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Mr. R. Venkata Subramani, a published author of two volumes of the series ‘Accounting for Investments’, known for his in-depth practical exposure in the field of Financial Instruments has brought out the book “Financial Instruments as per Ind AS” which would prove to be an invaluable companion for anyone dealing with the financial instruments – accounting, reporting, presentation and disclosure.
The key concepts enunciated by the accounting standards on financial instruments are brought out in a very simple manner. Each topic is discussed along with adequate illustrations to elucidate the topic for getting an insight into the same. Journal entries along with the ledger accounts, trial balance, profit & loss account and balance sheet are also given to get a complete grasp of the topic covered which makes this book an extremely useful.
Dr. Rajkumar S. Adukia, FCA, ACS, ACMA, LL.B. MBA., Dip IFRS (UK), Ph.D.
Central Council Member, ICAI (1998 – 2016)
Chairman, Ind AS (IFRS) Implementation Committee (2014-15)
My compliments to CA. R. Venkata Subramani in bringing out the book ‘Financial Instruments as per Ind AS’ and making a very sincere attempt to bring out the nuances on financial instruments, relevant to Ind AS. The concepts have been explained in a lucid language with ample illustrations. Hedge accounting is another area explained in simplified manner with relevant examples. The writings on new impairment methodology should also be quite useful to the readers to understand the concept with more clarity. All the best.
Ind AS 109 mandates financial instruments that are classified as fair value through profit or loss account to be fair valued whenever the financial statements are prepared. This ipso facto means that for all the listed entities, fair valuation of such financial instruments should be performed on a quarterly basis due to the listing requirements. Below is the partial list of financial instruments that should be valued on a fair value basis at every reporting period.
- Equity investments
- Debt securities (other than the ones classified as amortised cost)
- All derivative contracts including equity derivatives, interest rate derivatives, commodity derivatives, foreign exchange derivatives and credit derivatives
- Financial guarantee contracts
- Loan commitments
- Pre-payment features affecting the fair value of long term loans payable
- Interest in subsidiaries, associates and joint ventures which are not valued at cost
- Preference shares – convertible preference shares, cumulative preference shares, non-cumulative preference shares, compulsorily convertible cumulative preference shares, compulsorily convertible non-cumulative preference shares, preference shares with a put option and call option
- Long term security deposits – interest bearing security deposits, interest free security de-posits, interest bearing security deposits having fixed maturity, interest free security de-posits having fixed maturity
- Long term loans to subsidiaries, joint ventures and associates which are given at a con-cessional rate of interest or zero percentage
- Debentures – redeemable convertible debentures, redeemable non-convertible debentures, either with or without put and call options
- Term loans from banks where the transaction costs are written off in an earlier period
Contact: firstname.lastname@example.org; Mobile: +919444025255
Three day training course on Financial Instruments as per Ind AS requirements
10 am to 1 pm
|Basic concepts of derivative instruments
– What are derivatives and why we need them
– Meaning of Forward, Futures and options
– Pricing futures
– Hedging, speculation & gambling
– Option basics: ITM, ATM, OTM, Exercise, Lapse
2 pm to 5 pm
|Advanced concepts on derivative instruments
– Greeks in options pricing
– Black-Scholes model / Binomial model
– Put-call parity
Features of equity and equity derivatives
– Exercise with practical problems
Features of Interest Rate Derivatives
– Interest Rate Swaps
– Interest Rate CAPs / Floors
– Interest Rate Collars / Reverse Collars
– Cross Currency Swaps
Fixed Income Securities
Credit Default Swaps
Total Return Swaps
10 am to 1 pm
|Accounting Standard Ind AS 32
– Financial asset and financial liabilities
– Compound instruments
– Liability Vs. Equity
2 pm to 5 pm
|Accounting Standard Ind AS 109
– Recognition, measurement, subsequent measurement
– Amortized cost
– Classification, reclassification & derecognition
– Embedded derivatives
Ind AS 107 Disclosures
– Live examples from published accounts
Report of the working group on implementation of Ind AS by Banks
– Discussion of the report and practical implications thereof
10 am to 11.15 pm
|Accounting for financial instruments
– Interest rate derivatives
– Fixed income securities
Effect of changes in foreign exchange rates Ind AS 21
– Impact on financial instruments / hedge accounting
11.30 am to 1 pm
– Fair Value Hedge
– Cash Flow Hedge
2 pm to 5 pm
– Case studies on Hedge Accounting
Financial instruments nuances in First time adoption
For details please send email to email@example.com or contact +919444025255
Financial liabilities that are non-derivatives are normally valued at amortised cost. Effective interest rate is computed for financial liabilities and based on that the interest expense is recognised on a periodical basis. Transaction costs to source the liability are reduced from the financial liability for the purpose of calculating the effective interest rate.
An entity can, however, value a financial liability at fair value provided it eliminates or significantly reduces an accounting mismatch. When an entity avails this option, then the financial liability is valued at fair value. The difference between the carrying value and the fair value is recognised in the profit and loss account.
Let us assume that an entity issues a debt instrument for Rs.100 crores. Let us also assume that the debt carries an interest rate of 8% per annum. The debt being a non-derivative financial liability should be categorised as amortised cost liability and valued at amortised cost at every reporting period. Let us also assume that at the time of issue, the bench mark interest rate was 6% and the credit risk premium amounts to 2% based on the credit rating of the entity.
If the entity exercises the option to classify the financial liability by availing the ‘Fair Value Option’ (FVO) option, then the liability will be valued at fair value on every valuation date. If the liability is to be valued on a fair value basis, then it is necessary to find out the appropriate rate at which the liability and associated cash flows should be discounted to arrive at the fair value. Let us assume that the bench mark interest rate becomes 7% at the end of the year and the credit rating remains the same. The financial liability will be valued based on 9% (7% towards bench mark interest plus 2% towards credit risk premium) to arrive at the fair value of the liability. Let us assume that the fair value of the liability at the end of the year based on 9% is Rs.97 crores. This means that the carrying value of the liability would be written down from Rs. 100 crores to Rs. 97 crores resulting in a profit of Rs. 3 crores. The entity will pass the following entry to record the fair value of the financial liability:
|Date||Particulars||Debit (₹)||Credit (₹)|
|8% Debt Instrument (Financial liability) A/c||3,00,00,000|
|To Fair Value changes in Financial Liability (P&L) A/c||3,00,00,000|
|(Being the fair value of the financial liability of Rs.97 crores recorded by transferring the difference between the carrying value and the fair value amounting to Rs.3 crores to the P&L account)|
Increase in Credit Risk
Let us assume that the bench mark interest rate remains the same viz., 6% at the end of the year. The entity incurs losses in the next 4 quarters and is perceived by the market as a risky enterprise. The credit rating of the entity goes down and the credit risk premium increases from 2% to 4%. Now the financial liability will be discounted at 10% (6% towards bench mark interest rate plus 4% towards credit risk premium). Let us assume discounting the cash flows based on 10% results of the financial liability being valued at Rs. 95 crores. The entity will then record a further profit of Rs.2 crores towards the fair value changes of the financial liability. The entity will pass the following entry:
|Date||Particulars||Debit (₹)||Credit (₹)|
|8% Debt Instrument (Financial liability) A/c||2,00,00,000|
|To Fair Value changes in Financial Liability (P&L) A/c||2,00,00,000|
|(Being the fair value of the financial liability of Rs.95 crores recorded by transferring the difference between the carrying value and the fair value amounting to Rs.3 crores to the P&L account)|
Here the entity earns a profit of Rs.5 crores without having to do anything. In fact, the entity is now worse off than it was at the beginning of the year since the credit rating has gone down. In spite of this, the entity makes a profit of Rs.5 crores. This looks a bit weird and is counterintuitive, as this ipso facto means that the entity becomes more profitable if it becomes more risky. The accounting standard has duly recognised this anomaly and has appropriately plugged the loop hole. Now as per Ind AS 109, the fair value changes on account of credit risk is recognised in the other comprehensive income (OCI) while the fair value changes on account of changes in the bench mark interest rate is recognised in the profit and loss account.
The Government of India named Sri T.N. Manoharan the first accountancy professional from Tamil Nadu to be conferred with the Padma Shri award. Manoharan is based out of Chennai, India and was recently appointed as a board member of the scam-hit Satyam Computer Services and later made as its chairman before the company was taken over by the Mahindra group. He is a distinguished professional and has several acheivements to his credit. Son of T.L. Narayana Chowdhry, a 93-year-old a freedom fighter, Manoharan, 52, is a partner in Manoharan Chowdhry Associates. He is also the past president of the Institute of Chartered Accountants of India (ICAI).
Padma Shri is an award given by the Government of India generally to Indian citizens to recognize their distinguished contribution in various spheres of activity including the Arts, Education, Industry, Literature, Science, Sports, Medicine, Social Service and public life. It stands fourth in the hierarchy of civilian awards after the Bharat Ratna, the Padma Vibhushan and the Padma Bhushan. On its obverse, the words “Padma”, meaning lotus in Sanskrit and “Shri”, in Devanagari script, appear above and below the lotus flower. The geometrical pattern on either side is in burnished bronze. All embossing is in white gold.
‘Accounting for Investments’ blog congratulates Sri T. N. Manoharan on being conferred with the Padma Shri award.
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R. Venkata Subramani
ECL / CECL
IFRS / US GAAP / Ind AS