SARANSH Indian Accounting Standards

FINANCIAL INSTRUMENTS
Overview of standards providing guidance on Scope of Ind AS 32
ÀQDQFLDOLQVWUXPHQWV Applied by all entities to all types of financial instruments
Exceptions:
Financial InstrumentT
Interests in subsidiaries, associates or joint ventures that
are accounted for in accordance with Ind AS 110, Ind AS
27, or Ind AS 28
Note: Entities shall apply this Standard to all derivatives
linked to interests in subsidiaries, associates or joint
Ind AS 32 ‘Financial Ind AS 107 ‘Financial
Instruments:
Ind AS 109 ‘Financial
Instruments:
ventures
Instruments’
Presentation’ Disclosures’
Employers’ rights and obligations under ‘Employee
benefit plans’ to which Ind AS 19 applies
Disclosures
Classification Classification Insurance contracts as defined in Ind AS 104
as Liability vs and re- Exception 1: Derivatives that are embedded in insurance
Equity classification contracts -if accounted separately by the issuer, as
Of
Initial
required by Ind AS 109.
Financial
Compound Measurement Exception 2: Financial guarantee contracts -if the issuer
liability
Financial applies Ind AS 109 in recognising and measuring the
Instruments Measurement contracts. However, issuer can elect applying Ind AS 104
Subsequent Of in recognising and measuring them
Offsetting a Measurement Financial
Financial asset
asset Financial instruments within the scope of Ind AS 104
and a Financial
liability Recognition (because they contain a discretionary participation
and de- feature). However, exemption is limited to paragraphs
Presentation recognition 15– 32 and AG25–AG35 which relates to the distinction
of Interest, between financial liabilities and equity instruments.
dividends, Impairment Note: Ind AS 32 applies to derivatives that are embedded
losses and gains in these instruments
Hedging
Derivative Instruments
and hedge Financial instruments, contracts and obligations under
accounting share-based payment transactions to which Ind AS 102
Hedged items applies,
Exception 1: Contracts within scope of paras 8-10 of Ind
AS 32
,1',$1$&&2817,1*67$1'$5' ,1'$6  Exception 2: Treasury shares purchased, sold, issued
or cancelled in connection with employee share option
),1$1&,$/,167580(17635(6(17$7,21 plans, employee share purchase plans, and all other share-
based payment arrangements to which paras 33, 34 of Ind
Objective of Ind AS 32 is to AS 32 applies
Establish Establish Classify Classify Circumstamces
principles principles financial related in which
for
presenting
for
offsetting
instruments,
from the
interest,
dividends,
financial assets
and financial
6XPPDU\ RI WKH WUDQVDFWLRQ RXWVLGH WKH
financial financial perspective losses and liability should VFRSH)LQDQFLDO,QVWUXPHQWV
instruments assets and of the issuer gains be offset S. Particulars Covered Covered Applicable
as liabilities financial into No. under under Ind AS
or equity liabilities -financial Ind AS 109 Ind AS 32
assets, 1 Interest in subsidiaries No No Ind AS 27
-financial (At Costs)
liabilities 2 Interests in associates No No Ind AS 27
and (At Costs)
-equity 3 Interest in joint ventures No No Ind AS 27
instruments (At Costs)
4 Rights and obligations No No Ind AS 116
under leases
Note: Principles in Ind AS 32 complement the principles for 5 Employers' rights and No No Ind AS 19
recognising and measuring financial assets and financial liabilities in obligations under
Ind AS 109 and for disclosing information about them in Ind AS 107. employee benefit plans

© ICAI BOS(A) 84
SARANSH Indian Accounting Standards

S. Particulars Covered Covered Applicable Contracts need not

No. under under Ind AS be in writing and
Ind AS 109 Ind AS 32 may take a variety What are Financial Any assets or
6 Rights and obligations No No Ind AS 104 of forms Instruments? liabilities that are not
under an insurance
contractual are not
contract An agreement financial assets or
7 Forward contract arising No No Ind AS 104 between two or Any contract financial liabilities.
in case of business more parties that Example: Income
combination t
IBT DMFBS taxes are a statutory
8 Loan commitment other No No Ind AS 37 economic obligation
than covered under Ind consequences and That gives rise
AS 109 and Ind AS 32 t
JT enforceable by
9 Shared based payments No No Ind AS 102 law
10 Reimbursement right in No No Ind AS 37
respect of provision
11 Rights and obligations No No Ind AS 115 To one entity’s To another entity’s
under revenue
for contracts with OR
customers
12 Interest in subsidiaries Yes Yes Ind AS 109 Financial asset Financial liability Equity instrument
/ Associates / Joint
venture (At Fair Value)

Scope of ‘Contract to Buy or Sell a Non-Financial Item’

What are
Financial Assets?
Ind AS 32 is applicable when the contract Ind AS 32 is not
(including written option) is settled applicable when
or or
Net in By another By exchanging When an entity Contract is entered Equity Contract (Derivative or Non-
cash financial financial irrevocably into and continue instrument A contractual Derivative) settled with variable
instrument instruments designates to be held for the Cash of another amount of entity’s own equity
right:
the contract purpose of the entity instruments
as measured receipt or delivery of
at fair value a non-financial item
through profit in accordance with
As if the contract was or loss as per the entity’s expected To receive cash To exchange financial Exception:
a financial instrument para 2.5 of Ind purchase, sale or or another assets or financial Entity’s own equity
AS 109 usage requirements financial asset OR liabilities with another instruments do not
from another entity under conditions include
entity that are potentially t
QVUUBCMF mOBODJBM
Even if it was entered into for the purpose of the receipt or favourable to the entity instruments
delivery of a non-financial item in accordance with the entity's classified as equity
expected purchase, sale or usage requirements instruments
The ability A contingent right and t
JOTUSVNFOUT UIBU
to exercise a obligation meets the impose on the
Note: This designation is available only at inception of the
contractual definition of financial asset entity an obligation
contract and only if it eliminates or significantly reduces a
right or to satisfy and financial liability, even to deliver to
recognition inconsistency which arise from not recognising
a contractual though such assets and another party a
that contract under Ind AS 32
obligation may be liabilities are not always pro rata share of
absolute or it may recognized in the financial the net assets of
Ways in which a contract to buy or sell a non-financial item can be settled net in be contingent on statements. For eg.: A the entity only on
cash or another financial instrument or by exchanging financial instruments. occurrence of one lender may be provided liquidation and are
or more future with a financial guarantee classified as equity
events, not wholly by a party (‘guarantor’) on instruments, or
within the control behalf of borrower, entitling t
JOTUSVNFOUT UIBU
When the When the ability to settle When, for similar When the
of either party to to recover the outstanding are contracts for
terms of the net in cash or another contracts, the non-
the contractual dues from the guarantor the future receipt
contract permit financial instrument, or entity has a financial
arrangement if the borrower were to or delivery of the
either party to by exchanging financial practice of taking item that is
default, etc. entity’s own equity
settle it instruments, is not delivery of the the subject
t
OFU JO DBTI PS explicit in the terms of the underlying and of the instruments
t
BOPUIFS contract, but the entity selling it within contract
financial has a practice of settling a short period is readily Important Points
instrument or similar contracts in the after delivery convertible t
Physical assets (such as inventories, property, plant and
t
CZ said manner for the purpose to cash equipment), right-of-use assets and intangible assets (such as
exchanging (whether with the of generating a patents and trademarks) are not financial assets.
financial counterparty, by entering profit from short- t
"TTFUT TVDI BT prepaid expenses) for which the future economic
instruments into offsetting contracts term fluctuations benefit is the receipt of goods or services, rather than the right to
or by selling the contract in price or receive cash or another financial asset, are not financial assets.
before its exercise or lapse) dealer's margin t
‘Perpetual’ debt instruments (such as ‘perpetual’ bonds,
debentures and capital notes) normally provide the holder with
the contractual right to receive payments on account of interest
Note: Such Contracts on which Ind AS 32/Ind AS 109 is applicable are at fixed dates extending into the indefinite future, either with
considered to be derivatives while those contracts that are not covered no right to receive a return of principal or a right to a return of
under the scope of Ind AS 32 are considered as executory contracts. principal under terms that make it very unlikely or very far in the
future. The holder and issuer of the instrument have a financial
asset and a financial liability, respectively.

© ICAI BOS(A) 85
SARANSH Indian Accounting Standards

TEST YOUR KNOWLEDGE What are Financial Liabilities?

Particulars Whether Remarks
Financial A contractual Contract (Derivative or Non-
Asset (FA) obligation Derivative) settled with variable
or not? amount of entity’s own equity
instruments
Investment in bonds FA Contractual right to receive cash
debentures
Loans and FA Contractual right to receive cash To deliver cash To exchange financial
receivables or another assets or financial
financial asset OR liabilities with another
Deposits given FA Contractual right to receive cash to another entity under conditions
entity that are potentially
Trade & other FA Contractual right to receive cash
unfavourable to the entity
receivables
Cash and cash FA Specifically covered in the
equivalents definition
Exception:
Bank balance FA Contractual right to receive cash
Investments in FA Equity instrument of another Rights, options or warrants to acquire a fixed number of the
equity shares entity entity’s own equity instruments for a fixed amount of any
currency are equity instruments if the entity offers the rights,
Perpetual debt FA Such instruments provide the
options or warrants pro rata to all of its existing owners of
instruments contractual right to receive
the same class of its own non-derivative equity instruments
Eg. perpetual interest for indefinite future or a
bonds, debentures right to return of principal under
and capital notes. terms that make it very unlikely The equity conversion option embedded in a convertible
or very far in the future bond denominated in foreign currency to acquire a fixed
Physical assets No Control of such assets does not number of the entity’s own equity instruments if the exercise
create a present right to receive price is fixed in any currency
Eg. inventories,
property, plant and cash or another financial asset
equipment etc. Puttable financial instruments that are classified as equity
Right to use assets No Control of such assets does not instruments as per paras 16A and 16B
Eg. Lease vehicle create a present right to receive
etc. cash or another financial asset
*nstruments that impose on the entity an obligation to
Intangibles No Control of such assets does not deliver to another party a pro rata share of the net assets of
Eg. Patents, create a present right to receive the entity only on liquidation and are classified as equity
trademark etc. cash or another financial asset instruments as per para 16C and 16D, or
Prepaid expenses No These instruments provide
Eg. Prepaid future economic benefit in the *nstruments that are contracts for the future receipt
insurance, prepaid form of goods or services, rather or delivery of the entity’s own equity instruments
rent etc. than the right to receive cash
Advance given for No These instruments provide "Note: An instrument that meets the definition of a financial
goods and services future economic benefit in the liability is classified as an equity instrument if it has all the features
form of goods or services, rather and meets the conditions in paragraphs 16A and 16B or paragraphs
than the right to receive cash 16C and 16D."

TEST YOUR KNOWLEDGE

Particulars Whether Financial Remarks
Liability (FL)
or not?
Loans payable or bank loan FL Contractual obligation to pay cash / bank
Trade and other payables FL Contractual obligation to pay cash / bank
Bills payable / acceptance FL Contractual obligation to pay cash / bank
Deposits received FL Contractual obligation to pay cash / bank
Mandatory redeemable preferences FL Contractual obligation to pay cash / bank
shares
Financial guarantee given FL Contractual obligation to pay cash, due
to the occurrence of certain events

© ICAI BOS(A) 86
SARANSH Indian Accounting Standards

™ Settlement in own equity instruments is equity

Equity Instrument classified only if it’s a fixed-for-fixed transaction,
ie, issue of fixed number of shares and involves a
fixed amount of cash or other financial asset
Any contract that ™ Where an entity enters into a non-derivative contract
to issue a fixed number of its own equity instruments
in exchange for a fixed amount of cash (or another
financial asset), it is an equity instrument of the
Settlement entity. But this does not apply for instruments that
Evidences a residual interest in the assets of an entity
in own are equity classified being a puttable instrument or
after deducting all of its liabilities
equity other instrument entitling the holder to pro-rata
instruments share in net assets that meet specified criteria
™ However, if such a contract contains an obligation for
the entity to pay cash (or another financial asset), it
The instrument is an equity instrument if, and only if, both also gives rise to a liability for the present value of the
conditions (a) and (b) below are met: redemption amount. For example: a forward contract
entered into by an entity to repurchase fixed number
of its own shares for a fixed amount of cash gives rise
to a financial liability to be recorded at present value
of redemption amount

An issuer of non-puttable ordinary shares assumes a liability when:

(b) If the instrument will or may
(a) The instrument t
JU GPSNBMMZ BDUT UP NBLF B EJTUSJCVUJPO BOE
be settled in the issuer’s own
includes no contractual t
CFDPNFT MFHBMMZ PCMJHFE UP UIF TIBSFIPMEFST UP EP TP
equity instruments, it is:
obligation:
(i) A non-derivative that includes
(i) To deliver cash or another
no contractual obligation for
financial asset to another This may be the case following the:
the issuer to deliver a variable
entity; or t
%FDMBSBUJPO PG B EJWJEFOE PS
number of its own equity
(ii) To exchange financial instruments; or t
8IFO UIF FOUJUZ JT CFJOH XPVOE VQ BOE BOZ BTTFUT SFNBJOJOH BGUFS UIF
assets or financial satisfaction of liabilities become distributable to shareholders
(ii) A derivative that will be settled
liabilities with another
only by the issuer exchanging
entity under conditions
a fixed amount of cash or
that are potentially Example: When the dividend is approved by shareholders in AGM, the
another financial asset for a
unfavourable to the Company has taken an obligation to distribute dividend to its shareholders
fixed number of its own equity
issuer and hence, it is a contractual obligation meeting the definition of financial
instruments
liability

Fixed-for-fixed
transaction!

Examples of equity instruments include:

Note: A contractual obligation, including one arising from a derivative
financial instrument, that will or may result in the future receipt or
delivery of the issuer’s own equity instruments, but does not meet
conditions (a) and (b) above, is not an equity instrument.
Non-puttable ordinary shares, for example: equity shares issued by companies
Some puttable instruments (if they meet requisite criteria and are not classified
as financial liabilities)

Some instruments that impose on the entity an obligation to deliver to another

The key characteristics of an equity instrument have been further
explained as follows:
™ A key characteristic of equity instruments is that they
carry no contractual obligation throughout for any
payment or distribution towards the holders of such
instruments.
™ However, following type of instruments as an
No exception are ‘equity’ classified even if they contain
contractual
an obligation to deliver cash or other financial asset,
obligation provided certain requisite criteria are met –
1. Puttable financial instruments that meet certain
conditions
2. An instrument, or a component of an instrument,
that contains an obligation for the issuing entity
to deliver to the holder a pro rata share of the net
assets of the issuing entity only on its liquidation
party a pro rata share of the net assets of the entity only on liquidation (if they
meet requisite criteria and are not classified as financial liabilities)
Some types of preference shares (where repayment and distribution is at the
discretion of the Issuer);
Warrants or written call options that allow the holder to subscribe for or
purchase a fixed number of non-puttable ordinary shares in the issuing entity
in exchange for a fixed amount of cash or another financial asset.
™ Other instruments convertible into fixed number of equity shares, etc.
Important Points
t
ͳF DMBTTJmDBUJPO PG B mOBODJBM JOTUSVNFOU VOEFS *OE "4 
is done from the perspective of the issuer and not from the
perspective of the holder
t
'PS TPNF mOBODJBM JOTUSVNFOUT BMUIPVHI UIFJS MFHBM GPSN NBZ CF
equity, the substance of the arrangements may be that they are
liabilities. Paragraphs 11 and 16 of Ind AS 32 provides guidance
to distinguish a financial liability from an equity instrument
t
" QSFGFSFODF TIBSF GPS FYBNQMF NBZ EJTQMBZ FJUIFS FRVJUZ PS
liability characteristics depending on the substance of the rights
attaching to it

© ICAI BOS(A) 87
SARANSH Indian Accounting Standards

Comparative Table For Classifying Financial Liabilities And The Flowchart Below Further Summarises The Distinction
Equity Instruments From The Perspective Of The Issuer Between The Definitions Of A Financial Liability And Equity:

No Not a financial instrument, account

Financial liability (Ind AS 32.11)
A financial instrument that fulfils A financial instrument that fulfils
either of (A) or (B) below: both (A) and (B) below:
Condition (A):
An instrument that is a
contractual obligation:
i. to deliver cash or another
financial asset to another
entity; or
ii. to exchange financial assets or
financial liabilities with another
entity under conditions that are
potentially unfavourable to the
entity
Condition (B):
An instrument that will or may be
settled in the entity's own equity
instruments and is:
i. A non-derivative for which the
entity is or may be obliged
to deliver a variable number
of the entity's own equity
instruments; or
ii. A derivative that will or may
be settled other than by the
exchange of a fixed amount
of cash or another financial
asset for a fixed number of the
entity's own equity instruments
Equity (Ind AS 32.16) Is there a contractual obligation?
for under relevant standard
Yes
Obligation to deliver cash or Yes
Condition (A): another financial asset?
An instrument that contains no No
contractual obligation:
Obligation to exchange
i. to deliver cash or another financial assets or liabilities Yes
financial asset to another under potentially unfavourable Financial liability
entity; or conditions
ii. to exchange financial assets or No
financial liabilities with another Yes
entity under conditions that are (A) Obligation to issue own
equity instruments, AND Measured at Measured at
potentially unfavourable to the (B) Either of the consideration Amortised cost Fair value
entity received/receivable
or number of equity
Condition (B): instruments is VARIABLE
An instrument that will or may be t
$PTU SFDPSEFE JO UIF JODPNF
No, this implies statement
settled in the entity's own equity
t
*NQBDU PO OFU QSPmU  0$*
instruments and is:
(A) Obligation to issue own
i. a non-derivative that includes equity instruments, AND Hence
no contractual obligation for (B) Both of the consideration Equity instrument
the issuer to deliver a variable received / receivable
number of the entity's own and number of equity
instruments are FIXED
equity instruments; or Carried at cost
ii. a derivative that will or may be
settled only by the exchange
of a fixed amount of cash or All transactions recorded directly in equity
another financial asset for a
fixed number of the entity's
own equity instruments

No Contractual Obligation Uo Deliver Cash Pr Another Financial Asset

A critical feature in differentiating a financial liability from an equity instrument is the existence of
a contractual obligation of the issuer either to deliver cash or another financial asset to the holder
or to exchange financial assets or financial liabilities with the holder under conditions that are
potentially unfavourable to the issuer
There are very limited exceptions to this principle in the form of “puttable instruments” and
“obligations arising on liquidation”

The financial instrument is a financial liability even when the amount of cash or other financial
assets is determined on the basis of an index or other item that has the potential to increase or
decrease

If an entity does not have an unconditional right to avoid delivering cash or another financial asset
to settle a contractual obligation, the obligation meets the definition of a financial liability

A financial instrument that does not explicitly establish a contractual obligation to deliver cash
or another financial asset may establish an obligation indirectly through its terms and conditions

© ICAI BOS(A) 88
SARANSH Indian Accounting Standards

Settlement In The Entity’s Own Equity Instruments

To recapitulate: A financial instrument is classified as a liability not just when there is an obligation to deliver cash or another financial
asset, it is sometimes so classified even when the entity’s obligation is to settle the instrument through delivery of its own equity instruments.

If an entity has a contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so
that the fair value of the entity's own equity instruments to be received or delivered equals the amount of the contractual right or obligation,
such a contract is a financial liability.

Such a contractual right or obligation may be for a fixed amount or an amount that fluctuates in part or in full in response
to changes in a variable other than the market price of the entity's own equity instruments (eg an interest rate, a commodity
price or a financial instrument price)

The number of equity instruments to be delivered could vary as a result of entity’s own share price.

A contract that will be settled by the entity (receiving or) delivering a fixed number of its own equity instruments in exchange
for a fixed amount of cash or another financial asset is an equity instrument

The above requirements are summarised in the table below:

S.no. 2 in table S. Consideration Number of own equity Classification and rationale

is also called No. for financial instruments to be
“fixed for fixed” instrument issued in settlement
test for equity
classification 1 Fixed Variable Financial liability – own equity instruments are being used as
currency to settle an obligation for a fixed amount
i.e. fixed amount
of cash or 2 Fixed Fixed Equity – issuer does not have an obligation to pay cash and
other financial holder is not exposed to any variability
asset for fixed 3 Variable Fixed Financial liability – though issuer does not have an obligation
number of to pay cash, but holder is exposed to variability
own equity
instruments 4 Variable Variable Financial liability – though issuer does not have an obligation
to pay cash, but both parties are exposed to variability

Another point to note is a fine distinction highlighted in the definition of financial liability and equity, as mentioned in the paragraph
“Definitions – financial liability and equity”. Being mirror images of each other, for simplicity sake, let us look at condition (B) in the
definition of “financial liability”:

“An instrument that will or may be settled in the entity's own equity instruments and is:
i. a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity's own equity instruments; or
ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed
number of the entity's own equity instruments”

In short, the treatment can be explained as follows

Conversion feature fails “fixed No Equity instrument – consideration

for fixed” test? received is credited to equity

Yes

Conversion feature is No Can be subsequently measured

derivative? at amortised cost

Yes

Subsequently measured at fair value

with fair value changes recognised
in profit or loss

© ICAI BOS(A) 89
SARANSH Indian Accounting Standards

Important Points Preference Shares

t
Changes in the fair value of a contract arising from variations
in market interest rates that do not affect the amount of
cash or other financial assets to be paid or received, or the In determining whether a preference share is a financial
number of equity instruments to be received or delivered, on liability or an equity instrument, an issuer assesses the
settlement of the contract do not preclude the contract from particular rights attached to the share to determine
being an equity instrument whether it exhibits the fundamental characteristic of a
financial liability or an equity instrument
t
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for a written option or warrant on the entity’s own shares) is
added directly to equity
Redeemable Preference shares Non-Redeemable Preference shares
t
"OZ DPOTJEFSBUJPO QBJE TVDI BT UIF QSFNJVN QBJE GPS B
purchased option) is deducted directly from equity.
t
Changes in the fair value of an equity instrument are not Redemption Redemption Redemption When distributions to
recognised in the financial statements at a specified at option of at option of holders of the preference
date Holder Issuer shares, whether cumulative
or non-cumulative, are at
Contracts settled in own equity instruments but classified the discretion of the issuer
as ‘financial liability’ (where equity instrument is treated as
currency): Classified as a Classified as equity The shares are equity
financial liability instrument instruments
Terms Evaluation under Ind AS 32
Non t
" DPOUSBDU UIBU XJMM CF settled in a variable number
derivative of entity's own shares whose value equals a fixed The potential inability of an An obligation may arise, when the
contract amount is a financial liability, because the entity issuer to redeem a preference issuer of the shares exercises its
is under an obligation to pay a fixed amount that share when contractually option, (usually by formally notifying
is settled through equity instruments (similar to required either because of a lack the shareholders of an intention to
settlement in currency) of funds, a statutory restriction redeem the shares), at which time
t
4JNJMBSMZ B DPOUSBDU UIBU XJMM CF settled in a fixed or insufficient profits or reserves, this instrument shall be reclassified
number of the entity's own shares, but the rights does not negate the obligation from ‘equity’ to ‘financial liability’
attaching to those shares will be varied so that
the settlement value equals a fixed amount or Points to be noted:
an amount based on changes in an underlying t
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variable, is a financial asset or a financial liability t
"OZ IJTUPSJDBM USFOE PS BCJMJUZ PG UIF *TTVFS EPFT OPU BĉFDU UIF DMBTTJmDBUJPO
of an instrument as ‘equity’ or ‘financial liability’.
Derivative t
" DPOUSBDU UIBU XJMM CF settled in a variable number t
ͳF DMBTTJmDBUJPO PG B QSFGFSFODF TIBSF BT BO FRVJUZ JOTUSVNFOU PS B mOBODJBM
contract of the entity's own shares whose value equals an liability is not affected by
amount based on changes in an underlying variable (a) A history of making distributions
(eg a commodity price) is a financial asset or a (b) An intention to make distributions in the future
financial liability. (c) A possible negative impact on the price of ordinary shares of the issuer
An example is a written option to buy gold that, if distributions are not made
if exercised, is settled net in the entity's own (d) The amount of the issuer's reserves
instruments by the entity delivering as many of (e) An issuer's expectation of a profit or loss for a period or
those instruments as are equal to the value of the (f) An ability or inability of the issuer to influence the amount of its profit
option contract or loss for the period

Classification / Evaluation of Preference Shares Based on Distribution on and of Preference Shares

Nature Dividend Terms Evaluation Classification Accounting
whether at the
option of the issuer
Mandatory Non - t %JWJEFOE o -JBCJMJUZ Liability Amortized costs
Redeemable Discretionary t 3FEFNQUJPO o -JBCJMJUZ
Preference
Discretionary t %JWJEFOE o &RVJUZ Compound FI Split Accounting into liability
Shares
t 3FEFNQUJPO o -JBCJMJUZ and Equity component
t
/PO Non - t %JWJEFOE o -JBCJMJUZ Liability Amortized costs
redeemable Discretionary t 'JYFE UP 'JYFE o /PU NFU o -JBCJMJUZ
t
$POWFSUJCMF
t %JWJEFOE o -JBCJMJUZ Compound FI Split Accounting into liability
t 'JYFE UP 'JYFE o .FU o &RVJUZ and Equity component
Discretionary t %JWJEFOE o &RVJUZ Compound FI Split Accounting into liability
t 'JYFE UP 'JYFE o /PU NFU o -JBCJMJUZ and Equity component
t %JWJEFOE o &RVJUZ Equity t 'BJS WBMVF
t 'JYFE UP 'JYFE o .FU o &RVJUZ t /P SFNFBTVSFNFOU

© ICAI BOS(A) 90
SARANSH Indian Accounting Standards

Puttable Instruments

It gives the to put the instrument for cash or another is automatically put
OR
holder the right back to the issuer financial asset back to the issuer

phrase “put on the occurrence the death or

back to the of an uncertain OR retirement of the
issuer” refers to
future event instrument holder
redemption of
the instrument

A puttable financial instrument includes a contractual obligation for the issuer to repurchase
or redeem that instrument for cash or another financial asset on exercise of the put
Note: If the holder has a right, but not an obligation to require the issuer to redeem the
instrument, it is referred to as “put option
As per the principle, it shall be classified as financial liability. However, it would be classified as
Equity, subject to fulfillment of certain conditions

Exception to the definition of a financial liability ie when a puttable financial

instrument is classified as an equity instrument if it has ALL the following features:

1. It takes a 2. It is 3. All 4. Apart from 5. Total expected 6. The issuer

pro rata share subordinate financial the contractual cash flows must have no
of the entity’s to all other instruments obligation for attributable to other financial
net assets in classes of in that class of the issuer to the instrument instrument or
the event of instrument instruments repurchase or over the life of contract that has:
the entity’s have identical redeem the the instrument t
UPUBM DBTI nPXT
liquidation features instrument for are based on same terms
cash or another substantially on as point 5, with
financial asset, the: t
UIF FĉFDU PG
there are no t
QSPmU PS MPTT substantially
other contractual t
DIBOHF JO UIF restricting
For example, they obligations: recognised net or fixing the
must all be puttable, t
UP EFMJWFS DBTI assets or residual return
That is, in its present and the formula or or another t
DIBOHF JO UIF to the puttable
form, it has no other method used to financial asset fair value of the instrument
priority over other calculate the repurchase to another recognised and holders
claims to the entity's or redemption price entity, or unrecognised
assets on liquidation is the same for all t to settle net assets
(entity will need to instruments in that in variable of the entity over
assume liquidation on class n u m b e r the life of the
date of classification) of entity’s instrument
own equity
instruments
with another
entity

Or say, if the cash flows are attributable

In other words, there are no other
to any factors other than the three
features of the instrument which could
listed above, ex., an index, the
satisfy the definition of “financial
puttable instrument will fail the equity
liability”
classification

© ICAI BOS(A) 91
SARANSH Indian Accounting Standards

Carve Out in Ind AS 32 from IAS 32

As per IFRS
As per accounting treatment prescribed under IAS 32, equity
conversion option in case of foreign currency denominated
convertible bonds is considered a derivative liability which is
embedded in the bond. Gains or losses arising on account of change
in fair value of the derivative need to be recognised in the statement
of profit and loss as per IAS 32.
Carve out
In Ind AS 32, an exception has been included to the definition of
‘financial liability’ in paragraph 11 (b) (ii), whereby conversion option
in a convertible bond denominated in foreign currency to acquire a
fixed number of entity’s own equity instruments is classified as an
equity instrument if the exercise price is fixed in any currency.

Obligations Arising on Reclassification of Puttable Instruments / Obligations

Liquidation Arising on Liquidation

Some financial instruments include a contractual obligation for the Classification
issuing entity to deliver to another entity a pro rata share of its net
assets only on liquidation
As an Equity instrument is
to be done, from the date
when the instrument has all
The obligation the features and meets the
arises because: specified conditions
Re-Classification
Is to be done from the date,
when the instrument ceases
to have all the features
or meet all the specified
conditions

Accounting for reclassification:

Liquidation either is certain Is uncertain to occur but
to occur and outside the is at the option of the
OR
control of the entity (for instrument holder Reclassification Reclassification Measurement Recognition
example, a limited life entity) from to of difference
in carrying
amount and
measurement
As per the principle, it shall be classified as financial liability. of reclassified
However even then it would be classified as Equity, subject to instrument
fulfillment of certain conditions Financial Equity At the carrying -N.A.-
liability value of the
financial
Note: The conditions number 1-3 and 6 given for puttable financial liability at
instrument (to be classified as equity instruments) are also the date of
applicable in case of Instruments, or components of instruments, reclassification
that impose on the entity an obligation to deliver to another party a Equity Financial At fair value of In equity
pro rata share of the net assets of the entity only on liquidation, for liability the instrument
classification as an equity instruments at the date of
reclassification

Contingent Settlement Provisions

A financial instrument may require an entity to deliver cash or another financial asset, or
settle it in some other way that would require it to be classified as a financial liability, but
only in the event of occurrence or non-occurrence of some uncertain future event

The issuer of such an instrument does not have the unconditional right to avoid delivering cash or
another financial asset (or otherwise to settle it in such a way that it would be a financial liability)

However, there are some exceptions where it is classified as equity

Note:
The occurrence or non-occurrence of uncertain future events beyond the control of both the issuer
and the holder of the instrument might include:
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© ICAI BOS(A) 92
SARANSH Indian Accounting Standards

Classification of Contingent Settlement Compound Financial Instruments

Provisions into Liability or Equity
Is the contingent event within
the control of the issuer?
No
Assess whether the part of
the contingent settlement
provision that indicates liability
classification is genuine
Yes
A compound financial instrument has a legal form
of a single instrument, whereas the substance is that
Yes both liability and equity instrument exist
A compound financial instrument is a non-
derivative financial instrument that, from the
issuer's perspective, contains both a liability and
an equity component
No
The issuer of a non-derivative financial instrument
should evaluate the terms of the financial instrument
to determine whether it contains both a liability and
an equity instrument

Can the issuer be required to Example: In convertible bond, a bond holder

settle the obligation in cash or can either be paid cash at maturity or get fixed
Yes Equity
another financial asset only in number of shares in exchange of bond at maturity.
classification It is compound financial instrument as it contains 2
the event of the liquidation of
the issuer? elements viz Liability and Equity

No Convertible bond

Does the instrument have

all the features and meet all
the conditions relating to
the exceptions for puttable
instruments and obligations
arising on liquidation?
No
Financial liability classification
Liability component
Yes
Reason: Issuer has the
obligation as per contractual
arrangement to deliver cash
or another financial asset
Equity component
Reason: A call option
granting the holder the right,
for a specified period of time,
to convert it into a fixed
number of ordinary shares of
the entity

Accounting Treatment of Compound Financial

Statements in Issuer’s Books

TEST YOUR KNOWLEDGE Issuer must perform the ‘split accounting’ on initial
Contingent settlement event Within the issuer’s recognition as follows:
control?
Issue of an IPO prospectus prior to the Yes In compound financial instrument, identify the various components
conversion date
Successful completion of IPO No Ascertain the fair value of the compound financial
instrument as a whole
A change in accounting, taxation, or No
regulatory regime which is expected to
adversely affect the financial position of the Ascertain the fair value of the liability component
issuer Note: The fair value of the liability component is to be calculated
with reference to fair value of a similar liability (with the same terms
Issuer makes a distribution on ordinary Yes. Dividends on like interest rate, duration etc) that does not have any associated
shares ordinary shares are equity conversion feature
discretionary
Appointment of a receiver, administrator, No. Depends on
entering a scheme of arrangement, or the respective Ascertain the fair value of the equity component as:
compromise agreement with creditors requirements in Fair value of the compound financial instrument as a whole (less)
each jurisdiction the fair value of liability component
Suspension of listing of the issuer's shares No
from trading on the stock exchange for This step ensures
more than a certain number of days no gain or loss on initial
recognition
Change in credit rating of the issuer No

© ICAI BOS(A) 93
SARANSH Indian Accounting Standards

Treasury Shares Offsetting a Financial Asset and a

Financial Liability
Treasury shares are entity’s own reacquired equity
instruments, that are held by the entity A financial asset and a financial liability shall be offset and the
net amount presented in the statement of financial position
when, and only when, an entity:
Holdings of treasury shares may arise in a number of
ways. For example:
Currently has a legally Intends either to settle on
enforceable right to a net basis, or to realise the
In Consolidated financial statement: The entity holds the set off the recognised asset and settle the liability
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benefit trust direct transaction, such as
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entity which subsequently t
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reporting requirements shareholders. the normal course of business, effect, equivalent
in the event of default and to net settlement,
in the event of insolvency or the entity will meet
bankruptcy of the entity and all the net settlement
of the counterparties criterion

Accounting Treatment of Treasury Shares Offsetting a recognised financial asset and a recognised
financial liability and presenting the net amount is different
Consideration paid or received for acquisition of from the derecognition of a financial asset or a financial liability
Treasury shares shall be adjusted in Equity

Although offsetting does not give rise to recognition of a gain

Are own equity Are own equity or loss, the derecognition not only results in the removal of the
previously recognised financial instrument from the statement
instruments acquired? instruments sold? of financial position but also may result in recognition of a gain
or loss
Debit amount paid Credit amount paid
directly to equity directly to equity A right of set-off is a debtor's legal right, by contract or
otherwise, to settle or otherwise eliminate all or a portion of an
No gains / losses recognised in profit or loss on: amount due to a creditor by applying against that amount an
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equity instruments or
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shares
The conditions set out above are generally not satisfied and
offsetting is usually inappropriate when:
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either in the balance sheet or in the notes, in accordance with
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instruments from related parties presented in an entity's statement of financial position on a
net basis unless they meet the criteria for offsetting

Interest, Dividends, Losses and Gains

The classification of an issued financial instrument as either a
financial liability or an equity instrument determines recognition
of interest, dividends, gains, and losses relating to that instrument
in profit or loss or directly in equity.
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equity - Directly to equity. Taxes will be recognised in Equity
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financial liabilities - Interest expense in Profit and loss. Taxes
will be recognised in Profit or loss
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entity – Not recognised.
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are not expensed but accounted for as a deduction from equity.
Such costs include regulatory fees, legal fees, advisory fees, and
other transaction costs
Financial assets and financial liabilities arise from financial
instruments having the same primary risk exposure (for
example, assets and liabilities within a portfolio of forward
contracts or other derivative instruments) but involve
different counterparties
Financial or other assets are pledged as collateral for non-
recourse financial liabilities
Financial assets are set aside in trust by a debtor for the
purpose of discharging an obligation without those assets
having been accepted by the creditor in settlement of the
obligation (for example, a sinking fund arrangement)
Obligations incurred as a result of events giving rise to
losses are expected to be recovered from a third party by
virtue of a claim made under an insurance contract

© ICAI BOS(A) 94