Financial Instrument

D-Fortune Classes & V’Smart Academy – CA.
Jai Chawla
FINANCIAL INSTRUMENTS
IND AS 109, 32 & 107
UNIT – 1
BASIC KNOWLEDGE ABOUT FINANCIAL INSTRUMENTS

Before we proceed for in depth discussion we should understand the basic knowledge
of some of the terms, which are as under:
What is Financial Instrument?

FI is any contract that gives rise to Financial Assets for One Entity and Financial
Liability or Equity for Another Entity.
There can be two types of FI:

Primary FI : such as receivables, payables, loans
Derivatives FI: such as futures, options, forwards, swaps
What is a Financial Asset?

A Financial Asset is any asset i.e.
(a) cash, includes deposits of cash with banks or financial institution
(b) any equity instrument of another entity (such as investment in equity shares of
another entity i.e. BHEL, RIL)
(c) a contractual right to receive cash or another financial asset from another
entity (such as trade receivables, loan receivables, bonds receivables)
(d) a contractual right to exchange the financial assets or financial liability with
another entity under the conditions that are favorable to the entity.
(e) A contract that will or may be settled in entity‟s own equity instruments and is-
A non-derivative for which the entity is or may be obliged to receive a variable
number of entity‟s own equity instruments; (where shares are used as currency)
(f) Derivative Contracts
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D-Fortune Classes & V’Smart Academy – CA. Jai Chawla
ITEMS of ASSETS FA – Yes/No

Building
Receivables
Inventory
Advance Tax
Loan Given
Rent Advance
3 month rent deposit
with
loandlord as security
Advance to Supplier
Intangible Assets
Investment Property
Capital WIP
Investment in
Debentures/Bonds
Investment in Gold
Investment in Gold
Bonds
Equity Shares held in
other company
Leases
What is Financial Liability?

Financial liability is any liability i.e.
(a) A contractual obligation to deliver cash (such as trade payables, loan liabilities)
or to deliver another financial asset to another entity.
(b) A contractual obligation to exchange the financial asset or financial liability with
another entity under the conditions which are potentially unfavorable to the
entity.
(c) A contract that will or may be settled in entity‟s own equity instruments and is:
A non-derivative for which the entity is or may be obliged to deliver a variable
number of entity‟s own equity instruments; (a liability which is to be settled in
variable no. of own equity shares, which are used as currency)
(d) Derivative Instruments
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ITEMS of FL – Yes/No
LIABILITIES
Loan Taken
Creditors/Payables
Salary Payable
Credit balance of
debtors
Debentures Issued
Provision for Income
Tax
Security deposit
accepted (refundable)
Contingent Liabilities
Eg. Guarantees given
Preference Share
capital redeemable
Dividend Proposed
Dividend approved
Q178. (ICAI New Syllabus Module)

A Ltd. (the ‘Company’) makes a borrowing for INR 10 lacs from RBC Bank, with bullet
repayment of INR 10 lacs and an annual interest rate of 12% per annum. Now, Company
defaults at the end of 5th year and consequently, a rescheduling of the payment schedule is
made beginning 6th year onwards. The Company is required to pay INR 1,300,000 at the end
of 6th year for one time settlement, in lieu of defaults in payments made earlier.
(a) Does the above instrument meet definition of financial liability? Please explain.
(b) Analyse the differential amount to be exchanged for one-time settlement.
Solution:
(a) A Ltd. has entered into an arrangement wherein against the borrowing, A Ltd. has
contractual obligation to make stream of payments (including interest and principal).
This meets definition of financial liability.
(b) Let‟s compute the amount required to be settled and any differential arising upon
one time settlement at the end of 6th year –
 Loan principal amount = Rs. 10,00,000
 Amount payable at the end of 6th year = Rs. 12,54,400 [10,00,000 * 1.12 * 1.12
(Interest for 5th& 6th year in default plus principal amount)]
 One time settlement = Rs. 13,00,000
 Additional amount payable = Rs. 45,600
The above represents a contractual obligation to pay cash against settlement of a financial
liability under conditions that are unfavorable to A Ltd. (owing to additional amount
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payable in comparison to amount that would have been paid without one time settlement).
Hence, the rescheduled arrangement meets definition of „financial liability‟.
Q179. (ICAI New Syllabus Module)

Target Ltd. took a borrowing from Z Ltd. for Rs. 10,00,000. Z Ltd. enters into an
arrangement with Target Ltd. for settlement of the loan against issue of a certain number
of equity shares of Target Ltd. whose value equals Rs. 10,00,000. For this purpose, fair
value per share (to determine total number of equity shares to be issued) shall be
determined based on the market price of the shares of Target Ltd. at a future date, upon
settlement of the contract. Evaluate this under definition of financial instrument.
Solution:
In the above scenario, Target Ltd. is under an obligation to issue variable number of equity
shares equal to a total consideration of Rs. 10,00,000. Hence, equity shares are used as
currency for purpose of settlement of an amount payable by Target Ltd. Since this is
variable number of shares to be issued in a non-derivative contract for fixed amount of
cash, it tantamounts to use of equity shares as „currency‟ and hence, this contract meets
definition of financial liability in books of Target Ltd.
What is Equity? (Fix Payment ki koi obligation nai hoti)

An equity instrument is any contract that evidences a residual interest in the net assets
of an entity after deducting all of its liabilities. Equity Holder can-not claim on the
company, if he/she can claim he is not equity he is someone else.
The most important characteristic of equity instrument is it does not have contractual
obligation.
ITEMS Equity – Yes/No

Equity Share Capital
Reserves and Surplus
Redeemable Pref Share

Capital
Irredeemable Pref. Shares
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Perpetual Debt Instruments

(Irredeemable)
100% Compulsorily
Convertible Debentures
Convertible Debentures at
the option of Holder
Share Warrants
Convertible Debentures at
the option of Issuer
Irredeemable Preference
shares with non-cumulative
dividend
Equity comprises of:

(a) Non-puttable equity shares issued by entity (No obligation to redeem)
(b) Instruments which are convertible in fixed no. of equity shares (Fixed for Fixed)
(c) Puttable instruments subject to fulfillment of certain conditions.
Exclusion from scope of IndAS 109 although following items may be in the nature
of financial assets and financial liabilities:
1. Share based payments (IndAS 102)

2. Employee Benefits payable (IndAS 19)
3. Rights/Obligations arising under construction contracts (IndAS 11/18/115)
4. Contracts of Insurance (IndAS 104)
5. Contracts under Business Combinations (IndAS 103)
6. Contingent Liabilities and Contingent Assets (IndAS 37)
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Settlement in own equity shares of entity:

Consideration No. of own equity Classification with reason
for financial shares to be issue
instrument in settlement
Fixed Fixed Equity – Neither issuer has any
obligation to pay cash nor holder
is exposed to any variability.
It is called Fixed for Fixed
Test.
Fixed Variable Financial Liability – Issuer has
(equity shares will obligation to provide variable
be issue at the fair equity shares i.e. equity
value prevailing at instruments are being used as
the time of currency for settlement
redemption)
Variable Fixed Financial Liability – issuer does
not have any obligation to pay
cash but holder is exposed to
variability.
Variable Variable Financial Liability – both parties
are exposed to variability and
equity shares are being used as
currency.
Q180. (ICAI)
DF Ltd. issues convertible debentures to JL Ltd. for a subscription amount of Rs. 100
crores. Those debentures are convertible after 5 years into 15 crore equity shares of Rs.
10 each.
Examine the nature of the financial instrument.
Answer: This contract is an equity instrument because changes in the fair value of equity
shares arising from market related factors do not affect the amount of cash or other
financial assets to be paid or received, or the number of equity instruments to be received
or delivered.
Q181. (ICAI)
CBA Ltd. issues convertible debentures to RQP Ltd. for a subscription amount of Rs. 100
crores. Those debentures are convertible after 5 years into equity shares of CBA Ltd at a
fair value at the time of redemption.
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Examine the nature of the financial instrument.
Answer: Such a contract is a financial liability of the entity even though the entity
can settle it by delivering its own equity instruments. It is not an equity instrument
because the entity uses a variable number of its own equity instruments as a means to
settle the contract. The underlying thought behind this conclusion is that the entity
is using its own equity instruments ‘as currency’.
PUTTABLE INSTRUMENTS:
In a simple term – puttable instrument means redeemable equity shares.
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
Put back means redemption. Therefore, puttable instruments are „financial liabilities‟.
Exception – Puttable Instruments are not financial liability but equity instruments if
they fulfill all the following conditions:
1. It entitles the holder to a pro rata share of the entity's net assets in the
event of the entity's liquidation. Providing pro rata share means providing
residual interest in the net assets of any entity. It should be exact pro rata
neither lower nor higher.
Example: 1
ABC Ltd. has two classes of puttable shares – Class A shares and Class B shares. On
liquidation, Class B shareholders are entitled to a pro rata share of the entity’s
residual assets up to a maximum of Rs. 10,000,000.
There is no limit to the rights of the Class A shareholders to share in the
residual assets on liquidation. Examine the nature of the financial instrument.
The cap of Rs. 10,000,000 means that Class B shares do not have entitlement
to a pro rata share of the residual assets of the entity on liquidation. They
cannot therefore be classified as equity.
2. If it is sub-ordinate to all other classes of instruments. That means it has no

priority over other claims to the net assets. These instruments are rank last
for the repayment in the event of liquidation.
3. They should have Identical features in the entire class of puttable
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instruments
4. Holders of puttable instruments should have no other contractual right to
receive cash or entity‟s own equity in variable numbers that could satisfy the
definition of financial liability.
5. Return on puttable instruments (Expected cash flows attributable to the
instruments) should only be based on - Profit/Loss, change in Net assets and
change in the fair value of net assets and not any other factor other than
these three. For example if return is based on index price then such
instrument is not equity.
Executory Contracts are outside the scope of IndAS 109:

 Contracts to buy or sell non-financial assets/items for self-consumption are
not Financial Instruments.
 Contracts to buy or sell non-financial assets/items and to be settled net in
cash are financial instruments (Derivative contracts), i.e. contracts without any
physical delivery of Non-Financial items/assets.
 Contracts between the parties where objective it to take quick delivery and
quickly resell it may also be derivative contracts hence they may be financial
instruments.
Example:
ABC Ltd. enters into a contract to buy 100 tonnes of cocoa beans at 1,000 per tonne
for delivery in 12 months. On the settlement date, the market price for cocoa beans is
1,500 per tonne. If the contract cannot be settled net in cash and this contract is
entered for delivery of cocoa beans in line with ABC Ltd.‟s expected purchase/ usage
requirements, then own-use exemption applies. In such case, the contract is
considered to be an executory contract outside the scope of Ind AS 109 and hence,
shall not be accounted as a derivative.
If the contract can be settled in net cash then it will become Derivative contract and
treated as Financial Asset or Liablity.
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PRESENTATION IN BALANCE SHEET

Division –II (IndAS Based Entities)
Particulars Note CY PY
no.
1. 2. 3. 4.
(1) Assets
Non-current assets
(a) Property, plant and
equipment
(b) Capital work-in-progress
(c) Investment property
(d) Goodwill
(e) Other intangible assets
(f) Intangible assets under
development
(g) Biological assets other
than bearer plant
(h) Financial assets
(i) Investment
(ii) Trade receivable
(iii) Loan
(i) Deferred tax assets (net)
(j) Other non-current assets
(2) Current assets:
(a) Investment
(b) Financial assets
i. Investments
ii. Trade receivable
iii. Cash and cash
equivalents
iv. Bank balance other
than (iii) above
v. Loans
vi. Others (to be
specified)
(c) Current Tax Assets (Net)
(d) Other current assets
Total Assets
Equity and Liabilities
Equity
(a) Equity share capital
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(1) (b) Other equity

Liabilities
Non-current liabilities
(a) Financial liabilities
i. Borrowings
ii. Trade payables
iii. Other financial
liabilities (other than
those specified in
item (b) to be
specified)
(b) Provisions
(c) Deferred tax liabilities
(net)
(d) Other non-current
liabilities
Current liabilities
(a) Financial liabilities
i. Borrowings
ii. Trade payables
iii. Other financial
liabilities (other
than those
specified in item
(c), to be
specified)
(b) Other current liabilities
(c) Provisions
(d) Current tax liabilities
(Net)
Total Equity and liabilities
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UNIT – 2
RECOGNITION & MEASUREMENT OF
FINANCIAL INSTRUMENTS
INITIAL RECOGNITION
Initial Recognition means – First Time Recording in the books of accounts.
Financial Assets – Initial Recognition at Fair Value

(a) Amortised Cost – at Fair Value +/- Transaction Cost
(b) Fair Value through OCI (FVTOCI) – at Fair Value +/- Transaction Cost
(c) Fair Value through P&L (FVTPL) – at Fair value (transaction cost is to be
charged to P&L a/c directly)
Financial Liabilities – Initial Recognition at Fair Value

(a) Amortised Cost – at Fair Value +/- Transaction Cost
(b) Fair Value through P&L (FVTPL) – at Fair value (transaction cost is to be
charged to P&L a/c directly)
Equity -
Since it is a residual interest in the net assets of the company therefore it is
recognised at Residual Value not fair value.
SUBSEQUENT RECOGNITION
Subsequent Recognition means – Measurement at Balance Sheet date (reporting date)

Financial Assets
Financial Assets are classified into 3 categories for the accounting purpose:
(i) Amortised cost
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(ii) Fair value through Other Comprehensive Income (FVTOCI)

(iii) Fair value through Profit & Loss(FVTPL)
The above classification will be based on entity‟s “Business Model” for managing the
financial assets.
The classification will be made as under:
(a) Financial assets measured at Amortised Cost -

 If the business model is such that the objective is to hold such asset till
maturity date and earn contractual cash flows entirely.
 Such asset can generate INTEREST INCOME only on the instruments. (i.e. not
able to sale and earn other income like capital gain)
 And the instrument generates cash flows only from INTEREST & PRINCIPAL on
SPECIFIED DATES
eg. FD, LIC, Debentures redeemable in cash, staff advances, Govt. Securities and
Bonds.
Initial Recognition: If the above three conditions are satisfied then financial
asset will be measured at fair value i.e. amortised cost (PV of future cash
flows at ERI) after considering any initial transaction cost.
Subsequent Recognition:
1. Income shall be recorded in the profit and loss statement always.
2. At Balance sheet date such Financial Asset is required to be measured at
Present value of agreed contractual cash flows calculated using “Effective Rate
of Interest” (IRR)
(b) Financial assets measured at Fair Value Through OCI

(FVTOCI)-
 If the business model of an entity is such that the objective is not to hold till
maturity date but to sell such instruments in the market or having no maturity;
 Such Asset can generate INTEREST as well as OTHER INCOME (such as
capital gain) from the sale of instrument;
 And the instrument generates PRINCIPAL & INTEREST on SPECIFIED DATES.
Then the financial asset will be measured at FVTOCI eg. Listed company‟s
debentures, irredeemable instruments etc
Initial Recognition: Financial asset under FVTOCI will be measured at fair

value after considering any initial transaction cost. (FV +/- Transaction
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Cost)
1. Regular (specified) Income shall be recorded in the profit and loss statement
always.
2. At Balance sheet date such Financial Asset is required to be measured at Fair
Value (market value) and any changes in carrying amount due to fair valuation will
be accumulated in OCI. (since it is unrealized gain or loss)
3. On derecognition of FA under this category, accumulated balance in OCI in
respect of such FA shall be recycle (transfer) to P&L a/c. (it means it becomes
realised gain/loss)
(c) Financial assets measured at Fair Value through P&L

(FVTPL)-
This is a residual category and the financial assets falls under this category are
generally those assets whose contractual cash flows are not fixed and they does not
generate cash flows on specified dates such as Investments in equity shares of other
companies.
eg. Equity shares (except not held for trading), derivatives.
Initial Recognition: Financial asset under FVTPL will be measured at fair value only.
Transaction cost shall always be transfer to Profit and loss a/c immediately.
1. Regular Income shall be recorded in the profit and loss statement always.
2. At Balance sheet date such Financial Asset is required to be measured at Fair
Value (market value) and any changes in carrying amount due to fair valuation will
be recognised in P&L A/c.
Example: We bought share of Infosys Ltd. at Rs.2100. Transaction cost is Rs.2. On

quarter end FV of shares is Rs.2250. These shares are designated as FVTPL (held for
trading)
Answer: Day-1 Investment in shares Dr. 2100
Transaction cost (P&L) Dr. 2

To Bank A/c 2102
Quarter end –
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Investment in shares Dr. 150
To Fair value gain (P&L) 150
Now suppose if we sell these shares at Rs.2500 and transaction cost is Rs.3
Bank Dr. 2500
To investment in shares A/c 2250
To P&L (Gain) A/c 250
Transaction cost (P&L) A/c 3

To Bank A/c 3
Exception:
Equity Instruments are generally Held for Trading. However if equity instruments are not
held for Trading then there is an option that Equity instruments (not held for trading) may
be designated as FVTOCI.
Is equity instrument (FA) held for trading? If Yes :-then FVTPL always.
If No:- there is an option to designate it to FVTOCI instead of FVTPL (it means holder
may opt to categorize under FVTOCI)
NOTE: If the option of FVTOCI is selected for equity shares not held for trading, then
any resulting gain/loss on REVALUATION (subsequent recognition) will be transferred to
OCI and NO RECYCLING to P&L is permissible and this option is IRREVOCABLE. On sale
of such option, it will also be reflected in OCI and not P&L.
Example: We bought shares of Infosys at Rs.2100. Transaction cost is Rs.2. On quarter

end FV of shares is Rs.2250. These shares are designated as FVTOCI, not held for
trading.
Answer: Day-1 Investment in shares Dr. 2102

To Bank A/c 2102
Quarter end –
Investment in shares Dr. 148
To OCI 148
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Now suppose if we sell these shares at Rs.2500 and transaction cost is Rs.3
Bank Dr. 2497
To investment in shares A/c 2250
To OCI A/c 247
Q182: A Ltd. has made a security deposit whose details are described below. Make
necessary journal entries for accounting of the deposit. Assume market interest rate for
a deposit for similar period to be 12% per annum.
Particulars Details
Date of Security Deposit (Starting date) 1/4/X1
Date of Security deposit (finishing date) 31/03/X6
Description Leases
Total Lease Period 5
Discount Rate 12%
Security Deposit (A) 10,00,000
PV of the deposit at beginning (B) 5,67,427
Prepaid lease payment at beginning (A-B) 4,32,573
Solution: The above security deposit is an interest free deposit redeemable at the end of
lease term for Rs. 1000000. Hence this involves collection of contractual cash flows at
specified date and not able to sale in the market hence will be categorized under
“Amortised Cost”.
Journal Entry:
At beg. Security Deposit a/c Dr. 5,67,427
Prepaid Lease Exp A/c Dr. 4,32,573
To Bank A/c 10,00,000
At the end of 1st Year:

Security deposit a/c Dr. 68,091
To Interest income a/c 68,091
Prepaid lease expense shall be amortised over the life of lease term on SLM basis unless
any other approach is reasonable.
Rent Expense a/c Dr. 86,515
To Prepaid Expense a/c 86,515
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Q183: (Staff Welfare)

XYZ Ltd. Grants loans to its employees at 4% amounting to Rs. 10,00,000 at the beginning
of 2015-2016. The principal amount is repaid over a period of 5 years whereas the
accounted interest computed on reducing balance at simple interest is collected in 2 equal
annual instalments after collection of the principal amount.
Assume the benchmark interest rate is 8%.
Show the accounting entries on 1.4.2015 and 31.3.2016.
Solution:
Year CCF PV @ 8% Remarks

15-16 2,00,000 185185 Principle
16-17 2,00,000 171467 Principle
17-18 2,00,000 158766 Principle
18-19 2,00,000 147006 Principle
19-20 2,00,000 136118 Principle
20-21 60,000 37810 Interest
21-22 60,000 35010 Interest
Financial Asset (at the 8,71,362
beginning)
Employee Expenses = 10,00,000 – 8,71,362 = 1,28,638/-
Finance charges for 1st Year = 871362 x 8% = 69,709/-

U can calculate subsequent finance charges (income) on the balance outstanding
balance accordingly.
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SUBSEQUENT RECOGNITION
FINANCIAL LIABILITY
Under IND-AS 109, Financial Liabilities are classified into 2 categories i.e.
(i) Amortised cost (Default category)
(ii) FVTPL (Fair value to P&L)
(a) Amortised Cost:
Accounting treatment of financial liability which can be measured at amortised cost:
 For the purpose of accounting, we need EFFECTIVE INTEREST RATE (i.e. IRR)
for the financial liability measured at amortised cost.
 The effective interest rate will be given in the question or we need to calculate
interest by interpolation technique.
TYPES OF FINANCIAL LIABILITY UNDER AMORTISED COST:

 Compound FI
 Non compound FI
Amortised Cost - COMPOUND FINANCIAL INSTRUMENT

Compound Financial Instruments are those instruments which are having
features of both equity as well as financial liability.
Modification in Financial Instruments (Early settlement/late settlement):

Modification may rise to – Change in ERI, Change in Service Period, Change in
repayment terms like contractual interest rate or principle repayment or change in
Fair value of instruments. Following steps are to be followed:
Step 1 – Determine the carrying values of Financial Assets/Liability and Equity as
on Modification date.
Step 2 – Calculate Revised values of FA/FL and Equity on modification as per

revised terms such as revised ERI, revised period, revised CCF and revised Fair
Values etc.
Note: If revised ERI is not given but as per question‟s information it shows that
ERI should be revised then we have to calculate IRR
Step 3 – Difference between Revised values of FA/FL/Equity and Carrying values
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of the same shall be treated as under –

Difference in FA/FL shall be transferred to Profit and Loss a/c (Gain or Loss)
Difference in Equity shall be transferred to Other Equity (SOCE)
Step 4 – Settle the amount of FA/FL or Equity as per the question‟s requirement
(b)Fair Value through Profit and Loss (FVTPL):

Financial liability are measured at FVTPL when they are held for trading . A financial
liability is held for trading when it is acquired or incurred principally for the purpose of
selling or repurchasing it in the near term or when it is a derivative. (except a derivative
of hedging in the nature of Cash Flow)
Q184: (Non-Compound Instruments)

B ltd issued on 1-4-2008 9% Debentures whose face value is Rs. 20,00,000 at discount of
5%. Company is to redeem 50% Debentures on 31-3-2011 at 7% premium and balance will
be redeemed on 31-3-2013 at 10% premium. On 31-3- 2012 Rs. 20,000 will be distributed
as cash bonus to debenture holders. Prepare Debentures. A/c
Ans. 12.66%
Q185: (Compound Instruments)

B Itd Issued 9% Compulsory Convertible Debentures of Rs.7,00,000 at 10% discount on 1-
4-2008 convertible on 31-3-2011. These are to be redeemed at 10% Premium. Interest
Rate on Non- Convertible Debentures is 13%.Calculate Debt. and Equity.
(Answer: Fin. Liab.: Rs. 148743; Equity: Rs. 481257)
Q186: (Compound Instruments)

Mega Ltd. issued Rs. 100,00,000 worth of 8% Debentures of face value Rs100/- each on
par value basis on 1st Jan, 2011. These debentures are redeemable at 12% premium at the
end of 2014 or exchangeable for Ordinary shares of Mega Ltd. on 1 : 1 basis. The interest
rate for similar debentures that do not carry conversion entitlement is 12%. You are
required to calculate the value of the debt position of the above compound financial
instrument. The Present value of the rupee at the end of years 1 to 4 at 8% and 12% are
supplied to you as:
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8% 12%
End of year 1 0.926 0.893
End of year 2 0.857 0.797
End of year 3 0.794 0.712
End of year 4 0.735 0.636
(Answer: Financial Liability: Rs. 9553600; Equity: Rs. 446400)
Q187: (Compound Instrument)

On 1st April, 2008 Sigma Ltd. issued 6% Convertible debentures of face value of Rs.100
per debenture at par. The debentures are redeemable at a premium of 10% on 31-03-2012
or these may be converted into ordinary shares at the option of the holder, the interest
rate for equivalent debentures without conversion rights would have been 10%, Being a
compound financial instrument you are required to separate equity and debt portion
(Debenture amount). The present value is Rs.1,85,400 for equity portion. Find out the debt
portion (Debenture amount). The present value of Rs. 1 receivable at the end of each year
based on discount rates of 6% and 10% can be taken as:
End Year 6% 10%
of
1 0.94 0.91
2 0.89 0.83
3 0.84 0.75
4 0.79 0.68
(Answer: FL – 2814600; No. of Debentures = 30,000)
Q188: (RTP – May 18) (Compound Instruments – Modification)

On 1st April, 20X4, Shelter Ltd. issued 5,000, 8% convertible debentures with a face
value of Rs 100 each maturing on 31st March, 20X9. The debentures are convertible into
equity shares of Shelter Ltd. at a conversion price of Rs 105 per share. Interest is payable
annually in cash. At the date of issue, Shelter Ltd. could have issued non-convertible debt
with a 5 year term bearing a coupon interest rate of 12%. On 1st April, 20X7, the
convertible debentures have a fair value of Rs 5,25,000. Shelter Ltd. makes a tender
offer to debenture holders to repurchase the debentures for Rs 5,25,000, which the
holders accepted. At the date of repurchase, Shelter Ltd. could have issued non-
convertible debt with a 2 year term bearing a coupon interest rate of 9%.
Show accounting entries in the books of Shelter Ltd. for recording of equity and liability
component:
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(i) At the time of initial recognition and

(ii) At the time of repurchase of the convertible debentures.
The following present values of Rs. 1 at 8%, 9% & 12% are supplied to you:
Interest Rate Year 1 Year 2 Year 3 Year 4 Year 5

8% 0.926 0.857 0.794 0.735 0.681
9% 0.917 0.842 0.772 0.708 0.650
12% 0.893 0.797 0.712 0.636 0.567
SOLUTION:
(i) At the time of initial recognition
Rs
Liability component
Present value of 5 yearly interest payments of Rs 40,000, 1,44,200
discounted at 12% annuity (40,000 x 3.605)
Present value of Rs 5,00,000 due at the end of 5 years, 2,83,500
discounted at 12%, compounded yearly (5,00,000 x 0.567)
4,27,700
Equity component
(Rs 5,00,000 – Rs 4,27,700) 72,300

Total proceeds 5,00,000
Note: Since Rs 105 is the conversion price of debentures into equity shares and not the
redemption price, the liability component is calculated @ Rs 100 each only.
Journal Entry
Rs Rs
Bank Dr. 5,00,000
To 8% Debentures (Liability component) 4,27,700
To 8% Debentures (Equity component) 72,300
(Being Debentures are initially recorded a fair
value)
(ii) At the time of repurchase of convertible debentures

The repurchase price is allocated as follows:
Carrying Value Fair Value Differenc
@ 12% @ 9% e
Rs Rs Rs
Liability component
Present value of 2 remaining 67,600 70,360
20
yearly interest payments of `

40,000, discounted at 12% and
9%, respectively
Present value of Rs 5,00,000 3,98,500 4,21,000
due in 2 years, discounted at
12% and 9%, compounded yearly,
respectively
Liability component 4,66,100 4,91,360 (25,260)
Equity component 72,300 33,640* 38,660
(5,25,000 - 4,91,360)
Total 5,38,400 5,25,000 13,40
*(5,25,000 – 4,91,360) = 33,640
Journal Entries
Rs. Rs.
8% Debentures (Liability component) Dr. 4,66,100
Profit and loss A/c (Debt settlement expense) Dr. 25,260
To Bank A/c 4,91,360
(Being the repurchase of the liability component
recognised)
8% Debentures (Equity component) Dr. 72,300
To Bank A/c 33,640
To Reserves and Surplus A/c 38,660
(Being the cash paid for the equity component
recognised)
Q189: (Exam – May 18 – 8 Marks) (Loan by Holiding to its Subsidiary at concessional

rate)
S Limited issued redeemable preference share to its Holding Company – H Limited. The
terms of the instruments have been summarized below. Analyses the given situation
supplying the guidance in Ind AS 109 „Financial Instruments‟, and account for this in the
books of H Limited.
Nature Non-cumulative redeemable preference

shares
Re Repayment Redeemable after 3 years
D Date of Allotment 1st April 2015
Date of Repayment 31st March 2018
21
Total Period 3 Years

Value of Preference 5,00,00,000
Shares issued
Dividend Rate 0.0001% Per Annum
Market rate of interest 12% per Annum
Present value factor 0.7118
Solution:
1. Analysis of the financial instrument issued by S Ltd. to its holding company H
Ltd.
Applying the guidance in Ind AS 109, a „financial asset‟ shall be recorded at its fair value
upon initial recognition. Fair value is normally the transaction price. However, sometimes
certain type of instruments may be exchanged at off market terms (ie, different from
market terms for a similar instrument if exchanged between market participants).
For example, a long-term loan or receivable that carries no interest while similar
instruments if exchanged between market participants carry interest, then fair value for
such loan receivable will be lower from its transaction price owing to the loss of interest
that the holder bears. In such cases where part of the consideration given or received is
for something other than the financial instrument, an entity shall measure the fair value
of the financial instrument.
22
In the above case, since S Ltd has issued preference shares to its Holding Company– H
Ltd, the relationship between the parties indicates that the difference in transaction
price and fair value is akin to investment made by H Ltd. in its subsidiary. This can further
be substantiated by the nominal rate of dividend i.e. 0.0001% mentioned in the terms of
the instrument issued.
Computation on Initial Recognition:
Transaction Value of redeemable Pref Shares 5,00,00,000

Less: Present value of loan component @ 12% (5,00,00,000 x (3,55,90,000)
0.7118
Investment in Subsidiary 1,44,10,000
Subsequently, such preference shares shall be carried at amortised cost at each

reporting date as follows:
Year Date Opening Bal. Interest Closing Bal.

01/04/2015 3,55,90,000 - 3,55,90,000
1 31/03/2016 3,55,90,000 42,70,800 3,98,60,800
2 31/03/2017 3,98,60,800 47,83,296 4,46,44,096
3 31/03/2018 4,46,44,096 53,55,904** 5,00,00,000
** Last year‟s Interest is taken balancing figure due to rounding off error.
Q190: (Modification) (ICAI New Syllabus Module)

On 1 January 20X0,XYZ Ltd. issues 10 year bonds for Rs 1,00,000, bearing interest at 10%
(payable on 31st December each year). The bonds are redeemable on 31 December 20X9
for Rs 1,000,000. No costs or fees are incurred. The effective interest rate is therefore
10%. On 1 January 20X5 (i.e. after 5 years) XYZ Ltd. and the bondholders agree to a
modification in accordance with which: no further interest payments are made
The bonds are redeemed on the original due date (31 December 20X9) for Rs 1,600,000;
LEGAL fees will be 50,000 on the date of modification
23
(Answer: IRR 11.10%)
Q191: (Modification) (ICAI New Syllabus Module)

JK Ltd. has an outstanding unsecured loan of Rs 90 crores to a bank. The effective
interest rate (EIR) of this loan is 10% Owing to financial difficulties; JK Ltd. is unable to
service the debt and approaches the bank for a settlement.
The bank offers the following terms which are accepted by JK Ltd.
 2/3rd of the debt is unsustainable and hence will be converted into 70% equity interest
in JK Ltd. The fair value of net assets of JK Ltd. is Rs 80 crores.
 1/3rd of the debt is sustainable and the bank agrees to certain moratorium period and
decrease in interest rate in initial periods. The present value of cash flows as per
these revised terms calculated using original EIR is Rs 25 crores. The fair value of the
cash flows as per these revised terms is Rs 28 crores.
(Answer: 6 Cr. Gain on modification charged to Profit and Loss a/c)
Q192: (Conversion into Equity) (ICAI New Syllabus Module)
ABC Ltd. issued convertible debentures (at the option of holder) amounting to Rs. 100
Lacs. As per the terms of the issue it has been agreed to issue equity shares amounting to
Rs. 150 lacs to redeem the debentures at the end of 3rd year. Assume the companies
market yield is 10% for Initial year and year 1 end, and 10.5% for year 2 end. Show
accounting entries.
Solution:
Value of Debentures (Financial Liability) to be recorded initially :

PV of Rs. 150 lacs at 10% (at the end of 3rd year) = 150x.7513 = Rs. 1,12,69,500
Difference between current initial inflow and value of FL is = 1269500 to be transfer
to profit and loss a/c
Q193: FVTOCI (ICAI New Syllabus Module)
A Ltd. invested in equity shares of C Ltd. on 15th March for Rs 10,000. Transaction costs
were Rs 500 in addition to the basic cost of Rs 10,000. On 31 March, the fair value of the
equity shares was Rs 11,200 and market rate of interest is 10% per annum for a 10 year
24
loan. Pass necessary journal entries. Analyse the measurement principle and pass necessary
journal entries.
Solution:
The above investment is in equity shares of C Ltd and hence, does not involve any
contractual cash flows that are solely payments of principal and interest. Hence, these
equity shares shall be measured at fair value through profit or loss. Also, an irrecoverable
option exists to designate such investment as fair value through other comprehensive
income.
Journal Entries
Particulars Amount Amount
Upon initial recognition –
Investment in equity shares of C Ltd. Dr. 10,500
To Bank a/c 10,500
(Being investment recognized at fair value plus
transaction costs upon initial recognition)
Subsequently –
Investment in equity shares of C Ltd. Dr. 700
To Fair value gain on financial instruments 700
(Being fair value gain recognized at year end in
P&L)
25
MISCELLANEOUS PROVISIONS OF INDAS 109/32

(A)
TRADE DATE ACCOUNTING VS. SETTLEMENT DATE ACCOUNTING
1. Entity may choose either Trade date accounting or Settlement date accounting for
Financial Instruments.
2. Trade date accounting – FA/FL shall be recorded on agreement date itself
although the transaction is yet to be settled in future.
3. Settlement date accounting – FA/FL shall be recorded on final settlement date
only and ignoring trade date.
4. On Balance sheet date, while measuring asset/liability at fair value –
Trade date accounting – FA/FL shall be increased/decreased accordingly
Settlement date accounting – Changes in Fair value of FA/FL shall be recorded
only without recording any FA/FL
5. The most important thing to understand is whether we are following Trade
date accounting or settlement date accounting, FA/FL shall be shown at Fair
Value on Settlement date.
(B)
TREASURY SHARES – (BUYBACK OF EQUITY SHARES)
If an entity reacquires its own equity instruments:
 Consideration paid for those instruments ('treasury shares') shall be deducted from
equity. An entity's own equity instruments are not recognised as a financial asset
regardless of the reason for which they are reacquired.
 Consideration received shall be recognised directly in equity.
 No gain or loss shall be recognised in profit or loss on the purchase, sale, issue or
cancellation of an entity's own equity instruments
(C)
BUYBACK OPTION OR WRITTEN PUT OPTION OR OBLIGATION TO PURCHASE
OWN EQUITY:
 Such contracts are puttable instruments and are treated as Financial Liability.
 If an entity announces written put option for such instrument which was earlier
classified under equity, then this will rise to reclassification from equity to
financial liability at PV of redemption amount.
 Any option premium collected by entity on written put option shall be directly
recognised in equity not in P&L a/c
 At the time of exercise of option by holder the financial liability is paid off if the
26
option is exercised otherwise it is again reclassified to equity if option is not

exercised.
Following journal entries may be passed:
(a) On receipt of option premium:
Bank a/c Dr.
To Option premium (Equity) a/c
(b) On transfer of equity to financial liability on the date of option agreement

Equity a/c Dr.
To Financial Liaibility a/c (Re-measurement)
(c) On recognition of Interest/Finance charges every year on above financial liability

Interest (P&L) a/c Dr.
To Financial Liability a/c
(d) On Settlement date:

If option is exercised –
Financial Liability a/c Dr.
To Bank a/c
If option is not exercised –
Financial Liability a/c Dr.
To Equity a/c
(D) RECLASSIFICATION FROM EQUITY TO FL OR FL TO EQUITY

Example, if an entity redeems all its issued non-puttable instruments and any puttable
instrument that remain outstanding have all the features and meet all the conditions
mentioned above, the entity shall reclassify the puttable instruments as equity
instruments from the date when it redeems the non-puttable instruments.
Reclassification Reclassification Measurement Recognition of

From to Diff. in CA &
Measurement of
instrument
Financial Liability Equity Same amount NA
(i.e. Carrying (holder avails the
value on the date option of
of conversion into
27
reclassification) equity)
Equity Financial liability Fair Value at the In Equity
date of (not in Profit and
reclassification Loss account)
(eg. PV of CCF at
(eg. Buyback
ERI in case of
Amortised Cost) option)
(E) RECLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Reclassification of Financial Liability is not allowed. Reclassification of Financial Assets is
possible only when entity changes its Business Model:
Case 1:Amortised cost to FVTPL - It is measured at fair value on reclassification date.

- Any gain or loss arising from difference between the previous amortised cost of
the financial asset and fair value is recognised in profit or loss.
Example 1:
Bonds for Rs 1,00,000 reclassified as FVTPL. Fair value on reclassification is Rs 90,000.
Pass the required journal entry.
Solution
Bonds at FVTPL Dr. 90,000
Loss on reclassification Dr. 10,000
To Bonds at amortised cost 1,00,000
Case 2: Amortised cost to FVOCI - It is measured at fair value on reclassification date.

the financial asset and fair value is recognised in other comprehensive income
- Effective interest rate and measurement of expected credit losses are not
adjusted as a result of reclassification.
Example 2:
Bonds for Rs 1,00,000 reclassified as FVOCI. Fair value on reclassification is Rs 90,000.
Solution
Bonds at FVOCI Dr. 90,000
OCI (Loss on reclassification) Dr. 10,000
28
To Bonds at amortised cost 1,00,000


Case 3: FVTPL to Amortised cost
- It is measured at fair value on reclassification date and this fair value becomes the
new gross carrying amount. Effective interest rate is computed based on this new
gross carrying amount.
the financial asset and fair value is recognised in profit or loss.
Example 3:
Bonds for Rs 100,000 reclassified as Amortised cost. Fair value on reclassification is Rs
90,000. Pass the required journal entry.
Solution
Bonds at Amortised cost Dr. 90,000
To Bonds at FVTPL 1,00,000

Case 4: FVTPL to FVOCI
- The financial asset continues to be measured at fair value.
- The effective interest rate is determined on the basis of fair value of asset at
reclassification date.
Example 4:
Bonds for Rs 100,000 reclassified as FVOCI. Fair value on reclassification is Rs 90,000.
Solution
Bonds at FVOCI Dr. 90,000
To Bonds at FVTPL 1,00,000

Case 5: FVOCI to Amortised cost
- The financial asset is measured at fair value on reclassification date.
- However, cumulative gain or loss previously recognised in other comprehensive
income (OCI) is removed from equity and adjusted against fair value of financial
asset at reclassification date.
- As a result, the financial asset is measured at reclassification date as if it had
29
always been measured at amortised cost. This adjustment affects OCI but does not
affect profit or loss and therefore, is not a reclassification adjustment.
- Effective interest rate and measurement of expected credit losses are not
adjusted as a result of reclassification.
Example 5:
Bonds for Rs 100,000 reclassified as Amortised cost. Fair value on reclassification is Rs
90,000 and Rs 10,000 loss was recognised in OCI till date of reclassification. Pass required
journal entry.
Solution
ACCOUNTING AND REPORTING OF Amount Amount

FINANCIAL INSTRUMENT SSolution Particulars
Bonds at FVOCIDr. 10,000
To OCI-Loss on reclassification 10,000
[Being lossrecognized in OCI now reversed priorto
reclassification]
Bonds(Amortised cost)Dr. 100,000
To Bonds at FVOCI 100,000
[Being bondsreclassified fromFVOCI to Amortised
cost]

Case 6: FVOCI to FVTPL

- The financial asset continues to be measured at fair value.
- The cumulative gain or loss previously recognised in other comprehensive income
(OCI) is reclassified from equity to profit or loss as a reclassification adjustment
at the reclassification date.
Example 6:
Bonds for Rs 100,000 reclassified as FVTPL. Fair value on reclassification is Rs 90,000.
Solution
Particular Amount Amount

P&L-Loss on reclassification Dr. 10,000
To OCI-Loss on reclassification 10,000
Bonds at FVTPL Dr. 90,000
To bonds at FVOCI 90,000
30
(F)
LOAN GRANTED BY PARENT CO. TO SUBSIDIARY AT CONCESSIONAL RATE:
Step 1:
Calculate fair value of loan using Effective rate of interest (Amortised Cost Method).
Step 2:
Any difference between loan amount paid and fair value of step 1 will be considered as
Cost of Investment in subsidiary and capitalised accordingly.
Step 3:
Under consolidated financial statements, while comparing Cost of investment with the
equity of subsidiary (Net Assets), such capitalised amount will be offset since it is
included in cost of parent and equity of subsidiary.
(G)
CARVE OUT FROM IFRS: EQUITY CONVERSION OPTION EMBEDDED IN A
FOREIGN CURRENCY CONVERTIBLE BOND
IndAS 32 considers the equity conversion option embedded in a convertible bond
denominated in foreign currency to acquire a fixed number of entity’s own equity
instruments as an equity instrument if the exercise price is fixed in any currency.
Example:
Entity A issues a bond with face value of USD 100 and carrying a fixed coupon rate of 6%
p.a. Each bond is convertible into 1,000 equity shares of the issuer. Examine the nature of
the financial instrument.
Solution
While the number of equity shares is fixed, the amount of cash is not. The variability in
cash arises on account of fluctuation in exchange rate of INR-USD. Such a foreign
currency convertible bond (FCCB) will qualify the definition of “financial liability”.
However, Ind AS 32 provides, “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.”
Accordingly, FCCB will be treated as an “equity instrument”.
(H)
TRANSACTION COSTS:
 Transaction costs includes fees and commission paid to agents (including employees
acting as selling agents), advisers, brokers and dealers, levies by regulatory
31
agencies and security exchanges, and transfer taxes and duties. Transaction costs
do not include debt premiums or discounts, financing costs or internal
administrative or holding costs.
 Any transaction costs incurred for acquisition of the financial asset are adjusted
upon initial recognition while determining fair value.
 If an entity originates a loan that bears an off-market interest rate (eg 5 per cent
when the market rate for similar loans is 8 per cent), and receives an upfront fee
as compensation, the entity recognises the loan at its fair value, ie net of the fee it
receives.
Transaction cost under Financial Assets

FA under AMC – Included as a part of Financial Assets (+/- in the initial outflow) i.e.
Included in calculation of effective interest rate and amortised over expected life of the
instrument.
FA under FVTOCI - Included as a part of Financial Assets (+/- in the initial outflow)
FA under FVTPL – Directly charged to Profit and Loss a/c (no capitalisation)
Transaction Cost under Financial Liabilities

FL under AMC – Included as part of Financial Liabilities (+/- in the initial inflow)
But in case of compound financial instrument - allocated to the liability and equity
components of the instrument in proportion to the allocation of proceeds.
FL under FVTPL - Directly charged to Profit and Loss a/c.
Transaction cost under Equity:

Deduction from equity to the extent they are incremental costs directly attributable to
the equity transaction that otherwise would have been avoided. The costs of an equity
transaction that is abandoned are recognised as an expense.
(I)
IMPAIRMENT OF FINANCIAL ASSETS/LOSS ALLOWANCE:
Loss allowance is not required in case of Investment in Equity Instruments and FA under
FVTPL
Loss allowance can be provided for following assets –
(a) FA under AMC & FVTPL
(b) A lease receivable
32
(c) Loan commitment

(d) Financial guarantee contract
Loss allowance is to be provided using “Expected Credit Loss method”
Expected credit loss is equal to the sum of present values of expected cash flows that
may not be realised in future as per the current circumstances. (discount rate shall be
original ERI)
 Life time expected credit losses means Probability of default for total life of FA
 12 month expected credit losses means Probability of default over next 12 months
 If the Financial Asset is Credit impaired then always use Lifetime expected credit
loss approach. (Credit impaired means High risk of default or credit risk has been
increased significantly like breach of loan terms and conditions, IBC proceedings
are initiated etc)
 If the amount of FA remains overdue for more than 30 days period there is
rebuttable presumption that Financial Asset is Credit Impaired.
 An entity may use practical expedients when measuring expected credit losses.
An example of a practical expedient is the calculation of the expected credit losses
on trade receivables using a provision matrix. The entity would use its historical
credit loss experience for trade receivables to estimate the 12-month expected
credit losses or the lifetime expected credit losses on the financial assets as
relevant. A provision matrix might, for example, specify fixed provision rates
depending on the number of days that a trade receivable is past due (for example, 1
per cent if not past due, 2 per cent if less than 30 days past due, 3 per cent if
more than 30 days but less than 90 days past due, 20 per cent if 90–180 days past
33
due etc).
Loss Allowance under ECL = Amount of FA x Probability of Unrealised cash flows (%)
x Probability of default (%)
(J) OFFSETTING A FINANCIAL ASSET AND A FINANCIAL LIABILITY

A financial asset and a financial liability shall be offset and the net amount presented in
the statement of financial position (Balance Sheet) when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognised amounts
(b) intends either to settle on a net basis, or to realise the asset and settle the
liability simultaneously
(K)
DERECOGNITION OF FINANCIAL ASSETS
(a) Derecognition refers to the timing of removing a financial asset from the balance
sheet.
(b) FA under FVTOCI category – any gain or loss previously recognised in OCI shall be
recycled to Profit and Loss a/c (except for Equity instruments not held for trading
designated under FVTOCI)
(c) Financial Asset is derecognised when any of the following conditions are satisfied:
 Right to receive cash flows has been expired; or
 The entity has transferred its right to receive cash flows and transferred
substantially all the risks and rewards.
(d) Financial Assets can be transferred with Risks (means without recourse) and
without risks (means with recourse).
(e) Transfer of Financial Assets without Risk (with recourse) – This FA shall not be
derecognised, entity shall continue to recognise the transferred asset.
Also a separate Financial liability shall be booked for the consideration received at
fair value using Effective rate of interest.
(1) Bank A/c Dr.
To Loan (FL) a/c
(2) Interest a/c Dr.

To Loan a/c
(f) Accounting Treatment for de-recognition of FA (Risks and Rewards transferred):
Full transfer of FA-
34
Bank a/c Dr. (proceeds)

To FA a/c (BV)
(difference in above transfer to profit and loss a/c)
Partial transfer of FA – FA shall be divided into two parts – Strip transferred and
strip unsold. We have to first separate the strip transferred and strip unsold from
the total book value of FA in proportion of Fair Value (considering ERI of Future
Cash flows)
To separate the entire FA into two parts:
Strip Transferred A/c Dr.
Strip Unsold A/c Dr.
To Financial Assets a/c (BV)
To transfer the part of FA:
Bank A/c Dr.
To Strip transferred a/c
(difference in above shall be charged to P&L A/c)
(Strip Unsold shall be continuously shown in the Balance Sheet)

If question specify the word “service asset” then it means that this is part of interest
strip less cost of collecting funds from FA or u can treat Cost of collecting funds as
Service Asset.
Q194:Written put option over non-controlling interests

Parent P holds a 70% controlling interest in Subsidiary S. The remaining 30% is held by
Entity Z. On 1 January 20X1, P writes an option to Z which grants Z the right to sell its
shares to Parent P on 31 December 20X2 for Rs 1,000. Parent P receives a payment of Rs
100 for the option. The applicable discount rate for the put liability is determined to be
12%. State by which amount the financial instrument will be recognised and under which
category.
Solution
On 1 January 20X1, the present value of the (estimated) exercise price is Rs 797 (Rs
1,000 discounted over 2 years at 12%).
35
Accordingly, P will recognise a financial liability of Rs 797 and the difference between
cash received i.e. Rs 1000 and the financial liability of Rs 797 will be debited to
equity.
Q195: (Concessional Loan to Subsidiary)
P Ltd. has subscribed 5% Preference Share of its subsidiary S Ltd. having face value of
Rs. 25 lacs on 01/04/17. Market rate being 11% pa. Discuss the treatment as per IndAS
109 in the separate financial statement as well as Consolidated Financial statement of P
Ltd. Also in the separate financial statement of S Ltd. Term - 5 years.
Solution:
Q196: 12 month expected credit loss – Probability of default approach

Entity A originates a single 10 year amortising loan for Rs. 1 million. Taking into
consideration the expectations for instruments with similar credit risk (using reasonable
and supportable information that is available without undue cost or effort), the credit risk
of the borrower, and the economic outlook for the next 12 months, Entity A estimates
that the loan at initial recognition has a probability of default (PoD) of 0.5 per cent over
the next 12 months. Entity A also determines that changes in the 12-month PoD are a
reasonable approximation of the changes in the lifetime PoD for determining whether
there has been a significant increase in credit risk since initial recognition. Loss given
default (LGD) is estimated as 25% of the balance outstanding. Calculate loss allowance.
Solution
At reporting date, no change in 12-month PoD and entity assesses that there is no
significant increase in credit risk since initial recognition – therefore lifetime ECL is not
required to be recognised.
Particulars Details
Loan Rs 1,000,000 (A)
LGD 25% (B)
PoD – 12 months 0.5% (C)
Loss allowance (for 12-months ECL) Rs 1,250 (A*B*C)
36
Q197: Life time expected credit losses (provision matrix for short term receivables)
Company M, a manufacturer, has a portfolio of trade receivables of Rs. 30 million in 20X1
and operates only in one geographical region. The customer base consists of a large number
of small clients and the trade receivables are categorised by common risk characteristics
that are representative of the customers' abilities to pay all amounts due in accordance
with the contractual terms. The trade receivables do not have a significant financing
component in accordance with IndAS 18. In accordance with paragraph 5.5.15 of Ind AS
109 the loss allowance for such trade receivables is always measured at an amount equal to
lifetime time expected credit losses.
Please use the following information of debtors outstanding:

Gross carrying amount
Current Rs. 15,000,000
1–30 days past due Rs. 7,500,000
31–60 days past due Rs. 4,000,000
61–90 days past due Rs. 2,500,000
More than 90 days past due Rs. 1,000,000
Rs. 30,000,000
Company M uses following default rates for making provisions:
Current 1–30 days 31–60 days 61–90 days More than 90
past due past due past due days past due
Default 0.3% 1.6% 3.6% 6.6% 10.6%
rate
Determine the expected credit losses for the portfolio
Solution
To determine the expected credit losses for the portfolio, Company M uses a provision
matrix. The provision matrix is based on its historical observed default rates over the
expected life of the trade receivables and is adjusted for forward-looking estimates. At
every reporting date the historical observed default rates are updated and changes in the
forward-looking estimates are analysed. In this case it is forecast that economic
conditions will deteriorate over the next year.
On that basis, Company M estimates the following provision matrix:
Current 1–30 days 31–60 days 61–90 days More than 90

past due past due past due days past due
Default 0.3% 1.6% 3.6% 6.6% 10.6%
rate
37
The trade receivables from the large number of small customer‟s amount to CU 30 million
and are measured using the provision matrix.
Gross carrying amount Lifetime expected credit loss
allowance (Gross carrying amount
x lifetime expected credit loss
rate)
Current Rs. 15,000,000 Rs. 45,000
1–30 days past due Rs. 7,500,000 Rs. 120,000
31–60 days past Rs. 4,000,000 Rs. 144,000
due
61–90 days past Rs. 2,500,000 Rs. 165,000
due
More than 90 days Rs. 1,000,000 Rs. 106,000
past due
Rs. 30,000,000 Rs. 580,000
Q198: Impairment of Financial Assets under “Amortised Cost” (RTP – NOV 18)
On 1st April 2017, A Ltd. lent Rs. 2 crores to a supplier in order to assist them with their
expansion plans. The arrangement of the loan cost the company Rs. 10 lakhs. The company
has agreed not to charge interest on this loan to help the supplier's short-term cash flow
but expected the supplier to repay Rs. 2.40 crores on 31st March 2019. As calculated by
the finance team of the company, the effective annual rate of interest on this loan is
6.9%. On 28th February 2018, the company received the information that poor economic
climate has caused the supplier significant problems and in order to help them, the
company agreed to reduce the amount repayable by them on 31st March 2019 to Rs. 2.20
crores. Suggest the accounting entries as per applicable Ind AS.
Solution:
The loan to the supplier would be regarded as a financial asset. The relevant accounting
standard Ind AS 109 provides that financial assets are normally measured at fair value.
If the financial asset in which the only expected future cash inflows are the receipts of
principal and interest and the investor intends to collect these inflows rather than dispose
of the asset to a third party, then Ind AS 109 allows the asset to be measured at
amortised cost using the effective interest method.
If this method is adopted, the costs of issuing the loan are included in its initial carrying
value rather than being taken to profit or loss as an immediate expense. This makes the
initial carrying value ` 2,10,00,000.
38
Under the effective interest method, part of the finance income is recognised in the
current period rather than all in the following period when repayment is due. The income
recognised in the current period is ` 14,49,000 (` 2,10,00,000 x 6.9%)
In the absence of information regarding the financial difficulties of the supplier the
financial asset at 31st March, 2018 would have been measured at ` 2,24,49,000 (`
2,10,00,000 + 14,49,000). The information regarding financial difficulty of the supplier is
objective evidence that the financial asset suffered impairment at 31st March 2018.
The asset is re-measured at the present value of the revised estimated future cash
inflows, using the original effective interest rate. Under the revised estimates the closing
carrying amount of the asset would be ` 2,05,79,981 (` 2,20,00,000 / 1.069). The
reduction in carrying value of ` 18,69,019 (` 2,24,49,000 – 2,05,79,981) would be charged
to profit or loss in the current period as an impairment of a financial asset.
Therefore, the net charge to profit or loss in respect of the current period would be
Rs. 4,20,019 (18,69,019 – 14,49,000).
Q199: (De-recognition of partial Financial Asset)
Sea Ltd. has lent a sum of Rs. 10 lakhs @ 18% pa for 10 years. The loan had a fair value of
Rs. 12,23,960 at the effective interest rate of 13%. To mitigate prepayment risks but at
the same time retaining control over the loan, Sea Ltd. transferred its right to receive the
principal amount of the loan on its maturity with interest, after retaining rights over 10%
of principal and 4% interest that carries Fair Value of Rs. 29000, and 184620 respectively.
The consideration for the transaction was Rs. 990000. The interest component retained
included a 2% fee towards collection of principal and interest that has a fair value of
65160. Defaults, if any are deductible to a maximum extent of the company‟s claim on
principal portion. You are required to show the journal entries to the record the
derecognition of Loan.
(Answer: Stirp Sold – 825468 & Gain on Transfer – 164352/-)
39
Additional Questions for Practice:
Q200. (ICAI New Syllabus Module) (Home Work)
A Ltd issued redeemable preference shares to a Holding Company – Z Ltd. The terms of
the instrument have been summarized below. Account for this in the books of Z Ltd.
Nature Non-cumulative redeemable preference

shares
Repayment: Redeemable after 5 years
Date of Allotment: 1-Apr-20X1
Date of repayment: 31-Mar-20X6
Total period: 5.00 years
Value of preference shares issued: 100,000,000
Dividend rate 0.0001%
Market rate of interest 12.00% per annum
Solution
Applying the guidance in Ind AS 109, a „financial asset‟ shall be recorded at its fair value
upon initial recognition. Fair value is normally the transaction price. However, sometimes
certain type of instruments may be exchanged at off market terms (ie, different from
market terms for a similar instrument if exchanged between market participants).
For example, a long-term loan or receivable that carries no interest while similar
instruments if exchanged between market participants carry interest, then fair value for
such loan receivable will be lower from its transaction price owing to the loss of interest
that the holder bears. In such cases where part of the consideration given or received is
for something other than the financial instrument, an entity shall measure the fair value
of the financial instrument.
In the above case, since A Ltd has issued preference shares to its Holding Company – Z
Ltd, the relationship between the parties indicates that the difference in transaction
price and fair value is akin to investment made by Z Ltd. in its subsidiary.
Following is the table summarising the computations on initial recognition:
Market rate of interest 12.00%

Present value 56,742,686
40
Loan component 56,742,686

Investment in subsidiary 43,257,314
Subsequently, such preference shares shall be carried at amortised cost at each reporting
date. The computation of amortised cost at each reporting date has been done as follows:
Year Date Opening Asset Days Interest @ 12% Closing balance

1-Apr-20X1
1 31-Mar-20X2 56,742,686 364 6,790,467 63,533,153
2 31-Mar-20X3 63,533,153 365 7,623,978 71,157,131
3 31-Mar-20X4 71,157,131 365 8,538,856 79,695,987
4 31-Mar-20X5 79,695,987 366 9,589,720 89,285,707
5 31-Mar-20X6 89,285,707 365 10,714,285 100,000,00
Journal Entries to be done at every reporting date

Date of transaction
Investment - Equity portion Dr. 43,257,314
Loan receivable Dr. 56,742,686
To Bank (100,000,000)
Interest income - March 31, 20X2
To Interest income (6,790,467)
To Interest income (7,623,978 )
Settlement of transaction
41
Bank Dr. 100,000,000

To Loan receivable (100,000,000)
Q201. (ICAI New Syllabus Module) (Home Work)

A Limited issues INR 1 crore convertible bonds on 1 July 20X1. The bonds have a life of
eight years and a face value of INR 10 each, and they offer interest, payable at the end
of each financial year, at a rate of 6 per cent annum. The bonds are issued at their face
value and each bond can be converted into one ordinary share in A Limited at any time in
the next eight years. Companies of a similar risk profile have recently issued debt with
similar terms, without the option for conversion, at a rate of 8 per cent per annum.
Required:
(a) Identify the present value of the bonds, and, allocating the difference between the
present value and the issue price to the equity component, provide the appropriate
accounting entries.
(b) Calculate the stream of interest expenses across the eight years of the life of the
bonds.
(c) Provide the accounting entries if the holders of the option elect to convert the
options to ordinary shares at the end of the third year.
Solution
(a) Applying the guidance for compound instruments, the present value of the bond is
computed to identify the liability component and then difference between the present
value of these bonds & the issue price of INR 1 crore shall be allocated to the equity
component. In determining the present value, the rate of 8 per cent will be used, which
is the interest rate paid on debt of a similar nature and risk that does not provide an
option to convert the liability to ordinary shares.
Present value of bonds at the market rate of debt

Present value of principal to be received in eight years discounted at 8%
(10,000,000 X 0.5403) = 5,403,000
Present value of interest stream discounted at 8% for 8 years
(6,00,000 X 5.7466) = 3,447,960
Total present value = 8,850,960
Equity component = 1,149,040
Total face value of convertible bonds = 10,000,000
42
The accounting entries will be as follows:
Dr. Amount Cr. Amount

(INR) (INR)
1 July 20X1
Cash Dr. 10,000,000
To Convertible bonds (liability) 8,850,960
To Convertible bonds (equity component) 1,149,040
(Being entry to record the convertible bonds and
the recognition of the liability and equity
components)
30 June 20X2
Interest expense Dr. 708,077
To Cash 600,000
To Convertible bonds (liability) 108,077
(Being entry to record the interest expense, where
the expense equals the present value of the
opening liability multiplied by the market rate of
interest).
(b) The stream of interest expense is summarised below, where interest for a given year is
calculated by multiplying the present value of the liability at the beginning of the
period by the market rate of interest, this is being 8 per cent.
Date Payment Interest expense Increase in Total bond
at 8% bond liability liability
01 July 20X1 8,850,960
30 June 20X2 600,000 708,077 108,077 8,959,037
30 June 20X3 600,000 716,723 116,723 9,075,760
30 June 20X4 600,000 726,061 126,061 9,201,821
30 June 20X5 600,000 736,146 136,146 9,337,967
30 June 20X6 600,000 747,037 147,037 9,485,004
30 June 20X7 600,000 758,800 158,800 9,643,804
30 June 20X8 600,000 771,504 171,504 9,815,308
30 June 20X9 600,000 784,692* 184,692 10,000,000
*for rounding off
(c) if the holders of the options elect to convert the options to ordinary shares at the end
of the third year of the debentures (after receiving their interest payments), the
entries in the third would be:
43
Dr. Amount Cr. Amount

(INR) (INR)
30 June 20X4
Interest expense Dr. 726,061
To Cash 600,000
To Convertible bonds (liability) 126,061
(Being entry to record interest expense for the
period)
30 June 20X4
Convertible bonds (liability) Dr. 9,201,821
Convertible bonds (equity component) Dr. 1,149,040
To Contributed equity 10,350,861
(Being entry to record the conversion of bonds
into shares of A Limited).
Q202. (ICAI New Syllabus Module) (Allocation of Transaction Cost)

ABC Company issued 10,000 compulsory cumulative convertible preference shares (CCCPS)
as on 1 April 20X1 @ Rs 150 each. The rate of dividend is 10% payable every year. The
preference shares are convertible into 5,000 equity shares of the company at the end of
5th year from the date of allotment. When the CCCPS are issued, the prevailing market
interest rate for similar debt without conversion options is 15% per annum. Transaction
cost on the date of issuance is 2% of the value of the proceeds.
Key terms:
Date of Allotment 01-Apr-20X1

Date of Conversion 01-Apr-20X6
Number of Preference Shares 10,000
Face Value of Preference Shares 150
Total Proceeds 15,00,000
Rate Of dividend 10%
Market Rate for Similar Instrument 15%
Transaction Cost 30,000
Face value of equity share after conversion 10
Number of equity shares to be issued 5,000
44
Solution:
This is a compound financial instrument with two components – liability representing
present value of future cash outflows and balance represents equity component.
a. Computation of Liability & Equity Component

Date Particulars Cash Flow Discount Net present
Factor Value
01-Apr-20X1 0 1 0.00
31-Mar-20X2 Dividend 150,000 0.869565 130,434.75
31-Mar-20X3 Dividend 150,000 0.756144 113,421.6
31-Mar-20X4 Dividend 150,000 0.657516 98,627.4
31-Mar-20X5 Dividend 150,000 0.571753 85,762.95
31-Mar-20X6 Dividend 150,000 0.497177 74,576.55
Total Liability Component 502,823.25
Total Proceeds 1,500,000.00
Total Equity Component (Bal 997,176.75
fig)
b. Allocation of transaction costs

Particulars Amount Allocation Net Amount
Liability Component 502,823 10,056 492,767
Equity Component 997,177 19,944 977,233
Total Proceeds 1,500,000 30,000 1,470,000
c. Accounting for liability at amortised cost: -

 Initial accounting = Present value of cash outflows less transaction costs
 Subsequent accounting = At amortised cost, ie, initial fair value adjusted for interest
and repayments of the liability.
Assume the effective interest rate is 15.86%
Opening Financial Interest B Cash Flow Closing Financial
Liability A C Liability A+B-C
01-Apr-20X1 492,767 - - 4,92,767
31-Mar-20X2 492,767 78,153 150,000 4,20,920
31-Mar-20X3 420,920 66,758 150,000 3,37,678
31-Mar-20X4 337,678 53,556 150,000 2,41,234
31-Mar-20X5 241,234 38,260 150,000 1,29,494
31-Mar-20X6 129,494 20,506 150,000 -
45
d. Journal Entries to be recorded for entire term of arrangement are as follows:

Date Particulars Debit Credit
01-Apr-20X1 Bank A/c Dr. 1,470,000
To Preference Shares A/c 492,767
To Equity Component of Preference shares A/c 977,233
(Being compulsorily convertible preference shares issued. The same are divided into
equity component and liability component as per the calculation)
31-Mar-20X2 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid to the shareholders)
31-Mar-20X2 Finance cost A/c Dr. 78,153
(Being interest as per EIR method recorded)
To Bank A/c 150,000
To Bank A/c 150,000
To Bank A/c 150,000
To Bank A/c 150,000
46

31-Mar-20X6 Equity Component of Preference 977,233
shares A/c Dr.
To Equity Share Capital A/c 50,000
To Securities Premium A/c 927,233
(Being Preference shares converted in equity shares and remaining equity component
is recognised as securities premium)
Q202: Accounting for assets at FVTOCI (Homework)

Metallics Ltd. has made an investment in equity instrument of a company – Castor Ltd. for
19% equity stake. Significant influence not exercised. The investment was made for Rs
5,00,000 for 10,000 equity shares on 01 April 20X1. On 30 June 20X1 the fair value per
equity share is Rs 45. The Company has taken an irrevocable option to measure such
investment at fair value through other comprehensive income.
Solution
The Company has made an irrecoverable option to carry its investment at fair value
through other comprehensive income. Accordingly, the investment shall be initially
recognised at fair value and all subsequent fair value gains/ losses shall be recognised in
other comprehensive income (OCI).
Journal Entries
Upon initial recognition –
Investment in equity shares of C Ltd. Dr. 5,00,000
To Bank a/c 5,00,000
(Being investment recognized at fair value plus
transaction costs upon initial recognition)
Subsequently –
Fair value loss on financial instruments Dr. 50,000
To Investment in equity shares of C Ltd. 50,000
(Being fair value loss recognised)
Fair value reserve in OCI Dr. 50,000
To Fair value loss on financial instruments 50,000
(Being fair value loss recognized in other
comprehensive income)
47
UNIT – 3
DERIVATIVES, EMBEDDED DERIVATIVES & HEDGE
ACCOUNTING
(Here we will cover IndAS portion as well as Guidance Note on Accounting for
Derivative contracts portion)
(GN on Derivative contracts is applicable for Non IndAS based entities.)
DERIVATIVES
Koi bhi contract jiska price koi dusre financial/non-financial item (underlying)
se derive ho.
Ek party k liye favorable position create hoti hai aur dusri party k liye
unfavorable position banti hai i.e. FA for one party and FL/Equity for
another.
There can be two types of derivatives –

1. Standalone derivative contracts (Options, Futures, Forwards etc); and
2. Embedded derivative contracts - which are part of or included in a hybrid contract,
in which some non-derivative host is included.
It should have the following characteristics;

a. Its value changes in response to change in an underlying. (Underlying can be
equity share, stock index, Foreign Exchange rates, interest rates, any financial
instrument, commodity index, commodity price i.e gold, or any other variable item
that has some value or even a non-financial asset)
b. It requires no investment or very little initial investment.
c. It is settled at a future date
Note: It may settle on net to net basis (i.e in cash without any delivery) in case of non-
financial item or it may settle with delivery also for Financial Items.
Q203: Prepaid forward (ICAI New Syllabus Module)

Entity XYZ enters into a forward contract to purchase 1 million ordinary shares of Entity
T in one year
The current market price of T is Rs 50 per share.
48
The one-year forward price of T is Rs 55 per share
XYZ is required to prepay the forward contract at inception with a Rs 50 million payment.
Analyse whether this is a derivative contract.
Solution
Purchase of 1 million shares for current market price is likely to have the same response
to changes in market factors as the contract mentioned above. Accordingly, the prepaid
forward contract does not meet the initial net investment criterion of a derivative
instrument.
Q204:
PQR Ltd. issues a call option (i.e. an option to buy) to ABC Ltd. to subscribe to PQR
Ltd.‟s equity shares at a price of ` 100 per share. The call option is to be settled on a
„net‟ basis i.e. without physical delivery of shares. If at the balance sheet date, market
value of equity share of PQR Ltd. is ` 110 per share, PQR Ltd. will be obliged to pay `
10 to settle the option. Such a condition is potentially unfavourable to PQR Ltd. and
hence ` 10 represents a financial liability for PQR Ltd.
Q205: (Nov. 2011, 4 marks)

BEE Ltd. has entered into a contract by which it has the option to sell its identified
property, plant and equipment (PPE) to AXE Ltd. for Rs. 100 lakhs after 3 years whereas
its current market price is Rs.150 lakhs. Is the put option of BEE Ltd. a financial
instrument? Explain.
Hint: If settlement will be on net to net then this contract (put option) is Financial
Instrument If settlement by way of physical delivery then this is not a financial
instrument.
Q206: (Nov. 2015, 4 marks)

Company owns an office building. Company enters into a put option with an investor that
permits the company to put the building to the investor for Rs. 150 million. The current
value of the building is Rs. 175 million. The option expires in 5 years. The option if
exercised may be settled through physical delivery or net cash, at company‟s option. How
do the company and the investor account for the option?
Hint: If settlement will be on net to net then this contract (put option) is Financial
Instrument If settlement by way of physical delivery then this is not a financial
instrument.
49
Q207: (Nov. 2015, 4 marks)

A Company enters into fixed price forward contract to purchase one million kilograms of
copper in accordance with its expected usage requirements. The contract permits the
company to take physical delivery of the copper at the end of 12 months or to pay or
receive a net settlement in cash, based on change in fair value of copper. Is the contract
accounted for as a derivative? Explain.
(Answer:
BASIC RULE OF ACCOUNTING FOR DERIVATIVES:
Derivatives are always accounted under FVTPL category (do not conduct business
model test or contractual cash flows test)
Basic Principle: All derivative contracts should be recognised on balance sheet at Fair
Value whether there is a favorable position or unfavorable position.
This means that on Balance Sheet date, if there are any unsettled derivative contracts
then we have to create Financial Asset (Favourable position) or Financial Liability
(Unfavourable Position) at Fair values through P&L a/c.
Fair value means “EXIT PRICE” i.e the price that would be paid to transfer a liability
or the price that would be received when transferring an asset in an orderly transaction
between market participants.
ACCOUNTING FOR VARIOUS DERIVATIVES

Eg. of Derivatives: Futures, Options, Hedging, Forwards, Swaps
FUTURES
Entered into with the help of Exchange. It has Defined Underlying, Defined Tenor,
Defined Size.
Long Position: Price will go up
Short Position: Price will go down
50
Follow the three steps accounting as under:
 On the date of contract: No Accounting (except for margin payment), only a

proper disclosure can be given.
 At each reporting dates: Derivative Future Asset or Liability shall be recognized
through Profit and Loss a/c (FVTPL) (difference amount only)
 On settlement Date: Gain or Loss transfer to Profit and Loss A/c
Accounting Entries:
1. For Initial Margin: (this can be treated as Security deposit)
Initial Margin (Futures) A/c
Dr.
To Bank A/c
2. For Mark to Market
Margin:
Bank A/c Dr. MTMDM A/c Dr.
To MTMDM A/c To Bank A/c
(in some cases this margin may not require to be paid every time)
3. Recognition on BS Date: (Ind AS application) – at Fair Value
Futures A/c (Asset) Dr. P&L A/c Dr.
To P&L A/c To Futures A/c
(Liability)
4. Settlement of Future Contract (if margin is received/paid earlier)
MTMDM A/c Dr. Futures (Liability) A/c Dr.
To Futures (Assets) A/c To MTMDM A/c
5. Settlement of Future Contract (if no margin is received/paid
earlier)
Bank A/c Dr. Futures (Liability) A/c Dr.
To Futures (Assets) A/c To Bank A/c
51
FORWARDS
 Same as Futures but without the help of Stock Exchange or any intermediary.
 Customized contract between two parties.
 Any Underlying, any size, any term.
Accounting is same as accounting for Future Contracts as above.
OPTIONS
Entered into with the help of Exchange. Defined Underlying, Defined Term, Defined
Size.
Option contracts are Right without obligation for Holder and obligation without
right for Issuer/writer.
Here the holder needs to pay a premium to get the option (i.e. Right).
Option is for Non-Financial Asset without physical delivery (net cash settlement),
this will be covered under IndAS 109.
Option is for Non-Financial Asset with physical delivery, this will not be covered
under IndAS 109.
Buyer of Options Seller of Option

Call position (Right to Buy) Call position (Obligation to Sell)
Put Position (Right to Sell) Put Position (Obligation to Buy)
(In both cases he has to pay premium) (In both cases he gets premium)
When to Exercise the Option?

Call Option – When market price is higher
Put Option – When market price is lower
Accounting Entries:
Option Holder Option Writter
1. On payment of option premium 1. On receipt of option premium
Derivative Option (Asset) A/c Dr. Bank A/c Dr.
52
To Bank a/c To Derivative option (Liability) A/c

2. On measurement at Balance Sheet 2. On measurement at Balance Sheet
date for unsettled Derivative date for unsettled Derivative
Derivative Option (Asset) a/c Dr. Fair Value loss (P&L) a/c Dr.
To Fair Value Gain (P&L) a/c To Derivative Option (Liability) a/c
Fair Value loss (P&L) a/c Dr. Derivative Option (Liability) a/c Dr.
To Derivative Option (Asset) a/c To Fair Value Gain (P&L) a/c
3. On Settlement date 3. On Settlement date
If contract is settled in Net Cash without If contract is settled in Net Cash without
physical delivery- physical delivery
Only in favourable position Only in Un-favourable position
Bank A/c Dr. Derivative Liability A/c Dr.
To Derivative Asset a/c To Bank a/c
If contract is settled with physical If contract is settled with physical

delivery - delivery -
Financial Asset a/c Dr. (FV) Derivative Liability a/c Dr. (BV)
To Bank a/c (Payment) Bank a/c Dr. (Payment)
To Derivative Asset a/c (BV) To Financial Asset a/c
Buyer: To get Call/Put option I need to pay option premium. This premium is non-
refundable. Amount of premium will be booked as Financial Asset until the expiry of
Contract.
Suppose, I bought NIFTY 1 month call option on 1000 lots at strike price of Rs. 11050 at
the premium of Rs. 25/- per unit.
Day 1 Accounting – Option Premium (Asset) A/c Dr. 25000
To Bank a/c 25000
After 1 Month – Nifty is as follows:
Cases Nifty Index Exercise/Not Accounting Entry

Exercise
53
1 10900
2 11000
3 11075
(Breakeven)
4 12000
5 12100
Now Suppose, before the end of 1 month, there is a BS date and NIFTY on that date
becomes 11090. What should I do?
IND AS 109 requires that the derivative instruments needs to be fair valued through P&L.
Since this is a call option, Strike price is increased there is a favorable position (Gain of
Rs. 15000)
Accounting at BS date:
Suppose on settlement date the Nifty becomes 11040 –
Accounting on settlement date:
54
Q208: (Equity Index Futures) (Homework)

Mr. A Purchases the following units of equity Index Futures (EIF).
Date of Name of Expiry Contract Price Per Contract
Purchase Future Date l Unit Multiplier
Series M (No. of Units)
28th Mar., 2003 EF1 May, 2003 1420 200
29th Mar., 2003 EF2 June,2003 4280 50
29th Mar., 2003 EF1 May,2003 1416 200
Daily Settlement Prices of the above units of Equity Index Futures were as follows:
Date EF-1 May Series EF-2 June Series
28/03/2003 1410
29/03/2003 1428 4300
30/03/2003 1435 4270
31/03/2003 1407 4290
01/04/2003 1415 4250
02/04/2003 1430 -
03/04/2003 1442 -
For the sake of convenience, it has been assumed that the above contracts were settled
on the following dates:
 EF-2 June Series on 1st April, 2003
 A contract of 200 units of EF-1 May Series on 2nd April, 2003.
 The other contract of EF-1 May series on 3rd April, 2003.
Prepare necessary accounts.
Solve Here:
55
Q209: (Equity Index Futures)
Mr. A purchases the following units of Equity Stock Futures (ESF):
Date of ESF (Name of Expiry Date/ Contract price Contract

Purchase Company) Series per Unit Multiplier (No.
of Units)
28th March, 18 XYZ Ltd. May 18 1420 200
th
29 March, 18 PQR Ltd. June, 18 4280 50
th
29 March, 18 XYZ Ltd. May 18 1416 200
The contracts are settled through net cash on the Settlement Date, i.e., May 29, 2018 and
June 26, 2018 respectively.
Suppose 30th April is year ending date. On 30th April, XYZ Ltd‟s future sells at 1425 and
PQR Ltd.‟s future sells at 4240.
On settlement date XYZ contract settles at 1423 and PQR settles at 4210. Journalise
settlement entry.
Solve Here:
56
Q210: (Forwards on Currency Rates) (ICAI New Syllabus Module)

On 1st January 20X1, Sam Co. Ltd. agreed to purchase USD ($) 20,000 from JT Bank in
future on 31st December 20X1 for a rate equal to Rs 68 per USD. Sam Co. Ltd. did not pay
any amount upon entering into the contract. Sam Co Ltd. is a listed company in India and
prepares its financial statements on a quarterly basis.
Following the principles of recognition and measurement as laid down in Ind AS 109, you
are required to record the entries for each quarter ended till the date of actual purchase
of USD.
For the purposes of accounting, please use the following information representing marked
to market fair value of forward contracts at each reporting date:
As at 31st March 20X1 –Rs (25,000)
As at 30th June 20X1 –Rs (15,000)
As at 30th September 20X1 - Rs12,000
Spot rate of USD on 31st December 20X1 - Rs66 per USD
Solution:
(i) Assessment of the arrangement using the definition of derivative included
under Ind AS 109.
Derivative is a financial instrument or other contract within the scope of this
Standard with all three of the following characteristics:
a) 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').
b) it requires no initial net investment or an initial net 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.
c) it is settled at a future date.
Upon evaluation of contract in question it is noted that the contract meets the
definition of a derivative as follows:
57
a) the value of the contract to purchase USD at a fixed price changes in response to
changes in foreign exchange rate.
b) the initial amount paid to enter into the contract is zero. A contract which would
give the holder a similar response to foreign exchange rate changes would have
required an investment of USD 20,000 on inception.
c) the contract is settled in future
The derivative is a forward exchange contract.

As per Ind AS 109, derivatives are measured at fair value upon initial recognition and
are subsequently measured at fair value through profit and loss.
(ii) Accounting on 1st January 20X1:
As there was no consideration paid and without evidence to the contrary the
fair value of the contract on the date of inception is considered to be zero.
Accordingly, no accounting entries shall be recorded on the date of entering
into the contract.
(iii) Accounting on 31st March 20X1:

Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Profit and loss A/c Dr. 25,000
To derivative financial liability 25,000
(Being mark to market loss on forward
contract recorded)
(iv) Accounting on 30th June 20X1:

The change in value of the derivative forward contract shall be recorded as a
derivative financial liability in the books of SamCo Ltd. by recording the following
journal entry:

Derivative financial liability A/c Dr. 10,000
To Profit and loss A/c 10,000
(Being partial reversal of mark to market
loss on forward contract recorded)
58
(v) Accounting on 30th September 20X1:

The value of the derivative forward contract shall be recorded as a derivative
financial asset in the books of SamCo Ltd. by recording the following journal entry:

Derivative financial liability A/c Dr 15,000
Derivative financial asset A/c Dr 12,000
(being gain on mark to market of forward
contract booked as derivative financial
asset and reversal of derivative financial
liability)
(vi) Accounting on 31st December 20X1:

The settlement of the derivative forward contract by actual purchase of USD
20,000 shall be recorded in the books of Sam Co Ltd. by recording the following
journal entry:

Cash (USD Account) @ 20,000 * 66 Dr. 13,20,000
To Cash @ 20,000 x 68 13,60,000
To Derivative financial asset A/c 12,000
(being loss on settlement of forward
contract booked on actual purchase of
USD)
Q211: (Forwards on Currency Rates) (ICAI New Syllabus Module) (Homework)

On 1st January 20X1, SamCo. Ltd. entered into a written put option for USD ($) 20,000
with JT Corp to be settled in future on 31st December 20X1 for a rate equal to ` 68 per
USD at the option of JT Corp. SamCo. Ltd. did not receive any amount upon entering into
the contract. SamCo Ltd. is a listed company in India and prepares its financial statements
on a quarterly basis.
Following the classification principles of recognition and measurement as laid down in Ind
AS 109, you are required to record the entries for each quarter ended till the date of
actual purchase of USD.
For the purposes of accounting, please use the following information representing marked
to market fair value of put option contracts at each reporting date:
As at 31st March 20X1 – Rs (25,000)
As at 30th June 20X1 - Rs (15,000)
59
As at 30th September 20X1 - Rs NIL

Spot rate of USD on 31st December 20X1 - Rs 66 per USD
Solution
i. Assessment of the arrangement using the definition of derivative included

under Ind AS 109.
Derivative is a financial instrument or other contract within the scope of this Standard
with all three of the following characteristics:
a. 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').
b. it requires no initial net investment or an initial net 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.
c. it is settled at a future date.
Upon evaluation of contract in question it is noted that the contract meets the definition
of a derivative as follows:
b) the value of the contract to purchase USD at a fixed price changes in response to
changes in foreign exchange rate.
d) the initial amount received to enter into the contract is zero. A contract which would
give the holder a similar response to foreign exchange rate changes would have
required an investment of USD 20,000 on inception.
e) the contract is settled in future
The derivative liability is a written put option contract.

As per Ind AS 109, derivatives are measured at fair value upon initial recognition and are
subsequently measured at fair value through profit and loss.
ii. Accounting on 1st January 20X1

As there was no consideration paid and without evidence to the contrary the fair
value of the contract on the date of inception is considered to be zero.
Accordingly, no accounting entries shall be recorded on the date of entering into
the contract.
iii. Accounting on 31st March 20X1
60
The value of the derivative put option contract shall be recorded as a derivative
financial liability in the books of SamCo Ltd. by recording the following journal
entry:

To derivative financial liability 25,000
(Being mark to market loss on the put
option contract recorded)
iv. Accounting on 30th June 20X1

The change in value of the derivative put option contract shall be recorded as a
derivative financial liability in the books of SamCo Ltd. by recording the following
journal entry:

(Being partial reversal of mark to
market loss on the put option contract
recorded)
v. Accounting on 30th September 20X1

The change in value of the derivative option contract shall be recorded as a zero in
the books of SamCo Ltd. by recording the following journal entry:

(Being gain on mark to market of put
option contract booked to make the
value the derivative liability as zero)
vi. Accounting on 31st December 20X1

The settlement of the derivative put option contract by actual purchase of USD
20,000 shall be recorded in the books of SamCo Ltd. upon exercise by JT Corp. by
recording the following journal entry:
61
Cash (USD Account) @ 20,000 x 66 Dr. 13,20,000

To Cash @ 20,000 x 68 13,60,000
(being loss on settlement of put option
contract booked on actual purchase of
USD)
Q212: (Equity Options)
Mr. A buys the following Equity Stock Options and the seller/writer of the options is Mr.
B.
Date of Type of Expiry Date Market Lot Premium per Strike Price
Purchase Options Unit
29 June, 01 XYZ Co. Ltd. Aug, 30 100 30 450
Call 2001
30 June, 01 ABC Co. Ltd. Aug, 30 100 40 550
Put 2001
Journalize assuming price of XYZ Co. Ltd. and ABC Co. Ltd. on 30th August, 2001 is Rs.
470 and Rs. 500 respectively.
Solve Here:
62
INTEREST RATE SWAPS

These contracts are undertaken to cover the risk of Interest rates on variable or fixed
rate of interest.
Accounting Treatement
Step 1 – on contract date Do nothing
Step 2 – on balance sheet date, check whether the entity is in favourable position or
unfavourable position and create Financial Asset Receivable a/c or Financial Liability
Payable a/c accordingly by the net gain in interest swaps.
Step 3 – on settlement date, re-measure the Financial Asset or Liability based on

position on settlement date and then realise the Financial Asset or settle the financial
liability in Cash.
Prepaid Interest Rate Swaps:

If interest rate swaps (Pay variable, get fixed rate) is prepaid, then these are not
derivative contracts, since the initial investment on these are not nil or very less.
Q213: Prepaid pay-variable, receive-fixed interest rate swap (ICAI)

Entity S enters into a Rs 100 crores notional amount five-year pay-variable, receive-fixed
interest rate swap with Counterparty C.
The variable leg of the swap is reset on a quarterly basis to three-month MIBOR.
The fixed interest payments under the swap are calculated as 10% of the swap's notional
amount, i.e. Rs 10 crores p.a.
Entity S prepays its obligation under the variable leg of the swap at inception at current
market rates. Say, that amount is Rs 36 crores.
It retains the right to receive fixed interest payments of 10% on Rs 100 crores every
year. Analyse whether this a derivative contract.
Solution
In effect, this contract results in an initial net investment of Rs 36 crores which yields a
cash inflow of Rs 10 crores every year, for five years. By discharging the obligation to pay
variable interest rate payments, Entity S in effect provides a loan to Counterparty C.
Therefore, all else being equal, the initial investment in the contract should equal that of
other financial instruments that consist of fixed annuities. Thus, the initial net investment
63
in the pay-variable, receive-fixed interest rate swap is equal to the investment required in
a non-derivative contract that has a similar response to changes in market conditions.
For this reason, the instrument fails the condition 'no initial net investment or an
initial net 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'.
Therefore, the contract is not accounted for as a derivative contract.
EMBEDDED DERIVATIVES
Any contract which has Two Elements, one is Host Contract (i.e. main contract) which is
non-derivative part of the contract and the other one is derivative part (it is embedded
with the host contract).
So what to do with this embedded derivative? Do we need to separate this from host
contract or not?
So the answer is - if the host contract and embedded derivative are closely related
with each other, then no need to separate them.
If they are not closely related then derivative element is required to be accounted
separately.
Case – 1
No separation is required – Entire contract shall be accounted as one single contract as
per the relevant IndAS.
Case – 2
Separation is required –
(a) Contract of Sell/purchase in future-
 Record the sale/purchase at pre-determined forward rate (forward rate on the
date of contract)
 Consider changes in forward rate as Derivative Contract (FVTPL)
(b) Prepayment option in Loan-

Calculate value of Loan as per Amortised Cost Method
Calculate value of Loan as per ACM if prepayment option is exercised
If difference in above two values is significant then record separately the Derivative
Asset/Liability.
64
Q214: Debt instrument with prepayment option (ICAI New Syllabus Module)
Entity PQR borrows Rs 100 crores from CFDH Bank on 1 April 20X1.
Interest is payable at 12% p.a. and there is a bullet repayment of principal at the end of
the term.
Term of the loan is 6 years.
The loan includes an option to prepay the loan at 1st April each year with a prepayment
penalty of 3%.
There are no transaction costs.
Without the prepayment option, the interest rate quoted by bank is 11% p.a.
Analyse
Solution
Step 1: Identify the host contract and embedded derivative, if any
In the given case,
 Host is a debt instrument comprising annual interest payment at 12% p.a. and bullet
principal repayment at the end of 6 years.
 Option to prepay the debt at Rs 103 crores is an embedded derivative
Step 2: Determine the amortised cost of the host debt instrument

Whether the prepayment option is likely to be exercised or not, the amortised cost of the
host debt instrument should be calculated as present value (PV) of expected cash flows
using a fair market interest rate for a debt without the prepayment option (11% p.a. in this
case). This is calculated below as Rs 104.23 crores:
Year Cash outflow PV @ 11% p.a. Finance cost Amortised cost
Rs crores
1 12.00 10.81 11.46 103.68
2 12.00 9.74 11.41 103.09
3 12.00 8.77 11.34 102.43
4 12.00 7.90 11.27 101.70
5 12.00 7.12 11.20 100.90
6 112.00 59.88 11.10 -
104.22 67.78
Step 3: Compare the exercise price of the prepayment option with the amortised cost
of the host debt instrument
Year Amortised cost Exercise price of prepayment Difference
option
Rs Crores
1 103.68 103.00 0.7%
2 103.09 103.00 0.1%
3 102.43 103.00 -0.6%
65
4 101.70 103.00 -1.3%

5 100.90 103.00 -2.1%
6 - N/A
The management of Entity PQR may formulate an appropriate accounting policy to

determine what constitutes “approximately equal”. In this case, if the management
.determines that a difference of more than 2% will indicate that the option's exercise
price is not approximately equal to the amortised cost of the host debt instrument, it will
need to separate the embedded derivative and account for it as per principles given in the
subsequent sub-section.
Q215:
Entity A (an INR functional currency entity) enters into a USD 1,000,000 sale contract on
1 January 20X1 with Entity B (an INR functional currency entity) to sell equipment on 30
June 20X1.
Spot rate on 1 January 20X1: INR/USD 45

Spot rate on 31 March 20X1: INR/USD 57
Three month forward rate on 31 March 20X1: INR/USD 45
Six month forward rate on 1 January 20X1: INR/USD 55
Spot rate on 30 June 20X1: INR/USD 60
Let‟s assume that this contract has an embedded derivative that is not closely related and
requires separation. Please provide detailed journal entries in the books of Entity A for
accounting of such embedded derivative until sale is actually made.
Solution
The contract should be separated using the 6 month USD/INR forward exchange rate, as
at the date of the contract (INR/USD = 55). The two components of the contract are
therefore:
 A sale contract for INR 55 Million
 A six-month currency forward to purchase USD 1 Million at 55
 This gives rise to a gain or loss on the derivative, and a corresponding derivative asset
or liability.
On delivery
1. Entity A records the sales at the amount of the host contract = INR 55 Million
2. The embedded derivative is considered to expire.
3. The derivative asset or liability (i.e. the cumulative gain or loss) is settled by becoming
part of the financial asset on delivery.
4. In this case the carrying value of the currency forward at 30 June 20X1 on maturity is
= INR (1,000,000*60-55*1,000,000)=Rs 5,000,000 (profit/asset)
66
The table summarising the computation of gain/ loss to be recorded at every period end –
Date Transaction Sales Debtors Derivative (Profit) Loss
Asset
(Liability)
INR INR INR INR
1-Jan- Embedded Derivative Nil Value
20X1
31-Mar- Change in Fair Value of (10,000,000) 10,000,000
20X1 Embedded Derivatives
MTM (55-45)*1Million
30-Jun- Change in Fair Value of 15,000,000 (15,000,000)
20X1 Embedded Derivatives
(60-45)*1Million
30-Jun- Recording sales at (55,000,000) 55,000,000
20X1 forward rate
30-Jun- Embedded derivative- 5,000,000 (5,000,000)
20X1 settled against debtors
Journal Entries to be recorded at every period end

a. 01 January 20X1 – No entry to be made
b. 31 March 20X1 –
Profit and loss A/c Dr. 10,000,000
To Derivative financial liability A/c 10,000,000
(being loss on mark to market of embedded
derivative booked)
C. 30 June 20X1 –
Derivative financial asset A/c Dr. 5,000,000
Derivative financial liability A/c Dr. 10,000,000
To Profit and loss A/c 15,000,000
(being gain on embedded derivative based on spot
rate at the date of settlement booked)
D. 30 June 20X1 –
Trade receivable A/c Dr. 55,000,000
To Sales A/c 55,000,000
67
(being sale booked at forward rate on the date of

transaction)
E. 30 June 20X1 –
Trade receivable A/c Dr 5,000,000
To Derivative financial asset A/c 5,000,000
(being derivative asset re-classified as a part of
trade receivables, bringing it to spot rate on the
date of sale)
HEDGE ACCOUNTING
Hedging means – Managing Risk or reducing risk in a Recognised Asset/Liability or Firm

commitment to buy an Asset or Highly forecast cash flow transaction by making a
derivative or non-derivative contract in a Financial Instruments in such a way that change
in Fair value of Hedging Instrument wholly or partially offset change in Fair value of of
Hedged Item.
Some Important Terms:

(a) Hedged item – It may be a recognised Asset or Liabilitiy (Financial or Non-
Financial such as Foreign Currency Debtors/Creditors, Inventory etc), a firm
commitment to buy asset or a Highly probable Forecast Transaction which involves
cash flows.
(b) Hedging instrument – It may be investment in Derivative instrument or non-
derivative instrument such as (Futures, Forwards, Options, Swaps).
(c) Firm Commitment: A firm commitment is a binding agreement for the exchange of
specified quantity of resources at specified future date or dates.
(d) Highly Forecast Cash Flow Transaction: A forecast transaction is an uncommitted
but anticipated future transaction which involves cash inflow or outflow.
Conditions for Hedge Accounting:

1. There must be eligible hedging instrument and eligible hedged items
2. At the inception of the hedging relationship, there must be a formal designation and
documentation of the hedging relationship and the entity's risk management
objective and strategy for undertaking the hedge.
3. Hedge effectiveness should exist. It means economic relations between hedged items
and Hedging instruments should exist.
68
If the above conditions are not fulfilled, then Hedging accounting will not be permissible.
In that situation, we will follow normal derivative accounting separately for Hedged Item
and separate accounting for Hedging Instruments.
CASH FLOW HEDGE
If the entity is having risk of change in future cash flows (inflow or outflow) from:
Sale or purchase of stock in future;
 Sale or purchase of shares in future; or
 From collection or payment to debtors or creditors; or
 From highly forecast cash flow transaction.
Accounting Treatment
Step 1 – Fair value the Hedged Item (Recognised Asset/Liability) through OCI (Cash
Flow hedge reserve)
Step 2 – Fair value the hedging instruments (derivative contract) through OCI (Cash
Flow hedge reserve)
Step 3 – Amortise the actual loss over the life of contract by debiting Profit and Loss
a/c and crediting Cash Flow Hedge Reserve (OCI)
69
Step 4 – On settlement date, realise or settle the contract in cash. CFHR (OCI)
account will be nil.
Q216:
On 1 January 20X1, Company D issues a three-year 5.5% fixed rate bond of USD 15 million
at par. D's functional currency is sterling. As part of its risk management policy, D decides
to eliminate the exposure arising from movements in the US dollar/GBP exchange rates on
the principal amount of the bond for three years. D enters into a foreign currency forward
contract to buy USD 15 million and sell GBP 9,835,389 at 31 December 20X3.
D designates and documents the forward contract as the hedging instrument in a cash flow
hedge of the variability in cash flows arising from the repayment of the principal amount
of the bond due to movements in forward US dollar/sterling exchange rates.
D states in its hedge documentation that it will use the hypothetical derivative method to
assess hedge effectiveness. D identifies the hypothetical derivative as a forward contract
under which it sells USD 15 million and purchases GBP 9,835,389 at 31 December 20X3
(the repayment date of the bond). The hypothetical foreign currency forward contract has
a fair value of zero at 1 January 20X1. The spot and the forward exchange rates and the
fair value of the foreign currency forward contract are as follows:
Date Spot FWD FV of FWD

rate rate forward points
1-Jan-20X1 0.6213 0.6557 - 0.0344 USD 15,000,00
0
31-Dec-20X1 0.5585 0.5858 (957,205) 0.0273 Forward 516,000
points
31-Dec-20X2 0.5209 0.528 (1,833,346) 0.0071
31-Dec-20X3 0.5825 0.5825 (1,097,789) -
Pass necessary journal entries.
Solution
The hedge remains effective for the entire period, with changes in the fair value of the
forward contract and the hedging instrument being perfectly offset. Because D has
designated the variability in cash flows arising from movements in the forward rates as
the hedged risk, the entire change in the fair value of the forward contract is recognised
in OCI.
70
At each reporting date, G reclassifies from equity an amount equal to the movement in the
spot rate on the principal amount of the bond.
In addition, to ensure that the forward points recognised in OCI are reclassified fully to
profit or loss over the life of the hedge, D reclassifies from equity the forward points
recognised in OCI amortised over the life of the hedging relationship. Assuming that all
criteria for hedge accounting have been met, D records the following journal entries:
Particulars Dr Cr
Cash Dr. 93,19,500
To Bond 93,19,500
(Being bond liability recognized at spot rate)
31 December 20X1
Hedging Reserve (OCI) Dr. 9,57,205
To Derivative 9,57,205
(Being loss on hedging instrument i.e. forward
contract (as per Ind AS 109.6.5.11(b), change in
fair value of spot element – loss of 9,42,000 and
as per Ind AS 109.6.5.16, change in fair value of
forward element – loss of 15,205) recognized in
OCI)
Bond Dr. 9,42,000
To Foreign currency (P&L) 9,42,000
(Being gain on restatement of hedged item i.e.
foreign currency bond recognized in P&L as per
Ind AS 21)
Foreign currency (P&L) Dr. 9,42,000
To Hedging Reserve (OCI) 9,42,000
(Being cash flow hedge reserve associated with
hedged item recognized as per Ind AS
109.6.5.11(a))
(Being reclassification adjustment in respect of
amortization of forward element at the date of
designation of the forward contract as hedging
instrument over the tenor of forward contract)
Interest expense Dr. 4,60,763
71
To Cash 4,60,763
(Being interest expense recognized (for sake of
simplicity, the same is recognized at closing spot
rate whereas Ind AS 21.21-22 mandates use of
exchange rate on the date of transaction or an
average rate over the relevant period))
31 December 20X2
To Derivative 8,76,141
(Being loss on hedging instrument i.e. forward
fair value of spot element – loss of 5,64,000 and
forward element – loss of 3,12,141) recognized in
OCI)
Bond Dr. 5,64,000
(Being gain on restatement of hedged item i.e.
Ind AS 21)
109.6.5.11(a))
To Cash 4,29,743
rate whereas Ind AS 21.21- 22 mandates use of
72
31 December 20X3
Derivative Dr. 7,35,346
(Being gain on hedging instrument i.e. forward
fair value of spot element – gain of 9,24,000 and
forward element – loss of 1,88,654) recognized in
OCI)
To Bond 9,24,000
(Being loss on restatement of hedged item i.e.
Ind AS 21)
109.6.5.11(a))
To Cash 4,80,563
rate whereas Ind AS 21.21- 22 mandates use of
Bond Dr. 87,37,500
To Cash 87,37,500
(Being financial liability towards spot value of
73
bonds extinguished through repayment)

Derivative Dr. 10,97,789
To Cash 10,97,789
(Being payment for derivative liability on date of
settlement i.e. difference between spot rate on
the date of issuance of bond and date of
settlement)
Movement of hedging reserve is summarised below:
Opening (1,56,795) (16,654)

Derivative 9,57,205 8,76,141 (7,35,346)
MTM on loans (9,42,000) (5,64,000) 9,24,000
Forward point (1,72,000) (1,72,000) (1,72,000)
Closing balance (1,56,795) (16,654) -
Q217:
The Company has taken an external commercial borrowing of $1 million. The term of the
loan is 3 years. The Company also bought a foreign currency swap to hedge the foreign
currency risk. The Company paid premium of Rs. 1 million to purchase the swap with
exercise INR/USD price of 53.Other details are given below:
Date of Spot Forward End of Spot Forward End Spot Forward

Loan Price rate Q1 Price rate of Q2 Price rate
USD 31- 50 53 31- 52 56 30- 55 60
to Dec- Mar- Jun-
INR 20X1 20X2 20X2
rate
MTM values of derivative contract
31-Dec-20X1 10,00,000
31-Mar-20X2 25,00,000
30-Jun-20X2 65,00,000
Record journal entries if Company was to do hedge accounting and if the Company did not
opt for hedge accounting. Assume hedge is effective for this purpose.
Solution
Ind-AS (without hedge Ind-AS (with hedge

accounting) accounting)
74
Entry Carrying Entry Carrying

required value required value
As on Balance Sheet
31
Decembe
r 20X1
Bank a/c 49,000,000 49,000,000 49,000,000 49,000,000
Loan a/c (50,000,000) (50,000,000) (50,000,000) (50,000,000)
Derivative a/c 1,000,000 1,000,000 1,000,000 1,000,000
(Ind AS)
As on Balance Sheet
31
March
20X2
Bank a/c - 49,000,000 - 49,000,000
Loan a/c (2,000,000) (52,000,000) (2,000,000) (52,000,000)
Derivative a/c 1,500,000 2,500,000 1,500,000 2,500,000
Profit & Loss Account
(Profit)/loss on 2,000,000 2,000,000 2,000,000 2,000,000
restatement of loan
(Profit)/loss on derivative (1,500,000) (1,500,000) (2,000,000) (2,000,000)
Amortisation of forward - - 83,333 83,333
element (Ind AS hedge
accounting)
(Being 1/12th of initial
premium for option
contract representing one
quarter‟s amortization)
Other Comprehensive Income
Forward element of - - 416,667 416,667
hedging instrument
As on 30 June 20X2 Balance Sheet
Bank a/c - 49,000,000 - 49,000,000
Loan a/c (3,000,000) (55,000,000) (3,000,000) (55,000,000)
Derivative a/c (Ind AS) 4,000,000 6,500,000 4,000,000 6,500,000
Profit & Loss Account
Profit/loss on 3,000,000 5,000,000 3,000,000 5,000,000
restatement of loan
Profit/loss on derivative (4,000,000) (5,500,000) (3,000,000) (5,000,000)
Amortisation of forward - - 83,333 166,667
75
element (Ind AS hedge

accounting)
Other Comprehensive Income
Forward element of - - (1,083,333) (666,667)
hedging instrument
FAIR VALUE HEDGE
When there is a risk on Hedged item being other than Cash such as Inventory,
Gold, Shares of another co. held as investments or any other financial or non-
financial asset.
Under Fair value hedge, entity covers the risk by entering into hedging derivative
contract in Futures, Forwards or Options.
Accounting Treatment – Both the Hedged Items and Hedging Instrument are
measured at Fair Value through Profit and Loss a/c.
Exception: If equity instruments (not held for trading) are designated as FVTOCI
then measurement of Hedged item and Hedging Instrument shall be done through
OCI. This fair value gain or loss accumulated in OCI is not allowed to be recycled.
On sale of Investment in equity, this OCI shall be directly transferred to General
reserve.
Q218:
Entity has Investment in Equity shares of Infosys Ltd. On 1/03/18 carrying amount of
investments is Rs. 1500. Entity is worried about decrease in market price of equity share.
On the same date entity has entered into future contract (to sell) on shares of Infosys
Ltd. at Rs. 1400 for 3 months.
On 31/03/2018, Mp of equity shares (Non-derivative market) = Rs. 1425
And MV of 2 months Future contract on Infosys (Derivative market) = Rs. 1370
On Settlement date – MV of equity shares – Rs. 1350/-
Assume that entity has entered into Future contracts to hedge the risk of decrease in
price of Shares.
Show the accounting treatment.
76
Solve here:
77
HEDGE OF NET INVESTMENT IN FOREIGN OPERATION
Hedge of a net investment in foreign operation, including a hedge of a monetary item

that is accounted for as part of the net investment, shall be accounted for similarly to
cash flow hedges:
The cumulative gain or loss on the hedging instrument relating to the effective portion of
the hedge that has been accumulated in the foreign currency translation reserve shall be
reclassified from equity to profit or loss as a reclassification adjustment on the disposal
or partial disposal of the foreign operation.
78
Important Notes:
79

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D-Fortune Classes & V’Smart Academy – CA.

BASIC KNOWLEDGE ABOUT FINANCIAL INSTRUMENTS

What is Financial Instrument?

There can be two types of FI:

Derivatives FI: such as futures, options, forwards, swaps

What is a Financial Asset?

ITEMS of ASSETS FA – Yes/No

What is Financial Liability?

Q178. (ICAI New Syllabus Module)

Q179. (ICAI New Syllabus Module)

What is Equity? (Fix Payment ki koi obligation nai hoti)

ITEMS Equity – Yes/No

Reserves and Surplus

Redeemable Pref Share

Irredeemable Pref. Shares

Perpetual Debt Instruments

Equity comprises of:

1. Share based payments (IndAS 102)

Settlement in own equity shares of entity:

Examine the nature of the financial instrument.

2. If it is sub-ordinate to all other classes of instruments. That means it has no

3. They should have Identical features in the entire class of puttable

Executory Contracts are outside the scope of IndAS 109:

PRESENTATION IN BALANCE SHEET

(1) (b) Other equity

Initial Recognition means – First Time Recording in the books of accounts.

Financial Assets – Initial Recognition at Fair Value

Financial Liabilities – Initial Recognition at Fair Value

Subsequent Recognition means – Measurement at Balance Sheet date (reporting date)

(i) Amortised cost

(ii) Fair value through Other Comprehensive Income (FVTOCI)

The classification will be made as under:

(a) Financial assets measured at Amortised Cost -

(b) Financial assets measured at Fair Value Through OCI

Initial Recognition: Financial asset under FVTOCI will be measured at fair

(c) Financial assets measured at Fair Value through P&L

Example: We bought share of Infosys Ltd. at Rs.2100. Transaction cost is Rs.2. On

Answer: Day-1 Investment in shares Dr. 2100

Transaction cost (P&L) Dr. 2

Investment in shares Dr. 150

To Fair value gain (P&L) 150

To investment in shares A/c 2250

To P&L (Gain) A/c 250

Transaction cost (P&L) A/c 3

Example: We bought shares of Infosys at Rs.2100. Transaction cost is Rs.2. On quarter

Answer: Day-1 Investment in shares Dr. 2102

Investment in shares Dr. 148

To investment in shares A/c 2250

To OCI A/c 247

At the end of 1st Year:

Q183: (Staff Welfare)

Year CCF PV @ 8% Remarks

Employee Expenses = 10,00,000 – 8,71,362 = 1,28,638/-

Finance charges for 1st Year = 871362 x 8% = 69,709/-

TYPES OF FINANCIAL LIABILITY UNDER AMORTISED COST:

Amortised Cost - COMPOUND FINANCIAL INSTRUMENT

Modification in Financial Instruments (Early settlement/late settlement):

Step 2 – Calculate Revised values of FA/FL and Equity on modification as per