AS-31: Financial Instruments: Presentation

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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 presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. The principles in this accounting standard complement the principles for recognising and measuring financial assets and financial liabilities in Accounting Standard (AS) – 30.

Definitions:
The following terms are used in this accounting standard with the meanings specified:

1.      Financial instrument: A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
2.      Financial asset: A financial asset is any asset that is:
a.      Cash;
b.      An equity instrument of another entity;
c.       A contractual right:i.        To receive cash or another financial asset from another entity; or
ii.      To exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or
d.      A contract that will or may be settled in the entity’s own equity instruments and is:i.        A non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
ii.      A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments.
3.      Financial liability: A financial liability is any liability that is:
a.      A contractual obligation:

i.        To deliver cash or another financial asset to another entity; or
ii.      To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
b.      A contract that will or may be settled in the entity’s own equity instruments and is:

i.        A non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
ii.      A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments.
4.      Equity instrument: An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
5.      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.
6.      Financial Instruments: Recognition and Measurement: Financial Instruments: Recognition and Management and are used in this accounting standard with the meaning specified in    AS – 30.
a.      Amortised cost of a financial asset or financial liability.
b.      Available for sale financial assets.
c.       Derecognition.
d.      Derivative.
e.       Effective interest method.
f.       Financial asset or financial liability or fair value through profit or loss.
g.      Financial guarantee contract.
h.      Firm commitment.
i.        Forecast transaction.
j.        Hedge effectiveness.
k.      Hedge item.
l.        Hedging instrument.
m.    Held-to-maturity investments.
n.      Loans and receivables.
o.      Regular way purchase or sale.
p.      Transaction costs.

7.      ‘Contract’ and ‘Contractual’: In this accounting standard, ‘contract’ and ‘contractual’ refer to an agreement between two or more parties that has clear economic consequences that the parties have little, if any, discretion to avoid, usually because the agreement is enforceable by law. Contracts, and thus financial instruments, may take a variety of forms and need not be in writing.

8.      Entity: In this accounting standard, ‘entity’ includes individuals, partnerships, incorporated bodies, trusts and government agencies.
Interpretation of AS-31:
1.      The objective of this accounting standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.
2.      It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset.
3.      The requirements for presenting information about financial instruments are in Accounting Standard (AS) – 31, Financial Instruments: Presentation.
4.      The terms used in AS – 30 and AS – 32 are defined in AS – 31.
5.      The requirements for disclosing information about financial instruments are in Accounting Standard (AS) – 32, Financial Instruments: Disclosures.

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