Measurement & Recognition of Financial Assets & Liabilities
1. Financial Assets are measured at:
a) Amortised Cost Method (ACM)
- If intention is to hold the asset till maturity.
- Only collect contractual cash flows (Interest or Principal).
b) Fair Value Through Other Comprehensive Income (FVTOCI)
- If intention is to hold asset for some time and sell before maturity.
- Collect contractual cash flows and benefit from sale of asset.
c) Fair Value Through Profit or Loss (FVTPL)
- If intention is to trade the asset.
- Only collect cash flows from sale (market prices).
Only two Financial Assets are shown at FVTPL:
- Investment in Equity Shares of any other entity
- Derivative Financial Asset
Note:
Investment in equity shares of any other entity can be shown at FVTOCI also. But this is an irrevocable choice and cannot be
changed back to FVTPL.
2. Financial Liabilities are generally measured at:
- Amortised Cost Method (ACM)
Note:
Only the following two financial liabilities should be measured at FVTPL:
- Derivative Financial Liability
- Financial Guarantee
Amortised Cost Method (ACM) - Detailed Summary
1. Initial Recognition of FA / FL at Fair Value
- Market Terms:
-> Use EIR (Effective Interest Rate)
-> Amount given/received is fair value
- Off Market Terms:
-> Use Market Rate / Similar Instrument Rate
-> Discount future cash flows
-> PV = Fair Value
2. Post Recognition Accounting (EIR Method)
- Charge Interest (FL) / Interest Income (FA) using EIR
- Use amortisation schedule to update balances
Discounting Rate:
- Market Terms: Use EIR
- Off Market: Use Market Rate or EIR if given
3. Journal Entries
For Financial Asset:
- Beginning: Financial Asset A/c Dr. To Bank
- Year End:
-> FA A/c Dr. To Finance Income
-> Bank A/c Dr. To FA A/c
For Financial Liability:
- Beginning: Bank A/c Dr. To Financial Liability
- Year End:
-> Finance Cost Dr. To FL
-> FL Dr. To Bank
4. Notes
(i) EIR = Rate where PV of future CFs = Initial CFs
(ii) Transaction Cost:
-> Added to FA, Subtracted from FL at recognition
(iii) Off Market Terms:
-> Difference = Adjusted in Journal Entry at beginning
5. Special Relationships - Accounting
Employer - Employee: Loan at concessional rate = Salary Income (Ind AS 19)
Lessor - Lessee: Security deposit = Adjust over lease term using EIR (Ind AS 116)
Parent - Subsidiary: Follow Ind AS 21, 109, 110 depending on nature
Example: Transaction at Market Terms (Ind AS 109)
A Ltd. issued 10% Debentures (Face Value Rs.1,00,000) at Rs.94,000. Interest is paid annually. It will be redeemed at the end of 3rd
year.
Step 1: EIR Calculation (Trial & Error Method)
PV at 12% = Rs.95,220
PV at 13% = Rs.92,910
EIR = 12% + (95,220 - 94,000)/(95,220 - 92,910) × (13 - 12) = 12.53%
Step 2: Interest Expense Calculation
Year | OB |
[email protected]% | Paid | CB
1 | 94,000 | 11,778 | 10,000 | 95,778
2 | 95,778 | 12,001 | 10,000 | 97,779
3 | 97,779 | 12,221 | 1,10,000 | -
Step 3: Journal Entries - Year 1
At Beginning:
Bank A/c Dr. 94,000
To 10% Debentures A/c 94,000
At Year End:
Option 1:
Interest Expense Dr. 11,778
To 10% Debentures A/c 11,778
10% Debentures A/c Dr. 10,000
To Bank 10,000
Option 2:
Interest Expense Dr. 11,778
To Bank 10,000
To 10% Debentures A/c 1,778
Example: Transaction at Off Market Terms (Ind AS 109)
A Ltd. provides concessional Loan of Rs.1,00,000 to its Employee at 6% p.a. for 3 years.
Employee pays annual interest and principal at year 3.
Market Rate = 10%
Step 1: PV of Loan = Rs.90,016
Prepaid Staff Cost = Rs.9,984 (balancing fig)
Step 2: Interest Income (EIR 10%)
Year | OB | Interest@10% | Received | CB
1 | 90,016 | 9,002 | 6,000 | 93,018
2 | 93,018 | 9,302 | 6,000 | 96,320
3 | 96,320 | 9,680 | 1,06,000 | -
Step 3: Journal Entries - Year 1
At Beginning:
Loan to Staff A/c Dr. 90,016
Prepaid Staff Cost A/c Dr. 9,984
To Bank A/c 1,00,000
At Year End:
Loan to Staff A/c Dr. 9,002
To Interest Income A/c 9,002
Bank A/c Dr. 6,000
To Loan to Staff A/c 6,000
Staff Cost A/c Dr. 3,328
To Prepaid Staff Cost A/c 3,328
