Financial Instruments

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 Corporate Financial Reporting

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Financial Instruments

Chapter

Financial Instruments
IND AS 32/107/109

1. Preface:
Covered under:
Ind AS 109 Recognition and Measurement
Ind AS 32 Presentation
Ind AS 107 Disclosure

2. Financial Instruments - FI :
is any contract that gives rise to a Financial Asset - FA of one Entity and a Financial Liability - FL or Equity
Instruments - EI of another Entity.
Case Study - 2.1

Mr. F Purchases Debentures of TQM Limited

FA FL
Case Study - 2.2
Mr. Q Invests Equity Shares of FX Limited

FA EI

3. Financial Assets -
FA : includes:
a) Cash : a deposit of cash with a Bank or any Financial Institution is a FA as it represents right to obtain
cash from bank/ Financial Institution.
b. an Equity instrument (EI) of another Entity
c. Contractual Right to receive cash or another Financial Asset from other entity.
Examples :
 Debtors
 Trade Receivables
 Investments in Debentures of any other Entity
 Investments in Preference shares of an Entity
 Loans given

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 Corporate Financial Reporting

d. A contractual right to receive EI of any other entity (example Investments in convertible

debentures/Preference shares of any other entity)
e. Derivative contracts that are Potentially favourable (PFC)
Case Study - 3.1
F3 Limited holds a call option to purchase equity shares in a listed company say G-77 limited for ` 500 per
share at the end of say 90 days period. Now, if the value of share on exercise /settlement date is more than
`500 then it is a potentially favourable condition (PFC).

f. A contract that will or may be settled in entity's own EI and for which Entity is or may be obliged to
receive a variable number of Entity's own EI.
Case Study - 3.2
Entity Q Sells plot of land to Mr. S (who is also a shareholder of Entity Q)

Mr. S settles consideration through variable no. of EI of Entity Q

4. Financial Liability : FL - includes:

a. a contractual obligation to deliver cash or FA to another Entity.

Examples:
Creditors
Trade Payable
Redeemable Debentures issued by an entity
Redeemable Preference shares issued by an entity
Loans raised etc.

b. Derivate contracts that are potentially unfavourable to the entity

Case Study - 4.1
If the Entity is a writer of a call option and prices are favourable to the holder of the option then holder surely
would exercise the options under favourable conditions but writer has to settle the same under conditions that
Potentially unfavourable.
c. a contract that will or may settled in Entity's own Equity Instruments and Entity is Obliged to deliver
Equity instruments.
Case Study - 4.2
Entity Q Purchases Technology Rights from Tech India Limited (and as per
agreed terms Entity Q is obliged to discharge consideration through its EI )

For Entity Q it’s a FL.

5. Equity Instruments(EI)
It is a contract that evidences a residual interest in the assets of an entity after deducting all liabilities.
Entity

Assets less Liabilities = Residual Interest in Net Assets

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Financial Instruments

Note: Contracts to issue variable number of own equity shares are also considered as EI
6. Analytical Points
If there is any statutory right to receive cash or statutory obligation to deliver cash, then it will not be classified
as
1. Financial asset or financial Liability for example Income tax Payable
2. If an entity issued PS or Debentures or takes a loan i.e. in case of borrowings by an entity then entity
needs to classify that borrowings as FL or EI on the basis of the following:
a. If interest/dividend payable on such borrowings is mandatory then classify it as FL however if not
mandatory then classify it as EI
b. If such borrowing is Redeemable then treat it as FL
if such borrowings is irredeemable then treat it as EI
c. If such borrowings is convertible in

Fixed no. of Equity shares

Variable no. of Equity shares

If it is compulsorily If it is convertible at the

convertible option of

Equity instruments
Equity

of Issuer ( entity) Holder

Equity CFI

3. if any borrowings by the entity has mix features of FL & EI then it is called as CFI - Compound Financial
Instrument.
4. It is important to note that CFI classification is possible only from perspective of Entity raising money or
borrowing i.e. issuer.
5. From the view point of Investor (holder) - who is investing in PS /Debentures / ES of any entity , it will be
FA only.
6. Interest / dividend income on FA is recognised in PL
7. Interest / Dividend Expense on FL is recognised in PL
8. Interest/ Dividend Expense on EI is recognised in Retained Earnings
9. How one would treat preference Shares that are redeemable at the option of entity?
Entity shall treat such shares as Equity Instruments as these shares are redeemable at the option of the
company and such there is no obligation to deliver cash or any other FA.
10. An entity issues non-redeemable Preference shares with dividend payments limited to ordinary shares.
Such shares shall be treated as EI as there is no obligation with respect to Principal and dividend payments.
Case Study - 6.1
A. Assets side Items FA/FL / Equity Reasons
Investments in Equity Shares FA As per definition
Investments in loans FA Contractual right to receive cash or any
other FA
Trade & other Receivables FA Contractual right to receive cash or any

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 Corporate Financial Reporting

other FA
Government Bonds FA Contractual right to receive cash or any
other FA

B. Liability Side Items

Issue of Debentures FL Contractual obligation to deliver cash or
any other FA
Perpetual Debentures FL Contractual obligation to deliver cash or
any other FA - Interest payments
Deposits and advances received FL Contractual obligation to deliver cash or
any other FA

Mix Items
Loans and advances given FA Contractual right to receive cash or any
other FA
Bank loan raised FL Contractual obligation to deliver cash or
any other FA
Sundry Creditors / Bills Payables FL Contractual obligation to deliver cash or
any other FA
Inventories N/A It is just an asset held by an entity
PPE N/A It is just an asset held by an entity
Intangibles N/A It is just an asset held by an entity
Prepaid Expenses N/A No contractual right to receive cash or
any other FA although there is right to
receive some services against the
same
Deferred Revenue Items N/A Its an income that has been already
received but not yet recognised fully.
Also, there is no obligation to repay
also.
Income taxes N/A Not an obligation under a contact. It is
an obligation due to statutory
requirements
Gold Bonds FA Contractual right to receive cash or any
other FA
Gold N/A Just an asset held by the entity

Financial guarantees given FL Contractual obligation to deliver cash or

any other FA.
Shares in a co-operative society FL As per law, a shareholder of a co-
operative society can get his shares
redeemed or can get back his money.
Hence it is an obligation for the co-
operative society
Irredeemable PS/Deb. With discretionary Equity No obligation
Interest

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Financial Instruments

CCPS (compulsorily convertible preference Equity Since compulsorily convertible into

shares) / Deb. With discretionary Interest Equity share ( Equity) and no obligation
for Interest ( Equity)
Redeemable PS / Deb. With discretionary CFI = FL + EI Liability/obligation to pay (FL) & No
Interest obligation to pay Interest ( Equity)
Irredeemable PS / Deb. With Mandatory CFI = FL + EI No obligation to pay (Equity)
Interest &obligation to pay Interest ( FL)
CCPS (compulsorily convertible preference CFI = FL + EI Since compulsorily convertible into
shares) / Deb. with Mandatory Interest Equity share ( Equity) & obligation to
pay Interest ( FL)
PS / Deb. Convertible at the option of Holder CFI = FL + EI If holder exercises the option then
Equity and if does not ( then entity will
have to pay him cash) then FL

7. Methods for Measurement of FA & FL

Financial Instrument

Recognised as

FA FL Equity

Measured as

Fair Value through P/L - FVTPL Fair Value Through OCI - FVTOCI Amortised Cost
7.1
FVTPL : Simply means that changes in the fair value of FA shall be transferred to SPL
FVTPL

a. held for trading that is intention to collect b. Specially Designated as FVTPL to

cash flow from sale of asset only to derive avoid mismatch in accounting
benefit of market prices

Note :The term trading generally reflects active and frequent buying and
selling. Indirectly it means FI has been acquired primarily for
sale/purchase in near future.
On the other hand category (b) is a forced designation to avoid
Only following FA are shown at FVTPL
accounting mismatch.
Investment in Equity shares of other entity can be shown at FVTOCI
also. In that case, it will be an irrevocable choice that is entity shall have
to follow it forever and it cannot show it as Investment in equity shares at
Investments in Equity shares of other entity FVTPL again in future.
Derivative FA

Accounting:
Under this method entity shall recognise the FA or FL at fair value
Dividend will be recognised at coupon rate directly in PL.

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 Corporate Financial Reporting

At each year end, difference between FV at balance sheet date and at which it was previously recorded shall
be recognised as FV Gain/Loss in PL.
Transaction cost is not added/deducted from FV on initial recognition of FA or FL at FVTPL.
Transaction cost shall be charged to PL
7.2
FVTOCI
 Signifies that changes in Fair Value of Financial Instrument is transferred to OCI - which is presented
below the P/L
 If intention is to hold the asset for some time and sell it before maturity that is here intention is to
collect CCF ( contractual cash flows) and also to collect cash from sale of asset by taking advantage
of market prices.
 Under this method , entity shall apply accounting as follows:
 Same as ACM ( discussed below) but on each balance sheet date, FA shall be shown at FV.
 Difference between carrying amount as per ACM & FV is recognised as FV Gain/Loss in OCI.
 Balance in FV Reserve (OCI) will be reclassified to PL on sale of such FA.
 In case of Investment in Equity Shares ( which are generally measured at FVTPL ) shown at FVTOCI
under irrevocable option, FV Reserve (OCI) , on sale of such Investment shall be transferred to
retained earnings directly that is it is an item of OCI which cannot be reclassified to PL
7.3
Amortised Cost method (ACM):
Under the concept, transactions are recorded using effective interest rate that is real rate rather than
coupon rate.
 ERI is nothing but IRR - where PVs of cash inflows are equal to PVs of Outflows.
 If intention is to hold the asset till maturity that is intention here is to collect only CCF of the asset (
Interest & Principal)
 FL are generally measured at amortised cost method only.
 Only two FL should be measured at FVTPL
 Derivate FL
 Financial Guarantee
Accounting :
Under this method entity shall initially recognise FA or FL at Fair Value ( adjusted with transaction cost)
Fair Value

If transaction is done at market terms that If transaction is done at off market terms
is only effective Interest rate (EIR) is given i.e. Market Interest Rate on similar
in the question instrument is given in question

Amount received or given is considered as

FV Calculate fair value by discounting the future cash
flows using MIR on similar instruments (PV of Future
cash flows)

Investments in Equity shares of other entity

Derivative FA

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Financial Instruments

Case Study 7.1

Fine-X limited acquired 12% 1,000 debentures of `100 each at `115 - which will be redeemed after 3 years.
Company receives `12,000 every year and `1,00,000 payment of principal at the end of 3rd year.
Given IRR as 6.352%
Solution :
Year Cash Outflow
To (1,15,000)
T1 12,000
T2 12,000
T3 12,000
1,00,000

IRR = 6.352%
Computation of Interest income
Opening balance Interest @6.352 Total Receipts Closing balance
1,15,000 7,305 1,22,305 12,000 1,10,305
1,10,305 7,006 1,17,311 12,000 1,05,311
1 4- 2 3
1,05,311 6,689 B.F 1,12,000 1,12,000
Last year's Interest has been taken as difference between total amount and Opening balance.
Entries:
1 2 3
Cash a/c Dr. 12,000 12,000 12,000
To Interest a/c 7,305 7,006 6,689
To Investment in Deb. a/c 4,695 4,994 5,311

Cash a/c Dr. 1,00,000

To Investments in Debenture a/c 1,00,000

Case Study 7.2:

Morning limited grants loans to its Employees at 4% amounting to `10,00,000 at the beginning of 2015-16.
The principal amount is repaid over a period of 5 years- where as accumulated interest is collected in two
equal instalments after collection of Principal amount.
Assume benchmark Interest rate is 8%.
Show accounting treatment.
Year Inflows Principal Outstanding ` Interest at 4% `
31.03.16 2,00,000 8,00,000 40,000
31.03.17 2,00,000 6,00,000 32,000
31.03.18 2,00,000 4,00,000 24,000
31.03.19 2,00,000 2,00,000 16,000
31.03.20 2,00,000 - 8,000
Total 1,20,000
Fair Value of loan ( FA) as at 1.04.15:
Year Cash Inflows Discount Factor 8% PV `
31.03.16 2,00,000 .9259 1,05,185
31.03.17 2,00,000 .8573 1,77,468
31.03.18 2,00,000 .7938 1,58,776
31.03.19 2,00,000 .7350 1,47,006
31.03.20 2,00,000 .6806 1,36,117
31.03.21 60,000 .6302 37,810

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 Corporate Financial Reporting

31.03.22 60,000 .5835 35,009

8,71,361
3. Entry at the time of initial recognition
Loan - FA Dr. `8,71,361
P/L - (Employee Benefit Expenses) Dr. `1,28,639
To, Bank a/c `10,00,000
Case 7.3
G-99 Limited- as a part of staff welfare expense contracted to lend to its Employees sum of Money at 5%
Interest per annum.
The amount lent is to be repaid in five equal instalments along with interest.
Market rate of interest is 10% per annum.
The amount of loan is `16,00,000 and lent on 1.01.2015.
Following the principles of Ind AS 109, you are required to record entries for the year ended 31.12.2015 and
calculate the value of Loan to be recognised initially and also amortised cost for all subsequent years.
Solution :
step - a: Initial Recognition:
Year Principal Interest @5% Total Discount Factor @ 10% PV
` ` ` `
2015 3,20,000 80,000 4,00,000 .909 3,63,600
2016 3,20,000 64,000 3,84,000 .827 3,17,568
2017 3,20,000 48,000 3,68,000 .751 2,76,368
2018 3,20,000 32,000 3,52,000 .683 2,40,416
2019 3,20,000 16,000 3,36,000 .620 2,08,320
14,06,272
Step -b-:Fair Value of Loan `14,06,272
Step - c- Amount charged to P/L (staff welfare Expenses) = `16,00,000 - `14,06,272 = `1,93,728
Step -d -: Entry at the time of initial recognition
Loan - FA Dr. `14,06,272
P/L - (Staff Welfare Expenses) Dr. ` 1,93,728
To, Bank a/c `16,00,000
Step - e -
Calculation of amortised cost of Loan
Year Amortised Cost Interest to be Repayments i.e. Amortised Cost i.e.
Op. balance: recognised @10 % Principal + Interest Closing carrying amount
` ` `
1 2 3 4 = 1+2-3
2015 14,06,272 1,40,627 4,00,000 11,46,899
2016 11,46,899 1,14,690 3,84,000 8,77,589
2017 8,77,589 87,759 3,68,000 5,97,348
2018 5,97,348 59,735 3,52,000 3,05,083
2019 3,05,083 30,917 ( Taken as 3,36,000 -
diff. between 1 &3)
Step - f -
Date Particulars ` `
31.12.2015 Loan a/c Dr. 1,40,627
To Interest a/c 1,40,627

31.12.2015 Bank a/c Dr. 4,00,000

To Loan a/c 4,00,000

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Financial Instruments

31.12.2015 Interest a/c Dr. 1,40,627

To P/L 1,40,627

Case Study 7.5

Evening 24 Limited is located in a SEZ and receives interest free Loan of `5,00,000 from Central
Government.
Loan carries no interest and is repayable at the end of third year.
If the Fair Value of loan is `4,50,000 as per Ind AS 109, how should this be accounted for in the books of the
entity.
Solution:
As per the standard Loan received from Government that have a below market rate of Interest or without
interest should be recognised at Fair Value.
However fair value is ` 4,50,000 and the amount of loan is `5,00,000 and the difference shall be accounted
for as Grant as per Ind AS 20.
Bank Dr. ` 5,00,000
To FL (Loan) `4,50,000
To Grant `50,000

8. Compound Financial Instrument

CFI = Debt + Equity
It is an instrument issued by an entity having mix features of FL & Equity instruments.
Steps for solving Practical questions:
1. Allocate total Proceeds of the instrument ( issue Price) at initial recognition into :
a. FL component : by computing PV of Future Cash flows on the basis of market rate of interest on similar
instruments.
and
b. EI component : Total Proceeds (Issue Price) Less FL component
Cash flows in the nature of FL means a:
 Interest / Dividend payment in cash ( if mandatory)
 Redemption amount (if redeemable in cash or convertible at the option of the holder)
c. Allocate transaction cost (if any) on CFI to FL & Equity component in the ratio of their amounts as
calculated in Step 1.
2. Then, Initially recognise FL component & EI component after deducting such transaction cost.
Journal Entry
Bank a/c xxx
To, Debentures ( FL) xxx
To, Debentures (Equity) xxx

d. Financial Liability component is measured at ACM on each balance sheet date. Equity component is
carried at initially recognised value only
3. On the maturity date :
a. If convertible into Equity shares
Entry will be :
Debenture (FL ) at carrying amount
Debenture (Equity) at Carrying amount
To Equity share capital Face Value
To Security Premium B.F
Or

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b. If redeemable in cash
Debenture (FL) carrying amount
To Bank a/c
Debenture (Equity) carrying amount
To Retained Earnings
Case Study 8.1 -
SXM limited issued 5,000 6% Debentures of Face Value of `100 each and company gave an option to the
debenture-holders to get their debentures converted into equity shares at the end of 3rd year in the ratio of
1:1.
If , SXM Limited , if, would not have issued debentures with conversion option, then rate of interest on these
debentures would have been 10%.
Pass the entry at the time of initial recognition.
Solution
Step - 1
Statement showing present Value of Cash Outflows:
Year Cash Outflow Discount Factor 10% PV of Outflows
1 30,000 0.909 27,273
2 30,000 0.826 24,793
3 30,000 0.751 22,539
5,00,000 0.751 3,75,657
4,50,263
Step - 2
Segregation of Debt (FL) & Equity (EI)
Fair value of proceeds of issue `5,00,000
FL : Present value of outflows `4,50,263
Equity ` 49,737

Step -3
Entry at the time of initial recognition:
Bank a/c `5,00,000
To, Debentures ( FL) `4,50,263
To, Debentures (Equity) ` 49,737

Step - 4 - Entries
1st year end 2nd Year end 3rd year end
Interest a/c Dr.
To, Debenture (FL) 45,026 46,529 48,182

Debenture ( FL) 30,000 30,000 5,30,000

To, Bank
Step - 5 - Movement in Debenture Liability
Date Details ` Date Details `
Year 1 end Bank 30,000 Year 1 Beg. Bank 4,50,263
Bal. c/d - 4,65,289 End Interest @ 10% 45,026

Year 2 End Bank 30,000 Year 2 Beg. Bal. b/d 4,65,289

Bal. c/d 4,81,818 End Interest @ 10% 446,529

Year 3 End Bank 5,30,000 Year 1 Beg. Bal. b/d 4,81,818

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Financial Instruments

End Interest - B.F 48,182

Case Study 8.2 -
TFM limited issued 10,000 10% Debentures of Face Value of `100 each for a 5 year term. Debentures are
mandatorily convertible into equity shares at the end of 5 year in the ratio of 1:1.
Market rate of Interest for similar debentures without conversion option is 15%.
Calculate Value of FL and Equity at initial Recognition and Pass the entry at the time of initial recognition.
Solution :
Step - 1- Determination of FL that is calculation of PV of Outflows
Year Cash Outflow Discount Factor 15% PV of Outflows
1 1,00,000
2 1,00,000
3 1,00,000
4 1,00,000
5 1,00,000
3,35,200
Step - 2 - Segregation of Debt (FL) & Equity (EI)
Fair value of proceeds of issue ₹10,00,000 ₹10,00,000
FL : Present value of outflows ₹3,35,200
Equity ₹6,64,800

Step - 3- entry at initial Recognition

Fair value of proceeds of issue ₹10,00,000
FL : Present value of outflows ₹3,35,200
Equity ₹6,64,800

Step - 4 - Movement in Debenture Liability

Date Details ` Date Details `
Year 1 end Bank 1,00,000 Year 1 Beg. Bank 3,35,200
Bal. c/d - 2,85,480 End Interest @ 15% 50,280

Year 2 End Bank 1,00,000 Year 2 Beg. Bal. b/d 2,85,480

Bal. c/d 2,28,302 End Interest @ 15% 42,822

Year 3 End Bank 1,00,000 Year 3 Beg. Bal. b/d 2,28,302

Bal. c/d 1,62,547 End Interest - B.F 34,245

Year 4, End Bank 1,00,000 Year 4 Beg. Bal. b/d 1,62,547

Bal. c/d 86,929 End Interest @ 15% 24,382

Year 5, End Bank 1,00,000 Year 5. Beg. Bal. b/d 86,929

End Interest @ 15% - B.F 13,071
Step - 5:
Conversion Entry at the end of year 5
Debenture ( Equity) `6,64,500
Equity (loss) `3,35,200
To, Equity Share Capital (10,000 x 100 ) `10,00,000

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Case Study - 8.3

ZX limited issued 6% Cumulative Debentures of Face Value of `100 each at Par. Debentures are redeemable
at premium of 10% on 31.3.20 (i.e. after 4 years)or they may converted into ordinary shares at the option of
the holders.
Interest rate for equivalent debentures without considering conversion rights is 10%.
being a compound Financial Instrument, you are required to separate Debt portions as at issue date.
Given Equity Portion is 1,85,400.
Solution
a. let the principal = X
b. interest at 6% of x = 0.06X
c. Payment at the end of the 4th Year : X x 10% of x = 1.10x
d. Present value of outflow i.e. FL (debt):
Year Cash Outflow Discount Factor 10% PV of Outflows
1 0.06x
2 0.06x
3 0.06x
4 0.06x
1.10x
0.9382x
e. total proceeds = x
Less: FL = 0.9382x
Equity = 0.0618x
f. Equity Portion given ` 1,85,400
Thus
0.618x = `185,400
x = 1,85,400 / 0.0618x
= ` 30,00,000
g. So total proceeds = ` 30,00,000
out of which Equity Portion is `1,85,400
Therefore, FL (Debt) = ` 28,14,600
Case Study 8.4
G-51 limited hold 5,000 convertible debentures of Zem India at a cost of `5,00,000.
Accountant of G-51 wants to know whether these are CFI and whether should be bifurcated into Debt and
Equity Instruments from the perspective of Debenture-holders.
Solution:
As per Ind AS 32, Holders of CFI need not require to bifurcate and account separately CFI.
Case Study 8.5
Five-X Limited issued 8% 10,000 perpetual debentures of `100 each.
market rate of Interest is 8%.
how these debentures are to be accounted for by the entity Five-X limited?
What would be your answer if market rate of interest is 10%?
As per Ind AS, FI liability portion is initially recognised at Fair Value i.e. PV of Cash Outflows. In the given
case rate of interest on Debentures is 8% and market rate of interest is also 8%. It means debentures have
been issued at Fair Value itself.
thus entire proceeds shall be considered as FL. as it is at Fair Value.
If the market rate is 10% then entity need to compute Fair Value of Liability using market rate..
PV of Perpetual Cash Outflow:
Yearly Cash Flows

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Financial Instruments

Market rate of interest

80,000
10/100
`8,00,000
Total proceeds `10,00,000
out of which FL (debt) shall be `8,00,000 and Equity shall be ` 2,00,000
Case Study 8.6
TSQ limited issued 1,000 10% Debentures of `100 each for 5 year term.
Debentures are convertible at the option of debenture-holders, after 5 years into equity shares.
Market rate of Interest for the similar debentures without conversion is 20%.
Calculate value of Equity and Liability presuming that Entity incurred underwriting Commission of 2%.
Solution :
Step - a
Present value of outflow i.e. FL (debt):
Year Cash Outflow Discount Factor 20% PV of Outflows
1 10,000
2 10,000
3 10,000
4 10,000
5 10,000
1,00,000
70,094
Step -b:
total Proceeds : ` 1,00,000
Less: Fair Value of Outflows i.e. FL (Debt) : ` 70,094
Equity Portion = ` 29,906
Step- c:
Transaction Cost 2% of `1,00,000 = ` 2,000
Allocation of Transaction Cost
FL Equity
Amount `70,094 `29,906
Transaction Cost ₹2,000 in the ratio of (`1,402) (`598)
FL : Equity
Shall be Recognised at: 68,692 29,308

9. Transaction Costs:
Transaction Costs (TC) are incremental costs i.e. entity would not have incurred such costs if it had not
issued or acquired or disposed of FI.
such costs are directly attributable to the acquisition or issue or disposal of FA/FL.
TC Include
 Fee or Commission
 Legal Fee
 Transfer Fee
 Taxes
 Duties and levies
However, following are not considered as transaction costs:
 Premium on Redemption
 discount on issue

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 financing costs
9.1 Accounting For Transaction Costs
At the time of initial recognition, TC should also be considered.
If FA/FL is classified as FVTPL then TC should be charged to P/L.
If FA/FL is classified as FVTOCI or Amortised Cost then TC is added (FA) or subtracted (FL) from FA or FL
respectively.
For example, if an Entity has paid say any brokerage on acquisition of FA and Fair Value say is `100 lakhs
and brokerage amounts to `2 lakhs and further presuming FA is classified as FVTOCI then TC of `2 lakhs
shall be added to FA and it FA shall be recognised at `102 lakhs.
on the other hand if Entity has issued say `1,00,000 10% Debentures (classified as FVTOCI) and has paid
say `2,000 as TC then FL shall be recognised at `98,000.
Case Study - 9.1
Ten-X Limited invested in Equity Shares of another Entity on 15.03.22 `10,000.
Transaction cost incurred amounted to `100.
Fair value on the B/S date 31.03.22 is ` 12,000.
Pass entries if FA is classified as FVTPL.
Solution :
Date Particulars ` `
15.03.22 Investments in Equity Instruments a/c 10,000
Transaction Cost 100
To Bank a/c 10,100
Acquisition of Investments & TC incurred
31.03.22 P/L a/c 100
To Transaction costs a/c 100
TC charged to P/L
31.03.22 Investments in Equity Instruments a/c Dr. 2,000
To P/L 2,000
Changes in Fair Value credited to P/L
Case 9.2
Eleven - X Limited invested in Equity Shares of another Entity on 15.03.22 `10,000.
Transaction cost incurred amounted to `100.
Fair value on the B/S date 31.03.22 is ` 12,000.
Pass entries if FA is classified as FVTOCI.
Solution :
Date Particulars ` `
15.03.22 Investments in Equity Instruments a/c 10,100
To Bank a/c 10,100
Acquisition of Investments & TC incurred
31.03.22 Investments in Equity Instruments a/c Dr. 2,000
To OCI ( Fair Value Gain) 2,000
Changes in Fair Value credited to OCI

10.Treatment of Interest and Dividend Income

a. Interest Revenue: Shall be computed by using Effective Rate of Interest.
b. Dividend Income : Is recognised in P/L only when :
 Entity's right to receive payment of dividend is established.
 It is possible that economic benefits of dividend will flow to the entity and
 The amount of dividend can be measured reliably.

16
Financial Instruments

Distribution to holders of Equity Instruments should be debited directly to the Equity net of any Tax
adjustments.
Balance Sheet
Equity and Liability
1. Equity
a. Share Capital
FI ( Equity) Dividend xxx
Less: TDS xxx xxx
Transaction Costs related to Equity Instruments should be deducted from Equity.
Case Study - 10.1
F-500 bought a debt instrument- that is classified as FVTOCI. How does entity recognise interest income.
Answer:
As per Ind AS 109, Interest Income should be recognised by considering effective rate of Interest i.e. Market
rate of interest.
Case Study - 10.2
F-600 placed its privately held Equity Shares that are classified as Equity, with stock exchange and
simultaneously raises new capital by issuing Equity Shares on the stock exchange.
Transaction cost i.e. share issue expenses incurred in respect of both the transactions. Determine the
treatment of TC.
Response:
In the given case, there are two transactions viz. a. listing of shares &
b. Issue of new equity shares
TC related to Listing of shares shall not be considered for deduction in Equity. It will be debited to P/L.TC
related to new Issue only should be recognised and deducted from Equity.
Case Study 10.3
F-700 Limited issues non-redeemable callable bonds with 6% coupon. Coupon can be deferred in perpetually
at issuer's option.
Issuer has history of payment of coupon each year and the current bond price is predicted on holder's
expectation that coupon will be continued to be paid.
In addition .the stated policy of the issuer is that the coupon will be paid each year and that is publically
communicated.
Response:
A non-redeemable callable Bond with option to defer coupon at Issuer's option should be treated as Equity
Instruments as Issuer is not having any contractual obligation to deliver cash or FA.
As such TC related to these instruments should be subtracted from Equity
Case Study 10.4
Evaluate the TC related to Zero Coupon Bond.
Response: A zero coupon Bond i.e. an instrument where no interest is payable during the life of Instrument
and normally issued at deep ( high) discount to the value at which redeemable. As per the terms of issue, the
Entity does not have any obligation to pay Interest- however, Entity has obligation to redeem the debentures
at a future point of time.
As such, Instrument should be categorised as FL and TC should be subtracted from it.
Case Study - 10.5
F-800 Limited issued redeemable shares at market rate in the current year.
Also, the entity distributed Preference dividend in the current year.
Can Preference Dividend be presented as a deduction from Equity?
Response:

17
 Corporate Financial Reporting

Redeemable Preference Shares are FL and therefore preference dividend paid on these shares should be
treated as an expense and presented in the P/L along with Finance Cost.
Case Study - 10.6
F-900 limited has declared dividend on financial Instruments - which have been classified as FL, after the end
of reporting period.
Whether, the entity is required to reflect such dividend in the Financial Statements for the year, even if it has
declared dividend after the end of the reporting period?
Response:
Payment of dividend or Interest on FI classified as FL, accrues at the end of the reporting period, even if it is
paid or declared after the end of the reporting period.
Accordingly, F-900 should account such dividend, even if it is declared after the end of the reporting period.
preference dividend on Preference shares classified as FL should be debited to P/L under finance cost.

11. Treasury Shares:

If an entity re-purchases its own equity instruments (i.e. treasury shares) then such instruments are deducted
from Equity.
An Entity's own FI are not recognised as FA.
No gain or loss should be recognised in P/L on purchase, sale, issue or cancellation of own equity
instruments.
Case Study - 11.1
F-1000 limited, buys back 1,00,000 of its own equity shares @ `5 per share. The bought back shares are
held as treasury shares to give them to Employees who are entitled to options under share based payment
arrangements. Explain the treatment.
Response:
As per the standard, if Entity re-purchases its own equity instruments then such instruments are subtracted
from the equity.
Entity passes following entry
Equity Share Capital a/c Dr. `5,00,000
To, Bank a/c `5,00,000
Since these shares are held by the entity for the purpose of issuing them to Employees under SBPA scheme,
these shares are treasury shares.
Such shares are not recognised as FA.

12. Derivatives:
It is a contract between 2 parties for purchase or sale of an underlying asset on certain future date for a
certain price
Underlying asset can be shares, currency etc.
Examples of derivative contracts are Forward contracts, Option Contracts, future contracts etc.
As per Ind AS 109, Derivatives have following characteristics:
Derivative contracts do not have any value of its own but derives its value from the underlying asset and Its
value changes in response to changes in the value of Underlying asset.
Requires nil or insignificant investment( Premium paid for purchase of an option contract)
Settled at a Future Date.
Settlement could be as follows:
Forward and option contracts : Through Physical delivery or on Net cash basis
Future Contracts - Settled on Net cash basis only
Accounting
If Derivative contract is:
Potentially Favourable for the entity : Recognised as FA i.e. Derivate Financial Asset

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Financial Instruments

Potentially unfavourable for the entity then recognised as FL i.e. Derivative Financial Liability
Is always measured at FVTPL
Fair value of Derivative Contract
a. at Initial Recognition i.e. contract date : is generally zero. However, if there is some cost/ premium paid to
enter into Derivative contract, then that amount will be considered as Fair Value ( potentially favourable)
b. At each balance sheet date : Difference between Price of underlying asset on contract date and balance
sheet date will be recognised as fair value gain/loss in PL
11.1 Forward Contract:
Is simply a contract between two parties to buy or sell an asset at a specified future time and at a specified
price agreed today.
Example:
Mister F enters into a contract with stock broker on 1.10.23 for purchase of say 1,000 shares of Tata Steel
Limited at `440 per share on 1.1.24.
In this case, irrespective of the price on 1.1.24, Stock broker shall have to sell shares to Mr. F.
Now, if the Price of the share happens to be more than `440 on settlement date i.e. 1.1.24, then Mr. F will be
at a Profit.
12.2 Future Contract:
Futures and Forwards are essentially one and same except that Futures take place on recognised Stock
Exchanges - which act as a market place for buyers and sellers.
Buyers of the contracts are said to be at a LONG POSITION (advantageous) while Seller are said to be at
SHORT POSITION (Dis-advantageous) .
Since , parties are undertake risks and there is always a possibility that on settlement date counterparty may-
track.
For the same parties are asked to deposit some margin money with the Stock Exchanges.
In the previous Example if contract to purchase shares of Tata Steel is entered on a RSE then both the
parties shall have to deposit some margin amount for honouring the contact
12.3 Options:
An option is a contract that gives the buyer ( the holder of the options0 the right but not the obligation to buy
or sell the underlying asset or instrument on a specified date and price.
Continuing the same example, Mr. F who purchased the options to buy (call options) @ `440 from stock
broker say has paid a premium amount of `2 per share.
In this Case Mr. F is buyer of options that is Mr. F shall have the choice to buy the shares or not on the
specified date.
Since Mr. F shall enjoy such rights he will initially pay some margin or Premium to Seller ( otherwise why
seller shall give such rights to buyer) -which in this case is `2 per share i.e`2x 10,000 = `20,000.
Now suppose on specified date Mr. F is interested in buying the shares and price on the settlement date is
say `500 per share.
Mr. F shall pay ` 1,000 x`440 Less `20,000 =`4,20,000
Also Mr. F can sell these shares in the market @ `500 per share and he can make a profit of 1,000 x `60
( 500 - `440) that is `60,000
12.4 Accounting Aspects
Case Study 12.4.1:
Mr. Nice has written an option - details of which are as follows:
1.2.21 Lot Size 1,000 Shares of F Limited on 31.3.22 at an exercise price of
`102
Option Premium `5 per share
Market Price `100 per share
31.3.21: Reporting Date Market Price is `104 per share

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 Corporate Financial Reporting

31.05.21 : Settlement Date Market Price `105 per share

Option Premium 1,000 x `5

Mr. Nice Buyer

Seller of Options Contract 1,000 shares @ ` 102 Buyer of Options

Means he has given the right to Buyer to exercise or reject on settlement date. Buyer shall pay option
Premium
Books of Buyer
` `
1.2.21 Forward Contract Dr. 5,000
To Bank 5,000
Receipt of option premium

31.3.21 Forward Contract a/c Dr. 2,000

To Fair Value Gain (SPL) 2,000
Changes in Fair Value recorded in P/L
Gain = 1,000 Shares x (`104 - `102)

31.05. 21 Forward Contract a/c Dr. 1,000

To Fair Value Gain (SPL) 1,000
Changes in Fair Value recorded in P/L
Gain = 1,000 Shares x (`105 - `104)

Bank a/c Dr. 8,000

To Forward Contract a/c 2,000
Contract Settled
Books of Seller
` `
1.2.21 Bank a/c 5,000
Dr.
To Forward Contract 5,000
Receipt of option premium

31.3.21 Fair Value Loss (SPL)a/c 2,000

Dr.
To Forward Contract 2,000
Changes in Fair Value recorded in P/L
Loss = 1,000 Shares x (` 104 - `102)

31.05. 21 Fair Value Loss (SPL)a/c 1,000

Dr
To Forward Contract 1,000
Changes in Fair Value recorded in P/L
Loss = 1,000 Shares x (`105 - `104)

Forward Contract a/c Dr. 8,000

To Bank a/c 8,000
Contract Settled

20
Financial Instruments

Case Study 12.4.2 :

Mr. Ten has purchased a call option - details of which are as follows:
1.2.21 Lot Size 1,000 Shares of F Limited on 31.3.22 at an exercise price of
`102
Option Premium `5 per share
Market Price `100 per share
31.3.21: Reporting Date Market Price is `104 per share
31.05.21 : Settlement Date Market Price `105 per share

Option Premium 1,000 x `5

Seller Ten is buyer

of Options Contract 1,000 shares @ ` 102 Buyer of Options

Means he has given the right to Buyer to exercise or reject on settlement date. Buyer shall pay option
Premium
Books of Buyer
` `
1.2.21 Forward Contract Dr. 5,000
To Bank 5,000
Receipt of option premium

31.3.21 Forward Contract a/c Dr. 2,000

To Fair Value Gain (SPL) 2,000
Changes in Fair Value recorded in P/L
Gain = 1,000 Shares x (`104 - `102)

31.05. 21 Forward Contract a/c 1,000

Dr.
To Fair Value Gain (SPL) 1,000
Changes in Fair Value recorded in P/L
Gain = 1,000 Shares x (`105 - `104)

Bank a/c Dr.. 8,000

To Forward Contract a/c 2,000
Contract Settled
Case Study 12.4.3 :
Mr. Night has entered into a forward contract to buy shares - details of which are as follows:
Contract Date 1.2.21
Maturity Date 31.12.21
Exercise Price `104 per share
No. of Shares 1,000
Market price on 1.2.21 `100
31.3.21: Reporting Date Market Price is `110 per share
31.12.21 : Settlement Date Market Price `106 per share

Books of Buyer
` `

21
 Corporate Financial Reporting

1.2.21 Forward Contract Dr. -

To Bank -
Receipt of option premium

31.3.21 Forward Contract a/c Dr. 6,000

To Fair Value Gain (SPL) 6,000
Changes in Fair Value recorded in P/L
Gain = 1,000 Shares x (`110 - `104)

31.05. 21 Fair Value Loss a/c Dr. 4,000

To Forward Contract (SPL) 4,000
Changes in Fair Value recorded in P/L
Loss = 1,000 Shares x (`106 - `110)

Bank a/c Dr. 2,000

To Forward Contract a/c 2,000
Contract Settled in cash

13. Interest Rate Swap ( IRS)

An IRS is a contractual agreement between two parties to exchange interest payments. suppose Mr. A has
deposited or say Invested `1,00,000 and earns variable interest income as his interest is linked to market rate
of Interest.
On the other hand , let's presume there is Mr. B who too has deposited/invested `1,00,000 but is earning
`10,000 interest each year.
Presuming further Messer's A & B enter into IRS agreement.
Supposing further, in the current year A's Interest Income is ` 9,000 and Mr. B's `10,000 then, due to IRS
agreement, difference will be settled by payment of `1,000 by Mr. B to Mr. A.
Case Study 13.1
Mr. A owns investments worth `10,00,000 and gets interest income equal to LIBOR+1%. Since LIBOR goes
up and down, interest income of A is variable.
Mr. B also owns investments worth `10,00,000 and gets 1.5% every month.
Now suppose A- who is having variable interest income wishes to have a fixed income and likewise Mr. B-
who is having fixed interest income wish to have variable income.
So, A & B enter into a contract of interest rate swap.
Under the terms of the agreement mr. A agrees to pay Mr. B LIBOR+1% pm and Mr. B agrees to pay Mr. A
@1.5 % pm.
Suppose LIBOR rate = 0.25%
Then,
A shall receive monthly interest of ` 10,00,000 x ( 0.25 + 1%) = `12,500
and
Mr. B shall receive : `10,00,000 x 1.5% = `15,000
Thus A is suppose to pay `12,500 to B
while, B is suppose to pay to A ` 15,000
As such, Mr. b will pay net amount of `2,500 to A to settle IRS
Suppose LIBOR rate is 1.00%
In this Case
A's Interest income per month would be : `10,00,000 x (1%+1%) = `20,000
B's Interest income would be `10,00,000 x 1.5% = `15,000
So, A would Pay `5,000 to B to settle IRS

22
Financial Instruments

Case Study - 13.2

Swap limited entered into a SWAP arrangement on 1.4.21 whereby Swap limited would pay 6 months LIBOR
and would receive annual fixed Interest of 7% every half year on a notional amount of `50,00,000.
Following value of SWAP are available:
1.4.21 : NIL
31.3.22: `50,000
6 months LIBOR on 30.09.21 was 6% and on 31.3.22 is 8.5%.
Record the entries.
` `
1.4.21 Swap Contract - FA Dr. -
To Swap Contract - FL -
Receipt of option premium

30.09.21 Bank A/c Dr. 50,000

To Interest on IRS 50,000
Receipt of payment against settlement of IRS
Entity's Interest `50,00,000 x 6% = `3,00,000 is
swapped against ` 50,00,000 x 7% = `3,50,000

31.03. 21 Interest on IRS Dr. 75,000

To Bank a/c 75,000
Payment of payment against settlement of IRS
Entity's Interest `50,00,000 x 8.5% = `4,25,000
is swapped against ` 50,00,000 x 7% =
`3,50,000

14. Reclassification of Financial assets

When an entity changes its business model, entity shall re-classify the affected Financial Assets. However, an
entity shall never re-classify FL.
FA are classified as :
FVTPL
FVTOCI
Amortised Cost
As far as re-classification is concerned following possibilities may emerge:
1. From Amortised Cost to FVTPL

FVTOCI
2. From FVTPL to A. Cost

FVTOCI
3. From FVTOCI to A. Cost

FVTPL
Case Study - 14.1
Bonds of a company are measured at amortised cost. Entity wants to re-classify them into FVTPL. Book
Value of Bond on the date of re-classification is `1,35,000 while Fair Value is `90,000.
Solution:
Bonds - FVTPL - Dr. `90,000
P/L Dr. `45,000

23
 Corporate Financial Reporting

To Bonds - AC ` 1,35,000

Case Study - 14.2

Bonds of a company are measured at amortised cost. Entity wants to re-classify them into FVTOCI. Book
Value of Bond on the date of re-classification is `1,35,000 while Fair Value is `90,000.
Solution:
Bonds - FVTPL - Dr. `90,000
OCI Dr. `45,000
To Bonds - AC ` 1,35,000
Case Study - 14.3
Bonds of a company are measured at FVTPL. Entity wants to re-classify them into AC. Book Value of Bond
on the date of re-classification is `1,20,000 while Fair Value is `1,05,000.
Solution:
Bonds - AC Dr. `1,05,000
P/L Dr. ` 15,000
To Bonds - FVTPL ` 1,20,000

Case Study - 14.4

Bonds of a company are measured at FVTPL. Entity wants to re-classify them into FVTOCI. Book Value of
Bond on the date of re-classification is `1,20,000 while Fair Value is `1,05,000.
Solution:
Bonds - FVTOCI Dr. `1,05,000
OCI Dr. ` 15,000
To Bonds - FVTPL ` 1,20,000

Case Study - 14.5

Bonds of a company are measured at FVTOCI. Entity wants to re-classify them into FVTPL. Book Value of
Bond on the date of re-classification is `1,20,000 while Fair Value is `1,150,000.
Solution:
Bonds - FVTPL Dr. `1,50,000
To Bonds - FVTOCI ` 1,20,000
To SPL - Gain on Re-classification ` 30,000

Case Study - 14.6

Bonds of a company are measured at FVTOCI. Entity wants to re-classify them into AC. Book Value of Bond
on the date of re-classification is `90,000 while Fair Value is `1,05,000.
Solution:
Bonds - AC Dr. `1,05,000
To FVTOCI ` 90,000
To Gain on R/C ` 15,000

15. De-Recognisation of Financial assets

An entity de-recognizes a FA when:
a. The contractual rights to the cash flows from the asst expire or
b. Entity transfers FA
Any loss or gain (carrying amount less Consideration is recognised in P/L.
Case Study - 15.1
Entity Old-Line has subscribed to 50,000 10% debentures of `100 each for a 5 year period of Orange Limited,
Orange limited on 31.03.22 redeemed all the debentures.
Solution :

24
Financial Instruments

Since, the contractual rights to the cash flows from the asset ( Investments in Debentures of Orange Limited)
have expired on 31.03.22 on account of redemption, Entity Old-Line should de-recognise its FA ( Investments
in Debentures)

16. De-Recognisation of Financial Liabilities

an Entity shall remove FL from its balance sheet when it is extinguished that is the obligation specified in the
contract, has been discharged.
Case Study - 16.1
Entity Hi-End Limited has issued to 50,000 10% debentures of ₹100 each for a 5 year period .
31.03.22, Entity redeemed all the debentures.
Solution :
Since, the contractual obligations have been discharged on 31.03.22 on account of redemption, Entity Hi-End
Limited should de-recognise its FL (Debentures).

17. Off - Setting of FA and FL

FA and FL should be off set and net amount presented in the balance sheet provided:
a. Currently, entity has legally enforceable right to set off and
b. Company intends either to settle on a net basis or to realise asset and settle the liability.
Case Study - 16.2
Entity F-55 Limited owes T-55 limited `20,00,000 at the end of 31.03.23.
On the other hand T-55 limited owes F-55 limited `15,00,000 as at same date.
F-55 Limited has the legal right to set off the FA and FL but historically company F-55 Limited has settled one
month after T-55 limited has settled the dues.
Solution :
Although F-55 has a legal right to set off yet intentions appear otherwise. In the past settlement on net basis
was not done.
thus F-55 Limited should present FA and FL separately and not on net basis.

18. Regular Way Purchase or Sale of FA

In certain markets, parties enter into transactions for purchase or sale of securities on a particular date
however, actual delivery or settlement takes place on subsequent mutually agreed date.
Such transactions are termed as regular way transactions
Generally such transactions are regulated by conventions of the market.
As per Ind AS 109, a regular way purchase or sale of FA should be recognised and de-recognised using any
of the following method:
a. Trade Date Accounting
b. Settlement Date Accounting
In the case of Trade Date Accounting, recognition and de-recognition takes place on the trade date by
recognising the asset purchased and de-recognising the asset sold.
Under Settlement Date accounting, recognition and de-recognition is done on the date of actual delivery.

Case Study - 18.1

On 25.3.21 Fair Value per ordinary share is `45 of GMX India limited.
On this date, G Limited commits to buy 10,000 shares of GMS India Limited at Fair Value .
G Limited paid the price and accepted delivery of shares on 3.04.22.
G limited closes its books on 31.03.22.
Fair Value of GMS India's Share is :
`45.40 on 31.03.21
`45.30 on 03.04.22

25
 Corporate Financial Reporting

Show the entries in the books of G limited in respect of :

FA classified as Amortised Cost
FA classified as FVTOCI
FA classified as FVTPL
Under:
Trade Date Accounting and
Settlement Date accounting
Solution :
A. Trade Date Accounting
i. FA classified as AC:
` `
25.03.21 FA Dr. 4,50,000
To FL 4,50,000
10,000 x ₹45

31.03.21 No Entry for Fair value change

03.04.22 No entry for Fair value change

FL Dr. 4,50,000
To bank 4,50,000
ii.
FA classified as FVTOCI
` `
25.03.21 FA Dr. 4,50,000
To FL 4,50,000
10,000 x ₹45

31.03.21 FA Dr. 4,000

To OCI 4,000
10,000 x .40

03.04.22 OCI Dr. 1,000

To FA 1,000
10,000 x .10

FL Dr. 4,50,000
To bank 4,50,000
iii.
FA classified as PL
` `
25.03.21 FA Dr. 4,50,000
To FL 4,50,000
10,000 x ₹45

31.03.21 FA Dr. 4,000

To PL 4,000

26
Financial Instruments

10,000 x .40

03.04.22 PL Dr. 1,000

To FA 1,000
10,000 x .10

FL Dr. 4,50,000
To bank 4,50,000
B. Settlement Date Accounting
i.
FA classified as AC
` `
25.03.21 - Dr.
-

31.03.21 -
-

03.04.22 -

FA Dr. 4,50,000
To Bank 4,50,000
ii.
FA classified as FVTOCI
` `
25.03.21 No entry

31.03.21 FA Dr. 4,000

To OCI 4,000
10,000 x .40

03.04.22 OCI Dr. 1,000

To FA 1,000
10,000 x .10

FA Dr. 4,50,000
To bank 4,50,000
iii.
FA classified as PL
` `
25.03.21 No entry

31.03.21 FA Dr. 4,000

To PL 4,000
10,000 x .40

03.04.22 PL v Dr. 1,000

To FA 1,000

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 Corporate Financial Reporting

10,000 x .10

FA Dr. 4,50,000
To bank 4,50,000

19. Expected Credit Losses - ECL

Difference between carrying amount of financial assets (such as Loans and Advances) and Present Value of
total Cash Flows over remaining life is referred to as ECL.
Case Study - 19.1
Money- Mind Limited gave Loan of `10,00,000 in the beginning of year 1 for a tenure of 7 years. At the end
of 4th year (Current Year) Carrying amount of Loan is ` 5,00,000.
Present Value of total Cash flows over remaining Life is `3,50,000 .
Compute ECL.
Solution:
ECL = Carrying amount of Loan Less Present Value of cash flows over remaining Life
= `5,00,000 - ` 3,50,000 = ` 1,50,000

28