Optional Exemptions Financial Instruments

Compound Financial Liabilities

As per Ind AS 32, an entity is required to split compound financial liability and equity components at inception.  An entity need not reassess the equity and liability components subsequently after the first assessment. Ind AS 101 provides an exception when the liability component no longer exists, retrospective application of Ind AS 32 may not be necessary as splitting would amount to merely separating two portions of equity and really does not serve any useful purpose.  The first portion is in retained earnings and represents the cumulative interest accreted on the liability component.  The other portion represents the original equity component. Hence the first time adopters need not separate these two portions if the liability component is no longer outstanding at the date of transition.

Designation of previously recognised Financial Liability

A financial liability is normally designated as measured at amortized cost.  However, a financial liability can be designated as a financial liability at Fair Value through Profit or Loss when it meets certain criteria i.e. it substantially eliminates or reduces amounting mismatch and such designation is made at the inception of the liability without any undue delay.  In spite of this requirement as per Ind AS 101, an entity is permitted to designate any financial liability as at Fair Value through Profit or Loss at the date of transition provided the liability meets the criteria mentioned above.

Designation of previously recognised Financial Asset

An entity is allowed to designate a Financial Asset as measured at Fair Value through Profit or Loss in accordance with the facts and circumstances that exist on initial recognition.  The designation is possible only if it reduces the accounting mismatch and done without any undue delay.  However as per Ind AS 101, an entity may designate based on the facts and circumstances that exist at the date of transition to Ind AS.

Designation of previously recognised Equity Instrument

An entity may designate an investment in equity investment either at Fair Value through Profit or Loss or at Fair Value through other comprehensive income depending upon the facts and circumstance that exist at the date of inception of such equity investment.  The entity is allowed to designate an investment in equity instrument as Fair Value through Other Comprehensive Income provided it is not held for trading purposes and such designation is made without undue delay.  In spite of this requirement, an entity is permitted as per Ind AS 101 to designate an Equity Instrument as Fair Value through Other Comprehensive Income on the basis of the facts and circumstances that exist at the date of transition to Ind AS.

Fair Value of Financial Assets / Financial Liabilities at initial recognition

An entity may apply the requirements relating to fair value of financial assets and financial liabilities at initial recognition prospectively to transactions entered into on or after the date of transition to Ind ASs.

Extinguishing Financial Liabilities with Equity Instruments

A first-time adopter may apply the Appendix D of Ind AS 109 Extinguishing Financial Liabilities with Equity Instruments from the date of transition to Ind ASs.

Designation of contracts to buy or sell a non-financial item

Certain contracts to buy or sell a non-financial item can be designated at inception as measured at fair value through profit or loss.

Despite this requirement an entity is permitted to designate, at the date of transition to Ind ASs, contracts that already exist on that date as measured at fair value through profit or loss but only if they meet the other requirements for doing so and the entity designates all similar contracts.

Four ways of settlement

  1. Terms permit either party to settle in net in cash.
  2. Contract is readily convertible to cash.
  3. Terms not explicit but net settlement is the practice.
  4. Practice is to take delivery but sold within a short period with profit motive.

Scope

  • All the four types of contracts are within the scope of Ind AS 109.

Exceptions:

  • (c) and (d) is out of scope if usually meant to take/give delivery of non-financial asset.
  • May now be included within the scope of Ind AS 109 subject to certain conditions i.e., irrevocable and reduces accounting mismatch.
  • Written options is always within the scope even if it results in taking or giving delivery of non-financial asset.

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