IND-AS 109: Financial Instruments

IND-AS 109 is an accounting standard that dictates how companies should recognize, measure, and present financial assets and financial liabilities in their financial statements. Think of it as a rulebook for handling things like:

• Cash and Bank Accounts: Pretty straightforward!
• Investments (Shares, Bonds, etc.): Things you buy hoping they'll grow in value.
• Loans: Money you lend out or borrow.
• Derivatives (Futures, Options, etc.): Complex contracts whose value is tied to something else.
• Trade Receivables & Payables: Money owed to you and that you owe to others.
• Debt instruments: instruments that show a business’ debt.

Why is it important?

Imagine if every company had their own unique way of accounting for these things. It would be a chaotic mess for investors, lenders, and anyone trying to understand a company's financial health. IND-AS 109 brings consistency and comparability to financial reporting.

Key Concepts in IND-AS 109

Let's look at the main ideas:

1. Financial Assets & Financial Liabilities:

• Financial Asset: Anything that gives you a right to receive cash or another financial asset in the future. Think of it as something you own. Example: Cash in your bank account, shares of Reliance Industries, a loan you made to a friend.

• Financial Liability: An obligation to deliver cash or another financial asset to someone else. Think of it as something you owe.

  • Example: A loan from a bank, money you owe to a supplier for raw materials.

2. Classification: How we categorize financial assets is crucial because it determines how we value them. The main categories are:

   • Amortized Cost: These are generally held for cash collection and are valued at their original cost adjusted for payments received and impairments.
     • Example: A loan you've given to a friend, a simple bond (where you get interest payments)

• Fair Value through Other Comprehensive Income (FVOCI): These are held for both collecting cash and potential sale. They are valued at their fair (market) value, and changes in the value (not profit or loss) are recorded in the other comprehensive income (OCI).

  • Example: A long-term debt investment that you might sell later.

• Fair Value through Profit or Loss (FVTPL): These are often held for trading purposes or if they don't fit into the other categories. They are valued at their fair value, and changes in their value go straight to the company's profit or loss statement.

  • Example: Shares in a company that you plan to buy and sell quickly for profit, derivatives.

3. Initial Recognition: When a financial instrument is first recognized on the balance sheet, it is generally recorded at fair value (the price it would be sold for in the open market).

4. Subsequent Measurement: How a financial asset or liability is valued after it's initially recognized depends on its classification, as detailed above.

5. Impairment: If there's a risk that a financial asset won't be fully recovered (like a loan where the borrower might default), an "impairment loss" must be recognized.

Example: Company Investing in Bonds

Let's take a practical example. Suppose "ABC Company" invests in bonds for ₹10,000. Let's see how IND-AS 109 would apply, depending on the company's intention:

Scenario 1: Amortized Cost

• Intention: ABC intends to hold the bonds to maturity and collect interest payments.
• Classification: Amortized cost.
• Accounting:
  • Initial Recognition: The bond is initially recorded at its cost ₹10,000.
  • Subsequent Measurement: The value is adjusted for interest revenue. If the issuer of the bond is at risk of default, it would be recorded as an impairment loss.
  • Example: Bond interest is ₹500, recorded as interest revenue. If a risk is that 10% will not be received, ₹1000 will be recorded as impairment loss.

Scenario 2: FVOCI

• Intention: ABC wants to hold it for interest income but also has the option to sell it in the future.
• Classification: FVOCI
• Accounting:
  • Initial Recognition: The bond is recorded at its cost ₹10,000.
  • Subsequent Measurement: The bond's value changes based on market conditions. If the fair value of the bond increases to ₹10,500 the difference of ₹500 is recorded in Other Comprehensive Income (OCI), if it drops to ₹9,700, the loss of ₹300 is recorded in OCI.

Scenario 3: FVTPL

• Intention: ABC plans to actively trade the bond to make a short-term profit.
• Classification: FVTPL
• Accounting:
  • Initial Recognition: The bond is recorded at its cost ₹10,000.
  • Subsequent Measurement: The bond's value changes based on market conditions. If the fair value of the bond increases to ₹10,500 the profit of ₹500 goes to the profit and loss statement, if it drops to ₹9,700, the loss of ₹300 goes to the profit and loss statement.

Simplified Summary Table

Key Takeaways

• IND-AS 109 provides the rules for accounting for various financial instruments.
• Classification of financial assets (Amortized cost, FVOCI, FVTPL) dictates how they're measured after initial recognition.
• Fair Value is a crucial concept - the market price of an asset.
• It promotes clarity and consistency in financial reporting, making it easier for stakeholders to understand and evaluate a company's financial position.

Important Note: IND-AS 109 is a complex standard, and the details can be intricate. This explanation provides a simplified overview. For detailed accounting, always refer to the complete standard and seek professional advice.