IND AS 109 - Accounting and Reporting of Financial Instruments Flashcards
What is the overall or general meaning to understood when something is to be called as a financial instrument as per IND AS 109?
The mandatory thing to be understood is that it should be a contractual obligation to deliver or receive and not constructive obligation or legal obligation.
What is the definition of Financial asset and what are the various nuances in the definition which needs to be given attention to?
We generally should apply basic rules, rather than checking whether the asset has a derivative component in it or not. We have to test fixed for Fixed test for equity and variable for Financial asset or a liability.
What is the definition of the term financial liability ? and how is it different from the financial asset?
Here Financial liability involves delivering something(Cash or financial assets) whereas in case of Financial assets, we are on the receiving end of the transaction accordingly.
What is the definition of equity? is preference share capital included under the heading equity? if not, why?
Equity instruments are those that evidences a residual interest - That is there is no contractual obligation to deliver cash or other financial asset accordingly.
What are some general examples of Financial assets, Financial liabilities and Equity instruments as per the standard on IND AS 109?
The concept of discretionary interest to classify it as equity is a new concept under IND AS 109 and hence has to be carefully done.
What are the examples of some special cases where it is not so evident to classify something as Financial asset or liability or equity Instruments?
What are the principles for classification of preference shares or equity shares as equity or financial Liability under varied scenarios where under AS, it is classified under equity directly?
What is the treatment of deferred Interest? what is the classification when the same can be deferred for a specified period vs. For Perpetuity?
What is the meaning of the own use condition when the same is gross settled vs Net settled? this should be answered in relation to commodities since gross settlement by way of delivery is possible only in that instrument?
Gross Settled ( Settlement through physical delivery) - Not a financial instrument
Net Settled ( Settled in cash through difference in Price ) - Financial Instrument
What are the general principles to be remembered overall in settlement by way of entity’s own equity instruments ( Fixed vs Variable classification) ( own share vs Share of the other company)
In the given case, the dividend is mandatory and hence has FL features. Further, the principal is redeemable after 10 years, hence has FL features as well, hence the entire instrument has to be classified as a financial instrument.
Silver Ltd. issued irredeemable preference shares with face value of Rs 100 each. These shares dividend 8% per annum, however dividend is paid when Silver declares dividend on equity shares?
decla_ratJon o: eq~ty dividend is discretionary and hence payment of preference diVIdend 1s also d1scret10nary, hence it has equity features.
What are the exception to the fixed for fixed test rule? that is to say if the instrument has a variable factor and was concluded to be a financial liability, but however if the variability falls below the following exceptions, the same shall be considered to having been fulfill the fixed for fixed test and be classified as equity itself?
what are the classifications of financial instruments, and under what categories, these assets are permitted to be classified and are there certain categories to which it is not permitted to be classified under?
What is the criteria to decide whether an asset has to be measured at amortised cost or FVOCI or FVTPL? what are certain tests prescribed to identify the same?
What is the summary of the tests that need to be fulfilled to be classified under different categories? and what are the types of investments that are covered under this?
What is the meaning of the CCFC/ SPPI test that need to be satisfied for the purpose of classification? what are the scenarios of Interest where it cannot hold good to be for CCFC test, give examples of the same?
However, if the compensation is indexed / linked to the inflation rate, RBI rate, credit rating then CCFC test is satisfied as a lender in a basic lending arrangement expects to be compensated for time value or credit risk.
Apart from the above, charges levied by lender like processing fees, prepayment / extension penalties are also considered to be in line with the basic lending arrangement.
What are the special cases in which the debtors or loans in credit sale transaction where during the credit period we generally do not expect interest rather we only get the principal repayment at the end of the term?
It is considered to be a basic lending arrangement and consider to satisfy CCFC / SPPI Test accordingly.
What is the test to be satisfied as a business model test along with the CCFC test that needs to be satisfied for classification as per IND AS 109?
What is the sinking fund portfolio and how can the business model be inferred from the investment maturity of the fund?
When the classification of the financial asset/ liability from Amortised cost to FVOCI or vice versa be made? name the scenario where it will be possible?
What is the overall summary of all the classification and the tests which has to be fulfilled in different scenarios accordingly?
Given an example of the entries that will be passed and the method of calculating the amortised cost under different scenarios?
As can be seen, 1,137 is amortized over 5 year through effective interest unlike AS 13 where the entire gain would be recorded in the 5th year.
