AS – 30 Financial Instruments: Recognition and Measurement:
Applicability of Accounting Standard: Applicable w.e.f. accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. It will be mandatory on or after 1-4-2011 for all commercial industrial and business entities except to a Small and Medium-sized Entity.
Main gist of accounting standard:
The objective of this accounting standard is to establish principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. The requirements for presenting information about financial instruments are in Accounting Standard (AS) – 31, Financial Instruments: Presentation. The requirements for disclosing information about financial instruments are in Accounting Standard (AS) – 32, Financial Instruments: Disclosures.
The terms defined in AS – 31, Financial Instruments: Presentation are used in this accounting standard with the meanings specified in paragraph 7 of AS – 31. AS – 31 defines the following terms:
a. Financial instrument
b. Financial asset
c. Financial liability
d. Equity instrument and provides guidance on applying those definitions.
1. Derivative:A derivative is a financial instrument or other contract within the scope of this accounting standard with all three of the following characteristics:
a. Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable is not specific to a party to the contract (sometimes called the ‘underlying’).
b. It requires no initial ne investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
c. It is settled at a future date.
2. Four Categories of Financial Instruments:
A. Financial Asset or Financial Liability:A financial asset or financial liability at fair value through profit or loss is a financial asset or financial liability that meets either of the following conditions:
a. It is classified as held for trading. A financial asset or financial liability is classified as held for trading if it is:
i. Acquired of incurred principally for the purpose of selling or repurchasing it in the near term; or
ii. Part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or
iii. A derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).
b. Upon initial recognition it is designated by the entity as at fair value through profit or loss.
Accounting Standard (AS) – 32, Financial Instruments: Disclosures, requires the entity to provide disclosures about financial assets and financial liabilities it has designated as at fair value through profit or loss, including how it has satisfied these conditions.
B. Held-to-maturity investments:Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity other than:
a. Those that the entity upon initial recognition designates as at fair value through profit or loss;
b. Those that meet the definition of loans and receivables; and
c. Those that the entity designates as available for sale.
An entity should not classify any financial assets as held to maturity if the entity has, during any financial year or during the two preceding financial years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity (more than insignificant in relation to the total amount of held-to-maturity investments) other than sales or reclassifications.
C. Loans and receivables:Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:
a. Those that the entity intends to sell immediately or in the near term, which should be classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss;
b. Those that the entity upon initial recognition designates as available for sale; or
c. Those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, which should be classified as available for sale.
D. Available for sale financial assets:Available for sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held to maturity investments, or (c) financial assets at fair value through profit or loss.
3. Financial guarantee contract: A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
4. Recognition and Measurement: The amortised cost of a financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility.
5. Effective interest method: The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.
6. Effective interest rate: The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
7. Derecognition: Derecognition is the removal of a previously recognized financial asset or financial liability from an entity’s balance sheet.
8. Fair value: Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.
9. Transaction costs: Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.
10. Relating to Hedge Accounting
A. Firm Commitment: A firm commitment is a binding agreement for the exchange of a specified quantity of resources at a specified price on a specified future date or dates.
B. Forecast transaction: A forecast transaction is an uncommitted but anticipated future transaction.
C. Functional currency: Functional currency is the currency of the primary economic environment in which the entity operates.
D. Hedging instrument: A hedging instrument is (a) a designated derivative or (b) for a hedge of the risk of changes in foreign currency exchange rates only, a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item.
E. Hedged item: A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that (a) exposes the entity to risk of changes in fair value or future cash flows and (b) is designated as being hedged.
F. Hedge effectiveness:Hedge effectiveness is the degree to which changes in the fair value or cash flows of the hedged item that are attributable to hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.
11. Embedded Derivative: An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract – with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative.
Interpretation of AS-30:
1) The objective of this accounting standard is to establish principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.
2) The terms used in AS-31 and AS-32 are defined in AS-30: Financial Instruments: Recognition and Measurement.
3) The requirements for presenting information about financial instruments are in Accounting Standard (AS) – 31, Financial Instruments: Presentation.
4) The requirements for disclosing information about financial instruments are in Accounting Standard (AS) – 32, Financial Instruments: Disclosures.