IFRS IFRS 9/IAS 32

FINANCIAL INSTRUMENTS

MEANING

A financial instrument is defined as any contract that gives rise to a:

- Financial asset of one entity and

- Financial liability or equity of another entity.

FINANCIAL ASSET

Any asset that is:

a) Cash

b) an equity instrument of another entity

c) a contractual right:

- to receive cash or another financial asset from another entity

OR

- To exchange financial assets or financial liabilities with another entity under

conditions that are potentially favourable to the entity.

OR

- that will or may be settled in the entity’s own equity instrument under certain
circumstances.

FINANCIAL LIABILITY

Any liability that is:

A contractual obligation:

- to deliver cash or another financial asset from another entity

OR

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- To exchange financial assets or financial liabilities with another entity under

conditions that are potentially unfavourable to the entity.

OR

- that will or may be settled in the entity’s own equity instrument under certain
circumstances.

EQUITY

 It’s a contract that evidences a residual interest in the assets of an entity after deducting all of
its liabilities.
 No contractual obligation to deliver cash/ another financial asset.
 No contractual obligation to exchange FA/FL under conditions that are potentially
unfavourable.
 Instruments settled in entity’s own equity instrument. (When number of equity shares and the
amount of obligation are fixed)

EXAMPLES

1. On 1 March, 2021, A Ltd. enters into a forward contract to purchase 500 shares after 3 months
@ $60 per share. On 31 March, price is a) $75 per share or b) $35 per share. Pass journal
entries.

2. A Ltd entered into a forward contract to purchase 5,000 shares @ $65 per share after 5 months.
On 31 Mar 2021, share price = $75 per share.
On 30 June (i.e., settlement date) – Price is a) $80 per share b) $52 per share.
Pass journal entries.

3. X Ltd. Writes an option under which the counterparty can force the entity to sell equity shares
in the listed company Y Ltd for $5 per share at any time in the next 90 days. At the end of 90
days the market price exceeds $5.

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4. X Ltd. issued debentures amounting to $1,000,000. As per terms of debenture issue it has
been agreed to issue equity shares amounting to $1,500,000 to redeem these debentures at the
end of 3rd year. Are these debentures FL?

5. X Ltd. issued 100,000 ZCB of $10 each amounting to $1,000,000. Debentures will be
redeemed at the end of 3rd year issuing 145,000 own equity shares of $10 each of the
company. Determine the nature of financial instrument.

6. A Ltd. issues 10,000 convertible debentures of $150 each. These debentures will be
mandatorily converted after 5 years

Case 1: No. of equity shares are based on fair value on the date of conversion:

a) FV = $150

b) FV = $60

Case 2: No. of equity shares is based on the fixed price per share on the date of conversion
which is $180 per share.

a) FV = $150

b) FV = $60.

Identify the nature of financial instruments in each case.

CLASSIFICATION OF FINANCIAL ASSETS

All financial assets need to be valued at Fair value. However, IFRS 9 recognises Amortised cost
classification for financial assets.

3 categories:

1. Amortised cost

2. Changes in fair value through other comprehensive income (FVOCI)

3. Changes in fair value through profit and loss account (FVPL)

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S.N Particulars Amortised cost (Till I FVTOCI (Want to be FVTPL (Aaj Pooja, kal
die, This will be the with you, but if not koi duja)
guy) what can I do)
1. Income Principal + Interest Principal + Interest Trading P/L
2. Period held till maturity may or may not hold till N.A (Trading)
maturity
3. At the time N.A as held till maturity Balance in OCI Balance already in P&L
of disposal transferred to P&L then which gets transferred to
transferred to Retained Retained earnings
earnings
4. Interest/ Transferred to P&L Transferred to P&L Transferred to P&L
Dividend
5. Transaction Added to the value of Added to the value of Transferred to P&L
cost financial asset financial asset
6. Examples Debt instrument held till Debt instrument not Equity instrument*
maturity held till maturity

*Exception:

Sometimes, equity instruments may be recorded through FVOCI but this is an irrevocable option.

In such cases:

a) Transaction costs will be added to the value of financial asset

b) At the time of disposal, the balance in OCI, if any, will not be carried to P&L but will get
transferred to Retained earnings directly.

EXAMPLES

7. A Corp. gave a loan of $5,00,000 for an interest @ 10% p.a. At the end of 3 years (i.e., at
maturity) Principal amount of $5,00,000 is repaid. Transaction cost incurred is $10,000. Fair
value at the end of 1st year is $5,08,000 whereas at the end of 2nd year is $5,06,000. EIR is
9.2%.

Pass journal entries under both the categories – amortised cost and FVOCI.

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8. X Inc. invested in 500 equity shares of $350 each. Transaction cost is $15,000. Fair value at
the end of 1st year is $350 per share and at the end of 2nd year is $390 per share. During the
3rd year, these 500 shares are sold at $425 each. Pass journal entries under FVPL method and
considering X Inc. opted the irrevocable option (FVOCI).

RECLASSIFICATION OF FINANCIAL ASSETS

Reclassification is allowed only for Debt instruments. Following points to be noted before
reclassification:

(i) There should be a change in the business model.

(ii) Reclassification can happen only on the reporting date.

(iii) If debt instrument is being valued at FV, the first change it to the FV as on the reclassification
date and then reclassify.

(iv) In case reclassifying from FVOCI to FVPL, it will be treated as disposal of instrument.
Therefore, total balance in OCI will be transferred to P&L.

9. Bonds for $1,00,000 reclassified. Fair value on reclassification is $90,000. Pass the journal
entry if:

Case 1. Amortised cost to FVPL

Case 2. Amortised cost to FVOCI

Case 3. FVPL to FVOCI

Case 4. FVOCI to FVPL

Case 5. FVPL to Amortised cost

Case 6. FVOCI to Amortised cost

COMPOUND INSTRUMENTS EXAMPLES

10. X Co. Ltd. issues debentures to Y Co. Ltd. Those debentures are redeemable at the end of 10
years from the date of issue. Interest of 15% p.a. is payable at the discretion of the issuer.
Examine the nature of financial instrument.

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11. P Ltd. takes a loan from Q Ltd. The loan is perpetual and entitles the holder to fixed interest
of 8% p.a. Examine the nature of the instrument.

12. D Ltd. issues preference shares to G Ltd. for a consideration of Rs. 10 lakhs. The holder has
an option to convert these preference shares to a fixed number of equity instruments of the
issuer anytime up to a period of 3 years. If the option is not exercised by the holder, the
preference shares are redeemed at the end of 3 years. The preference shares carry a coupon
rate of 10%. The prevailing market rate for similar preference shares without the conversion
feature or issuer’s redemption option is 13% p.a. Calculate the value of the liability and
equity instruments.

13. On 1.7.2021, D Ltd. issues preference shares to G Ltd. for a consideration of Rs. 10lakhs.
The holder has an option to convert these preference shares to a fixed number of equity
shares of the issuer anytime up to a period of 3 years. If the option is not exercised by the
holder, the preference shares are redeemed at the end of 3 years. The preference shares carry
a fixed coupon of 6% p.a. and is payable every year. The prevailing market rate for similar
preference shares without the conversion feature is 9% p.a. Calculate the value of the
liability and equity components.

14. A Ltd. issued redeemable preference shares to a holding co Z Ltd. The terms of the
instruments have been summarised as below. Account for this in the books of Z Ltd.

Nature Non-cumulative redeemable

preference shares
Repayment Redeemable after 5 years
Date of allotment 1 April 2021
Date of repayment 31 March 2026
Total period 5 years
Value of preference shares issued 10,00,00,000
Dividend rate 0.0001%
Market rate of interest 12% p.a.
PV factor 0.56743

15. ABC Co. issued 10,000 compulsory cumulative convertible preference shares (CCCPS) as
on 1 April 2021 @ Rs. 150 each. The rate of dividend is 10% payable every year. The

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preference shares are convertible into 5,000 equity shares of the company at the end of 5 th
year from the date of allotment. When CCCPS are issued, prevailing market interest rate for
similar debt without conversion options is 15% p.a. Transaction cost on the date of issuance
is 2% of the value of the proceeds.

Key terms:

Date of allotment 01 April 2021

Date of conversion 31 March 2026
Number of preference shares 10,000
FV of preference shares 150
Total proceeds 15,00,000
Rate of dividend 10%
Market rate of similar instrument 15%
Transaction cost 30,000
FV of equity after conversion 10
Number of equity shares to be issued 5,000
Effective rate of interest 15.86%
You are required to compute the liability and equity component and pass journal entries for
the entire term of arrangement till the conversion to equity shares keeping in view the
provisions of relevant IFRS.

16. On 1 April 20X1, Star Limited has advanced a housing loan of Rs. 15 lakhs to one of its
employees at an interest rate of 6% per annum which is repayable in 5 equal annual
installments along with interest at each year end. Employee is not required to give any
specific performance against this benefit. The market rate of similar loan for housing finance
by banks is 10% per annum.

The accountant of the company has recognized the staff loan in the balance sheet equivalent
to the amount of housing loan disbursed i.e. Rs. 15 lakhs. The interest income for the year
is recognized at the contracted rate in the Statement of Profit and Loss by the company i.e.
Rs. 90,000 (6% of Rs. 15 lakhs).

Analyze whether the above accounting treatment made by the accountant is in compliance
with the relevant Ind AS. If not, advise the correct treatment of housing loan, interest and
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other expenses in the financial statements of Star Limited for the year 20X1-20X2 along
with workings and applicable Ind AS.

You are required to explain how the housing loan should be reflected in the Ind AS
compliant Balance Sheet of Star Limited on 31 March 20X2.

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