CA FINAL

FINANCIAL INSTRUMENTS
5 (IND AS 32, 107, 109)

Ind AS 32 Ind AS 109 Ind AS 107

Disclosures

Recognition & Classification of Measurement of Hedge

de-recognition financial assets financial asset & accounting
of financial & financial Financial
asset & liabilities liabilities
Financial
liabilities

Offsetting
Classification
financial asset
as Liability v/s
& financial
Equity liability

A. Basic Understanding & Scope:

Financial Instrument is any contract that gives Financial Asset for one entity and
Financial Liability or/and Equity to another entity.

Financial Asset Financial Liability Equity

Cash Payables or Loans taken Equity Instruments
Investment in Equity Debt Securities Equity Share Warrants
Instruments of another
entity
Receivables or Loan Given Redeemable Preference Share Application Money
Shares with Fixed Rate of pending Allotment
dividends
Investments in Debt Derivative Liability Portion of Compound
Securities Financial Instruments
Derivative Assets Perpetual Bonds at Market Irredeemable Preference
Rate of Interest Shares with dividend at the
discretion of issuer

FINANCIAL REPORTING 1
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
 Physical assets, leased asset and intangible assets
Physical assets (such as inventories, property, plant and equipment), leased assets
and intangible assets (such as patents and trademarks) are not financial assets.
• Prepaid expenses
 Assets (such as prepaid expenses) for which the future economic benefit is the
receipt of goods or services, rather than the right to receive cash or another
financial asset, are not financial assets.
 Similarly, items such as deferred revenue and most warranty obligations are
not financial liabilities because the outflow of economic benefits associated
with them is the delivery of goods and services rather than a contractual
obligation to pay cash or another financial asset.

Evaluate the financial assets.

S. Whether
Particulars Remarks
No. FA or not
(1) Investment in bonds debentures FA • Contractual right to receive cash.
(2) Loans and receivables FA • Contractual right to receive cash.
(3) Deposits given FA • Contractual right to receive cash.
(4) Trade & other receivables FA • Contractual right to receive cash.
(5) Cash and cash equivalents FA • Specifically covered in the
definition.
(6) Bank balance FA • Contractual right to receive cash.
(7) Investments in equity shares FA • Equity instrument of another
entity.
(8) Perpetual debt instruments FA • Such instruments provide the
Eg. perpetual bonds, contractual right to receive
debentures and capital notes. interest for indefinite future or a
right to return of principal under
terms that make it very unlikely
or very far in the future.
(9) Physical assets No • Control of such assets does not
Eg. inventories, property, plant create a present right to receive
and equipment etc. cash or another financial asset.

(10) Right to use assets No • Control of such assets does not

Eg. Lease vehicle etc. create a present right to receive
cash or another financial asset.
(11) Intangibles No • Control of such assets does not
Eg. Patents, trademark etc. create a present right to receive
cash or another financial asset.

FINANCIAL REPORTING 2
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

(12) Prepaid expenses No • These instruments provide future

economic benefit in the form of
Eg. Prepaid insurance, prepaid
goods or services, rather than the
rent etc.
right to receive cash.

(13) Advance given for goods and No • These instruments provide future
services economic benefit in the form of
goods or services, rather than the
right to receive cash.

(14) Financial Guarantee Contracts Yes

Illustration 1:
A share broking company is dealing in sale/purchase of shares for its own account
and therefore is having inventory of shares purchased by it for trading.
How will these instruments be accounted for in the financial statements?
Solution:
Ind AS 2, Inventories, states that this Standard applies to all inventories, except
financial instruments (Ind AS 32, Financial Instruments: Presentation and Ind AS 109,
Financial Instruments).

Accordingly, the principles of recognizing and measuring financial instruments are

governed by Ind AS 109, its presentation is governed by Ind AS 32 and disclosures
are in accordance with Ind AS 107, Financial Instruments: Disclosures, even if these
instruments are held as stock-in trade by a company.

Accordingly, in the given case, the relevant requirements of Ind AS 109, Ind AS 32
and Ind AS107 shall be applied retrospectively.

Illustration 2: Trade receivables

A Ltd. makes sale of goods to customers on credit of 45 days. The customers are
entitled to earn a cash discount@ 2% per annum if payment is made before 45 days
and an interest @10% per annum is charged for any payments made after 45 days.
Company does not have a policy of selling its debtors and holds them to collect
contractual cash flows. Evaluate the financial instrument.
Solution:
In the above case, the trade receivable recorded in books represents contractual
cash flows that are solely payments of principal (and interest if paid beyond credit
period). Further, Company’s business model is to collect contractual cash flows.
Hence, this meets the definition of financial assets carried at amortised cost.

FINANCIAL REPORTING 3
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

Illustration 3: Deposits
Z Ltd. (the ‘Company’) makes sale of goods to customers on credit. Goods are
carried in large containers for delivery to the dealers’ destinations. All dealers are
required to deposit a fixed amount of ` 10,000 as security for the containers, which
is returned only when the contract with Company terminates. The deposits carry 8%
per annum which is payable only when the contract terminates. If the containers are
returned by the dealers in broken condition or any damage caused, then appropriate
adjustments shall be made from the deposits at the time of settlement. How would
such deposits be treated in books of the dealers?

Solution:
In this case, deposits are receivable in cash at the end of contract period between
the dealer and the Company. These deposits represent cash flows that are solely
payments of principal and interest. Moreover, these deposits normally cannot be
sold. Hence, they meet the definition of financial asset carried at amortised cost.

Illustration 4: Creditors for sale of goods

A Ltd. makes purchase of steel for its consumption in normal course of business.
The purchase terms provide for payment of goods at 30 days credit and interest
payable @ 12% per annum for any delays beyond the credit period. Analyse the
nature of this financial instrument.

Solution:
A Ltd. has entered into a contractual arrangement for purchase of goods at a fixed
consideration payable to the creditor. A contractual arrangement that provides for
payment in fixed amount of cash to another entity meets the definition of financial
liability.

REDEEMABLE PREFERENCE SHARES

Redemption terms Evaluation under Ind AS 32

Redemption at a specified date This contains a financial liability because
Redemption at option of Holder the issuer has an obligation to transfer
financial assets to the holder of the share.
The potential inability of an issuer to
satisfy an obligation to redeem a
preference share when contractually
required to do so, whether because of a
lack of funds, a statutory restriction or
insufficient profits or reserves, does not
negate the obligation.
Hence, classified as ‘financial liability’.

FINANCIAL REPORTING 4
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

Redemption at option of Issuer An option of the issuer to redeem shares

for cash does not satisfy the definition of
a financial liability because the issuer
does not have a present obligation to
transfer financial assets to the
shareholders. Hence, classified as ‘equity
instrument’.
An obligation may arise, however, when
the issuer of the shares exercises its
option, usually by formally notifying the
shareholders of an intention to redeem
the shares, at which time this instrument
shall be reclassified from ‘equity’ to
‘financial liability’.

Illustration 5: Preference shares with non-cumulative dividend

Silver Ltd. issued irredeemable preference shares with face value of ` 10 each and
premium of ` 90. These shares carry dividend @ 8% per annum, however dividend is
paid only when Silver Ltd declares dividend on equity shares. Analyse the nature of
this instrument.
Solution:
In the above case, two main characteristics of the preference shares are:
(i) Preference shares carry dividend, which is payable only when Company
declares dividend on equity shares
(ii) Preference share are irredeemable.
Analysing the definition of equity, an instrument meets definition of equity if:
(a) It contains no contractual obligation to pay cash; and
(b) Where an instrument shall be settled in own equity instruments, it’s a non-
derivative contract that will be settled only by issue of fixed number of shares
or a derivative contract that will be settled by issue of fixed number of shares
for a fixed amount of cash.
In the above instrument, there is no contractual obligation on the Company to pay
cash since–
(i) Face value is not redeemable (except in case of liquidation); and
(ii)Dividend is payable only if Company declares dividend on equity shares. Since
dividend on equity shares is discretionary and the Company can choose not to
pay, Company has an unconditional right to avoid payment of cash on
preference shares also.
Hence, preference shares meet definition of equity instrument.

FINANCIAL REPORTING 5
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

SCOPE OF FINANCIAL INSTRUMENTS

Scope of financial instruments excludes the following:

(a) Interests in subsidiaries, associates and joint ventures that are accounted for in
accordance with Ind AS 110 Consolidated Financial Statements, Ind AS 27 Separate
Financial Statements or Ind AS 28 Investments in Associates and Joint Ventures. Only if Valued
at cost
(b) Rights and obligations under leases to which Ind AS 116 Leases applies. However,
(i) finance lease receivables (i.e. net investments in finance leases) and
operating lease receivables recognised by a lessor are subject to the
derecognition and impairment requirements of Ind AS 109;
(ii) lease liabilities recognised by a lessee are subject to the derecognition
requirements of Ind AS 109; and
(iii) derivatives that are embedded in leases are subject to the embedded
derivatives requirements of Ind AS 109.
(c) Employers’ rights and obligations under employee benefit plans, to which Ind AS 19
Employee Benefits applies.
(d) Rights and obligations arising under an insurance contract as defined in Ind AS 104.
(e) Any forward contract between an acquirer and a selling shareholder to buy or sell an
acquiree that will result in a business combination within the scope of Ind AS 103
Business Combinations at a future acquisition date.
(f) Financial instruments, contracts and obligations under share-based payment
transactions to which Ind AS 102 Share-based Payment applies, except for contracts
to buy non financial items as described below. Settlement in Net
(g) Rights to payments to reimburse the entity for expenditure that it is required to
make to settle a liability that it recognises as a provision in accordance with Ind
AS37 Provisions, Contingent Liabilities and Contingent Assets, or for which, in an
earlier period, it recognised a provision in accordance with Ind AS 37.
(h) Rights and obligations within the scope of Ind AS 115 Revenue from Contracts with
Customers that are financial instruments, except for those that Ind AS 115 specifies
are accounted for in accordance with this Standard.

B. Classification & Measurement of Financial Assets:

FINANCIAL ASSETS: CLASSIFICATION

Categorisation of financial assets (FA) is determined based on the business model that
determines how cash flows of the financial asset are collected and the contractual cash
flow characteristics; and can be:
(a) Measured at Amortised cost
(b) Measured at fair value through comprehensive income (FVOCI)
(c) Measured at fair value through profit or loss (FVTPL).

FINANCIAL REPORTING 6
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

FINANCIAL ASSETS: MEASUREMENT

Measurement of financial assets is driven by their classification and can be broadly
explainedwith the help of following diagrammatic presentation:
Measurement:
Fair Value through
Amortised Fair Value through Profit &
Other Comprehensive
Cost(I) Loss (FVTPL) (III)
Income (FVTOCI) (II)
Solely Payment of (1)Does not fall under I/II
Principal & Interest (2)Designated to Category III
on Outstanding Satisfied Satisfied (3)Held for trading
Principal (4)Derivative Asset (unless for
(SPPI Test) Hedge Accounting)
(a) Should be done on instrument to instrument basis (5) Generally investment in
(b) Interest should consist of time value of money (+) equity shares fall in this
credit risk category, but there is
option provided to show
investments in Equity
Business Model To collect To collect contractual Shares under FVTOCI.
Test contractual cash flows and sale of
cash flows Financial Asset
(a) Is done on an aggregate basis & not on individual
basis.
(b) Done without considering worst / stress situations.
(c) Requires professional judgment.

FVTOCI
Amortised Cost FVTOCI (Debt) FVTPL
(Equity)
Initial At Transaction Value(assumed that transaction is at market terms
Measurement &therefore, transaction value = fair value)
Transaction Cost Add to Initial Measurement P&L
Subsequent At Amortised Cost
Measurement using Effective At Fair Value
Interest Method (EIM)
Difference on NA OCI with recycling OCI P&L
Subsequent without
Measurement recycling
Difference on P&L P&L, previous OCI P&L
Disposal or De – transfer to OCI will
Recognition be recycled to P&L
Interest or P&L
Dividend

FINANCIAL REPORTING 7
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

If the transaction is not at market terms

Record it at Fair Value: Difference between Transaction

Value & Fair Value will be accounted

If FV based on Level 1 input or If Fair Value is based on

valuation technique that uses only other than Level 1 Inputs
data from observable markets

Transfer to P&L Create an Asset, or Transfer to P&L

if possible

Important Points for Category “Amortised Cost”:-

(1) Financial Assets repayable on demand to be always shown at Value equal to the
amount to be received on repayment (eg. Telephone / Electricity Deposits, Loans
repayable on demand).

(2) Financial Assets at concessional rate of interest or no interest will be recorded at

fair value & difference between transaction value & fair value will be adjusted
(refer flowchart). Fair Value of Financial Asset = Present Value of Cash Inflows from
that Financial Asset, discounted at Market Rate of Interest. (eg. Staff Loans at
concessional rates, Security Deposit for any asset – difference being adjusted as
Prepaid Expenses /ROU Asset).

(3) Transaction between Holding Company & Subsidiary Company (Under IND AS
Ecosystem)

Benefit by H Co to S Co Benefit by S Co to H Co

H Co SFS S Co SFS H Co SFS S Co SFS

Investment in Contribution from Dividend Dividend

S Co A/c Parent A/c Income Distribution
(Equity)

FINANCIAL REPORTING 8
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(4)
FA Measured at fair value (FVOCI / FVTPL)

Interest / Dividend Gains/Iosses

FVTPL FVOCI - other than FVOCI - equity

equity instruments instruments

Realised/Unrealised Realised FV Unrealised Realised/Unrealised

FV gains/losses gains/losses FV losses FV gains/losses

Recognised in Recognised in Recognised

profit or loss profit or loss OCI

C. Classification & Measurement of Financial Liabilities:

FINANCIAL LIABILITIES: CLASSIFICATION

• Upon initial recognition, all financial liabilities are measured at fair value.
Subsequently, per Ind AS 109.4.2.1 – the classification of financial liabilities shall
be as follows:
(A) Measured at amortised cost

(B) Measured at fair value through profit or loss:

♦ Liabilities that meet the definition of “held for trading”
♦ Contingent consideration recognized by an acquirer in a business
combination

(C) Designated at fair value through profit or loss

Fair Value through P&L (FVTPL) Amortised Cost

(1) Held for trading Residual Category
(2) Designated to this category
(3) Derivate Liability (other than Hedge Accounting)
(4) Contingent Consideration in Business Combinations

FINANCIAL REPORTING 9
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

FINANCIAL LIABILITIES: MEASUREMENT

Amortised Cost FTVPL

Initial Measurement At Transaction Value (assumed at market terms)
Transaction Cost Reduced from Initial P&L
Measurement
Subsequent Measurement Amortised Cost (using EIM) Fair Value
Difference on Subsequent P&L
Measurement (for financial liabilities other
-NA - than trading, differences due
to entity’s own credit risk
will be recorded in OCI)
Difference on De-Recognition P&L
or Disposal

In case the entity changes its business model objective, there is a possibility of re-
classification of Financial Asset (from one basket to the other), but there is no possibility
of reclassification of Financial Liability.

Illustration 6
X Ltd. had taken 6 year term loan in April 20X0 from bank and paid processing fees
at the time of sanction of loan.
The term loan is disbursed in different tranches from April 20X0 to April 20X6. On
the date of transition to Ind AS, i.e. 1.4.20X5, it has calculated the net present
value of term loan disbursed upto 31.03.20X5 by using effective interest rate and
proportionate processing fees has been adjusted in disbursed amount while
calculating net present value. What will be the accounting treatment of processing
fees belonging to undisbursed term loan amount?
Solution:
Processing fee is an integral part of the effective interest rate of a financial
instrument and shall be included while calculating the effective interest rate.
(a) Accounting treatment in case future drawdown is probable
It may be noted that to the extent there is evidence that it is probable that
the undisbursed term loan will be drawn down in the future, the processing
fee is accounted for as a transaction cost under Ind AS 109, i.e., the fee is
deferred and deducted from the carrying value of the financial liabilities
when the draw down occurs and considered in the effective interest rate
calculations.
(b) Accounting treatment in case future drawdown is not probable
If it is not probable that the undisbursed term loan will be drawn down in the
future, then the fees is recognised as an expense on a straight-line basis over
the term of the loan.
FINANCIAL REPORTING 10
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Illustration 7
PQR Limited had obtained term loan from Bank A in 20X1-20X2 and paid loan
processing fees and commitment charges.
In May 20X5, PQR Ltd. has availed fresh loan from Bank B as take-over of facility
i.e. the new loan is sanctioned to pay off the old loan taken from Bank A. The
company paid prepayment premium to Bank A to clear the old term loan and paid
processing fees to Bank B for the new term loan.
Whether the prepayment premium and the processing fees both will be treated as
transaction cost (as per Ind AS 109, Financial Instruments) of obtaining the new
loan, in the financial statements of PQR Ltd?
Solution:
(a) Accounting treatment of prepayment premium
Ind AS 109, provides that if an exchange of debt instruments or modification
of terms is accounted for as an extinguishment, any costs or fees incurred are
recognised as part of the gain or loss on the extinguishment in the statement
of profit and loss. Since the original loan was prepaid, the prepayment would
result in extinguishment of the original loan. The difference between the CV
of the financial liability extinguished and the consideration paid shall be
recognised in profit or loss as per Ind AS 109.
Accordingly, the prepayment premium shall be recognised as part of the gain
or loss on extinguishment of the old loan.
(b) Accounting treatment of Unamortised processing fee of old loan
Unamortised processing fee related to the old loan will also be required to be
charged to the statement of profit and loss.
(c) Accounting treatment of Processing fee for new loan
Transaction costs are “Incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or financial liability. An
incremental cost is one that would not have been incurred if the entity had
not acquired, issued or disposed of the financial instrument.”

It is assumed that the loan processing fees solely relates to the origination of the
new loan(i.e. does not represent loan modification/renegotiation fees). Hence, the
processing fees paid toavail fresh loan from Bank B will be considered as
transaction cost in the nature of origination fees of the new loan and will be
included while calculating effective interest rate as per Ind AS 109.

Modifications of Financial Liabilities (FL):

(A) PV of Cash Flow based on modified terms (+) Expenses, if any (using Original E.I.R)
(-)
(B) PV of Balance Cash Flows based on original terms (i.e. Carrying Amount) (using
Original E.I.R)

FINANCIAL REPORTING 11
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Equal to OR More than 10% of B

Yes: Extinguishment No: Modification

Old Liability A/c DR. (Carrying Value) Adjust the expenses in existing carrying
P&L A/c DR. (Balancing Figure) value and then amortise it based on New
E.I.R. (i.e. Modified E.I.R.)
To New Liability A/c (Fair Value)
OR
To Bank A/c (expenses, if any)
Revised the amortised cost of the
To P&L A/c (Balancing Figure)
financial liability to reflect revised
future cash flows by discounting them to
their present value at the original effective
interest rate. The difference between the
carrying value and revised amortised cost is
recognized as a gain or loss in profit or loss.

Illustration 8
Original Loan Amount = ` 10,00,000 (10 years ago)
Carrying Value today on 01.01.2005 = ` 10,00,000
Original E.I.R = 10%
On 01.01.2005, terms of loan were modified.
Existing Terms Modified Terms
Repayment Date 31.12.2009 31.12.2011
Rate of Interest 10% 5%
Interest Amount p.a. ` 1,00,000 ` 50,000
Redemption Amount ` 10,00,000 ` 15,00,000
Expenses Incurred = ` 1,00,000
Existing ROI in Market = 11%
Scene B: Assume redemption amount to be ` 14,00,000.

FINANCIAL INSTRUMENTS: EQUITY AND FINANCIAL LIABILITIES

INTRODUCTION
Difference between Financial Liability & Equity:
Financial Liability Equity
A. Contractual Obligation to: A. No Contractual Obligation to:
1. Deliver cash or other financial 1. Deliver cash or other financial
assets, or assets, or
2. Exchange of financial assets or 2. Exchange of financial assets or
financial liability potentially financial liability potentially
unfavourable unfavourable
FINANCIAL REPORTING 12
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Or Or
B. Instrument settled in own equity B. Instrument settled in own equity
where number of own equity where number of own equity
instruments is variable or instruments is fixed or consideration is
consideration is variable. fixed. (i.e. satisfy fixed number of
equity shares for fixed amount of
consideration in functional currency**:
(FIXED To FIXED Criteria)
Examples: Examples:
A. Loans taken/Payables/Derivate Liabilities A. Equity Shares/Irredeemable Preference
B. i. Compulsory Convertible Debentures Shares with dividend at discretion of
at fixed interest rates, conversion the issuer.
based on MPS of Equity Shares on B. Compulsory Convertible Debentures or
conversion date. Preference Shares at interest/
ii. Compulsory Convertible Preference dividend at the discretion of the
Shares at fixed dividend rates, issuer and conversion ratio is
conversion based on MPS of Equity known at the time of issue.
Shares on conversion date.

**Carve Out: FCCB (Foreign Compulsory Convertible Bonds) under IND AS are treated
as Equity## but under IFRS are treated as Financial Liability.
##Logically, FCCB is a compound financial instrument where obligation to pay interest
is a financial liability and conversion into fixed number of shares for fixed
consideration inforeign currency is equity.

Split accounting for compound financial instruments

Compound Financial Instruments: Instruments that have colours of financial liability as

well as Equity.
a. Compulsory Convertible Debentures with Fixed Interest Conversion
b. Compulsory Convertible Preference Shares with fixed dividend Ratio fixed
c. Optionally Convertible Debentures/Preference Shares with on the date
fixed interest/dividend of issue

Accounting:
Total Fair Value of Instrument XXX
Less: Fair Value of Debt Component (XXX)
(Consider Contractual Cash Flows where entity has obligation to pay x Market Rate of
Interest)
Equity Portion XXX

FINANCIAL REPORTING 13
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(1) Once classified as Equity, there would be no re-measurement.
(2) Transaction Cost in relation to Equity are to be adjusted from Equity.
(3) Distribution of Transaction Cost for Compound Instruments:

Debt Component Equity Component

Reduce from Debt Component Reduce from Equity Component

Split in ratio of Initial Measurement Value

Number of own
Consideration
equity instruments
Sr.No. for financial Classification and rationale
to be issued in
instrument
Settlement
1. Fixed Variable Financial liability – own equity
instruments are being used as currency to
settle an obligation for a fixed amount
2. Fixed Fixed Equity – issuer does not have an
obligation to pay cash and holder is not
exposed to any variability
3. Variable Fixed Financial liability – though issuer does not
have an obligation to pay cash, but
holder is exposed to variability
4. Variable Variable Financial liability – though issuer does not
have an obligation to pay cash, but both
parties are exposed to variability

Conversion
Classification of the liability and equity components of a convertible instrument is not
revised as a result of a change in the likelihood that a conversion option will be
exercised, even when exercise of the option may appear to have become economically
advantageous to some holders. Holders may not always act in the way that might be
expected because, for example, the tax consequences resulting from conversion may
differ among holders. Furthermore, the likely hood of conversion will change from time
to time. The entity’s contractual obligation to make future payments remains
outstanding until it is extinguished through conversion, maturity of the instrument or
some other transaction. (Ind AS 32.30)
On conversion of a convertible instrument at maturity, the entity:
• derecognises the liability component and
• recognises it as equity.
• original equity component remains as equity (although it may be transferred from
one line item within equity to another).
• there is no gain or loss on conversion at maturity.

FINANCIAL REPORTING 14
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Early settlement
When an entity extinguishes a convertible instrument before maturity through an early
redemption or repurchase in which the original conversion privileges are unchanged, the
entityal locates the consideration paid and any transaction costs for the repurchase or
redemption to the liability and equity components of the instrument at the date of the
transaction.
The method used in allocating the consideration paid and transaction costs to the
separate components is consistent with that used in the original allocation to the
separate components of the proceeds received by the entity when the convertible
instrument was issued.
In other words, the issuer:
• starts by allocating the settlement price to the remaining liability i.e. it
determinest he fair value of the remaining liability using a discount rate that is
based on circumstances at the settlement date (this rate may differ from the rate
used for the original allocation), and
• allocates the residual settlement amount to the equity component.
As per Ind AS 32, once the allocation of the consideration is made, any resulting gain or
loss is treated in accordance with accounting principles applicable to the related
component, as follows:
(a) the amount of gain or loss relating to the liability component is recognised in profit
or loss; and
(b) the amount of consideration relating to the equity component is recognised in
equity.

TREASURY 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
In the consolidated financial statements, consideration for treasury shares acquired and
held by other members of the consolidated group, is deducted from equity.

• Transaction costs:
Equity transaction – accounted for as a 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.
• Changes in the fair value of an equity instrument are not recognised in the financial
statements.
FINANCIAL REPORTING 15
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
• Presentation:
♦ The amount of transaction costs accounted for as a deduction from equity in
the period is disclosed separately in accordance with Ind AS 1.
♦ Dividends classified as an expense may be presented in the statement of
comprehensive income either with interest on other liabilities or as a separate
item.

Impairment of Financial Asset (based on Expected Credit Loss Method – ECL)

Crude Form:
PV of Contractual Cash Flows XXX
Less: PV of Expected Cash Flows (XXX)
Impairment Loss XXX

Applicability:
1. Financial Assets at Amortised Cost
2. Financial Assets at FVOCI (Debt), Impairment Loss transferred to P&L
3. Lease Receivable
4. Trade Receivable & Contract Receivable
Non – Applicability:
1. Financial Assets at FVTPL
2. Financial Assets at FVTOCI (Equity)
Approach

General Approach: Based on stages Simplified Approach: for Trade Receivables

Either 12 Month ECL or Life Time ECL with no significant finance component, Life
Time ECL using Provision Matrix.

General Approach:
Stage I Stage II Stage III
No significant increase
Significant increase in Credit Risk
in Credit Risk
+ Credit Impaired
Impairment Loss 12 Month ECL Life Time ECL
Interest Recognition Gross Amount Gross Amount Net Amount
{Gross (-) Impairment
Loss}

FINANCIAL REPORTING 16
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

Is FA a trade receivable, Lease

Yes
receivable or contract asset?
Measure ‘life
time expected
No
credit losses’

Has the credit risk increased

singnificantly for the FA? Yes

Measure ‘12 -
No month expected
credit losses’

Illustration 9: 12 month expected credit loss – Loss rate approach

Bank A originates 2,000 bullet loans with a total gross carrying amount of CU
500,000.Bank A segments its portfolio into borrower groups (Groups X and Y) on the
basis of shared credit risk characteristics at initial recognition. Group X comprises
1,000 loans with a gross carrying amount per client of CU 200, for a total gross
carrying amount of CU 200,000. Group Y comprises 1,000 loans with a gross
carrying amount per client of CU 300, for a total gross carrying amount of CU
300,000. There are no transaction costs and the loan contracts include no options
(for example, prepayment or call options), premiums or discounts, points paid, or
other fees. Calculate loss rate when
Historic per annum average Present value of observed
Group
defaults loss assumed
X 4 CU 600
Y 2 CU 450
Solution:
• Bank A measures expected credit losses on the basis of a loss rate approach for
Groups X and Y. In order to develop its loss rates, Bank A considers samples of
its own historical default and loss experience for those types of loans.
• In addition, Bank A considers forward-looking information, and updates its
historical information for current economic conditions as well as reasonable
and supportable forecasts of future economic conditions. Historically, for a
population of 1,000 loans in each group, Group X’s loss rates are 0.3 per cent,
based on four defaults, and historical loss rates for Group Y are 0.15 per cent,
based on two defaults.

FINANCIAL REPORTING 17
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Estimated Total
Historic Estimated Present
per client estimated
Number per total gross value of
gross gross Loss
of clients annum carrying observed
carrying carrying rate
in sample average amount at loss
amount at amount at
defaults default assumed
default default
Group A B C=A×B D E=B×D F G=F÷C
X 1,000 CU 200 CU 2,00,000 4 CU 800 CU 600 0.3%
Y 1,000 CU 300 CU 3,00,000 2 CU 600 CU 450 0.15%

Features of Derivatives:-
1. Fair Value Changes in response to change in fair value of underlying.
2. No or Small initial investments.
3. Settled at future date.

Derivative Accounting

Other than Hedge Accounting Hedge Accounting

FTVPL Requires Documentation & Hedge Effectiveness

Fair Value Hedge

Cash Flow Hedge

• Contracts to buy or sell non-financial items are outside the scope of ‘financial
instruments’, except for the following:
(a) Contracts to buy or sell a non-financial item that can be settled net in cash or
another financial instrument, with the exception of contracts that were
entered into and continue to be held for the purpose of the receipt or
delivery of a non-financial item in accordance with the entity’s expected
purchase, sale or usage requirements.
(b) Such contract are irrevocably designated as measured at fair value through
profit or loss (even if it was entered into for the purpose of the receipt or
delivery of a non-financial item in accordance with the entity’s expected
purchase, sale or usage requirements).
This designation is available only at inception of the contract and only if it
eliminates or significantly reduces a recognition inconsistency (sometimes
referred to as an ‘accounting mismatch’) that would otherwise arise from not
recognising that contract because it is excluded from the scope of this
Standard applying the scope exclusion in(a) above.
FINANCIAL REPORTING 18
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
(c) A written option to buy or sell a non-financial item that can be settled net in
cash or another financial instrument, or by exchanging financial instruments,
where such a contract was not entered into for the purpose of receipt or
delivery of the non-financial item in accordance with entity’s expected
purchase, sale or usage requirements.

For
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 executor contract outside the scope of Ind AS 109 and hence, shall not be
accounted as a derivative.
Scope of Financial Instruments

Contract to buy or sell Non – Financial Items is outside the scope of IND AS 109.

However, if such contracts can be settled “NET”, then they are within the scope.

Exceptions: Contract to buy or sell Non – Financial Items in accordance with entity’s
usage requirement are outside the scope, provided there is no intention or past history
to settle net (Own Usage Exemption)
Note: The above exemption is not available to entity who is Writer of the Option.

Illustration 10
Entity XYZ enters into a fixed price forward contract to purchase one million
kilograms of copper in accordance with its expected usage requirements. The
contract permits XYZ to take physical delivery of the copper at the end of twelve
months or to pay or receive a net settlement in cash, based on the change in fair
value of copper. Is he contract accounted for as a derivative?
Solution:
While such a contract meets the definition of a derivative, it is not necessarily
accounted for as a derivative. The contract is a derivative instrument because
there is no initial net investment, the contract is based on the price of copper, and
it is to be settled at a future date. However, if XYZ intends to settle the contract
by taking delivery and has no history for similar contracts of setting net in cash or
of taking delivery of the copper and selling it within a short period after delivery
for the purpose of generating a profit from short – term fluctuating in price, the
contract is not accounted for as a derivative.
FINANCIAL REPORTING 19
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Illustration 11
A Entity XYZ owns an office building. XYZ enters into a put option with an investor
that permits XYZ to put the building to the investor for ` 150 million. The current
value of the building is ` 175 million. The option expires in five years. The option,
if exercised, may be settled through physical delivery or net cash, at XYZ’s options.
How do both XYZ and the investor account for the option?
Solution:
XYZ’s accounting depends on XYZ’s intention and past practice for settlement.
Although the contract meets the definition of a derivative, XYZ should not account
for it as a derivate if XYZ intends to settle the contract by delivering the building if
XYZ exercises its option and there is no past practise of setting net.
The investor, however, cannot conclude that the option was entered into to meet
the investor’s expected purchase, sale or usage requirements because the investor
does not have the ability to require delivery. In addition, the option may be settled
net in cash. Therefore, the investor has to account for the contract as a derivative.
Regardless of past practices, the investor does not affect whether settlement is by
delivery or in cash. The investor has written an option, and written option in which
the holder has a choice of physical settlement or net cash settlement can never
satisfy the normal delivery requirement for the exemption from Ind AS 109 because
the option writer does not have the ability to require delivery.

RECLASSIFICATION
 Reclassification of financial assets is required if and only if the objective of the
entity’s business model for managing those financial assets changes.
 Such changes are expected to be very infrequent and are determined by the
entity’s senior management as a result of internal or external changes and must be
significant to entity’s operations and demonstrable to external parties.
 A change in the objective of an entity’s business model will occur only when an
entity either begins or ceases to carry out an activity that is significant to its
operations.
Reclassified to
Amortised Cost FVTOCI FVTPL
Amortised Recognise at fair Recognise at fair
Cost value and difference value with the
between fair value difference between
Reclassified
NA and closing amortised fair value and
from
cost is recognised in closing amortised
OCI. cost is recognised in
profit or loss.

FINANCIAL REPORTING 20
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

FVTOCI Closing fair value Continue to Measure

plus/less the at fair value with
cumulative amount cumulative amount
in OCI at there in OCI reclassified
Reclassified
classification date NA immediately to profit
from
becomes the new or loss as an Ind AS 1
amortised cost gross reclassification
opening carrying adjustment.
amount.
FVTPL Closing fair value Continue to measure
becomes the new at fair value with
amortised cost anew EIR will be
Reclassified opening gross determined at there
NA
from carrying amount. At classification date
reclassification date
a new EIR will be
determined.

Embedded Derivatives

Does the hybrid contract contain a host that is an

asset within the scope of Ind AS 109?

No – separate embedded derivatives Yes – don’t separate embedded

that fulfill certain conditions as below derivatives (Refer note 1 below)

Economic characteristics and Yes Entire hybrid instrument

risks of the embedded derivative are is measured at fair value
closely related to those of the host? through profit or loss
No (Refer note 2 below)

A separate instrument with the same No

terms as the embedded derivative would
meet the definition of a derivative?
Yes
Is the hybrid contract measured at fair Yes
value through profit or loss?
No
Embedded derivative is separated
and accounted for separately
(refer section below)

FINANCIAL REPORTING 21
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Note 1: This implies that embedded derivatives are permitted to be separated from only
such hybrid contracts that contain a host which is either a (a) financial instrument
classified as financial liability or equity or compound; or (b) contract for purchase or
sale of a non financial item.

Note 2: If both the host and embedded derivative have economic characteristics of an
equity instrument, the hybrid instrument is not carried at fair value through profit or
loss. In other words, this measurement category is applicable only for host contracts
which are financial liabilities.

Question 12
Entity A (an INR functional currency entity) enters into a USD 1,000,000 sale
contract on 1January 20X1 with Entity B (an INR functional currency entity) to sell
equipment on 30 June20X1.
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

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 x 60 – 55 x 1,000,000) = ` 5,000,000 (profit/asset)

FINANCIAL REPORTING 22
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
The table summarising the computation of gain/ loss to be recorded at every
period end –
Derivative
Date Transaction Sales Debtors Asset (Profit) Loss
(Liability)
INR INR INR INR
1-Jan-20X1 Embedded Derivative Nil Value
31-Mar-20X1 Change in Fair Value of (10,000,000) 10,000,000
Embedded Derivatives
MTM (55-45) x 1 Million
30-Jun-20X1 Change in Fair Value of 15,000,000 (15,000,000)
Embedded Derivatives
(60-45) x1 Million
30-Jun-20X1 Recording sales at (55,000,000) 55,000,000
forward rate
30-Jun-20X1 Embedded derivative- 5,000,000 (5,000,000)
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 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
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 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
Derivative financial assetA/c Dr. 5,000,000
Derivative financial liabilityA/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 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
FINANCIAL REPORTING 23
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Trade receivable A/c Dr. 55,000,000
To Sales A/c 55,000,000
(being sale booked at forward rate on the date of
transaction)

e. 30 June 20X1 –
Dr. Amount Cr. Amount
Particulars
(`) (`)
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)

Question 13
Company A, an Indian company whose functional currency is `, enters into a
contract to purchase machinery from an unrelated local supplier, company B. The
functional currency of company B is also `. However, the contract is denominated
in USD, since the machinery issourced by company B from a US based supplier.
Payment is due to company B on delivery of the machinery.
Key terms of the contract:
Contractual features Details
Contract/order date 9 September 20X1
Delivery/payment date 31 December 20X1
Purchase price USD 1,000,000
USD/` Forward rate on 9 September 20X1 for 31 December 20X1 67.8
maturity
USD/` Spot rate on 9 September 20X1 66.4
USD/` Forward rates for 31 December, on: 30 September 67.5
31 December (spot rate) 67.0
Company A is required to analyse if the contract for purchase of machinery (a
capital asset)from company B contains an embedded derivative and whether this
should be separately accounted for on the basis of the guidance in Ind AS 109. Also
give necessary journal entries for accounting the same.
Solution:
Based on the guidance above, the USD contract for purchase of machinery entered
into by company A includes an embedded foreign currency derivative due to the
following reasons:

FINANCIAL REPORTING 24
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
 The host contract is a purchase contract (non-financial in nature) that is not
classified as, or measured at FVTPL.
 The embedded foreign currency feature (requirement to settle the contract
by payment of USD at a future date) meets the definition of a stand-alone
derivative – it is akin to a USD-` forward contract maturing on 31 December
20X1.
 USD is not the functional currency of either of the substantial parties to the
contract (i.e., neither company A nor company B).
 Machinery is not routinely denominated in USD in commercial transactions
around the world. In this context, an item or a commodity may be considered
‘routinely denominated’ in a particular currency only if such currency was
used in a large majority of similar commercial transactions around the world.
For example, transactions in crude oil are generally considered routinely
denominated in USD. A transaction for acquiring machinery in this illustration
would generally not qualify for this exemption.
 USD is not a commonly used currency for domestic commercial transactions in
the economic environment in which either company A or B operate. This
exemption generally applies when the business practice in a particular
economic environment is to use amore stable or liquid foreign currency (such
as the USD), rather than the local currency, for a majority of internal or cross-
border transactions, or both. In the illustration above, companies A and B are
companies operating in India and the purchase contract is an
internal/domestic transaction. USD is not a commonly used currency for
internal trade within this economic environment and therefore the contract
would not qualify for this exemption.

Accordingly, company A is required to separate the embedded foreign currency

derivative from the host purchase contract and recognise it separately as a
derivative.
The separated embedded derivative is a forward contract entered into on
9 September 20X1, to exchange USD 10,00,000 for ` at the USD/` forward rate of
67.8 on 31 December 20X1.
Since the forward exchange rate has been deemed to be the market rate on the
date of the contract, the embedded forward contract has a fair value of zero on
initial recognition.
Subsequently, company A is required to measure this forward contract at its fair
value, with changes in fair value recognised in the statement of profit and loss. The
following is the accounting treatment at quarter-end and on settlement:

FINANCIAL REPORTING 25
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Accounting treatment:
Amount Amount
Date Particulars
(`) (`)
09-Sep-X1 On initial recognition of the forward contract
(No accounting entry recognised since initial Nil Nil
fair value of the forward contract is considered
to be nil)
30-Sep-X1 Fair value change in forward contract
Derivative asset Dr. 3,00,000
[(67.8-67.5) x10,00,000]
To Profit or loss 3,00,000
31-Dec-X1 Fair value change in forward contract
Derivative asset Dr. 5,00,000
[{(67.8-67) x 10,00,000} - 3,00,000]
To Profit or loss 5,00,000
31-Dec-X1 Recognition of machinery acquired and on
settlement
Property, plant and equipment Dr. 6,78,00,000
(at forward rate)
To Derivative asset 8,00,000
To Creditor (company B) / Bank 6,70,00,000

Question 14
On 1st April, 20X1, Makers Ltd. raised a long term loan from foreign investors. The
investors subscribed for 6 million Foreign Currency (FCY) loan notes at par. It
incurred incremental issue costs of FCY 2,00,000. Interest of FCY 6,00,000 is
payable annually on 31st March, starting from 31st March, 20X2. The loan is
repayable in FCY on 31st March, 20X7 at a premium and the effective annual
interest rate implicit in the loan is 12%. The appropriate measurement basis for this
loan is amortised cost. Relevant exchange rates are as follows:
• 1st April, 20X1 - FCY 1 = ` 2.50.
• 31st March, 20X2 – FCY 1 = ` 2.75.
• Average rate for the year ended 31st Match, 20X2 – FCY 1 = ` 2.42. The
functional currency of the group is Indian Rupee.
What would be the appropriate accounting treatment for the foreign currency loan
in the books of Makers Ltd. for the FY 20X1-20X2? Calculate the initial
measurement amount for the loan, finance cost for the year, closing balance and
exchange gain / loss.
FINANCIAL REPORTING 26
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
Question 15
An Indian entity, whose functional currency is rupees, purchases USD dominated
bond at its fair value of USD 1,000. The bond carries stated interest @ 4.7% p.a. on
its face value. The said interest is received at the year end. The bond has maturity
FV 1250
period of 5 years and is redeemable at its face value of USD 1,250. The fair value
of the bond at the end of year 1is USD 1,060. The exchange rate on the date of
transaction and at the end of year 1 are USD1 = ` 40 and USD 1 = ` 45, respectively.
The weighted average exchange rate for the year is1 USD = ` 42.
The entity has determined that it is holding the bond as part of an investment
portfolio whose objective is met both by holding the asset to collect contractual
cash flows and selling the asset. The purchased USD bond is to be classified under
the FVTOCI category.
The bond results in effective interest rate (EIR) of 10% p.a. IRR always use USD Amount
Calculate gain or loss to be recognised in Profit & Loss and Other Comprehensive
Income for year 1. Also pass journal entry to recognise gain or loss on above.
(Round off the figures to nearest rupees)

Question 16
An entity purchases a debt instrument with a fair value of ` 1,000 on 15thMarch,
20X1 and measures the debt instrument at fair value through other comprehensive
income. The instrument has an interest rate of 5% over the contractual term of 10
years, and has a 5% effective interest rate. At initial recognition, the entity
determines that the asset is not a purchased or original credit-impaired asset.
On 31st March 20X1 (the reporting date), the fair value of the debt instrument has
decreased to ` 950 as a result of changes in market interest rates. The entity
determines that there has not been a significant increase in credit risk since initial
recognition and that ECL should be measured at an amount equal to 12 month ECL,
which amounts to ` 30.
On 1st April 20X1, the entity decides to sell the debt instrument for ` 950, which is
its fair value at that date.
Pass journal entries for recognition, impairment and sale of debt instruments as
per Ind AS 109. Entries relating to interest income are not to be provided.

Question 17
ABC Company issued 10,000 compulsory cumulative convertible preference shares
(CCCPS) as on 1 April 20X1 @ ` 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.
FINANCIAL REPORTING 27
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
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
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

Cash Discount Net present
Date Particulars
Flow 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 fig) 997,176.75

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

FINANCIAL REPORTING 28
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL
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
Cash Flow Closing Financial
Liability Interest B
C Liability A+B-C
A
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 -

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
(BeingDividendatthecouponrateof10%paidtothe
shareholders)
31-Mar-20X2 Finance cost A/c Dr. Dr. 78,153
To Preference Shares A/c 78,153
(Being interest as per EIR method recorded)
31-Mar-20X3 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)

FINANCIAL REPORTING 29
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

31-Mar-20X3 Finance cost A/c Dr. 66,758

To Preference Shares A/c 66,758
(Being interest as per EIR method recorded)
31-Mar-20X4 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-20X5 Finance cost A/c Dr. 53,556
To Preference Shares A/c 53,556
(Being interest as per EIR method recorded)
31-Mar-20X5 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-20X5 Finance cost A/c Dr. 38,260
To Preference Shares A/c 38,260
(Being interest as per EIR method recorded)
31-Mar-20X6 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-20X6 Finance cost A/c Dr. 20,506
To Preference Shares A/c 20,506
(Being interest as per EIR method recorded)
31-Mar-20X6 Equity Component of Preference shares A/c Dr. 977,233
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)

“If you want light to come into your life, you need to
stand where it is shining.”

FINANCIAL REPORTING 30
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)
CA FINAL

Notes



FINANCIAL REPORTING 31
FINANCIAL INSTRUMENTS
(IND AS 32, 107, 109)