Applicability of Ind AS - PowerPoint Presentation

1. Applicability of Ind AS Mandatory applicability of Ind AS to all companies w.e.f 1st April 2017, providedIt is a listed company or is in the process of being listed (as on 31.03.2016)Its net worth is greater than or equal to Rs 250 crore but less than 500 croreNet worth can be checked during the 4 previous years

2. MCA notified following Ind AS to deal with accounting of financial instruments Ind AS 32 - Financial Instruments : Presentation Ind AS 109 - Financial Instruments Ind AS 107-Finacial instruments : Disclosures

3. The trinity of financial instruments standards   IND AS 32IND AS 109IND AS 107Classifi-cation as Liability v\s Equity offsetting Financial Asset&Financial liabityRecognition & de- recognition of financial assets & financial liabilitiesClassification of Financial Assets & LiabilitesHedge Accoun-ting Disclo-suresClassificati on of financial assets & financial liabilitiesClassificati on of financial assets & financial liabilitiesClassificati on of financial assets & financial liabilitiesClassificati on of financial assets & financial liabilitiesClassificati on of financial assets & financial liabilitiesMeasure-ment of financial Assets & LiabilitiesClassificati on of financial assets & financial liabilitiesMeasurem ent of financial assets & financial liabilities

4. Common Examples * Cash * Trade receivables * Investment in bonds and deposits * Investments in equity instruments * loans receivable ,etc.Financial Asset

5. Common Examples * Loans and borrowings * Payables for purchase of goods & services * Finance lease obligations * Redeemable instruments like preferences shares , debentures ,etc. * Guarantee given for repayment of debt upon borrower’s default Financial Liability

6. * Equity instruments issued * Warrants to issue fixed number of shares at fixed price against each warrant * Others Instruments convertible into fixed number of equity Shares ,etc. also known as Derivaties Basis the above definition ,some of the key elements to understand * It includes currency and deposit of cash into bank/As it creates a contractual right to the depositor-medium of exchange EquityCash

7. Physical assets- plant and equipment leased assets intangible assets –Not financial Assets Prepaid expenses perpetual debt instruments are not financial assets Contractual right to receive cash or other financial asset

8. Contractual rights Examples * Trade receivables * Loans receivable * Deposits made; * Investment in bonds,etc.A Contractual right or to satisfy a contractual obliagtions may be absolute or it may be contigent on occurrence of one or more future events ,not wholly within the control of either party to the contractual arrangements.A contingent rights and obligations meets the definition of financial asset and financial liabilities are not always recognized in the financial statements. For eg.: A lender may be recognized in the financial guarantee by a party (‘guarantor’) on behalf of borrower, entititling to recover the outstanding dues from the guarantor if the borrower were to default,etc.

9. What Is a Financial liability ? A financial liability is an liability that is : (a) A Contractual obligation : (i) To deliver cash or other 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 ; Or (b) A contract that will or may be settled in 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 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 equity’s own equity instruments.

10. WHAT IS AN EQUITY INSTRUMENT ? - Per Ind AS 32.11 – An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. - Per Ind AS 32.16 - An instrument is an equity instrument if , and only if , both conditions (a) and (b) below we met: (a) The instrument includes no 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 issuer. (b) If the instrument will or may be settled in the issuer’s own equity instruments ,it is : (i) a non derivative that includes no contractual obligations for the issuer to deliver a variable number of its equity instruments ;or (ii) a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number on its own equity instruments .for this purpose,rights,options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights,

11. a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non –derivative equity instruments. Also , for these purposes the issuer’s own equity instruments do not include instruments that have all the features and meet the conditions described in paragraphs 16A and 16B or paragraphs 16C to 16D ,or Instruments that are contracts for the future receipts or delivery of the issuer’s own equity instruments. 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.

12. Contractual obligation to deliver cash/financial assetNoEquityLiabilityAll transactions recorded directly in equityYesAmortised costNon derivative contract to deliver variable no . of equity sharesYesNoLiabilityEquityFair ValueCarried at ‘cost’Carried at ‘cost’Cost recorded in income statementImpact on net profit/OCI

13. The Key Characteristics of an equity instrument have been further explained as follows: Equity instruments do not carry in the contractual obligations Puttable instruments are exception to this - If it gives rise to the company the right to buy back or redemption No Contractualobligation

14. Puttable instrumentsPuttable instrument” is a financial instrument that gives the holder:the right to put the instrument back to the issuer for cash or anotherfinancial asset, ORis automatically put back to the issuer on the occurrence of an uncertainfuture event or the death or retirement of the instrument holder.Phrase “put back to the issuer” = redemption of the instrument For example - mutual funds and unit trusts, wherein the redemption amount isequal to a proportionate share in the net assets of the entitySettlement in own equity instruments

15. If equity carries an obligation for repayment in cash or other financial asset –Financial Liability Example : forward contract to buy back fixed number of own shares is financial liability Settlement in own equity instruments

16. Ind AS 32 – objective, rationale and scope Objective: Lays down the principles for classification of financial instruments into equity, financial liability or bothScope : Only standard which deals with accounting for equity instrumentsCore principle : Emphasis on contractual rights and obligations arising from the terms of the instrument Probabilities of those contractual rights and obligations leading to an outflow of cash/ other resources are disregardedKey definitions : Equity instrument, financial liability and financial asset

17. Definition – Financial Instrument  Financial instrument is any contract that gives rise to a financial asset of one entity anda financial liability or equity instrument of another entity.

18. EquityAny contract that evidences a residual interest in net assets of an entity ExamplesOrdinary sharesShare warrantsMandatorily convertible preference shares   in other words, contracts that are not liabilities  

19. Definition – Financial Liability  Financial liability isA contractual obligationto deliver cash or other financial assets to another entityto exchange financial assets/ liabilities under potentially unfavourable conditions; ora contract that will or may be settled in the entity’s own equity instruments and is:a non-derivative for which the entity is or may be obliged to deliver a variable number ofthe entity’s own equity instruments; ora 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

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21. Equity and liability classificationFinancial instrument is an equity instrument only if both criteria are met:There is no obligation to deliver cash or another financial asset or to exchange financialassets or financial liability; andThe issuer will exchange fixed amount of cash or another financial asset for a fixednumber of its own equity instruments.Does the entity have an unavoidable contractual obligation? LiabilityEquity

22. Ind AS 32 - Equity or liability distinction  Why does it matter?Presentation in statement of financial positionInitial and subsequent measurement (scope of Ind AS 109)Treatment of payments,repurchases etc

23. Settlement in entity's own equity instrumentsA contract is not an equity instrument solely because it may result in the receiptor delivery of the entity's own equity instruments.If an entity has:a contractual right or obligationto receive or delivera number of its own shares or other equity instrumentsthat variesso that the fair value of the entity's own equity instruments to be received ordelivered equalsthe amount of the contractual right or obligationsuch a contract is a financial liability  

24. Settlement in entity's own equity instruments  Consideration forfinancial instrumentNumber of own equity instruments to be issued in settlementClassification and rationale1FixedVariableFinancial liability – own equity instruments are being used as currency to settle an obligation for a fixed amount2FixedFixedEquity – issuer does not have an obligation topay cash and holder is not exposed to any variability3VariableFixedFinancial liability – though issuer does not have an obligation to pay cash, but holder is exposed to variability4VariableVariableFinancial liability – though issuer does not have an obligation to pay cash, but both parties are exposed to variability

25. Settlement in entity's own equity instruments S. No.Consideration forfinancial instrumentNumber of own equity instruments to be issued in settlement Classification and rationale2FixedFixedEquity – issuer does not have an obligation topay cash and holder is not exposed to any variability“Fixed for fixed rule”

26. Obligation to deliver cashSubject to certain exceptions,if an entity does not havean unconditional rightto avoid delivering cash or another financial assetto settle a contractual obligationthe obligation meets the definition of a financial liability. Lack of access to funds or the need to obtain approval for payment from a regulatory authority, does not negate the entity's contractual obligation or the holder's contractual right under the instrument and hence does not affect its classification

27. Examples – obligation to deliver cash Type of instrument Liability Liability EquityNon-redeemable shares with discretionary dividends YES ('ordinary shares')  Shares that are redeemable at the option of the holder YES ('puttable shares' )Shares that are redeemable at the option of the issuer YES ('callable shares') Irredeemable preference shares with contractual dividends payable @4% p.a. Redeemable shares with discretionary dividends ('ordinary shares') 

28. UNIT 4: RECOGNITION AND DERECOGNITION OF FINANCIAL INSTRUMENTS yes Consolidate all subsidiaries (See note 1 below)Determine whether the derecognition principles are applied to a part or all of an asset(or group of similar assets) (see note 2 below)Have the rights to the cash flows from the asset expired? (see note 3 below)Derecognise

29. Obligations arising on liquidationCertain instruments create an obligation only on liquidation of the entity Liquidation may be certain to occur and outside issuer’s control or uncertain to occur and at the option of holder. For example - Limited life entities like special purpose vehicles (SPV) forexecution of an infrastructure projectAs per the ordinary definition of "financial liability", puttable instruments and instruments mentioned above shall always be classified as financial liabilities. But, there is an exception.

30. Compound instruments - Example InstrumentLiability ComponentEquity Component1) Redeemable preference shares with discretionary dividendsPrincipal redemptionDiscretionary dividend2) Convertible bonds – conversion option with holderPrincipal redemption andinterest paymentConvertibility option to theholder

31. Issuer of a non-derivative financial instrument to evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity component. If such components are identified, they must be accounted for separately as financial liabilities, financial assets or equity, and the liability and equity components are shown separately on the balance sheet.

32. Compound instruments – Separation  +Convertible DebtLiability :Fair value using rate for non-convertible debtEquity: Balancing FigureConvertible DebtConvertible Debt

33. Of setting of Financial asset against financial liability is practical and can be done

34. Financial Assets measured atAmortised CostFair value through other Comprehensive incomeFair Value through profit or lossIf below conditions are metFA is held with BM whose objective is to hold financial assets in order to collect contractual cash flowFA are accounted at FVTPL if:(a) Any asset which is not measured at amortised cost and not measured at FVOCI ; orFA shall be measured at FVOCI if below conditions are met(a) FA is held with BM whose objective is achieved both by collecting contractual cash flows and selling FA* Any equity instruments for which the entity makes an irrevocable elections to carry at fair value through OCI

35. Compound instrumentsInstrument whose terms indicate that it contains both a liability and an equity component‘Split accounting’Liability componentEquity Componentmust meet the definition of equitycalculated as a residual'splitaccounting''splitaccounting'

36. UNIT 4:RECOGNITION AND DERECOGNITION OF FINANCIAL INSTRUMENTS No Yes Have the rights to the cash flows from the assets expired?(see note 3 below)Derecognise the assetsConsolidate all subsidiaries( see note 1 below)Determine the derecognition principles are applied to a part or all of an asset(or group of similar assets) (see note 2 below)

37. No Yes No No YesHas the entity transferred its right to receive cash flows?(see note 4 below)Has the entity assumed a contractual obligation to pay the cash flows in an arrangement that needs 3 conditions?(see note 5 below)Has the entity substantially all risks and rewards?(see note 6 below)Continue to recognise the assetsDerecognise the assets

38. No yes No No Has the entity retained substantially all risks and rewards?(see note 6 below)Has the entity retained control of the asset(see note 7 below)Continue to recognise the assetDerecognise the assetContinue to recognise the asset