified to the profit or loss when the sales are booked in the
profit or loss. In this case, this will happen in September 2014 along with the maturity of
the commodity futures contract. Such reclassification can be made in the sales line item
in the statement of profit and loss .
5.    Exchange traded contract ­ Fair value hedge of investment
portfolio
Company Z holds a closed portfolio of equity shares classified as long term investments.
As per its risk management policies, Company Z hedges its exposure to variability of
expected fair value of the investments by entering into equity futures contract on a
recognised stock exchange.
Under AS 109, Company Z will record the following on March 31, 2014:
(i)    Record a derivative liability/derivative asset based on the fair value (MTM) of the
       equity futures contract with a corresponding debit to the profit or loss.
(ii)   Record an increase/decrease in long term investments for the change in fair value as
       a hedge accounting adjustment through profit or loss.
As at March 31, 2014, the Balance Sheet of Company Z will carry the following items:
       Derivative asset/ liability ­ MTM of the equity futures contract.
       Long term investments ­ valued as per AS 109.




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     Investment hedge accounting adjustment ­ adjustment to record change in fair
     value.
6. Cash flow hedge accounting ­ forecasted sale with a forward
contract
Company X is an Indian Company with annual reporting period ending on March 31 each
year. On January 1, 2014, Company X forecasts sales of USD 1 million on September 30,
2014. It is highly probable that the sales will occur based on historical and expected
sales. As per its risk management policies, in order to hedge the variability in cash flows
arising from future sales in foreign currency, on January 1, 2014, Company X enters into
a sell USD ­ buy INR forward contract which matures on September 30, 2014.
According to AS 109, Company X will record the following on March 31, 2014:
Record a derivative asset/liability based on the fair value (MTM) of the foreign currency
forward contract with a corresponding credit/debit to Cash Flow Hedge Reserve.
As at March 31, 2014, the Balance Sheet of Company X will carry the following items:
     Derivative asset/liability ­ MTM of the foreign currency forward contract.
     Cash Flow Hedge Reserve ­ MTM of the foreign currency forward contract.
Assuming that the sales in future occur as expected, the MTM carried in the Cash Flow
Hedge Reserve will be reclassified to the profit or loss when the sales are booked in the
profit or loss. In this case, this will happen in September 30, 2014 along with the maturity
of the foreign currency forward contract. Such reclassification can be made in the sales
line item in the statement of profit and loss, which records the sales at the hedged rate.
7. Cash flow hedge accounting - forecasted sale with an option
contract
Company X is an Indian Company with annual reporting period ending on March 31 each
year. On January 1, 2014, Company X forecasts sales of USD 1 million on September 30,
2014. It is highly probable that the sales will occur based on historical and expected
sales. As per its risk management policies, in order to hedge the variability in cash flows
arising from future sales in foreign currency, on January 1, 2014 Company X enters into a
sell USD ­ buy INR option contract which matures on September 30, 2014. The
Company pays a premium to purchase this option which has a strike rate equal the then
available forward exchange rate at the date when the option was purchased (often referred
to as an `At the Money' strike price option). As a result, the entire amount of the
premium paid for the option is attributable to time value of the option. The Company
assesses the time value of the option to be the `cost of hedging'.
According to AS 109, Company X will record the following:
On January 1, 2014 - Record an option asset on payment of option premium.




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On March 31, 2014 - Record changes in fair value of the option asset based on the MTM
of the foreign currency option contract with a corresponding credit/ debit to Cash Flow
Hedge Reserve. This amount includes both the time value and the intrinsic value, if any,
of the option contract on that date.
As at March 31, 2014, the Balance Sheet of Company X will carry the following items:
     Derivative asset/liability ­ MTM of the foreign currency option contract.
     Cash Flow Hedge Reserve - MTM of the foreign currency option contract.
Assuming that the sales in future occur as expected, the MTM carried in the Cash Flow
Hedge Reserve will be reclassified to the profit or loss when the sales are booked in the
profit or loss. In this case, this will happen on September 30, 2014, along with the
maturity of the foreign currency option contract. Such reclassification can be made in the
sales line item in the statement of profit and loss, which records the sales at the hedged
rate.
8. Cash flow hedge accounting ­ hedging the repayment of
foreign currency debt with an option contract
Company X is an Indian Company with annual reporting period ending on March 31 each
year. On January 1, 2014, Company X has USD 1 million of foreign currency debt that it
needs to repay on September 30, 2014. As per its risk management policies, in order to
hedge the variability in cash flows arising from the repayment of this debt in foreign
currency, on January 1, 2014 Company X enters into a buy USD ­ sell INR option
contract which matures on September 30, 2014. The Company pays a premium to
purchase this option which has a strike rate equal the then available forward exchange
rate at the date when the option was purchased (often referred to as an `At the Money'
strike price option). As a result the entire amount of the premium paid for the option is
attributable to time value of the option. The Company assesses the time value of the
option to be the `cost of hedging'.
According to AS 109, Company X will record the following:
On January 1, 2014 - Record an option asset on payment of option premium.
On March 31, 2014 - Record changes in fair value of the option asset based on the MTM
of the foreign currency option contract with a corresponding credit/debit to Cash Flow
Hedge Reserve. This amount includes both the time value and the intrinsic value, if any,
of the option contract on that date. In addition,
     Company X will also reclassify from the Cash Flow Hedge Reserve, a
     proportionate amount of the option premium paid as a `cost of hedging' type
     adjustment into the profit or loss; and
     To the extent that there is intrinsic value in the option contract that offsets the
     translation gain/loss on the foreign currency debt, Company will additionally
     reclassify such amounts to the profit or loss.




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As at March 31, 2014, the Balance Sheet of Company X will carry the following items:
     Derivative asset/ liability ­ MTM of the foreign currency option contract.
     Cash Flow Hedge Reserve - MTM of the foreign currency option contract adjusted
     for the `cost of hedging' reclassification and the intrinsic value reclassification, if
     any.
On September 30, 2014, in addition to the above treatment, the debt will be repaid at the
spot rate, the option settled or expires worthless (as the case may be) and any balance in
the cash flow hedge reserve will be reclassified to the profit or loss for the period ended
on that date.




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Appendix 1
Note: This Appendix is not a part of the Accounting Standard. The purpose of this Appendix is only
to bring out the major differences, if any, between relevant provisions of existing accounting
requirements i.e. Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates ,
Accounting Standard (AS) 13, Accounting for Investments, and Guidance Note on Accounting for
Derivative Contracts with upgraded Accounting Standard (AS) 109, Financial Instruments

Comparison with AS 11, The Effects of Changes in Foreign Exchange Rates, AS 13,
Accounting for Investments, and Guidance Note on Accounting for Derivative Contracts

   1. There is no comprehensive Accounting Standard that provides guidance on Financial
      Instruments. AS 30, 31 and 32, based on prevailing IFRS Standards, which were
      earlier issued by the ICAI on recommendatory basis, were withdrawn in November,
      2016 pursuant to commencement of Ind AS implementation. Presently, accounting
      requirements in respect of certain financial instruments are covered by the following:
      a) AS 11, The Effects of Changes in Foreign Exchange Rates
      b) AS 13, Accounting for Investments
      c) Guidance Note on Accounting for Derivative Contracts

       As part of the Upgraded ASs for entities that are not covered by Ind AS
       implementation, a new comprehensive standard viz. AS 109 prescribes accounting of
       all financial instruments and it is divided into following 3 sections:
       a) Section A, Basic Financial Instruments
       b) Section B, Other Financial Instrument (includes provisions of Guidance Note on
            Accounting for Derivative Contracts)
       c) Section C, Liabilities and Equity

       AS 109 is a comprehensive robust standard that addresses accounting and disclosures
       aspects of all types of financial instruments, with limited exceptions, over the entire
       life cycle of a financial instrument. The standards prescriptions are broadly
       categorised into main areas i.e. Scope, Definitions, Recognition, Classification, Initial
       and Subsequent Measurement (i.e. Fair Value, Amortised Cost, Cost, Impairment etc),
       Hedge Accounting, Derecognition and Disclosures.

   2. Scope: Compared to AS 109, the scope of existing ASs is very limited i.e. it deals
      only with limited specific type of financial instruments e.g. AS 13 primarily deals
      with typical financial investments such as Shares and Debentures, AS 11 deals with
      certain foreign currency transactions in the nature of forward exchange contracts and
      Guidance Note on Accounting for Derivative Contracts deals with accounting aspects
      of derivatives and hedge accounting.

   3. Classification: Under existing AS, iinvestment are classified into two categories viz.
      current and long term investments, based on the entity's intention to hold such
      investments for more than a year or less and the investment's ready realisability.
      However, under AS 109, financial instruments are divided into :
      a) Basic Financial Instruments - commonly used instruments such as cash, loans
          receivable/payable, equity instruments, fixed return bonds etc.



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   b) Other Financial Instruments - instruments complex in nature such as convertible
      debt, financial instruments with embedded derivatives, stand-alone derivative
      instruments.

4. Measurement:

   4.1   Initial Measurement: In AS 109 All financial instruments are initially, at the
         time of recognition, are measured at fair value. Under AS 13, investments are
         initially measured at cost with a few exceptions.

   4.2   Subsequent Measurement: In AS 109, subsequent measurement of Basic
         Financial Instruments, except equity instruments etc, depends upon the nature
         of return (cash flow features) on the financial instruments i.e. if the return is
         fixed in terms of amount or rate of return, then such instruments are measured at
         Amortised Cost using the Effective Interest Method. Equity instruments etc.
         held for trading are measured at Fair Value through Profit or Loss with both
         gains and losses recognised in profit or loss and those not held for trading are
         measured at cost less impairment.

5. Complex financial instruments are measured at Fair Value through Profit or Loss
   except derivative instruments that are designated as part of effective hedging
   relationship which are accounted as per separate and specific hedge accounting
   model. There are no differences between hedge accounting model as per existing
   Guidance Note on Derivative Contracts except introduction of `Other Comprehensive
   Income (OCI)' in AS 109. As per Guidance Note on Accounting for Derivative
   Contracts, gain or loss on effective cash flow hedge is recognized directly in equity.
   Under AS 109, it is included other comprehensive income concept, therefore such
   gains or losses are recognized in other comprehensive income. Also, under hedge
   accounting model of AS 109, option to release gains/losses held in cash flow hedge
   reserve to profit or loss in the same period in which the hedged non-financial asset or
   liability affects profit or loss has been eliminated for simplicity.

   In contrast, as per AS 13, current investments are carried at lower of cost and fair
   value.

6. Impairment: Financial assets subsequently measured at Amortised Cost are subject to
   impairment (commonly referred as provision for bad and doubtful debts or non-
   performing assets in the existing framework) at each reporting date. Impairment loss
   recognition is based on `Incurred Loss Approach' i.e. it is recognised when there is
   objective evidence of impairment of financial asset and the loss measurement takes
   into account time value of money where required. AS 13 prescribed impairment loss
   recognition in re case of long term investment when there is decline, other than
   temporary' in the value of a long term investment.

7. Derecogntion: AS 109 prescribes specific clearly articulated principles for
   derecognition of financial assets and financial liabilities and also for recognition and
   measurement of gain/loss on derecognition.




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8.   Disclosures: AS 109 has more and relevant disclosures regarding various key
     transactions/events and the determination of fair value and carrying values of different
     classification/category of financial instruments.




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Appendix 2
Note: This Appendix is not a part of the Accounting Standard (AS) 109. The purpose of this
Appendix is only to bring out the major differences, if any, between Ind AS 32, Financial
Instruments: Presentation Ind AS 107, Financial Instruments: Disclosures and Ind AS 109, Financial
Instruments and draft of upgraded AS 109.

Comparison with Ind AS 32, Financial Instruments: Presentation Ind AS 107, Financial
Instruments: Disclosures and Ind AS 109, Financial Instruments

1.    Under Ind AS, 3 different standards are prescribed for accounting of financial
      instruments. AS 109 comprehensively deals with all the aspects relating to recognition,
      presentation, derecognition, measurement and disclosure of financial instruments in a
      single standard. AS 109 is primarily structured and modelled on the basis of IFRS for
      SMEs which though based on Full IFRS Standards, is formulated keeping in view the
      type/nature of transactions undertaken by SMEs and in the style and language familiar
      to such entities.

2.    Scope: Financial Guarantee Contracts are excluded from AS 109 (hence, covered by
      AS 37, Provisions, Contingent Liabilities and Contingent Assets) whereas Ind AS 109
      provides an option to account for such contracts under AS 109 or as Insurance Contract.

3.    Recognition: Ind AS 109 as an exception to normal accounting principles, provides
      option to follow either trade date accounting or settlement date accounting for regular
      way purchase/sale transactions. Under draft AS 109, only trade date accounting is
      permitted.

4.    Classification:

      4.1   Under Ind AS 109, financial assets are classified based on Contractual Cash Flow
            Characteristics Test and Business Model Test, which determine the subsequent
            measurement of financial assets. In AS 109, financial assets classification is not
            based on such complex tests, instead they are divided into two broad categories
            namely, basic financial instruments and Other financial instruments. While the
            former category has certain similarities with Contractual Cash Flow
            Characteristics Test of Ind AS 109, it is not same.
      4.2   In AS 109, Equity Instruments are classified into two categories i.e. those held for
            trading and those not held for trading. The former category is subsequently
            measured at Fair Value through Profit or Loss and latter is carried at cost less
            impairment. In case of Ind AS 109, Equity Instruments are also classified into
            two categories but the criteria and subsequent measurement differs. All equity
            instruments are mandatorily classified as subsequently measured at Fair Value
            through Profit or Loss except certain equity instruments, at entity's option, are
            designated as subsequently measured at Fair Value through Other Comprehensive
            Income.


5.    Measurement:

      5.1   Fair Value Measurement: Similar to Ind AS 109, the initial measurement of all
            financial instruments and subsequent measurement of certain financial


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              instruments is at fair value. However, the fair value measurement principles and
              concepts are different in AS 109 vis-a-vis Ind AS 109 and these are highlighted
              below.

                      Fair Value Measurement in Ind AS 109 based on definition and
                      principles laid down in a separate standard viz. Ind AS 113. Similar to
                      IFRS for SMEs, the AS 109 provides definition, principles and other
                      accounting requirements of fair value. The main difference is in the
                      approach to fair value measurement i.e. Ind AS 113 is based on `Exit
                      Price' concept which may be difficult to understand and apply by SMEs
                      such as identification and quantification of `Day 1 Gains/Losses' and its
                      subsequent accounting. Therefore, AS 109 is based on currently
                      understood and followed approach of `Entry Price' i.e. fair value is
                      normally the transaction price in an arm's length transaction.

                      Ind AS 109 requires classification of fair value into different levels and
                      prescribes a `three level hierarchy'. AS 109 does not prescribe such a
                      detailed classifications.
     5.2      Amortised Cost: Under Ind AS 109, application of computation of effective
              interest rate and application of effective interest method is operationally
              challenging in case of floating (variable) rate instruments which also have
              transactions costs, discount/premiums etc. There is no explicit guidance in this
              regard. AS 109, provides explicit simple guidance for amortisation of such
              elements of effective interest rate for floating (variable) rate instruments on
              straight-line basis.
     5.3      Impairment: Under Ind AS 109, Impairment loss recognition and measurement is
              based on Expected Credit Loss (ECL) approach with `3 Bucket' segregation
              model and there is explicit requirement for consideration of time value of money.
              ECL model requires consideration of historical loss data as well as future forecast
              information which would be conceptually and operationally challenging to apply.
              Under AS 109, impairment loss is recognised and measured using Incurred Loss
              Approach.


6.   Under Ind AS 109, derecognition is based on complex principles of significant risk and
     reward, continuing involvement, pass through arrangement etc. Under AS 109,
     derecognition is based on principles of significant risk and reward and transfer of
     control over financial instruments.

7.   Hedge accounting provisions of AS 109 are quite similar to that of Ind AS 109 except
     in the following areas:

               When an entity separates intrinsic value and time value of an option contract.
               As per AS 109, time value of an option contract is treated as a period cost or
               at a point in time depending on the manner of designation and impact of
               hedged item on profit or loss. As per Ind AS 109, time value of an option is
               recognised in Other Comprehensive Income to the extent it relates to hedge
               item. Further, its treatment differs depending on whether it is a transaction
               related hedged item (included in carrying amount of asset/liability, or



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            reclassified to profit or loss) or a time-period related hedged item (amortised
            on systematic basis).

            Ind AS 109 provides an additional option to designate a credit exposure
            as measured at fair value through profit or loss if an entity uses a credit
            derivative (that is measured at fair value through profit or loss) to manage that
            credit risk.

8.   Under Ind AS, Hedge Accounting is based on classification into 3 categories with
     extensive and stringent prescriptions on hedged item (risk), hedging instruments,
     effectiveness tests, documentation, hedge ratio etc. Under draft upgraded AS 109, for
     derivatives and hedge accounting, provisions of Guidance Note on Accounting for
     Derivatives Contracts is substantially carried forward.

9.   Under Ind AS, a separate standard viz. Ind AS 107, Financial Instruments: Disclosures
     prescribes extensive disclosures. However, upgraded AS 109 contains optimal
     disclosures.




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