Financial Instruments

For Old Syllabus

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 Corporate Financial Reporting

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Financial Instruments

Chapter

Financial Instruments
IND AS 32/107/109

1. Preface:
Covered under:
Ind AS 109 Recognition and Measurement
Ind AS 32 Presentation
Ind AS 107 Disclosure

2. Financial Instruments - FI :
is any contract that gives rise to a Financial Asset - FA of one Entity and a Financial Liability - FL or Equity
Instruments - EI of another Entity.
Case Study - 2.1

Mr. F Purchases Debentures of TQM Limited

FA FL
Case Study - 2.2
Mr. Q Invests Equity Shares of FX Limited

FA EI

3. Financial Assets -
FA : includes:
a) Cash : a deposit of cash with a Bank or any Financial Institution is a FA as it represents right to obtain
cash from bank/ Financial Institution.
b. an Equity instrument (EI) of another Entity
c. Contractual Right to receive cash or another Financial Asset from other entity.
Examples :
 Debtors
 Trade Receivables
 Investments in Debentures of any other Entity
 Investments in Preference shares of an Entity
 Loans given

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d. A contractual right to receive EI of any other entity (example Investments in convertible

debentures/Preference shares of any other entity)
e. Derivative contracts that are Potentially favourable (PFC)
Case Study - 3.1
F3 Limited holds a call option to purchase equity shares in a listed company say G-77 limited for ` 500 per
share at the end of say 90 days period. Now, if the value of share on exercise /settlement date is more than
`500 then it is a potentially favourable condition (PFC).

f. A contract that will or may be settled in entity's own EI and for which Entity is or may be obliged to
receive a variable number of Entity's own EI.
Case Study - 3.2
Entity Q Sells plot of land to Mr. S (who is also a shareholder of Entity Q)

Mr. S settles consideration through variable no. of EI of Entity Q

4. Financial Liability : FL - includes:

a. a contractual obligation to deliver cash or FA to another Entity.

Examples:
Creditors
Trade Payable
Redeemable Debentures issued by an entity
Redeemable Preference shares issued by an entity
Loans raised etc.

b. Derivate contracts that are potentially unfavourable to the entity

Case Study - 4.1
If the Entity is a writer of a call option and prices are favourable to the holder of the option then holder surely
would exercise the options under favourable conditions but writer has to settle the same under conditions that
Potentially unfavourable.
c. a contract that will or may settled in Entity's own Equity Instruments and Entity is Obliged to deliver
Equity instruments.
Case Study - 4.2
Entity Q Purchases Technology Rights from Tech India Limited (and as per
agreed terms Entity Q is obliged to discharge consideration through its EI )

For Entity Q it’s a FL.

5. Equity Instruments(EI)
It is a contract that evidences a residual interest in the assets of an entity after deducting all liabilities.
Entity

Assets less Liabilities = Residual Interest in Net Assets

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Financial Instruments

Note: Contracts to issue variable number of own equity shares are also considered as EI
6. Analytical Points
If there is any statutory right to receive cash or statutory obligation to deliver cash, then it will not be classified
as
1. Financial asset or financial Liability for example Income tax Payable
2. If an entity issued PS or Debentures or takes a loan i.e. in case of borrowings by an entity then entity
needs to classify that borrowings as FL or EI on the basis of the following:
a. If interest/dividend payable on such borrowings is mandatory then classify it as FL however if not
mandatory then classify it as EI
b. If such borrowing is Redeemable then treat it as FL
if such borrowings is irredeemable then treat it as EI
c. If such borrowings is convertible in

Fixed no. of Equity shares

Variable no. of Equity shares

If it is compulsorily If it is convertible at the

convertible option of

Equity instruments
Equity

of Issuer ( entity) Holder

Equity CFI

3. if any borrowings by the entity has mix features of FL & EI then it is called as CFI - Compound Financial
Instrument.
4. It is important to note that CFI classification is possible only from perspective of Entity raising money or
borrowing i.e. issuer.
5. From the view point of Investor (holder) - who is investing in PS /Debentures / ES of any entity , it will be
FA only.
6. Interest / dividend income on FA is recognised in PL
7. Interest / Dividend Expense on FL is recognised in PL
8. Interest/ Dividend Expense on EI is recognised in Retained Earnings
9. How one would treat preference Shares that are redeemable at the option of entity?
Entity shall treat such shares as Equity Instruments as these shares are redeemable at the option of the
company and such there is no obligation to deliver cash or any other FA.
10. An entity issues non-redeemable Preference shares with dividend payments limited to ordinary shares.
Such shares shall be treated as EI as there is no obligation with respect to Principal and dividend payments.
Case Study - 6.1
A. Assets side Items FA/FL / Equity Reasons
Investments in Equity Shares FA As per definition
Investments in loans FA Contractual right to receive cash or any
other FA
Trade & other Receivables FA Contractual right to receive cash or any

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other FA
Government Bonds FA Contractual right to receive cash or any
other FA

B. Liability Side Items

Issue of Debentures FL Contractual obligation to deliver cash or
any other FA
Perpetual Debentures FL Contractual obligation to deliver cash or
any other FA - Interest payments
Deposits and advances received FL Contractual obligation to deliver cash or
any other FA

Mix Items
Loans and advances given FA Contractual right to receive cash or any
other FA
Bank loan raised FL Contractual obligation to deliver cash or
any other FA
Sundry Creditors / Bills Payables FL Contractual obligation to deliver cash or
any other FA
Inventories N/A It is just an asset held by an entity
PPE N/A It is just an asset held by an entity
Intangibles N/A It is just an asset held by an entity
Prepaid Expenses N/A No contractual right to receive cash or
any other FA although there is right to
receive some services against the
same
Deferred Revenue Items N/A Its an income that has been already
received but not yet recognised fully.
Also, there is no obligation to repay
also.
Income taxes N/A Not an obligation under a contact. It is
an obligation due to statutory
requirements
Gold Bonds FA Contractual right to receive cash or any
other FA
Gold N/A Just an asset held by the entity

Financial guarantees given FL Contractual obligation to deliver cash or

any other FA.
Shares in a co-operative society FL As per law, a shareholder of a co-
operative society can get his shares
redeemed or can get back his money.
Hence it is an obligation for the co-
operative society
Irredeemable PS/Deb. With discretionary Equity No obligation
Interest

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Financial Instruments

CCPS (compulsorily convertible preference Equity Since compulsorily convertible into

shares) / Deb. With discretionary Interest Equity share ( Equity) and no obligation
for Interest ( Equity)
Redeemable PS / Deb. With discretionary CFI = FL + EI Liability/obligation to pay (FL) & No
Interest obligation to pay Interest ( Equity)
Irredeemable PS / Deb. With Mandatory CFI = FL + EI No obligation to pay (Equity)
Interest &obligation to pay Interest ( FL)
CCPS (compulsorily convertible preference CFI = FL + EI Since compulsorily convertible into
shares) / Deb. with Mandatory Interest Equity share ( Equity) & obligation to
pay Interest ( FL)
PS / Deb. Convertible at the option of Holder CFI = FL + EI If holder exercises the option then
Equity and if does not ( then entity will
have to pay him cash) then FL