Subsequent Measurement of Financial Assets - Ind AS - Indian Accounting Standards - Companies Law

Subsequent Measurement of Financial Assets An entity shall classify its financial assets to be subsequently measured at: Amortised Cost; or Fair Value through other comprehensive income (FVTOCI) Fair Value through profit or loss (FVTPL). Such classification is based on the following Two tests. Entity s business model for managing the financial assets and Contractual cash flow characteristics of the financial assets A. BUSINESS MODEL TEST: An entity's business model refers to how an entity manages its financial assets in order to generate cash flows. An entity's business model is typically observable through the activities that the entity undertakes to achieve the objective of the business model and an entity will need to use judgement when it assesses its business model for managing financial assets. It holds the FA to collect the cash flows arising as per the contractual terms till maturity; or It holds the FA to collect the contractual cash flows and also to sell the financial asset before its maturity; Other business models such as to hold FA for the purpose of trading or the nature of financial asset is such that it does not give any contractual cash flows. B. CONTRACTUAL CASH FLOWS CHARACTERISTICS TEST: This standard requires an entity to classify a financial asset on the basis of its contractual cash flow characteristics if the financial asset is held: within a business model whose objective is to hold assets to collect contractual cash flows; or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. To do so, an entity is required to determine whether the asset's contractual cash flows are solely payments of principal and interest on the principal amount outstanding for the currency in which the financial asset is denominated.