Life-cycle of financial instruments
In the case of an equity instrument investment, impairment; according to IFRS (International Financial Reporting Standards) means a significant or prolonged decline in the fair value of that investment below its cost. And as per the US GAAP (generally accepted accounting principles), impairment is when an entity considers a decline in fair value to be other than temporary.
Indicators of impairment include the financial health of the counterparty, intention of the investor to hold the asset for a reasonable length of time to permit recovery in value, the duration and extent that the market value has been blow cost, and the prospects of a market price recovery, explains R. Venkata Subramani in the first volume of Accounting for Investments: Equities, futures and options ( www.wiley.com). Among the other differences that he highlights, in this regard, are reclassification, trading securities, and available-for-sale securities.
While in IFRS, the IAS (International Accounting Standard) 32, IAS 39, and IFRS 7 deal with the principles involved in recognition, measurement, disclosure, and presentation of financial instruments, the Indian pronouncements from the Institute of Chartered Accountants of India (ICAI) are AS 30 on the recognition and measurement of financial instruments and AS 32 on the disclosures. In sum and substance, the Indian Accounting Standards are the same as the corresponding IFRS, informs T. N. Manoharan in the foreword. Even though investment banking institutions suffered a serious setback due to the financial crisis that began in 2008, banks, hedge funds, and several other financial institutions do trade and invest in several financial instruments, the author observes in the preface.
“The need for comprehensively understanding these financial instruments, including the accounting aspects involved, assumes great importance. Even before the beginning of a trading day, the front office should know the positions of the various financial instruments held by the entity and have the flexibility to obtain a detail breakdown of cost, and so on.”
The book should be a handy reference for accountants because it deals with `the entire life-cycle’ of the different financial assets, and is replete with examples that drill down to details such as journal entries, general ledger accounts, trial balance, income statement, and balance sheet. More importantly, the book aspires to fill `the knowledge gap’ between the technology people and the finance professionals, in projects concerning the specialised field of investment accounting.
Recommended addition to the CAs’ shelf.
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