Almost all business transactions culminate in financial instruments in some form. In the present era of money, money and money, we witness an increasing trend of businesses being done through contractual arrangements which are structured to such an extent that after some time the contracting parties themselves struggle to understand the arrangement – intent vs agreement, substance vs form. Further, with commerce becoming global and development in any part of the globe affecting us, the movement of financial instruments is the first indicator of direction of impact. Derivatives market is growing, will take time to mature, more complex instruments are getting designed, markets’ depth is under test and they do impact valuation of both derivatives and the underlying. Financial reports should reflect the state of business and the business/ economic environment it is operating and hence all Financial Instruments have to be valued at the fair values on a continuous basis. Having said this, would like to highlight that this principle has been there in the Indian GaaP to date in the form of mark to market for forex receivables and payables, provisioning for receivables, mark to market of current investments and recognising shortfall, etc. The Financial Instruments standard is quite refined and has a matured approach where fair value is applied consistently and the gains/loss is recognised in “other comprehensive income” in most cases. The mark to market affects profit and loss statement only when there is an explicit choice or a conduct reflecting intent, to treat financial instruments as “fair value through profit and loss”. Also, there are many instruments which will continue to be carried at amortised cost (with right usage of effective interest rate) and do not require fair value determination.
The standard on Financial Instruments, has taken significant time to develop and even today there is no consensus on many aspects of the standard and unlikely in near future. A topic such as this, without a deep understanding of the financial markets is difficult to understand.
We in India, have a very peculiar situation of adopting a very complex standard like IFRS 9 (in the form of Ind AS 109), ahead of the rest of the world by 2-3 years. For companies who have voluntarily adopted Ind AS in FY15-16, the adoption has been done with transition date of 1st April 2014 vs. rest of the world who would follow from 1st Jan 2018.
In this backdrop, Venkat authoring a book is highly commendable and I thank him for the effort. Mr. R. Venkata Subramani (Venkat) has given adequate treatment of the subject with his hands-on experience on financial instruments as part of his previous assignments.
I have given a quick reading of the manuscript and compliment R. Venkata Subramani (Venkat) for the comprehensive coverage on Presentation, Recognition, Measurement and Disclosure aspects of financial instruments. Guidance is provided exhaustively on the new impairment methodology known commonly as ‘expected credit loss model’, which will be very relevant for banks and financial services companies. The book deals at length the complex topic on hedge accounting with several illustrations including guidance on basic journal entries for recording the same. The topics on fair value hedge and cash flow hedge are illustrated through a several examples. The book also covers the much needed first time adoption of Ind AS relating to financial instruments in particular. The Guidance Note on accounting for derivatives issued by ICAI is also covered quite well. The extracts from annual reports incorporated in the penultimate chapter should serve as ready reference to the professionals who implement Ind AS as it would give the precedence on several topics relating to financial instruments. To sum up, the book is a good teacher of the standards on financial instruments, a good reference book for practical application.
I advise readers of any authored text book to supplement with a reading of the text of the Ind AS, before applying the principles for professional purpose.
Happy reading. I wish Venkat the best and multiple editions of the book in years to come.