Understanding IND AS 109 Financial Instruments: Rules, Impact, and Benefits in Indian Accounting
Last Updated : Sept. 15, 2023, 4:55 p.m.
The rules for categorising, recognising, de-recognising, and measuring all financial assets and liabilities are covered by IND AS 109 Financial Instruments. The stakeholders will be able to judge the timeliness and unpredictability of a company’s future cash flow by using the principles for the accounting and disclosure of Financial Instruments (FI) provided by this standard. In this essay, we go into the complexities of IND AS 109 Financial Instruments, its guiding concepts, classification standards, assessment approaches, and effects on reporting financial information. Reviewing an IND AS 109 summary is essential to comprehend the impact of modifications to financial reporting.
Overview of IND AS 109
The International Accounting Standards Board or IASB created IFRS 9; IND AS 109, created by ICAI (Institute of Chartered Accountants of India), is IFRS 9’s counterpart in India. IND AS 39 Financial Instruments: Identification and Measurement were replaced by this standard, which was put into place primarily to bring Indian accounting practices into line with global norms. The IND AS 109 summary is frequently used by investors to evaluate the risk involved with a company’s investments.
The Classification of Financial Obligations
Except (a) At FVTPL, all monetary obligations are later measured at fair value. (b) Transfers that do not meet the criteria for derecognition (an approach based on ongoing involvement) Contracts to offer financial guarantees (c) Loan commitments made at below-market rates of interest (d) (e) Conditional consideration is to be valued at fair market value, with adjustments being recorded in profit or loss. Businesses should provide an IND AS 109 summary in their annual reports to increase stakeholder transparency.
Recognition of Financial Instruments
Only until the entity has signed the contract containing the instrument will it be able to recognise an asset or liability in its balance sheet. The date of trade bookkeeping or settlement accountancy can be used to recognise and de-recognise a regular acquisition or sale of financial commodities. Complex accounting regulations about financial instruments are clarified by the IND AS 109 summary.
Financial Assets are No Longer Recognised
Since this idea is used at the consolidated entity level, an entity must first consolidate all its subsidiaries to comply with IND AS 110. Subject to certain restrictions, derecognition may be applied to a specific portion, the total asset, or a group of related assets. Consider providing your staff with an IND AS 109 summary when addressing financial reporting adjustments to ensure better understanding. Only after the contractual entitlements to the financial asset’s cash flows expire or the financial aid is transferred, and the transfer is eligible for derecognition, must an entity de-recognise the financial support. When an entity distributes an asset of money, it must assess the degree to which it still bears the risks and benefits of Ownership. Understanding the valuation and accounting for financial instruments under Indian accounting standards is made possible by reading the IND AS 109 summary.
| All Risk rewards of Ownership | Result |
|---|---|
| Transfers substantially | Recognise the liabilities established or retained in the transfer separately and de-recognise the transferred monetary asset. |
| Retains substantially | Keep appreciating the financial asset |
| Neither transfers nor retains substantially | Check to see if the entity still maintains control over the financial asset. |
Financial Responsibilities are Erased
Only when an economic obligation (or portion of a financial liability) ceases to exist (a contract obligation is discharged, cancelled, or expires) may an entity eliminate it. The IND AS 109 summary describes categorising and measuring financial liabilities and assets. Let’s look at the different accounting procedure scenarios:
| Event | Accounting Process |
|---|---|
| Exchange with material changes between the current borrower and the lender | Cancellation of the initial financial obligation and identification of a new obligation |
| Extinguishment or transfer (whole or partial) to another party | Any discrepancy between the amount carried and the consideration received (including non-cash assets) will be recorded as a profit or loss. |
| Repurchase a portion of an obligation. | Given the fair assessments as of the acquisition date, divide the previous amount carried between the still-recognised and the de-recognised portion. |
Embedded Derivatives
A hybrid agreement that also contains a host contract that is not a derivative includes an embedded product. A few of the combined instrument’s earnings fluctuate like that of a standalone option. When a result is linked to a FI but is legally transferable apart from the financial instrument in question or has an additional counterparty, it is not an integral derivative; instead, it is a separate FI. Complex accounting regulations pertaining to financial instruments are clarified by the IND AS 109 summary.
Hybrid Agreements with Hosts of Financial Assets
In a hybrid contract, both dependent and non-derivative elements are present, and neither can be transferred independently from the host contract. Consult the IND AS 109 summary in your bookkeeping textbook for a brief overview of the essential clauses. A host in a hybrid agreement that is not an asset must be detached from the host and recorded as a derivative only if the following conditions are met:
- The host is not directly correlated with the embedded derivative’s financial features and dangers.
- A derivative is an independent financial instrument having the same terms as an embedded derivative. The IND AS 109 summary is a resource that auditors consult while evaluating a company’s financial accounts.
- Changes in fair value are not recognised in profit or loss when measuring the hybrid contract at fair value. If you cannot distinguish and quantify the incorporated derivative from its host, you should identify the entire mixed agreement as being at FVTPL. If it is impossible to accurately assess the fair value, the difference between the appropriate values of the hybrid contract and the host is considered the fair value; otherwise, FVTPL is used.
Conclusion
The Indian accounting landscape has undergone considerable change with the introduction of IND AS 109 Financial Instruments. It improves transparency, comparability, and the precision of financial information by being in line with global best practices. Although some organisations may experience difficulties transitioning to this standard, the advantages of better financial reporting and risk management make it an essential framework for the Indian corporate environment. In order to achieve a seamless and effective implementation of IND AS 109, entities should invest in the required skills and resources. It will ultimately result in improved decision-making and increased investor and trust among stakeholders.
FAQs
1. What modifications to hedge accounting does IND AS 109 make?
With the introduction of IND AS 109, hedge accounting will take a more fundamentally-based approach, better integrating risk management with financial reporting. It can lessen the volatility of the income statement caused by hedging activity.
2. How does IND AS 109 affect the reporting of earnings in India?
Increased openness, less income statement volatility, increased comparability with other countries’ standards, and alignment of risk management and accounting procedures are all benefits of IND AS 109. It offers a more realistic view of the financial health of a company.
3. What difficulties could organisations have when adopting IND AS 109?
The application of the standard can be complicated, data and technology problems are frequently encountered, and finance and accounting staff need to have proper training and instruction.
4. Are all Indian legal organisations subject to IND AS 109?
Depending on their size and registration status, some entities are subject to IND AS 109. For their financial reporting, large listed businesses and some other designated entities must implement IND AS, notably IND AS 109.