9911796707
TMI BlogFinancial InstrumentsX X X X Extracts X X X X X X X X Extracts X X X X ..... nterest in a subsidiary, associate or joint venture in accordance with some or all of the requirements of this Standard. Entities shall also apply this Standard to derivatives on an interest in a subsidiary, associate or joint venture unless the derivative meets the definition of an equity instrument of the entity in Ind AS 32 Financial Instruments: Presentation. 37 [(b) rights and obligations under leases to which Ind AS 116, Leases applies. However: (i) finance lease receivables (i.e. net investments in finance leases) and operating lease receivables recognised by a lessor are subject to the derecognition and impairment requirements of this Standard; (ii) lease liabilities recognised by a lessee are subject to the derecognition requirements in paragraph 3.3.1 of this Standard; and (iii) derivatives that are embedded in leases are subject to the embedded derivatives requirements of this Standard.] (c) employers rights and obligations under employee benefit plans, to which Ind AS 19 Employee Benefits applies. (d) financial instruments issued by the entity that meet the definition of an equity instrument in Ind AS 32 (including options and warrants) or that are required to be classi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AS 109 instead of Ind AS 117 to such contracts.] (f) any forward contract between an acquirer and a selling shareholder to buy or sell an acquiree that will result in a business combination within the scope of Ind AS103 Business Combinations at a future acquisition date. The term of the forward contract should not exceed a reasonable period normally necessary to obtain any required approvals and to complete the transaction. (g) loan commitments other than those loan commitments described in paragraph 2.3. However, an issuer of loan commitments shall apply the impairment requirements of this Standard to loan commitments that are not otherwise within the scope of this Standard. Also, all loan commitments are subject to the derecognition requirements of this Standard. (h) financial instruments, contracts and obligations under share-based payment transactions to which Ind AS102 Share-based Payment applies, except for contracts within the scope of paragraphs 2.4 2.7 of this Standard to which this Standard applies. (i) rights to payments to reimburse the entity for expenditure that it is required to make to settle a liability that it recognises as a provision in accordance with Ind AS 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into for the purpose of the receipt or delivery of a non-financial item in accordance with the entity s expected purchase, sale or usage requirements. This designation is available only at inception of the contract and only if it eliminates or significantly reduces a recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise from not recognising that contract because it is excluded from the scope of this Standard (see paragraph 2.4). 2.6 There are various ways in which a contract to buy or sell a nonfinancial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include: (a) when the terms of the contract permit either party to settle it net in cash or another financial instrument or by exchanging financial instruments; (b) when the ability to settle net in cash or another financial instrument, or by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments (whether with the counterparty , by entering into offse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idated financial statements, paragraphs 3.2.2 3.2.9, B3.1.1, B3.1.2 and B3.2.1 B3.2.17 are applied at a consolidated level. Hence, an entity first consolidates all subsidiaries in accordance with Ind AS110 and then applies those paragraphs to the resulting group. 3.2.2 Before evaluating whether, and to what extent, derecognition is appropriate under paragraphs 3.2.3 3.2.9, an entity determines whether those paragraphs should be applied to a part of a financial asset (or a part of a group of similar financial assets) or a financial asset (or a group of similar financial assets) in its entirety, as follows. (a) Paragraphs 3.2.3 3.2.9 are applied to a part of a financial asset (or a part of a group of similar financial assets) if, and only if, the part being considered for derecognition meets one of the following three conditions. (i) The part comprises only specifically identified cash flows from a financial asset (or a group of similar financial assets). For example, when an entity enters into an interest rate strip whereby the counterparty obtains the right to the interest cash flows, but not the principal cash flows from a debt instrument, paragraphs 3.2.3 3.2.9 are applied to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the transfer qualifies for derecognition in accordance with paragraph 3.2.6. (See paragraph 3.1.2 for regular way sales of financial assets.) 3.2.4 An entity transfers a financial asset if, and only if, it either: (a) transfers the contractual rights to receive the cash flows of the financial asset, or (b) retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets the conditions in paragraph 3.2.5. 3.2.5 When an entity retains the contractual rights to receive the cash flows of a financial asset (the original asset ), but assumes a contractual obligation to pay those cash flows to one or more entities (the eventual recipients ), the entity treats the transaction as a transfer of a financial asset if, and only if, all of the following three conditions are met. (a) The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset. Short-term advances by the entity with the right of full recovery of the amount lent plus accrued interest at market rates do not violate this condition. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icantly as a result of the transfer (eg because the entity has sold a financial asset subject to an agreement to buy it back at a fixed price or the sale price plus a lender s return). An entity has transferred substantially all the risks and rewards of ownership of a financial asset if its exposure to such variability is no longer significant in relation to the total variability in the present value of the future net cash flows associated with the financial asset (eg because the entity has sold a financial asset subject only to an option to buy it back at its fair value at the time of repurchase or has transferred a fully proportionate share of the cash flows from a larger financial asset in an arrangement, such as a loan sub-participation, that meets the conditions in paragraph 3.2.5). 3.2.8 Often it will be obvious whether the entity has transferred or retained substantially all risks and rewards of ownership and there will be no need to perform any computations. In other cases, it will be necessary to compute and compare the entity s exposure to the variability in the present value of the future net cash flows before and after the transfer. The computation and comparison are ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of the larger financial asset shall be allocated between the part that continues to be recognised and the part that is derecognised, on the basis of the relative fair values of those parts on the date of the transfer. For this purpose, a retained servicing asset shall be treated as a part that continues to be recognised. The difference between: (a) the carrying amount (measured at the date of derecognition ) allocated to the part derecognised and (b) the consideration received for the part derecognised (including any new asset obtained less any new liability assumed) shall be recognised in profit or loss. 3.2.14 When an entity allocates the previous carrying amount of a larger financial asset between the part that continues to be recognised and the part that is derecognised, the fair value of the part that continues to be recognised needs to be measured. When the entity has a history of selling parts similar to the part that continues to be recognised or other market transactions exist for such parts, recent prices of actual transactions provide the best estimate of its fair value. When there are no price quotes or recent market transactions to support the fair value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an asset to the extent of its continuing involvement, the entity also recognises an associated liability. Despite the other measurement requirements in this Standard, the transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the entity has retained. The associated liability is measured in such a way that the net carrying amount of the transferred asset and the associated liability is: (a) the amortised cost of the rights and obligations retained by the entity, if the transferred asset is measured at amortised cost, or (b) equal to the fair value of the rights and obligations retained by the entity when measured on a stand-alone basis, if the transferred asset is measured at fair value. 3.2.18 The entity shall continue to recognise any income arising on the transferred asset to the extent of its continuing involvement and shall recognise any expense incurred on the associated liability. 3.2.19 For the purpose of subsequent measurement, recognised changes in the fair value of the transferred asset and the associated liability areaccounted for consistently with each other in accordancewith paragraph 5.7.1, and shall not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he collateral, and the transferee shall recognise the collateral as its asset initially measured at fair value or, if it has already sold the collateral, derecognise its obligation to return the collateral. (d) Except as provided in (c), the transferor shall continue to carry the collateral as its asset, and the transferee shall not recognise the collateral as an asset. 3.3 Derecognition of financial liabilities 3.3.1 An entity shall remove a financial liability (or a part of a financial liability) from its balance sheetwhen, and only when, it is extinguished-ie when the obligation specified in the contract is discharged or cancelled or expires. 3.3.2 An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value through other comprehensive income or fair value through profit or loss on the basis of both: (a) the entity s business model for managing the financial assets and (b) the contractual cash flow characteristics of the financial asset. 4.1.2 A financial asset shall be measured at amortised cost if both of the following conditions are met: (a) the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and (b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Paragraphs B4.1.1 B4.1.26 provide guidance on how to apply these conditions. 4.1.2A A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met: (a) the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and (b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracts. After initial recognition, an issuerof such a contract shall (unless paragraph 4.2.1(a) or (b) applies) subsequently measure it at the higher of: (i) the amount of the loss allowance determined in accordance with Section 5.5 and 20 [(ii) the amount initially recognised (see paragraph 5.1.1) less, when appropriate, the cumulative amount of income recognised in accordance with the principles of Ind AS 115. ] (d) commitments to provide a loan at a below-market interest rate. An issuer of such a commitment shall (unless paragraph 4.2.1(a) applies) subsequently measure it at the higher of: (i) the amount of the loss allowance determined in accordance with Section 5.5 and 21 [(ii) the amount initially recognised (see paragraph 5.1.1) less, when appropriate, the cumulative amount of income recognised in accordance with the principles of Ind AS 115. ] (e) contingent consideration recognised by an acquirer in a business combination to which Ind AS103 applies. Such contingent consideration shall subsequently be measured at fair value with changes recognised in profit or loss. Option to designate a financial liability at fair value through profit or loss 4.2.2 An entity may, at initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host (see paragraphs B4.3.5 and B4.3.8); (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (c) the hybrid contract is not measured at fair value with changes in fair value recognised in profit or loss (ie a derivative that is embedded in a financial liability at fair value through profit or loss is not separated). 4.3.4 If an embedded derivative is separated, the host contract shall be accounted for in accordance with the appropriate Standards. This Standard does not address whether an embedded derivative shall be presented separately in the balance sheet. 4.3.5 Despite paragraphs 4.3.3 and 4.3.4, if a contract contains one or more embedded derivatives and the host is not an asset within the scope of this Standard, an entity may designate the entire hybrid contract as at fair value through profit or loss unless: (a) the embedded derivative(s) do(es) not significantly modify the cash flows that otherwise would be required by the contract; or (b) it is clear with little or no analysis w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial liability at initial recognition differs from the transaction price, an entity shall apply paragraph B5.1.2A. 5.1.2 When an entity uses settlement date accounting for an asset that is subsequently measured at amortised cost, the asset is recognised initially at its fair value on the trade date (see paragraphs B3.1.3 B3.1.6). 6 [ 5.1.3 *****] 23 [5.1.3 Despite the requirement in paragraph 5.1.1, at initial recognition, an entity shall measure trade receivables at their transaction price (as defined in Ind AS 115) if the trade receivables do not contain a significant financing component in accordance with Ind AS 115 (or when the entity applies the practical expedient in accordance with paragraph 63 of Ind AS 115).] 5.2 Subsequent measurement of financial assets 5.2.1 After initial recognition, an entity shall measure a financial asset in accordance with paragraphs 4.1.1 4.1.5 at: (a) amortised cost; (b) fair value through other comprehensive income; or (c) fair value through profit or loss. 5.2.2 An entity shall apply the impairment requirements in Section 5.5 to financial assets that are measured at amortised cost in accordance with paragraph 4.1.2 and to financial assets that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial asset and shall recognise a modification gain or loss in profit or loss. The gross carrying amount of the financial asset shall be recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset s original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets) or, when applicable, the revised effective interest rate calculated in accordance with paragraph 6.5.10. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. Write-off 5.4.4 An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off constitutes a derecognition event (see paragraph B3.2.16(r)). 55 [Changes in the basis for determining the contractual cash flows as a result of interest rate benchmark reform 5.4.5 An entity shall apply paragraphs 5.4.6‒5.4.9 to a financial asset or financial liability if, and only i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the method used to calculate the interest rate benchmark-with the addition of a fixed spread necessary to compensate for the basis difference between the existing interest rate benchmark and the alternative benchmark rate; (b) changes to the reset period, reset dates or the number of days between coupon payment dates in order to implement the reform of an interest rate benchmark; and (c) the addition of a fallback provision to the contractual terms of a financial asset or financial liability to enable any change described in (a) and (b) above to be implemented. 5.4.9 If changes are made to a financial asset or financial liability in addition to changes to the basis for determining the contractual cash flows required by interest rate benchmark reform, an entity shall first apply the practical expedient in paragraph 5.4.7 to the changes required by interest rate benchmark reform. The entity shall then apply the applicable requirements in this Standard to any additional changes to which the practical expedient does not apply. If the additional change does not result in the derecognition of the financial asset or financial liability, the entity shall apply paragraph 5.4.3 or parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit losses in the previous reporting period, but determines at the current reporting date that paragraph 5.5.3 is no longer met, the entity shall measure the loss allowance at an amount equal to 12-month expected credit losses at the current reporting date. 5.5.8 An entity shall recognise in profit or loss, as an 56 [ impairment gain or loss ] , t he amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised in accordance with this Standard. Determining significant increases in credit risk 5.5.9 At each reporting date, an entity shall assess whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, an entity shall use the change in the risk of a default occurring over the expected life of the financial instrument instead of the change in the amount of expected credit losses. To make that assessment, an entity shall compare the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spite paragraphs 5.5.3 and 5.5.5, at the reporting date, an entity shall only recognise the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance for purchased or originated credit-impaired financial assets. 5.5.14 At each reporting date, an entity shall recognise in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. An entity shall recognise favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition. Simplified approach for trade receivables, contract assets and lease receivables 25 [ 5.5.15 Despite paragraphs 5.5.3 and 5.5.5, an entity shall always measure the loss allowance at an amount equal to lifetime expected credit losses for: (a) trade receivables or contract asset that result from transactions that are within the scope of Ind AS 115, and that: (i) do not contain a significant financing component in accordance with Ind AS 115 (or when the entity applies the practical expedient in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re expected credit losses over the period that the entity is exposed to credit risk and expected credit losses would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period. 5.6 Reclassification of financial assets 5.6.1 If an entity reclassifies financial assets in accordance with paragraph 4.4.1, it shall apply the reclassification prospectively from the reclassification date. The entity shall not restate any previously recognised gains, losses (including impairment gains or losses) or interest. Paragraphs 5.6.2 5.6.7 set out the requirements for reclassifications. 5.6.2 If an entity reclassifies a financial asset out of the amortised cost measurement category and into the fair value through profit or loss measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from a difference between the previous amortised cost of the financial asset and fair value is recognised in profit or loss. 5.6.3 If an entity reclassifies a financial asset out of the fair value through profit or loss measurement category and into the amortised cost measurement category, its fair value at the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sified from equity to profit or loss as a reclassification adjustment (see Ind AS 1) at the reclassification date. 5.7 Gains and losses 5.7.1 A gain or loss on a financial asset or financial liability that is measured at fair value shall be recognised in profit or loss unless: (a) it is part of a hedging relationship (see paragraphs 6.5.8 6.5.14); (b) it is an investment in an equity instrument and the entity has elected to present gains and losses on that investment in other comprehensive income in accordance with paragraph 5.7.5; (c) it is a financial liability designated as at fair value through profit or loss and the entity is required to present the effects of changes in the liability s credit risk in other comprehensive income in accordance with paragraph 5.7.7; or (d) it is a financial asset measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A and the entity is required to recognise some changes in fair value in other comprehensive income in accordance with paragraph 5.7.10. 5.7.1A Dividends are recognised in profit or loss only when: (a) the entity s right to receive payment of the dividend is established; (b) it is probable that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .7.1A. Liabilities designated as at fair value through profit or loss 5.7.7 An entity shall present a gain or loss on a financial liability that is designated as at fair value through profit or loss in accordance with paragraph 4.2.2 or paragraph 4.3.5 as follows: (a) The amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability shall be presented in other comprehensive income (see paragraphs B5.7.13 B5.7.20), and (b) the remaining amount of change in the fair value of the liability shall be presented in profit or loss unless the treatment of the effects of changes in the liability s credit risk described in (a) would create or enlarge an accounting mismatch in profit or loss (in which case paragraph 5.7.8 applies). Paragraphs B5.7.5 B5.7.7 and B5.7.10 B5.7.12 provide guidance on determining whether an accounting mismatch would be created or enlarged. 5.7.8 If the requirements in paragraph 5.7.7 would create or enlarge an accounting mismatch in profit or loss, an entity shall present all gains or losses on that liability (including the effects of changes in the credit risk of that liability) in profit or loss. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and a hedged item in accordance with paragraphs 6.2.1 6.3.7 and B6.2.1 B6.3.25. For hedging relationships that meet the qualifying criteria, an entity shall account for the gain or loss on the hedging instrument and the hedged item in accordance with paragraphs 6.5.1 6.5.14 and B6.5.1 B6.5.28. When the hedged item is a group of items, an entity shall comply with the additional requirements in paragraphs 6.6.1 6.6.6 and B6.6.1 B6.6.16. 6.1.3 [Refer Appendix 1]. 6.2 Hedging instruments Qualifying instruments 6.2.1 A derivative measured at fair value through profit or loss may be designated as a hedging instrument, except for some written options (see paragraph B6.2.4). 6.2.2 A non-derivative financial asset or a non-derivative financial liability measured at fair value through profit or loss may be designated as a hedging instrument unless it is a financial liability designated as at fair value through profit or loss for which the amount of its change in fair value that is attributable to changes in the credit risk of that liability is presented in other comprehensive income in accordance with paragraph 5.7.7. For a hedge of foreign currency risk, the foreign currency risk compon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roportions of them) may be jointly designated as the hedging instrument only if, in combination, they are not, in effect, a net written option at the date of designation (unless it qualifies in accordance with paragraph B6.2.4). 6.3 Hedged items Qualifying items 6.3.1 A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a forecast transaction or a net investment in a foreign operation. The hedged item can be: (a) a single item; or (b) a group of items (subject to paragraphs 6.6.1 6.6.6 and B6.6.1 B6.6.16). A hedged item can also be a component of such an item or group of items(see paragraphs 6.3.7 and B6.3.7 B6.3.25). 6.3.2 The hedged item must be reliably measurable. 6.3.3 If a hedged item is a forecast transaction (or a component thereof), that transaction must be highly probable. 6.3.4 An aggregated exposure that is a combination of an exposure that could qualify as a hedged item in accordance with paragraph 6.3.1 and a derivative may be designated as a hedged item (see paragraphs B6.3.3 B6.3.4). This includes a forecast transaction of an aggregated exposure (ie uncommitted but anticipated future transactions that would give rise to an exposure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flows or fair value of an item attributable to a specific risk or risks (risk component), provided that, based on an assessment within the context of the particular market structure, the risk component is separately identifiable and reliably measurable (see paragraphs B6.3.8 B6.3.15). Risk components include a designation of only changes in the cash flows or the fair value of a hedged item above or below a specified price or other variable (a one-sided risk). (b) one or more selected contractual cash flows. (c) components of a nominal amount, ie a specified part of the amount of an item (see paragraphs B6.3.16 B6.3.20). 6.4 Qualifying criteria for hedge accounting 6.4.1 A hedging relationship qualifies for hedge accounting only if all of the following criteria are met: (a) the hedging relationship consists only of eligible hedging instruments and eligible hedged items. (b) at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity s risk management objective and strategy for undertaking the hedge. That documentation shall include identification of the hedging instrument, the hedged item, the nature of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e one that could affect other comprehensive income. In that case, and only in that case, the recognised hedge ineffectiveness is presented in other comprehensive income. 6.5.4 A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value hedge or a cash flow hedge. 6.5.5 If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio (see paragraph 6.4.1(c)(iii)) but the risk management objective for that designated hedging relationship remains the same, an entity shall adjust the hedge ratio of the hedging relationship so that it meets the qualifying criteria again (this is referred to in this Standard as rebalancing -see paragraphs B6.5.7 B6.5.21). 6.5.6 An entity shall discontinue hedge accounting prospectively only when the hedging relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria (after taking into account any rebalancing of the hedging relationship, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised. For this purpose, the replacement or rollover of a hedging instrument into another hedging instrument is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5). (b) the hedging gain or loss on the hedged item shall adjust the carrying amount of the hedged item (if applicable) and be recognised in profit or loss. If the hedged item is a financial asset (or a component thereof) that is measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A, the hedging gain or loss on the hedged item shall be recognised in profit or loss. However, if the hedged item is an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5, those amounts shall remain in other comprehensive income. When a hedged item is an unrecognised firm commitment (or a component thereof), the cumulative change in the fair value of the hedged item subsequent to its designation is recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss. 6.5.9 When a hedged item in a fair value hedge is a firm commitment (or a component thereof) to acquire an asset or assume a liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sults in the recognition of a non-financial asset or non-financial liability, or a hedged forecast transaction for a nonfinancial asset or a non-financial liability becomes a firm commitment for which fair value hedge accounting is applied, the entity shall remove that amount from the cash flow hedge reserve and include it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment (see Ind AS 1) and hence it does not affect other comprehensive income. (ii) for cash flow hedges other than those covered by (i), that amount shall be reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment (see Ind AS 1) in the same period or periods during which the hedged expected future cash flows affect profit or loss (for example, in the periods that interest income or interest expense is recognised or when a forecast sale occurs). (iii) however, if that amount is a loss and an entity expects that all or a portion of that loss will not be recovered in one or more future periods, it shall immediately reclassify the amount that is not expected to be recovered into profit or loss as a reclassif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction related hedged item shall be recognised in other comprehensive income to the extent that it relates to the hedged item and shall be accumulated in a separate component of equity. The cumulative change in fair value arising from the time value of the option that has been accumulated in a separate component of equity (the amount ) shall be accounted for as follows: (i) if the hedged item subsequently results in the recognition of a non-financial asset or a non-financial liability, or a firm commitment for a non-financial asset or a non-financial liability for which fair value hedge accounting is applied, the entity shall remove the amount from the separate component of equity and include it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment (see Ind AS 1) and hence does not affect other comprehensive income. (ii) for hedging relationships other than those covered by (i), the amount shall be reclassified from the separate component of equity to profit or loss as a reclassification adjustment (see Ind AS 1) in the same period or periods during which the hedged expected future cash flows affect profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall apply the application guidance in paragraphs B6.5.34 B6.5.39. 6.6 Hedges of a group of items Eligibility of a group of items as the hedged item 6.6.1 A group of items (including a group of items that constitute a net position; see paragraphs B6.6.1 B6.6.8) is an eligible hedged item only if: (a) it consists of items (including components of items) that are, individually, eligible hedged items; (b) the items in the group are managed together on a group basis for risk management purposes; and (c) in the case of a cash flow hedge of a group of items whose variabilities in cash flows are not expected to be approximately proportional to the overall variability in cash flows of the group so that offsetting risk positions arise: (i) it is a hedge of foreign currency risk; and (ii) the designation of that net position specifies the reporting period in which the forecast transactions are expected to affect profit or loss, as well as their nature and volume (see paragraphs B6.6.7 B6.6.8). Designation of a component of a nominal amount 6.6.2 A component that is a proportion of an eligible group of items is an eligible hedged item provided that designation is consistent with the entity s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the rolling net risk hedging strategy and the entity uses eligible hedging instruments to hedge the net risk (ie when the net position is not nil); (c) hedge accounting is normally applied to such net positions when the net position is not nil and it is hedged with eligible hedging instruments; and (d) not applying hedge accounting to the nil net position would give rise to inconsistent accounting outcomes, because the accounting would not recognise the offsetting risk positions that would otherwise be recognised in a hedge of a net position. 6.7 Option to designate a credit exposure as measured at fair value through profit or loss Eligibility of credit exposures for designation at fair value through profit or loss 6.7.1 If an entity uses a credit derivative that is measured at fair value through profit or loss to manage the credit risk of all, or a part of, a financial instrument (credit exposure) it may designate that financial instrument to the extent that it is so managed (ie all or a proportion of it) as measured at fair value through profit or loss if: (a) the name of the credit exposure (for example, the borrower, or the holder of a loan commitment) matches the referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstrument that gives rise to the credit risk, or a proportion of that financial instrument, at fair value through profit or loss, that financial instrument s fair value at the date of discontinuation becomes its new carrying amount. Subsequently, the same measurement that was used before designating the financial instrument at fair value through profit or loss shall be applied (including amortisation that results from the new carrying amount). For example, a financial asset that had originally been classified as measured at amortised cost would revert to that measurement and its effective interest rate would be recalculated based on its new gross carrying amount on the date of discontinuing measurement at fair value through profit or loss. 50 [ 6.8 Temporary exceptions from applying specific hedge accounting requirements 6.8.1 An entity shall apply paragraphs 6.8.4 6.8.12 and paragraphs 7.1.8 and 7.2.26(d) to all hedging relationships directly affected by interest rate benchmark reform. These paragraphs apply only to such hedging relationships. A hedging relationship is directly affected by interest rate benchmark reform only if the reform gives rise to uncertainties about- (a) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , an entity shall apply the requirement in paragraphs 6.3.7(a) and B6.3.8-that the risk component shall be separately identifiable-only at the inception of the hedging relationship. 6.8.8 When an entity, consistent with its hedge documentation, frequently resets (i.e, discontinues and restarts) a hedging relationship because both the hedging instrument and the hedged item frequently change (i.e, the entity uses a dynamic process in which both the hedged items and the hedging instruments used to manage that exposure do not remain the same for long), the entity shall apply the requirement in paragraphs 6.3.7(a) and B6.3.8-that the risk component is separately identifiable-only when it initially designates a hedged item in that hedging relationship. A hedged item that has been assessed at the time of its initial designation in the hedging relationship, whether it was at the time of the hedge inception or subsequently, is not reassessed at any subsequent redesignation in the same hedging relationship. End of application 6.8.9 An entity shall prospectively cease applying paragraph 6.8.4 to a hedged item at the earlier of- (a) when the uncertainty arising from interest rate benchmark ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the non-contractually specified risk component is designated is discontinued. 6.9 Additional temporary exceptions arising from interest rate benchmark reform 6.9.1 As and when the requirements in paragraphs 6.8.4 6.8.8 cease to apply to a hedging relationship (see paragraphs 6.8.9 6.8.13), an entity shall amend the formal designation of that hedging relationship as previously documented to reflect the changes required by interest rate benchmark reform, ie the changes are consistent with the requirements in paragraphs 5.4.6 5.4.8. In this context, the hedge designation shall be amended only to make one or more of these changes: (a) designating an alternative benchmark rate (contractually or non-contractually specified) as a hedged risk; (b) amending the description of the hedged item, including the description of the designated portion of the cash flows or fair value being hedged; or (c) amending the description of the hedging instrument. 6.9.2 An entity also shall apply the requirement in paragraph 6.9.1(c) if these three conditions are met: (a) the entity makes a change required by interest rate benchmark reform using an approach other than changing the basis for determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly affected by interest rate benchmark reform. Accounting for qualifying hedging relationships Cash flow hedges 6.9.7 For the purpose of applying paragraph 6.5.11, at the point when an entity amends the description of a hedged item as required in paragraph 6.9.1(b), the amount accumulated in the cash flow hedge reserve shall be deemed to be based on the alternative benchmark rate on which the hedged future cash flows are determined. 6.9.8 For a discontinued hedging relationship, when the interest rate benchmark on which the hedged future cash flows had been based is changed as required by interest rate benchmark reform, for the purpose of applying paragraph 6.5.12 in order to determine whether the hedged future cash flows are expected to occur, the amount accumulated in the cash flow hedge reserve for that hedging relationship shall be deemed to be based on the alternative benchmark rate on which the hedged future cash flows will be based. Groups of items 6.9.9 When an entity applies paragraph 6.9.1 to groups of items designated as hedged items in a fair value or cash flow hedge, the entity shall allocate the hedged items to subgroups based on the benchmark rate being hedged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternative benchmark rate and discontinue hedge accounting prospectively from the date of that reassessment for all hedging relationships in which the alternative benchmark rate was designated as a non-contractually specified risk component. 6.9.13 In addition to those hedging relationships specified in paragraph 6.9.1, an entity shall apply the requirements in paragraphs 6.9.11 and 6.9.12 to new hedging relationships in which an alternative benchmark rate is designated as a non-contractually specified risk component (see paragraphs 6.3.7(a) and B6.3.8) when, because of interest rate benchmark reform, that risk component is not separately identifiable at the date it is designated. ] 26 [ Chapter 7 Effective date and transition Effective Date (Section 7.1) 7.1.1 * 7.1.2 * 7.1.3 * 7.1.4 As a consequence of issuance of Ind AS 115, Revenue from Contracts with Customers , paragraphs 2.1, 2.2, 4.2.1, 5.1.1, 5.5.1, 5.5.15, Appendix A and Appendix B were amended. Paragraph 5.1.3 and a definition in Appendix A are added. An entity shall apply those amendments when it applies Ind AS 115.] 39 [ 7.1.5 Ind AS 116 amended paragraphs 2.1, 5.5.15, B4.3.8, B5.5.34 and B5.5.46. An entity shall app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of initial application, it is impracticable (as defined in Ind AS 8) for an entity to assess a modified time value of money element in accordance with paragraphs B4.1.9B B4.1.9D on the basis of the facts and circumstances that existed at the initial recognition of the financial asset, an entity shall assess the contractual cash flow characteristics of that financial asset on the basis of the facts and circumstances that existed at the initial recognition of the financial asset without taking into account the requirements related to the modification of the time value of money element in paragraphs B4.1.9B B4.1.9D. 7.2.5 If, at the date of initial application, it is impracticable (as defined in Ind AS 8) for an entity to assess whether the fair value of a prepayment feature was insignificant in accordance with paragraph B4.1.12(c) on the basis of the facts and circumstances that existed at the initial recognition of the financial asset, an entity shall assess the contractual cash flow characteristics of that financial asset on the basis of the facts and circumstances that existed at the initial recognition of the financial asset without taking into account the exception for pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss carrying amount of that financial asset or the amortised cost of that financial liability if the entity restates prior periods; and (b) the fair value of the financial asset or the financial liability at the date of initial application as the new gross carrying amount of that financial asset or the new amortised cost of that financial liability at the date of initial application of this Standard. 7.2.12 * 7.2.13 * 7.2.14 At the date of initial application, an entity shall determine whether the treatment in paragraph 5.7.7 would create or enlarge an accounting mismatch in profit or loss on the basis of the facts and circumstances that exist at the date of initial application. This Standard shall be applied retrospectively on the basis of that determination. 7.2.14A * 7.2.15 * 7.2.16 * 7.2.17 * 7.2.18 * 7.2.19 * 7.2.20 * 52 [ Transition for hedge accounting (Chapter 6) ] 7.2.21 * 7.2.22 * 7.2.23 * 7.2.24 * 7.2.25 * 53 [ 7.2.26 As an exception to prospective application of the hedge accounting requirements of this Standard, an entity- (a)-(c) [Refer Appendix 1] (d) shall apply the requirements in Section 6.8 retrospectively. This retrospective application applies only to those hedg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n would not have previously satisfied the condition in paragraph 4.2.2(a) but that condition is now satisfied as a result of the application of these amendments. Such a designation and revocation shall be made on the basis of the facts and circumstances that exist at the date of initial application of these amendments. That classification shall be applied retrospectively. 7.2.33 An entity is not required to restate prior periods to reflect the application of these amendments. The entity may restate prior periods if, and only if, it is possible without the use of hindsight and the restated financial statements reflect all the requirements in this Standard. If an entity does not restate prior periods, the entity shall recognise any difference between the previous carrying amount and the carrying amount at the beginning of the annual reporting period that includes the date of initial application of these amendments in the opening retained earnings (or other component of equity, as appropriate) of the annual reporting period that includes the date of initial application of these amendments. 7.2.34 In the reporting period that includes the date of initial application of these amendments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit or loss if that designation would not have previously satisfied the condition in paragraph 4.2.2(a) but that condition is now satisfied as a result of the application of these amendments. Such a designation and revocation shall be made on the basis of the facts and circumstances that exist at the date of initial application of these amendments. That classification shall be applied retrospectively. 7.2.40 An entity is not required to restate prior periods to reflect the application of these amendments. The entity may restate prior periods only if it is possible to do so without the use of hindsight. If an entity restates prior periods, the restated financial statements must reflect all the requirements in this Standard for the affected financial instruments. If an entity does not restate prior periods, the entity shall recognise any difference between the previous carrying amount and the carrying amount at the beginning of the annual reporting period that includes the date of initial application of these amendments in the opening retained earnings (or other component of equity, as appropriate) of the annual reporting period that includes the date of initial application of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ark rate is designated as a non-contractually specified risk component for the first time as referring to the date of initial application of these amendments (ie the 24-month period for that alternative benchmark rate designated as a non-contractually specified risk component begins from the date of initial application of these amendments). 7.2.46 An entity is not required to restate prior periods to reflect the application of these amendments. The entity may restate prior periods if, and only if, it is possible without the use of hindsight. If an entity does not restate prior periods, the entity shall recognise any difference between the previous carrying amount and the carrying amount at the beginning of the annual reporting period that includes the date of initial application of these amendments in the opening retained earnings (or other component of equity, as appropriate) of the annual reporting period that includes the date of initial application of these amendments. ] Appendix A Defined terms This appendix is an integral part of the Standard. 12-month expected credit losses The portion of lifetime expected credit losses that represent the expected credit losses that result f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrough the expected life of that financial instrument. The cash flows that are considered shall include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. There is a presumption that the expected life of a financial instrument can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the expected life of a financial instrument, the entity shall use the remaining contractual term of the financial instrument. credit-adjusted effective interest rate The rate that exactly discounts the estimated future Cash payments or receipts through the expected life of the financial asset to the amortised cost of a financial asset that is a purchased or originated credit-impaired financial asset . When calculating the credit-adjusted effective interest rate, an entity shall estimate the expected cash flows by considering all contractual terms of the financial asset (for example ,prepayment, extension, call and similar options) and expected credit losses . The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate (see paragraphs B5.4.1 B5.4.3), transaction costs , and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the entity shall use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments). expected credit losses The weighted average of credit losses with the respective risks of a default occurring as the weights. financial guarantee contract 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. financial liability at fair value through profit or loss A financial liability that meets one of the following con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss The amount arising from adjusting the gross carrying Amount of a financial asset to reflect the renegotiated or modified contractual cash flows. The entity recalculates the gross carrying amount of a financial asset as the present value of the estimated future cash payments or receipts through the expected life of there negotiated or modified financial asset that are discounted at the financial asset s original effective interest rate (or the original credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets ) or, when applicable, the revised effective interest rate calculated in accordance with paragraph 6.5.10.When estimating the expected cash flows of a financial asset, an entity shall consider all contractual terms of the financial asset (for example ,pre -payment, call and similar options) but shall not consider the expected credit losses , unless the financial asset is a purchased or originated credit impaired financial asset , in which case an entity shall also consider the initial expected credit losses that were considered when calculating the original credit adjusted effective interest rate . past due A financial asset is pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ationship with the entity in which the investment is made. The investor or joint venturer entity uses Ind AS 28Investments in Associates and Joint Ventures to determine whether the equity method of accounting shall be applied to such an investment. B2.4 This Standard applies to the financial assets and financial liabilities of insurers, other than rights and obligations that paragraph 2.1(e) excludes because they arise under contracts within the scope of 75 [ Ind AS 117 ] . B2.5 Financial guarantee contracts may have various legal forms, such as a guarantee, some types of letter of credit, a credit default contract or an insurance contract. Their accounting treatment does not depend on their legal form. The following are examples of the appropriate treatment (see paragraph 2.1(e)): 76 [ (a) Although a financial guarantee contract meets the definition of an insurance contract in Ind AS 117 (see paragraph 7(e) of Ind AS 117) if the risk transferred is significant, the issuer applies this Standard. Nevertheless, if the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting that is applicable to insurance contracts, the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and derecognition (Chapter 3) Initial recognition (Section 3.1) B3.1.1 As a consequence of the principle in paragraph 3.1.1, an entity recognises all of its contractual rights and obligations under derivatives in its balance sheet as assets and liabilities, respectively, except for derivatives that prevent a transfer of financial assets from being accounted for as a sale (see paragraph B3.2.14). If a transfer of a financial asset does not qualify for derecognition , the transferee does not recognise the transferred asset as its asset (see paragraph B3.2.15). B3.1.2 The following are examples of applying the principle in paragraph 3.1.1: (a) Unconditional receivables and payables are recognised as assets or liabilities when the entity becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash. (b) Assets to be acquired and liabilities to be incurred as a result of a firm commitment to purchase or sell goods or services are generally not recognised until at least one of the parties has performed under the agreement. For example, an entity that receives a firm order does not generally recognise an asset (and the entity that pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstead, such a contract is accounted for as a derivative in the period between the trade date and the settlement date. B3.1.5 The trade date is the date that an entity commits itself to purchase or sell an asset. Trade date accounting refers to (a) the recognition of an asset to be received and the liability to pay for it on the trade date, and (b) derecognition of an asset that is sold, recognition of any gain or loss on disposal and the recognition of a receivable from the buyer for payment on the trade date. Generally, interest does not start to accrue on the asset and corresponding liability until the settlement date when title passes. B3.1.6 The settlement date is the date that an asset is delivered to or by an entity. Settlement date accounting refers to (a) the recognition of an asset on the day it is received by the entity, and (b) the derecognition of an asset and recognition of any gain or loss on disposal on the day that it is delivered by the entity. When settlement date accounting is applied an entity accounts for any change in the fair value of the asset to be received during the period between the trade date and the settlement date in the same way as it accounts for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction where the repurchase price is a fixed price or the sale price plus a lender s return; (b) a securities lending agreement; (c) a sale of a financial asset together with a total return swap that transfers the market risk exposure back to the entity; (d) a sale of a financial asset together with a deep in-the-money put or call option (ie an option that is so far in the money that it is highly unlikely to go out of the money before expiry); and (e) a sale of short-term receivables in which the entity guarantees to compensate the transferee for credit losses that are likely to occur. B3.2.6 If an entity determines that as a result of the transfer, it has transferred substantially all the risks and rewards of ownership of the transferred asset, it does not recognise the transferred asset again in a future period, unless it reacquires the transferred asset in a new transaction. Evaluation of the transfer of control B3.2.7 An entity has not retained control of a transferred asset if the transferee has the practical ability to sell the transferred asset. An entity has retained control of a transferred asset if the transferee does not have the practical ability to sell the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred asset because the transferee would, in practice, not sell the transferred asset to a third party without attaching a similar option or other restrictive conditions. Instead, the transferee would hold the transferred asset so as to obtain payments under the guarantee or put option. Under these circumstances the transferor has retained control of the transferred asset. Transfers that qualify for derecognition B3.2.10 An entity may retain the right to a part of the interest payments on transferred assets as compensation for servicing those assets. The part of the interest payments that the entity would give up upon termination or transfer of the servicing contract is allocated to the servicing asset or servicing liability. The part of the interest payments that the entity would not give up is an interest-only strip receivable. For example, if the entity would not give up any interest upon termination or transfer of the servicing contract, the entire interest spread is an interest-only strip receivable. For the purposes of applying paragraph 3.2.13, the fair values of the servicing asset and interest-only strip receivable are used to allocate the carrying amount of the receivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at amortised cost, the associated liability is measured at its cost (ie the consideration received) adjusted for the amortisation of any difference between that cost and the gross carrying amount of the transferred asset at the expiration date of the option. For example, assume that the gross carrying amount of the asset on the date of the transfer is ₹ 98 and that the consideration received is ₹ 95. The gross carrying amount of the asset on the option exercise date will be ₹ 100. The initial carrying amount of the associated liability is ₹ 95 and the difference between ₹ 95 and ₹ 100 is recognised in profit or loss using the effective interest method. If the option is exercised, any difference between the carrying amount of the associated liability and the exercise price is recognised in profit or loss. Assets measured at fair value (c) If a call option right retained by an entity prevents a transferred asset from being derecognised and the entity measures the transferred asset at fair value, the asset continues to be measured at its fair value. The associated liability is measured at (i) the option exercise price less the time value of the opti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . For example, assume an entity transfers a financial asset that is measured at fair value while simultaneously purchasing a call with an exercise price of ₹ 120 and writing a put with an exercise price of ₹ 80. Assume also that the fair value of the asset is ₹ 100 at the date of the transfer. The time value of the put and call are ₹ 1 and ₹ 5 respectively. In this case, the entity recognises an asset of ₹ 100 (the fair value of the asset) and a liability of ₹ 96 [(R₹ 100 + ₹ 1) ₹ 5]. This gives a net asset value of ₹ 4, which is the fair value of the options held and written by the entity. All transfers B3.2.14 To the extent that a transfer of a financial asset does not qualify for derecognition , the transferor s contractual rights or obligations related to the transfer are not accounted for separately as derivatives if recognising both the derivative and either the transferred asset or the liability arising from the transfer would result in recognising the same rights or obligations twice. For example, a call option retained by the transferor may prevent a transfer of financial assets from being accounted for as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fair value. If an entity sells a financial assetand retains only a right of first refusal to repurchase the transferred asset at fair value if the transferee subsequently sells it, the entity derecognises the asset because it has transferred substantially all the risks and rewards of ownership. (e) Wash sale transaction. The repurchase of a financial asset shortly after ithas been sold is sometimes referred to as a wash sale. Such a repurchase does not preclude derecognition provided that the original transaction met the derecognition requirements. However, if an agreement to sell a financial asset is entered into concurrently with an agreement to repurchase the same asset at a fixed price or the sale price plus a lender s return, then the asset is not derecognised. (f) Put options and call options that are deeply in the money. If a transferred financial asset can be called back by the transferor and the call option is deeply in the money, the transfer does not qualify for derecognition because the transferor has retained substantially all the risks and rewards of ownership. Similarly, if the financial asset can be put back by the transferee and the put option is deeply in the mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer of substantially all the risks and rewards of ownership. (k) Cash-settled call or put options. An entity evaluates the transfer of a financial asset that is subject to a put or call option or a forward repurchase agreement that will be settled net in cash to determine whether it has retained or transferred substantially all the risks and rewards of ownership. If the entity has not retained substantially all the risks and rewards of ownership of the transferred asset, it determines whether it has retained control of the transferred asset. That the put or the call or the forward repurchase agreement is settled net in cash does not automatically mean that the entity has transferred control (see paragraphs B3.2.9 and (g), (h) and (i) above). (l) Removal of accounts provision. A removal of accounts provision is anunconditional repurchase (call) option that gives an entity the right to reclaim assets transferred subject to some restrictions. Provided that such an option results in the entity neither retaining nor transferring substantially all the risks and rewards of ownership, it precludes derecognition only to the extent of the amount subject to repurchase (assuming that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e based on a notional amount that is equal to the principal amount of the transferred financial asset. The interest rate swap does not preclude derecognition of the transferred asset provided the payments on the swap are not conditional on payments being made on the transferred asset. (q) Amortising interest rate swaps. An entity may transfer to a transferee a fixed rate financial asset that is paid off over time, and enter into an amortising interest rate swap with the transferee to receive a fixed interest rate and pay a variable interest rate based on a notional amount. If the notional amount of the swap amortises so that it equals the principal amount of the transferred financial asset outstanding at any point in time, the swap would generally result in the entity retaining substantial prepayment risk, in which case the entity either continues to recognise all of the transferred asset or continues to recognise the transferred asset to the extent of its continuing involvement. Conversely, if the amortisation of the notional amount of the swap is not linked to the principal amount outstanding of the transferred asset, such a swap would not result in the entity retaining prepaymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consideration received (₹ 25) represents consideration received for subordinating its retained interest to provide credit enhancement to the transferee for credit losses. In addition, the excess spread of 0.5 per cent represents consideration received for the credit enhancement. Accordingly, the total consideration received for the credit enhancement is ₹ 65 (₹ 25 + ₹ 40). The entity calculates the gain or loss on the sale of the 90 per cent share of cash flows. Assuming that separate fair values of the 90 per cent part transferred and the 10 per cent part retained are not available at the date of the transfer, the entity allocates the carrying amount of the asset in accordance with paragraph 3.2.14 of Ind AS109 as follows: Fair value Percentage Allocated carrying amount Portion transferred 9,090 90% 9,000 Portion retained 1,010 10% 1,000 Total 10,100 10,000 The entity computes its gain or loss on the sale of the 90 per cent share of the cash flows by deducting the allocated carrying amount of the portion transferred from the consideration received, ie₹ 90 (₹ 9,090 ₹ 9,000). The carrying amount of the portion retained by the entity is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law or by the creditor. (If the debtor has given a guarantee this condition may still be met.) B3.3.2 If an issuer of a debt instrument repurchases that instrument, the debt is extinguished even if the issuer is a market maker in that instrument or intends to resell it in the near term. B3.3.3 Payment to a third party, including a trust (sometimes called in-substance defeasance ), does not, by itself, relieve the debtor of its primary obligation to the creditor, in the absence of legal release. B3.3.4 If a debtor pays a third party to assume an obligation and notifies its creditor that the third party has assumed its debt obligation, the debtor does not derecognise the debt obligation unless the condition in paragraph B3.3.1(b) is met. If the debtor pays a third party to assume an obligation and obtains a legal release from its creditor, the debtor has extinguished the debt. However, if the debtor agrees to make payments on the debt to the third party or direct to its original creditor, the debtor recognises a new debt obligation to the third party. B3.3.5 Although legal release, whether judicially or by the creditor, results in derecognition of a liability, the entity may recog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent personnel (as defined in Ind AS 24 Related Party Disclosures). B4.1.2 An entity s business model is determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The entity s business model does not depend on management s intentions for an individual instrument. Accordingly, this condition is not an instrument-by instrument approach to classification and should be determined on a higher level of aggregation. However, a single entity may have more than one business model for managing its financial instruments. Consequently, classification need not be determined at the reporting entity level. For example, an entity may hold a portfolio of investments that it manages in order to collect contractual cash flows and another portfolio of investments that it manages in order to trade to realise fair value changes. Similarly, in some circumstances, it may be appropriate to separate a portfolio of financial assets into sub portfolios in order to reflect the level at which an entity manages those financial assets. For example, that may be the case if an entity originates or purchases a portfolio of mortgage loans and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not limited to: (a) how the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity s key management personnel; (b) the risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way in which those risks are managed; and (c) how managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected). A business model whose objective is to hold assets in order to collect contractual cash flows B4.1.2C Financial assets that are held within a business model whose objective is to hold assets in order to collect contractual cash flows are managed to realise cash flows by collecting contractual payments over the life of the instrument. That is, the entity manages the assets held within the portfolio to collect those particular contractual cash flows (instead of managing the overall return on the portfolio by both holding and selling assets). In determining whether cash flows are going to be realised by collecting the financial asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the assets credit risk), may also be consistent with a business model whose objective is to hold financial assets in order to collect contractual cash flows. In particular, such sales may be consistent with a business model whose objective is to hold financial assets in order to collect contractual cash flows if those sales are infrequent (even if significant in value) or insignificant in value both individually and in aggregate (even if frequent). If more than an infrequent number of such sales are made out of a portfolio and those sales are more than insignificant in value (either individually or in aggregate), the entity needs to assess whether and how such sales are consistent with an objective of collecting contractual cash flows. Whether a third party imposes the requirement to sell the financial assets, or that activity is at the entity s discretion, is not relevant to this assessment. An increase in the frequency or value of sales in a particular period is not necessarily inconsistent with an objective to hold financial assets in order to collect contractual cash flows, if an entity can explain the reasons for those sales and demonstrate why those sales do not reflect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l assets that are credit impaired. If payment on the loans is not made on a timely basis, the entity attempts to realise the contractual cash flows through various means-for example, by contacting the debtor by mail, telephone or other methods. The entity s objective is to collect the contractual cash flows and the entity does not manage any of the loans in this portfolio with an objective of realising cash flows by selling them. In some cases, the entity enters in to interest rate swaps to change the interest rate on particular financial assets in a portfolio from a floating interest rate to a fixed interest rate. Analysis The objective of the entity s business model is to hold the financial assets in order to collect the contractual cash flows. The same analysis would apply even if the entity does not expect to receive all of the contractual cash flows (eg some of the financial assets are credit impaired at initial recognition). Moreover, the fact that the entity enters into derivatives to modify the cash flows of the portfolio does not in itself change the entity s business model Example 3 An entity has a business model with the objective of originating loans to customers and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant in value, the objective of the entity s business model is not to hold the financial assets to collect contractual cash flows. Similarly, if the entity is required by its regulator to routinely sell financial assets to demonstrate that the assets are liquid, and the value of the assets sold is significant, the entity s business model is not to hold financial assets to collect contractual cash flows. Whether a third party imposes the requirement to sell the financial assets, or that activity is at the entity s discretion, is not relevant to the analysis. A business model whose objective is achieved by both collecting contractual cash flows and selling financial assets B4.1.4A An entity may hold financial assets in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. In this type of business model, the entity s key management personnel have made a decision that both collecting contractual cash flows and selling financial assets are integral to achieving the objective of the business model. There are various objectives that may be consistent with this type of business model. For example, the objective of the business m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m financial assets. When the investments mature, the entity reinvests the cash in new short term financial assets. The entity maintains this strategy until the funds are needed, at which time the entity uses the proceeds from the maturing financial assets to fund the capital expenditure. Only sales that are insignificant in value occur before maturity (unless there is an increase in credit risk). The objective of this contrasting business model is to hold financial assets to collect contractual cash flows. Example 6 A financial institution holds financial assets to meet its everyday liquidity needs. The entity seeks to minimise the costs of managing those liquidity needs and therefore actively manages the return on the portfolio. That return consists of collecting contractual payments as well as gains and losses from the sale of financial assets. As a result, the entity holds financial assets to collect contractual cash flows and sells financial assets to reinvest in higher yielding financial assets or to better match the duration of its liabilities. In the past, this strategy has resulted in frequent sales activity and such sales have been significant in value. This activity is ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the business model s objective; instead, it is incidental to it. B4.1.6 A portfolio of financial assets that is managed and whose performance is evaluated on a fair value basis (as described in paragraph 4.2.2(b)) is neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. The entity is primarily focused on fair value information and uses that information to assess the assets performance and to make decisions. In addition, a portfolio of financial assets that meets the definition of held for trading is not held to collect contractual cash flows or held both to collect contractual cash flows and to sell financial assets. For such portfolios, the collection of contractual cash flows is only incidental to achieving the business model s objective. Consequently, such portfolios of financial assets must be measured at fair value through profit or loss. Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding B4.1.7 Paragraph 4.1.1(b) requires an entity to classify a financial asset on the basis of its contractual cash flow characteristics if the financial asset is he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt outstanding for the currency in which the financial asset is denominated. B4.1.9 Leverage is a contractual cash flow characteristic of some financial assets. Leverage increases the variability of the contractual cash flows with the result that they do not have the economic characteristics of interest. Stand-alone option, forward and swap contracts are examples of financial assets that include such leverage. Thus, such contracts do not meet the condition in paragraphs 4.1.2(b) and 4.1.2A(b) and cannot be subsequently measured at amortised cost or fair value through other comprehensive income. Consideration for the time value of money B4.1.9A Time value of money is the element of interest that provides consideration for only the passage of time. That is, the time value of money element does not provide consideration for other risks or costs associated with holding the financial asset. In order to assess whether the element provides consideration for only the passage of time, an entity applies judgement and considers relevant factors such as the currency in which the financial asset is denominated and the period for which the interest rate is set. B4.1.9B However, in some cases, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an entity must consider factors that could affect future contractual cash flows. For example, if an entity is assessing a bond with a five-year term and the variable interest rate is reset every six months to a five-year rate, the entity cannot conclude that the contractual cash flows are solely payments of principal and interest on the principal amount outstanding simply because the interest rate curve at the time of the assessment is such that the difference between a five-year interest rate and a six-month interest rate is not significant. Instead, the entity must also consider whether the relationship between the five-year interest rate and the six-month interest rate could change over the life of the instrument such that the contractual (undiscounted) cash flows over the life of the instrument could be significantly different from the (undiscounted) benchmark cash flows. However, an entity must consider only reasonably possible scenarios instead of every possible scenario. If an entity concludes that the contractual (undiscounted) cash flows could be significantly different from the (undiscounted) benchmark cash flows, the financial asset does not meet the condition in paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fe of the instrument will be solely payments of principal and interest on the principal amount outstanding because of the relationship between missed payments and an increase in credit risk. (See also paragraph B4.1.18.) B4.1.11 The following are examples of contractual terms that result in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding: (a) a variable interest rate that consists of consideration for the time value of money, the credit risk associated with the principal amount outstanding during a particular period of time (the consideration for credit risk may be determined at initial recognition only, and so may be fixed) and other basic lending risks and costs, as well as a profit margin; 45 [ (b) a contractual term that permits the issuer (ie the debtor) to prepay a debt instrument or permits the holder (ie the creditor) to put a debt instrument back to the issuer before maturity and the prepayment amount substantially represents unpaid amounts of principal and interest on the principal amount outstanding, which may include reasonable compensation for the early termination of the contract; and ] (c) a contractual te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t outstanding. Linking payments of principal and interest on the principal amount outstanding to an unleveraged inflation index resets the time value of money to a current level. In other words, the interest rate on the instrument reflects real interest. Thus, the interest amounts are consideration for the time value of money on the principal amount outstanding. However, if the interest payments were indexed to another variable such as the debtor s performance(eg the debtor s net income) or an equity index, the contractual cash flows are not payments of principal and interest on the principal amount outstanding (unless the indexing to the debtor s performance results in an adjustment that only compensates the holder for changes in the credit risk of the instrument, such that contractual cash flows are solely payments of principal and interest).That is because the contractual cash flows reflect a return that is inconsistent with a basic lending arrangement (see paragraph B4.1.7A). Instrument B Instrument B is a variable interest rate instrument with a stated maturity date that permits the borrower to choose the market interest rate on an on going basis. For example, at each interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t interest rate. That variable interest rate is capped. Analysis The contractual cash flows of both: (a) an instrument that has affixed interest rate and (b) an instrument that has a variable interest rate are payments of principal and interest on the principal amount outstanding as long as the interest reflects consideration for the time value of money, for the credit risk associated with the instrument during the term of the instrument and for other basic lending risks and costs, as well as a profit margin. (See paragraph B4.1.7A) Consequently, an instrument that is a combination of (a) and (b) (eg a bond with an interest rate cap) can have cash flows that are solely payments of principal and interest on the principal amount outstanding. Such a contractual term may reduce cash flow variability by setting a limit on a variable interest rate (eg an interest rate cap or floor) or increase the cash flow variability because a fixed rate becomes variable. Instrument D Instrument D is a full recourse loan and is secured by collateral. Analysis The fact that a full recourse loan is collateralised does not in itself affect the analysis of whether the contractual cash flows are solely paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding arrangement (see paragraph B4.1.7A);ie the return is linked to the value of the equity of the issuer. Instrument G Instrument G is a loan that pays an inverse floating interest rate (ie the interest rate has an inverse relationship to market interest rates). Analysis The contractual cash flows are not solely payments of principal and interest on the principal amount outstanding. The interest amounts are not consideration for the time value of money on the principal amount outstanding. Instrument H Analysis Instrument H is a perpetual instrument but the issuer may call the instrument at any point and pay the holder the par amount plus accrued interest due. Instrument H pays a market interest rate but payment of interest can not be made unless the issuer is able to remain solvent immediately afterwards. Deferred interest does not accrue additional interest. The contractual cash flows are not payments of principal and interest on the principal amount outstanding. That is because the issuer may be required to defer interest payment sand additional interest does not accrue on those deferred interest amounts. As a result, interest amounts are not consideration for the time value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset from meeting the condition in paragraphs 4.1.2(b) and 4.1.2A(b). In such situations, the creditor is required to assess ( look through to ) the particular underlying assets or cash flows to determine whether the contractual cash flows of the financial asset being classified are payments of principal and interest on the principal amount outstanding. If the terms of the financial asset give rise to any other cash flows or limit the cash flows in a manner inconsistent with payments representing principal and interest, the financial asset does not meet the condition in paragraphs 4.1.2(b) and 4.1.2A(b). Whether the underlying assets are financial assets or non-financial assets does not in itself affect this assessment. B4.1.18 A contractual cash flow characteristic does not affect the classification of the financial asset if it could have only a de minimis effect on the contractual cash flows of the financial asset. To make this determination, an entity must consider the possible effect of the contractual cash flow characteristic in each reporting period and cumulatively over the life of the financial instrument. In addition, if a contractual cash flow characteristic could have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e solely payments of principal and interest on the principal amount outstanding (eg the interest rate on the tranche is not linked to a commodity index); (b) the underlying pool of financial instruments has the cash flow characteristics set out in paragraphs B4.1.23 and B4.1.24; and (c) the exposure to credit risk in the underlying pool of financial instruments inherent in the tranche is equal to or lower than the exposure to credit risk of the underlying pool of financial instruments (for example, the credit rating of the tranche being assessed for classification is equal to or higher than the credit rating that would apply to a single tranche that funded the underlying pool of financial instruments). B4.1.22 An entity must look through until it can identify the underlying pool of instruments that are creating (instead of passing through) the cash flows. This is the underlying pool of financial instruments. B4.1.23 The underlying pool must contain one or more instruments that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. B4.1.24 The underlying pool of instruments may also include instruments that: (a) reduce the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets, financial liabilities or both) as at fair value through profit or loss provided that doing so results in more relevant information. B4.1.28 The decision of an entity to designate a financial asset or financial liability as at fair value through profit or loss is similar to an accounting policy choice (although, unlike an accounting policy choice, it is not required to be applied consistently to all similar transactions). When an entity has such a choice, paragraph 14(b) of Ind AS 8 requires the chosen policy to result in the financial statements providing reliable and more relevant information about the effects of transactions, other events and conditions on the entity s financial position, financial performance or cash flows. For example, in the case of designation of a financial liability as at fair value through profit or loss, paragraph 4.2.2 sets out the two circumstances when the requirement for more relevant information will be met. Accordingly, to choose such designation in accordance with paragraph 4.2.2, the entity needs to demonstrate that it falls within one (or both) of these two circumstances. Designation eliminates or significantly reduces an accounting misma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of hedge accounting there is a significant inconsistency in the recognition of gains and losses. For example, the entity has financed a specified group of loans by issuing traded bonds whose changes in fair value tend to offset each other. If, in addition, the entity regularly buys and sells the bonds but rarely, if ever, buys and sells the loans, reporting both the loans and the bonds at fair value through profit or loss eliminates the inconsistency in the timing of the recognition of the gains and losses that would otherwise result from measuring them both at amortised cost and recognising a gain or loss each time a bond is repurchased. B4.1.31 In cases such as those described in the preceding paragraph, to designate, at initial recognition, the financial assets and financial liabilities not otherwise so measured as at fair value through profit or loss may eliminate or significantly reduce the measurement or recognition inconsistency and produce more relevant information. For practical purposes, the entity need not enter into all of the assets and liabilities giving rise to the measurement or recognition inconsistency at exactly the same time. A reasonable delay is permitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets and financial liabilities that share one or more risks and those risks are managed and evaluated on a fair value basis in accordance with a documented policy of asset and liability management. An example could be an entity that has issued structured products containing multiple embedded derivatives and manages the resulting risks on a fair value basis using a mix of derivative and non-derivative financial instruments. B4.1.35 As noted above, this condition relies on the way the entity manages and evaluates performance of the group of financial instruments under consideration. Accordingly, (subject to the requirement of designation at initial recognition) an entity that designates financial liabilities as at fair value through profit or loss on the basis of this condition shall so designate all eligible financial liabilities that are managed and evaluated together. B4.1.36 Documentation of the entity s strategy need not be extensive but should be sufficient to demonstrate compliance with paragraph 4.2.2(b). Such documentation is not required for each individual item, but may be on a portfolio basis. For example, if the performance management system for adepartment-as approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract (paragraph 4.3.3(a)) in the following examples. In these examples, assuming the conditions in paragraph 4.3.3(b) and (c) are met, an entity accounts for the embedded derivative separately from the host contract. (a) A put option embedded in an instrument that enables the holder to require the issuer to reacquire the instrument for an amount of cash or other assets that varies on the basis of the change in an equity or commodity price or index is not closely related to a host debt instrument. (b) An option or automatic provision to extend the remaining term to maturity of a debt instrument is not closely related to the host debt instrument unless there is a concurrent adjustment to the approximate current market rate of interest at the time of the extension. If an entity issues a debt instrument and the holder of that debt instrument writes a call option on the debt instrument to a third party, the issuer regards the call option as extending the term to maturity of the debt instrument provided the issuer can be required to participate in or facilitate the remarketing of the debt instrument as a result of the call option being exercised. (c) Equity-indexed interest or princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in an equity or commodity index that may increase or decrease (a puttable instrument ). Unless the issuer on initial recognition designates the puttable instrument as a financial liability at fair value through profit or loss, it is required to separate an embedded derivative (ie the indexed principal payment)under paragraph 4.3.3 because the host contract is a debt instrument under paragraph B4.3.2 and the indexed principal payment is not closely related to a host debt instrument under paragraph B4.3.5(a). Because the principal payment can increase and decrease, the embedded derivative is a non-option derivative whose value is indexed to the underlying variable. B4.3.7 In the case of a puttable instrument that can be put back at any time for cash equal to a proportionate share of the net asset value of an entity (such as units of an open-ended mutual fund or some unit-linked investment products), the effect of separating an embedded derivative and accounting for each component is to measure the hybrid contract at the redemption amount that is payable at the end of the reporting period if the holder exercised its right to put the instrument back to the issuer. B4.3.8 The economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not contain an option feature, andrequires payments denominated in one of the following currencies: (i) the functional currency of any substantial party to that contract; (ii) the currency in which the price of the related good or service that is acquired or delivered is routinely denominated in commercial transactions around the world (such as the US dollar for crude oil transactions); or (iii) a currency that is commonly used in contracts to purchase or sell nonfinancial items in the economic environment in which the transaction takes place (eg a relatively stable and liquid currency that is commonly used in local business transactions or external trade). (e) An embedded prepayment option in an interest-only or principal-only strip is closely related to the host contract provided the host contract (i) initially resulted from separating the right to receive contractual cash flows of a financial instrument that, in and of itself, did not contain an embedded derivative, and (ii) does not contain any terms not present in the original host debt contract. 40 [ (f) An embedded derivative in a host lease contract is closely related to the host contract if the embedded derivative is ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. An entity determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flows on the contract. B4.3.12 Paragraph B4.3.11 does not apply to embedded derivatives in contracts acquired in: (a) a business combination (as defined in Ind AS103 Business Combinations); 70 [ (b) a combination of entities or businesses under common control as described in Appendix C of Ind AS 103; or ] (c) the formation of a joint venture as defined in Ind AS111 Joint Arrangements or their possible reassessment at the date of acquisition. 2 Reclassification of financial assets (Section 4.4) Reclassification of financial assets B4.4.1 Paragraph 4.4.1 requires an entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived, see also paragraph B5.1.2A and Ind AS113). However, if part of the consideration given or received is for something other than the financial instrument, an entity shall measure the fair value of the financial instrument. For example, the fair value of a long-term loan or receivable that carries no interest can be measured as the present value of all future cash receipts discounted using the prevailing market rate(s) of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating. Any additional amount lent is an expense or a reduction of income unless it qualifies for recognition as some other type of asset. B5.1.2 If an entity originates a loan that bears an off-market interest rate (eg 5 per cent when the market rate for similar loans is 8 per cent), and receives an upfront fee as compensation, the entity recognises the loan at its fair value, ie net of the fee it receives. B5.1.2A The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price (ie the fair value of the consideration given or received, see also Ind AS113). If an entity determines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest method. B5.2.2A The subsequent measurement of a financial asset or financial liability and the subsequent recognition of gains and losses described in paragraph B5.1.2A shall be consistent with the requirements of this Standard. Investments in equity instruments and contracts on those investments B5.2.3 All investments in equity instruments and contracts on those instruments must be measured at fair value. However, in limited circumstances, cost may be an appropriate estimate of fair value. That may be the case if insufficient more recent information is available to measure fair value, or if there is a wide range of possible fair value measurements and cost represents the best estimate of fair value within that range. B5.2.4 Indicators that cost might not be representative of fair value include: (a) a significant change in the performance of the investee compared with budgets, plans or milestones. (b) changes in expectation that the investee s technical product milestones will be achieved. (c) a significant change in the market for the investee s equity or its products or potential products. (d) a significant change in the global economy or the economic environment in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot measured in accordance with paragraph 4.2.1(a) and it is probable that the entity will enter into a specific lending arrangement. These fees are regarded as compensation for an ongoing involvement with the acquisition of a financial instrument. If the commitment expires without the entity making the loan, the fee is recognised as revenue on expiry. (c) origination fees paid on issuing financial liabilities measured at amortised cost. These fees are an integral part of generating an involvement with a financial liability. An entity distinguishes fees and costs that are an integral part of the effective interest rate for the financial liability from origination fees and transaction costs relating to the right to provide services, such as investment management services. 34 [B5.4.3 Fees that are not an integral part of the effective interest rate of a financial instrument and are accounted for in accordance with Ind AS 115 include: (a) fees charged for servicing a loan; (b) commitment fees to originate a loan when the loan commitment is not measured in accordance with paragraph 4.2.1(a) and it is unlikely that a specific lending arrangement will be entered into; and (c) loan syndica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g modifications in accordance with paragraph 5.4.3 and changes in estimates of expected credit losses), it shall adjust the gross carrying amount of the financial asset or amortised cost of a financial liability (or group of financial instruments) to reflect actual and revised estimated contractual cash flows. The entity recalculates the gross carrying amount of the financial asset or amortised cost of the financial liability as the present value of the estimated future contractual cash flows that are discounted at the financial instrument s original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets) or, when applicable, the revised effective interest rate calculated in accordance with paragraph 6.5.10. The adjustment is recognised in profit or loss as income or expense. B5.4.7 In some cases a financial asset is considered credit-impaired at initial recognition because the credit risk is very high, and in the case of a purchase it is acquired at a deep discount. An entity is required to include the initial expected credit losses in the estimated cash flows when calculating the credit-adjusted effective i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, depending on the nature of the financial instruments and the credit risk information available for particular groups of financial instruments, an entity may not be able to identify significant changes in credit risk for individual financial instruments before the financial instrument becomes past due. This may be the case for financial instruments such as retail loans for which there is little or no updated credit risk information that is routinely obtained and monitored on an individual instrument until a customer breaches the contractual terms. If changes in the credit risk for individual financial instruments are not captured before they become past due, a loss allowance based only on credit information at an individual financial instrument level would not faithfully represent the changes in credit risk since initial recognition. B5.5.4 In some circumstances an entity does not have reasonable and supportable information that is available without undue cost or effort to measure lifetime expected credit losses on an individual instrument basis. In that case, lifetime expected credit losses shall be recognised on a collective basis that considers comprehensive credit risk inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt occurring since initial recognition (irrespective of whether a financial instrument has been repriced to reflect an increase in credit risk) instead of on evidence of a financial asset being credit-impaired at the reporting date or an actual default occurring. Generally, there will be a significant increase in credit risk before a financial asset becomes credit-impaired or an actual default occurs. B5.5.8 For loan commitments, an entity considers changes in the risk of a default occurring on the loan to which a loan commitment relates. For financial guarantee contracts, an entity considers the changes in the risk that the specified debtor will default on the contract. B5.5.9 The significance of a change in the credit risk since initial recognition depends on the risk of a default occurring as at initial recognition. Thus, a given change, in absolute terms, in the risk of a default occurring will be more significant for a financial instrument with a lower initial risk of a default occurring compared to a financial instrument with a higher initial risk of a default occurring. B5.5.10 The risk of a default occurring on financial instruments that have comparable credit risk is highe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt since initial recognition should consider the characteristics of the financial instrument (or group of financial instruments) and the default patterns in the past for comparable financial instruments. Despite the requirement in paragraph 5.5.9, for financial instruments for which default patterns are not concentrated at a specific point during the expected life of the financial instrument, changes in the risk of a default occurring over the next 12 months may be a reasonable approximation of the changes in the lifetime risk of a default occurring. In such cases, an entity may use changes in the risk of a default occurring over the next 12 months to determine whether credit risk has increased significantly since initial recognition, unless circumstances indicate that a lifetime assessment is necessary. B5.5.14 However, for some financial instruments, or in some circumstances, it may not be appropriate to use changes in the risk of a default occurring over the next 12 months to determine whether lifetime expected credit losses should be recognised. For example, the change in the risk of a default occurring in the next 12 months may not be a suitable basis for determining whether c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting date. (b) other changes in the rates or terms of an existing financial instrument that would be significantly different if the instrument was newly originated or issued at the reporting date (such as more stringent covenants, increased amounts of collateral or guarantees, or higher income coverage) because of changes in the credit risk of the financial instrument since initial recognition. (c) significant changes in external market indicators of credit risk for a particular financial instrument or similar financial instruments with the same expected life. Changes in market indicators of credit risk include, but are not limited to: (i) the credit spread; (ii) the credit default swap prices for the borrower; (iii) the length of time or the extent to which the fair value of a financial asset has been less than its amortised cost; and (iv) other market information related to the borrower, such as changes in the price of a borrower s debt and equity instruments. (d) an actual or expected significant change in the financial instrument s external credit rating. (e) an actual or expected internal credit rating downgrade for the borrower or decrease in behavioural scoring used to asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake scheduled contractual payments. Credit quality enhancements or support include the consideration of the financial condition of the guarantor and/or, for interests issued in securitisations, whether subordinated interests are expected to be capable of absorbing expected credit losses (for example, on the loans underlying the security). (m) expected changes in the loan documentation including an expected breach of contract that may lead to covenant waivers or amendments, interest payment holidays, interest rate step-ups, requiring additional collateral or guarantees, or other changes to the contractual framework of the instrument. (n) significant changes in the expected performance and behaviour of the borrower, including changes in the payment status of borrowers in the group (for example, an increase in the expected number or extent of delayed contractual payments or significant increases in the expected number of credit card borrowers who are expected to approach or exceed their credit limit or who are expected to be paying the minimum monthly amount). (o) changes in the entity s credit management approach in relation to the financial instrument; ie based on emerging indicator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets on which payments are more than 30 days past due, but that evidence does identify such a correlation when payments are more than 60 days past due. B5.5.21 An entity cannot align the timing of significant increases in credit risk and the recognition of lifetime expected credit losses to when a financial asset is regarded as credit-impaired or an entity s internal definition of default. Financial instruments that have low credit risk at the reporting date B5.5.22 The credit risk on a financial instrument is considered low for the purposes of paragraph 5.5.10, if the financial instrument has a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. Financial instruments are not considered to have low credit risk when they are regarded as having a low risk of loss simply because of the value of collateral and the financial instrument without that collateral would not be considered low credit risk. Financial instruments are also not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t results in derecognition of the original financial asset, there may be evidence that the modified financial asset is credit-impaired at initial recognition, and thus, the financial asset should be recognised as an originated credit-impaired financial asset. This might occur, for example, in a situation in which there was a substantial modification of a distressed asset that resulted in the derecognition of the original financial asset. In such a case, it may be possible for the modification to result in a new financial asset which is credit-impaired at initial recognition. B5.5.27 If the contractual cash flows on a financial asset have been renegotiated or otherwise modified, but the financial asset is not derecognised, that financial asset is not automatically considered to have lower credit risk. An entity shall assess whether there has been a significant increase in credit risk since initial recognition on the basis of all reasonable and supportable information that is available without undue cost or effort. This includes historical and forward-looking information and an assessment of the credit risk over the expected life of the financial asset, which includes information abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guaranteed. Accordingly, cash shortfalls are the expected payments to reimburse the holder for a credit loss that it incurs less any amounts that the entity expects to receive from the holder, the debtor or any other party. If the asset is fully guaranteed, the estimation of cash shortfalls for a financial guarantee contract would be consistent with the estimations of cash shortfalls for the asset subject to the guarantee. B5.5.33 For a financial asset that is credit-impaired at the reporting date, but that is not a purchased or originated credit-impaired financial asset, an entity shall measure the expected credit losses as the difference between the asset s gross carrying amount and the present value of estimated future cash flows discounted at the financial asset s original effective interest rate. Any adjustment is recognised in profit or loss as an impairment gain or loss. 41 [ B5.5.34 When measuring a loss allowance for a lease receivable, the cash flows used for determining the expected credit losses should be consistent with the cash flows used in measuring the lease receivable in accordance with Ind AS 116, Leases. ] B5.5.35 An entity may use practical expedients when meas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted credit losses B5.5.38 In accordance with paragraph 5.5.19, the maximum period over which expected credit losses shall be measured is the maximum contractual period over which the entity is exposed to credit risk. For loan commitments and financial guarantee contracts, this is the maximum contractual period over which an entity has a present contractual obligation to extend credit. B5.5.39 However, in accordance with paragraph 5.5.20, some financial instruments include both a loan and an undrawn commitment component and the entity s contractual ability to demand repayment and cancel the undrawn commitment does not limit the entity s exposure to credit losses to the contractual notice period. For example, revolving credit facilities, such as credit cards and overdraft facilities, can be contractually withdrawn by the lender with as little as one day s notice. However, in practice lenders continue to extend credit for a longer period and may only withdraw the facility after the credit risk of the borrower increases, which could be too late to prevent some or all of the expected credit losses. These financial instruments generally have the following characteristics as a result of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount and timing of the cash flows for particular outcomes and the estimated probability of those outcomes will probably be needed. In those situations, the expected credit losses shall reflect at least two outcomes in accordance with paragraph 5.5.18. B5.5.43 For lifetime expected credit losses, an entity shall estimate the risk of a default occurring on the financial instrument during its expected life. 12-month expected credit losses are a portion of the lifetime expected credit losses and represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date (or a shorter period if the expected life of a financial instrument is less than 12 months), weighted by the probability of that default occurring. Thus, 12-month expected credit losses are neither the lifetime expected credit losses that an entity will incur on financial instruments that it predicts will default in the next 12 months nor the cash shortfalls that are predicted over the next 12 months. Time value of money B5.5.44 Expected credit losses shall be discounted to the reporting date, not to the expected default or some other date, using the effective interest rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgement that is required to estimate expected credit losses depends on the availability of detailed information. As the forecast horizon increases, the availability of detailed information decreases and the degree of judgement required to estimate expected credit losses increases. The estimate of expected credit losses does not require a detailed estimate for periods that are far in the future-for such periods, an entity may extrapolate projections from available, detailed information. B5.5.51 An entity need not undertake an exhaustive search for information but shall consider all reasonable and supportable information that is available without undue cost or effort and that is relevant to the estimate of expected credit losses, including the effect of expected prepayments. The information used shall include factors that are specific to the borrower, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date. An entity may use various sources of data, that may be both internal (entity-specific) and external. Possible data sources include internal historical credit loss experience, internal ratings, credit l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le information that is available without undue cost or effort in estimating expected credit losses, an entity should also consider observable market information about the credit risk of the particular financial instrument or similar financial instruments. Collateral B5.5.55 For the purposes of measuring expected credit losses, the estimate of expected cash shortfalls shall reflect the cash flows expected from collateral and other credit enhancements that are part of the contractual terms and are notrecognised separately by the entity. The estimate of expected cash shortfalls on a collateralised financial instrument reflects the amount and timing of cash flows that are expected from foreclosure on the collateral less the costs of obtaining and selling the collateral, irrespective of whether foreclosure is probable (ie the estimate of expected cash flows considers the probability of a foreclosure and the cash flows that would result from it). Consequently, any cash flows that are expected from the realisation of the collateral beyond the contractual maturity of the contract should be included in this analysis. Any collateral obtained as a result of foreclosure is not recognised as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f applying Section 5.5 to the financial asset from the reclassification date, the date of the reclassification is treated as the date of initial recognition. Gains and losses (Section 5.7) B5.7.1 Paragraph 5.7.5 permits an entity to make an irrevocable election to present in other comprehensive income changes in the fair value of an investment in an equity instrument that is not held for trading. This election is made on an instrument-by instrument (ie share-by-share) basis. Amounts presented in other comprehensive income shall not be subsequently transferred to profit or loss. However, the entity may transfer the cumulative gain or loss within equity. Dividends on such investments are recognised in profit or loss in accordance with paragraph 5.7.6 unless the dividend clearly represents a recovery of part of the cost of the investment. B5.7.1A Unless paragraph 4.1.5 applies, paragraph 4.1.2A requires that a financial asset is measured at fair value through other comprehensive income if the contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding and the asset is held in a business model w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hedging relationship between a non-derivative monetary asset and a non-derivative monetary liability, changes in the foreign currency component of those financial instruments are presented in profit or loss. Liabilities designated as at fair value through profit or loss B5.7.5 When an entity designates a financial liability as at fair value through profit or loss, it must determine whether presenting in other comprehensive income the effects of changes in the liability s credit risk would create or enlarge an accounting mismatch in profit or loss. An accounting mismatch would be created or enlarged if presenting the effects of changes in the liability s credit risk in other comprehensive income would result in a greater mismatch in profit or loss than if those amounts were presented in profit or loss. B5.7.6 To make that determination, an entity must assess whether it expects that the effects of changes in the liability s credit risk will be offset in profit or loss by a change in the fair value of another financial instrument measured at fair value through profit or loss. Such an expectation must be based on an economic relationship between the characteristics of the liability and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecreases), the fair value of the mortgage bank s loan asset also decreases. The change in the fair value of the asset reflects the mortgage customer s contractual right to prepay the mortgage loan by buying the underlying bond at fair value (which, in this example, has decreased) and delivering the bond to the mortgage bank. Consequently, the effects of changes in the credit risk of the liability (the bond) will be offset in profit or loss by a corresponding change in the fair value of a financial asset (the loan). If the effects of changes in the liability s credit risk were presented in other comprehensive income there would be an accounting mismatch in profit or loss. Consequently, the mortgage bank is required to present all changes in fair value of the liability (including the effects of changes in the liability s credit risk) in profit or loss. B5.7.11 In the example in paragraph B5.7.10, there is a contractual linkage between the effects of changes in the credit risk of the liability and changes in the fair value of the financial asset (ie as a result of the mortgage customer s contractual right to prepay the loan by buying the bond at fair value and delivering the bond to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk is different from asset-specific performance risk. Asset-specific performance risk is not related to the risk that an entity will fail to discharge a particular obligation but instead it is related to the risk that a single asset or a group of assets will perform poorly (or not at all). B5.7.15 The following are examples of asset-specific performance risk: (a) a liability with a unit-linking feature whereby the amount due to investors is contractually determined on the basis of the performance of specified assets. The effect of that unit-linking feature on the fair value of the liability is asset-specific performance risk, not credit risk. (b) a liability issued by a structured entity with the following characteristics. The entity is legally isolated so the assets in the entity are ring-fenced solely for the benefit of its investors, even in the event of bankruptcy. The entity enters into no other transactions and the assets in the entity cannot be hypothecated. Amounts are due to the entity s investors only if the ringfenced assets generate cash flows. Thus, changes in the fair value of the liability primarily reflect changes in the fair value of the assets. The effect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than changes in the instrument s credit risk or changes in observed (benchmark) interest rates are not significant. This method would not be appropriate if changes in fair value arising from other factors are significant. In those cases, an entity is required to use an alternative method that more faithfully measures the effects of changes in the liability s credit risk (see paragraph B5.7.16(b)). For example, if the instrument in the example contains an embedded derivative, the change in fair value of the embedded derivative is excluded in determining the amount to be presented in other comprehensive income in accordance with paragraph 5.7.7(a). B5.7.20 As with all fair value measurements, an entity s measurement method for determining the portion of the change in the liability s fair value that is attributable to changes in its credit risk must make maximum use of relevant observable inputs and minimum use of unobservable inputs. Hedge accounting (Chapter 6) Hedging instruments (Section 6.2) Qualifying instruments B6.2.1 Derivatives that are embedded in hybrid contracts, but that are not separately accounted for, cannot be designated as separate hedging instruments. B6.2.2 An ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value hedge of the change in the value of the investment. B6.3.3 Paragraph 6.3.4 permits an entity to designate as hedged items aggregated exposures that are a combination of an exposure and a derivative. When designating such a hedged item, an entity assesses whether the aggregated exposure combines an exposure with a derivative so that it creates a different aggregated exposure that is managed as one exposure for a particular risk (or risks). In that case, the entity may designate the hedged item on the basis of the aggregated exposure. For example: (a) an entity may hedge a given quantity of highly probable coffee purchases in 15 months time against price risk (based on US dollars) using a 15-month futures contract for coffee. The highly probable coffee purchases and the futures contract for coffee in combination can be viewed as a 15-month fixed-amount US dollar foreign currency risk exposure for risk management purposes (ie like any fixed-amount US dollar cash outflow in 15 months time). (b) an entity may hedge the foreign currency risk for the entire term of a 10- year fixed-rate debt denominated in a foreign currency. However, the entity requires fixed-rate exposure in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and that the foreign currency risk will affect consolidated profit or loss. For this purpose an entity can be a parent, subsidiary, associate, joint arrangement or branch. If the foreign currency risk of a forecast intragroup transaction does not affect consolidated profit or loss, the intragroup transaction cannot qualify as a hedged item. This is usually the case for royalty payments, interest payments or management charges between members of the same group, unless there is a related external transaction. However, when the foreign currency risk of a forecast intragroup transactionwill affect consolidated profit or loss, the intragroup transaction can qualify as a hedged item. An example is forecast sales or purchases of inventories between members of the same group if there is an onward sale of the inventory to a party external to the group. Similarly, a forecast intragroup sale of plant and equipment from the group entity that manufactured it to a group entity that will use the plant and equipment in its operations may affect co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract for natural gas that is priced using a contractually specified formula that references commodities and other factors (for example, gas oil, fuel oil and other components such as transport charges). Entity A hedges the gas oil component in that supply contract using a gas oil forward contract. Because the gas oil component is specified by the terms and conditions of the supply contract it is a contractually specified risk component. Hence, because of the pricing formula, Entity A concludes that the gas oil price exposure is separately identifiable. At the same time, there is a market for gas oil forward contracts. Hence, Entity A concludes that the gas oil price exposure is reliably measurable. Consequently, the gas oil price exposure in the supply contract is a risk component that is eligible for designation as a hedged item. (b) Entity B hedges its future coffee purchases based on its production forecast. Hedging starts up to 15 months before delivery for part of the forecast purchase volume. Entity B increases the hedged volume over time (as the delivery date approaches). Entity B uses two different types of contracts to manage its coffee price risk: (i) exchange-traded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lects the benchmark quality as a risk component that is separately identifiable and reliably measurable even though it is not contractually specified. Consequently, Entity B may designate hedging relationships on a risk components basis (for the coffee price risk that reflects the benchmark quality) for coffee supply contracts as well as forecast transactions. (c) Entity C hedges part of its future jet fuel purchases on the basis of its consumption forecast up to 24 months before delivery and increases the volume that it hedges over time. Entity C hedges this exposure using different types of contracts depending on the time horizon of the hedge, which affects the market liquidity of the derivatives. For the longer time horizons (12 24 months) Entity C uses crude oil contracts because only these have sufficient market liquidity. For time horizons of 6 12 months Entity C uses gas oil derivatives because they are sufficiently liquid. For time horizons up to six months Entity C uses jet fuel contracts. Entity C s analysis of the market structure for oil and oil products and its evaluation of the relevant facts and circumstances is as follows: (i) Entity C operates in a geographical are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spread of debt instruments to that benchmark rate. The price of fixed rate debt instruments varies directly in response to changes in the benchmark rate as they happen. Entity D concludes that the benchmark rate is a component that can be separately identified and reliably measured. Consequently, Entity D may designate hedging relationships for the fixed rate debt instrument on a risk component basis for the benchmark interest rate risk. B6.3.11 When designating a risk component as a hedged item, the hedge accounting requirements apply to that risk component in the same way as they apply to other hedged items that are not risk components. For example, the qualifying criteria apply, including that the hedging relationship must meet the hedge effectiveness requirements, and any hedge ineffectiveness must be measured and recognised. B6.3.12 An entity can also designate only changes in the cash flows or fair value of a hedged item above or below a specified price or other variable (a one-sided risk ). The intrinsic value of a purchased option hedging instrument (assuming that it has the same principal terms as the designated risk), but not its time value, reflects a one-sided risk in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for designation as the hedged item. This applies irrespective of any inflation hedging instrument that the entity has actually entered into. In particular, the entity cannot simply impute the terms and conditions of the actual inflation hedging instrument by projecting its terms and conditions onto the nominal interest rate debt. B6.3.15 A contractually specified inflation risk component of the cash flows of a recognised inflation-linked bond (assuming that there is no requirement to account for an embedded derivative separately) is separately identifiable and reliably measurable, as long as other cash flows of the instrument are not affected by the inflation risk component. Components of a nominal amount B6.3.16 There are two types of components of nominal amounts that can be designated as the hedged item in a hedging relationship: a component that is a proportion of an entire item or a layer component. The type of component changes the accounting outcome. An entity shall designate the component for accounting purposes consistently with its risk management objective. B6.3.17 An example of a component that is a proportion is 50 per cent of the contractual cash flows of a loan. B6.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l item is designated as the hedged item, that component must be less than or equal to the total cash flows of the entire item. However, all of the cash flows of the entire item may be designated as the hedged item and hedged for only one particular risk (for example, only for those changes that are attributable to changes in LIBOR or a benchmark commodity price). B6.3.22 For example, in the case of a financial liability whose effective interest rate is below LIBOR, an entity cannot designate: (a) a component of the liability equal to interest at LIBOR (plus the principal amount in case of a fair value hedge); and (b) a negative residual component. B6.3.23 However, in the case of a fixed-rate financial liability whose effective interest rate is (for example) 100 basis points below LIBOR, an entity can designate as the hedged item the change in the value of that entire liability (ie principal plus interest at LIBOR minus 100 basis points) that is attributable to changes in LIBOR. If a fixed-rate financial instrument is hedged some time after its origination and interest rates have changed in the meantime, the entity can designate a risk component equal to a benchmark rate that is hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 15, the entity can designate as the hedged item the entire cash flow variability under the sales contract that is attributable to the change in the benchmark crude oil price. However, the entity cannot designate a component that is equal to the full change in the benchmark crude oil price. Hence, as long as the forward price (for each delivery) does not fall below ₹ 25, the hedged item has the same cash flow variability as a crude oil sale at the benchmark crude oil price (or with a positive spread). However, if the forward price for any delivery falls below ₹ 25, the hedged item has a lower cash flow variability than a crude oil sale at the benchmark crude oil price (or with a positive spread). Qualifying criteria for hedge accounting (Section 6.4) Hedge effectiveness B6.4.1 Hedge effectiveness is the extent to which changes in the fair value or the cash flows of the hedging instrument offset changes in the fair value or the cash flows of the hedged item (for example, when the hedged item is a risk component, the relevant change in fair value or cash flows of an item is the one that is attributable to the hedged risk). Hedge ineffectiveness is the extent to which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al correlation between two variables does not, by itself, support a valid conclusion that an economic relationship exists. The effect of credit risk B6.4.7 Because the hedge accounting model is based on a general notion of offset between gains and losses on the hedging instrument and the hedged item, hedge effectiveness is determined not only by the economic relationship between those items (ie the changes in their underlyings) but also by the effect of credit risk on the value of both the hedging instrument and the hedged item. The effect of credit risk means that even if there is an economic relationship between the hedging instrument and the hedged item, the level of offset might become erratic. This can result from a change in the credit risk of either the hedging instrument or the hedged item that is of such a magnitude that the credit risk dominates the value changes that result from the economic relationship (ie the effect of the changes in the underlyings). A level of magnitude that gives rise to dominance is one that would result in the loss (orgain) from credit risk frustrating the effect of changes in the underlyings on the value of the hedging instrument or the hedged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting outcome that would be inconsistent with the purpose of hedge accounting. Hence, for the purpose of designating a hedging relationship, an entity must adjust the hedge ratio that results from the quantities of the hedged item and the hedging instrument that the entity actually uses if that is needed to avoid such an imbalance. B6.4.11 Examples of relevant considerations in assessing whether an accounting outcome is inconsistent with the purpose of hedge accounting are: (a) whether the intended hedge ratio is established to avoid recognising hedge ineffectiveness for cash flow hedges, or to achieve fair value hedge adjustments for more hedged items with the aim of increasing the use of fair value accounting, but without offsetting fair value changes of the hedging instrument; and (b) whether there is a commercial reason for the particular weightings of the hedged item and the hedging instrument, even though that creates hedge ineffectiveness. For example, an entity enters into and designates a quantity of the hedging instrument that is not the quantity that it determined as the best hedge of the hedged item because the standard volume of the hedging instruments does not allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the money when it is designated as a hedging instrument does not in itself mean that a qualitative assessment is inappropriate. It depends on the circumstances whether hedge ineffectiveness arising from that fact could have a magnitude that a qualitative assessment would not adequately capture. B6.4.16 Conversely, if the critical terms of the hedging instrument and the hedged item are not closely aligned, there is an increased level of uncertainty about the extent of offset. Consequently, the hedge effectiveness during the term of the hedging relationship is more difficult to predict. In such a situation it might only be possible for an entity to conclude on the basis of a quantitative assessment that an economic relationship exists between the hedged item and the hedging instrument (see paragraphs B6.4.4 B6.4.6). In some situations a quantitative assessment might also be needed to assess whether the hedge ratio used for designating the hedging relationship meets the hedge effectiveness requirements (see paragraphs B6.4.9 B6.4.11). An entity can use the same or different methods for those two different purposes. B6.4.17 If there are changes in circumstances that affect hedge effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he change in fuel price relating to an unrecognised contractual commitment by an electric utility to purchase fuel at a fixed price) is a hedge of an exposure to a change in fair value. Accordingly, such a hedge is a fair value hedge. However, in accordance with paragraph 6.5.4, a hedge of the foreign currency risk of a firm commitment could alternatively be accounted for as a cash flow hedge. Measurement of hedge ineffectiveness B6.5.4 When measuring hedge ineffectiveness, an entity shall consider the time value of money. Consequently, the entity determines the value of the hedged item on a present value basis and therefore the change in the value of the hedged item also includes the effect of the time value of money. B6.5.5 To calculate the change in the value of the hedged item for the purpose of measuring hedge ineffectiveness, an entity may use a derivative that would have terms that match the critical terms of the hedged item (this is commonly referred to as a hypothetical derivative ), and, for example for a hedge of a forecast transaction, would be calibrated using the hedged price (or rate) level. For example, if the hedge was for a two-sided risk at the current market lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of this Standard. B6.5.8 Rebalancing is accounted for as a continuation of the hedging relationship in accordance with paragraphs B6.5.9 B6.5.21. On rebalancing, the hedge ineffectiveness of the hedging relationship is determined and recognised immediately before adjusting the hedging relationship. B6.5.9 Adjusting the hedge ratio allows an entity to respond to changes in the relationship between the hedging instrument and the hedged item that arise from their underlyings or risk variables. For example, a hedging relationship in which the hedging instrument and the hedged item have different but related underlyingschanges in response to a change in the relationship between those two underlyings (for example, different but related reference indices, rates or prices). Hence, rebalancing allows the continuation of a hedging relationship in situations in which the relationship between the hedging instrument and the hedged item changes in a way that can be compensated for by adjusting the hedge ratio. B6.5.10 For example, an entity hedges an exposure to Foreign Currency A using a currency derivative that references Foreign Currency B and Foreign Currencies A and B are pegged (ie th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cognising hedge ineffectiveness but does not require rebalancing. B6.5.13 Conversely, if changes in the extent of offset indicate that the fluctuation is around a hedge ratio that is different from the hedge ratio that is currently used for that hedging relationship, or that there is a trend leading away from that hedge ratio, hedge ineffectiveness can be reduced by adjusting the hedge ratio, whereas retaining the hedge ratio would increasingly produce hedge ineffectiveness. Hence, in such circumstances, an entity must evaluate whether the hedging relationship reflects an imbalance between the weightings of the hedged item and the hedging instrument that would create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting. If the hedge ratio is adjusted, it also affects the measurement and recognition of hedge ineffectiveness because, on rebalancing, the hedge ineffectiveness of the hedging relationship must be determined and recognised immediately before adjusting the hedging relationship in accordance with paragraph B6.5.8. B6.5.14 Rebalancing means that, for hedge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o longer exist, or are no longer expected to occur, but that they are not part of the hedging relationship. For example, decreasing the volume of the hedging instrument can result in the entity retaining a derivative, but only part of it might remain a hedging instrument of the hedging relationship. This could occur if the rebalancing could be effected only by reducing the volume of the hedging instrument in the hedging relationship, but with the entity retaining the volume that is no longer needed. In that case, the undesignated part of the derivative would be accounted for at fair value through profit or loss (unless it was designated as a hedging instrument in a different hedging relationship). B6.5.17 Adjusting the hedge ratio by increasing the volume of the hedged item does not affect how the changes in the fair value of the hedging instrument are measured. The measurement of the changes in the value of the hedged item related to the previously designated volume also remains unaffected. However, from the date of rebalancing, the changes in the value of the hedged item also include the change in the value of the additional volume of the hedged item. These changes are measured s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the fair value of the derivatives that make up the total volume of 110 tonnes. These derivatives could (and probably would) have different critical terms, such as their forward rates, because they were entered into at different points in time (including the possibility of designating derivatives into hedging relationships after their initial recognition). B6.5.20 Adjusting the hedge ratio by decreasing the volume of the hedged item does not affect how the changes in the fair value of the hedging instrument are measured. The measurement of the changes in the value of the hedged item related to the volume that continues to be designated also remains unaffected. However, from the date of rebalancing, the volume by which the hedged item was decreased is no longer part of the hedging relationship. For example, if an entity originally hedged a volume of 100 tonnes of a commodity at a forward price of ₹ 80 and reduces that volume by 10 tonnes on rebalancing, the hedged item after rebalancing would be 90 tonnes hedged at ₹ 80. The 10 tonnes of the hedged item that are no longer part of the hedging relationship would be accounted for in accordance with the requirements for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween variablerate and fixed-rate funding. The strategy is to maintain between 20 per cent and 40 per cent of the debt at fixed rates. The entity decides from time to time how to execute this strategy (ie where it positions itself within the 20 per cent to 40 per cent range for fixed-rate interest exposure) depending on the level of interest rates. If interest rates are low the entity fixes the interest for more debt than when interest rates are high. The entity s debt is ₹ 100 of variable-rate debt of which ₹ 30 is swapped into a fixed-rate exposure. The entity takes advantage of low interest rates to issue an additional ₹ 50 of debt to finance a major investment, which the entity does by issuing a fixed-rate bond. In the light of the low interest rates, the entity decides to set its fixed interest-rate exposure to 40 per cent of the total debt by reducing by ₹ 20 the extent to which it previously hedged its variable-rate exposure, resulting in ₹ 60 of fixed-rate exposure. In this situation the risk management strategy itself remains unchanged. However, in contrast the entity s execution of that strategy has changed and this means that, for ₹ 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the risk management objective has changed. This depends on the situation of an entity and could, for example, affect all or only some hedging relationships of a maturity period, or only part of a hedging relationship. (c) an entity has a risk management strategy whereby it manages the foreign currency risk of forecast sales and the resulting receivables. Within that strategy the entity manages the foreign currency risk as a particular hedging relationship only up to the point of the recognition of the receivable. Thereafter, the entity no longer manages the foreign currency risk on the basis of that particular hedging relationship. Instead, it manages together the foreign currency risk from receivables, payables and derivatives (that do not relate to forecast transactions that are still pending) denominated in the same foreign currency. For accounting purposes, this works as a natural hedge because the gains and losses from the foreign currency risk on all of those items are immediately recognised in profit or loss. Consequently, for accounting purposes, if the hedging relationship is designated for the period up to the payment date, it must be discontinued when the receivable is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no longer expected to occur, the entity s ability to predict forecast transactions accurately is called into question when predicting similar forecast transactions. This affects the assessment of whether similar forecast transactions are highly probable (see paragraph 6.3.3) and hence whether they are eligible as hedged items. B6.5.28 An entity can designate a new hedging relationship that involves the hedging instrument or hedged item of a previous hedging relationship for which hedge accounting was (in part or in its entirety) discontinued. This does not constitute a continuation of a hedging relationship but is a restart. For example: (a) a hedging instrument experiences such a severe credit deterioration that the entity replaces it with a new hedging instrument. This means that the original hedging relationship failed to achieve the risk management objective and is hence discontinued in its entirety. The new hedging instrument is designated as the hedge of the same exposure that was hedged previously and forms a new hedging relationship. Hence, the changes in the fair value or the cash flows of the hedged item are measured starting from, and by reference to, the date of desig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he character of a cost for obtaining protection against a risk over a particular period of time (but the hedged item does not result in a transaction that involves the notion of a transaction cost in accordance with (a)). For example, if commodity inventory is hedged against a fairvalue decrease for six months using a commodity option with a corresponding life, the time value of the option would be allocated to profit or loss (ie amortised on a systematic and rational basis) over that six-month period. Another example is a hedge of a net investment in a foreign operation that is hedged for 18 months using a foreign-exchange option, which would result in allocating the time value of the option over that 18-month period. B6.5.30 The characteristics of the hedged item, including how and when the hedged item affects profit or loss, also affect the period over which the time value of an option that hedges a time-period related hedged item is amortised, which is consistent with the period over which the option s intrinsic value can affect profit or loss in accordance with hedge accounting. For example, if an interest rate option (a cap) is used to provide protection against increases in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned time value differ, an entity shall determine the amount that is accumulated in a separate component of equity in accordance with paragraph 6.5.15 as follows: (a) if, at inception of the hedging relationship, the actual time value is higher than the aligned time value, the entity shall: (i) determine the amount that is accumulated in a separate component of equity on the basis of the aligned time value; and (ii) account for the differences in the fair value changes between the two time values in profit or loss. (b) if, at inception of the hedging relationship, the actual time value is lower than the aligned time value, the entity shall determine the amount that is accumulated in a separate component of equity by reference to the lower of the cumulative change in fair value of: (i) the actual time value; and (ii) the aligned time value. 63 [ Any remainder of the change in fair value of the actual time value shall be recognised in profit or loss. ] Accounting for the forward element of forward contracts and foreign currency basis spreads of financial instruments B6.5.34 A forward contract can be considered as being related to a time period because its forward element represents ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic and rational basis) over that six-month period. Another example is a hedge of a net investment in a foreign operation that is hedged for 18 months using a foreign-exchange forward contract, which would result in allocating the forward element of the forward contract over that 18-month period. B6.5.35 The characteristics of the hedged item, including how and when the hedged item affects profit or loss, also affect the period over which the forward element of a forward contract that hedges a time-period related hedged item is amortised, which is over the period to which the forward element relates. For example, if a forward contract hedges the exposure to variability in three-month interest rates for a three-month period that starts in six months time, the forward element is amortised during the period that spans months seven to nine. B6.5.36 The accounting for the forward element of a forward contract in accordance with paragraph 6.5.16 also applies if, at the date on which the forward contract is designated as a hedging instrument, the forward element is nil. In that case, an entity shall recognise any fair value changes attributable to the forward element in other comprehensiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of: (i) the absolute amount of the actual forward element; and (ii) the absolute amount of the aligned forward element. Any remainder of the change in fair value of the actual forward element shall be recognised in profit or loss. B6.5.39 When an entity separates the foreign currency basis spread from a financial instrument and excludes it from the designation of that financial instrument as the hedging instrument (see paragraph 6.2.4(b)), the application guidance in paragraphs B6.5.34 B6.5.38 applies to the foreign currency basis spread in the same manner as it is applied to the forward element of a forward contract. Hedge of a group of items (Section 6.6) Hedge of a net position Eligibility for hedge accounting and designation of a net position B6.6.1 A net position is eligible for hedge accounting only if an entity hedges on a net basis for risk management purposes. Whether an entity hedges in this way is a matter of fact (not merely of assertion or documentation). Hence, an entity cannot apply hedge accounting on a net basis solely to achieve a particular accounting outcome if that would not reflect its risk management approach. Net position hedging must form part of an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n B6.6.5 When an entity determines whether the hedge effectiveness requirements of paragraph 6.4.1(c) are met when it hedges a net position, it shall consider the changes in the value of the items in the net position that have a similar effect as the hedging instrument in conjunction with the fair value change on the hedging instrument. For example, an entity has a group of firm sale commitments in nine months time for FC100 and a group of firm purchase commitments in 18 months time for FC120. It hedges the foreign currency risk of the net position of FC20 using a forward exchange contract for FC20. When determining whether the hedge effectiveness requirements of paragraph 6.4.1(c) are met, the entity shall consider the relationship between: (a) the fair value change on the forward exchange contract together with the foreign currency risk related changes in the value of the firm sale commitments; and (b) the foreign currency risk related changes in the value of the firm purchase commitments. B6.6.6 Similarly, if in the example in paragraph B6.6.5 the entity had a nil net position it would consider the relationship between the foreign currency risk related changes in the value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expected to affect profit or loss (similarly to how it documents the sales volumes). For example, the forecast transaction would be specified as: (a) the first FC60 of purchases of Machinery Type A that are expected to affect profit or loss from the third reporting period over the next ten reporting periods; (b) the first FC40 of purchases of Machinery Type B that are expected to affect profit or loss from the fourth reporting period over the next 20 reporting periods; and (c) the first FC50 of purchases of Raw Material A that are expected to be received in the third reporting period and sold, ie affect profit or loss, in that and the next reporting period. Specifying the nature of the forecast transaction volumes would include aspects such as the depreciation pattern for items of property, plant and equipment of the same kind, if the nature of those items is such that the depreciation pattern could vary depending on how the entity uses those items. For example, if the entity uses items of Machinery Type A in two different production processes that result in straight-line depreciation over ten reporting periods and the units of production method respectively, its documentation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng items requires the specific identification of the nominal amount of the group of items from which the hedged layer component is defined. B6.6.12 A hedging relationship can include layers from several different groups of items. For example, in a hedge of a net position of a group of assets and a group of liabilities, the hedging relationship can comprise, in combination, a layer component of the group of assets and a layer component of the group of liabilities. Presentation of hedging instrument gains or losses B6.6.13 If items are hedged together as a group in a cash flow hedge, they might affect different line items in the statement of profit andloss . The presentation of hedging gains or losses in that statement depends on the group of items. B6.6.14 If the group of items does not have any offsetting risk positions (for example, a group of foreign currency expenses that affect different line items in the statement of profit and loss that are hedged for foreign currency risk) then the reclassified hedging instrument gains or losses shall be apportioned to the line items affected by the hedged items. This apportionment shall be done on a systematic and rational basis and shall n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grossing up of a single instrument s net gains or losses into offsetting gross amounts and recognising them in different line items (for example, this avoids grossing up a net interest receipt on a single interest rate swap into gross interest revenue and gross interest expense). Effective date and transition (Chapter 7) Transition (Section 7.2) Financial assets held for trading B7.2.1 At the date of initial application of this Standard, an entity must determine whether the objective of the entity s business model for managing any of its financial assets meets the condition in paragraph 4.1.2(a) or the condition in paragraph 4.1.2A(a) or if a financial asset is eligible for the election in paragraph 5.7.5. For that purpose, an entity shall determine whether financial assets meet the definition of held for trading as if the entity had purchased the assets at the date of initial application. Impairment B7.2.2 On transition, an entity should seek to approximate the credit risk on initial recognition by considering all reasonable and supportable information that is available without undue cost or effort. An entity is not required to undertake an exhaustive search for information when d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract to buy or sell a commodity at a fixed price at a future date). Such a contract is within the scope of this Standard unless it was entered into and continues to be held for the purpose of delivery of a non-financial item in accordance with the entity s expected purchase, sale or usage requirements. However, this Standard applies to such contracts for an entity s expected purchase, sale or usage requirements if the entity makes a designation in accordance with paragraph 2.5 (see paragraphs 2.4 2.7). BA.3 One of the defining characteristics of a derivative is that it has 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. An option contract meets that definition because the premium is less than the investment that would be required to obtain the underlying financial instrument to which the option is linked. A currency swap that requires an initial exchange of different currencies of equal fair values meets the definition because it has a zero initial net investment. BA.4 A regular way purchase or sale gives rise to a fixed price commitment between trade d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a business combination. 3 In this Standard monetary amounts are denominated in Indian Rupees (Rs.) and foreign currency units (FC). Appendix C Hedges of a Net Investment in a Foreign Operation (This appendix is an integral part of Ind AS 109) Background 1 Many reporting entities have investments in foreign operations (as defined in Ind AS 21 paragraph 8). Such foreign operations may be subsidiaries, associates, joint ventures or branches. Ind AS 21 requires an entity to determine the functional currency of each of its foreign operations as the currency of the primary economic environment of that operation. When translating the results and financial position of a foreign operation into a presentation currency, the entity is required to recognise foreign exchange differences in other comprehensive income until it disposes of the foreign operation. 2 Hedge accounting of the foreign currency risk arising from a net investment in a foreign operation will apply only when the net assets of that foreign operation are included in the financial statements. 4 The item being hedged with respect to the foreign currency risk arising from the net investment in a foreign operation may be an amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to an entity that has a net investment in a foreign operation that is a joint venture, an associate or a branch. 8 This Appendix applies only to hedges of net investments in foreign operations; it should not be applied by analogy to other types of hedge accounting. Issues 9 Investments in foreign operations may be held directly by a parent entity or indirectly by its subsidiary or subsidiaries. The issues addressed in this Appendix are: (a) the nature of the hedged risk and the amount of the hedged item for which a hedging relationship may be designated: (i) whether the parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between the functional currencies of the parent entity and its foreign operation, or whether it may also designate as the hedged risk the foreign exchange differences arising from the difference between the presentation currency of the parent entity s consolidated financial statements and the functional currency of the foreign operation; (ii) if the parent entity holds the foreign operation indirectly, whether the hedged risk may include only the foreign exchange differences arising from differences in func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign operation and that accounting has been maintained in the parent s consolidated financial statements. 12 The hedged risk may be designated as the foreign currency exposure arising between the functional currency of the foreign operation and the functional currency of any parent entity (the immediate, intermediate or ultimate parent entity) of that foreign operation. The fact that the net investment is held through an intermediate parent does not affect the nature of the economic risk arising from the foreign currency exposure to the ultimate parent entity. 13 An exposure to foreign currency risk arising from a net investment in a foreign operation may qualify for hedge accounting only once in the consolidated financial statements. Therefore, if the same net assets of a foreign operation are hedged by more than one parent entity within the group (for example, both a direct and an indirect parent entity) for the same risk, only one hedging relationship will qualify for hedge accounting in the consolidated financial statements of the ultimate parent. A hedging relationship designated by one parent entity in its consolidated financial statements need not be maintained by another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to profit or loss from the foreign currency translation reserve in the consolidated financial statements of a parent in respect of the net investment in that foreign operation in accordance with Ind AS 21 paragraph 48 is the amount included in that parent s foreign currency translation reserve in respect of that foreign operation. In the ultimate parent s consolidated financial statements, the aggregate net amount recognised in the foreign currency translation reserve in respect of all foreign operations is not affected by the consolidation method. However, whether the ultimate parent uses the direct or the step-by-step method of consolidation 5 may affect the amount included in its foreign currency translation reserve in respect of an individual foreign operation. The use of the step-by-step method of consolidation may result in the reclassification to profit or loss of an amount different from that used to determine hedge effectiveness. This difference may be eliminated by determining the amount relating to that foreign operation that would have arisen if the direct method of consolidation had been used. Making this adjustment is not required by Ind AS 21. However, it is an acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and pounds sterling. In the following examples the designated risk is the spot foreign exchange risk because the hedging instruments are not derivatives. If the hedging instruments were forward contracts, Parent could designate the forward foreign exchange risk. Amount of hedged item for which a hedging relationship may be designated (paragraphs 10 13) AG3 Parent wishes to hedge the foreign exchange risk from its net investment in Subsidiary C. Assume that Subsidiary A has an external borrowing of US$300 million. The net assets of Subsidiary A at the start of the reporting period are 400,000 million including the proceeds of the external borrowing of US$300 million. AG4 The hedged item can be an amount of net assets equal to or less than the carrying amount of Parent s net investment in Subsidiary C (US$300 million) in its consolidated financial statements. In its consolidated financial statements Parent can designate the US$300 million external borrowing in Subsidiary A as a hedge of the EUR/USD spot foreign exchange risk associated with its net investment in the US$300 million net assets of Subsidiary C. In this case, both the EUR/USD foreign exchange difference on the US$300 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aragraph AG4 because the change in value of both the hedging instrument and the hedged item are computed by reference to the euro functional currency of Parent against the US dollar functional currency of Subsidiary C, in accordance with the hedge documentation. The method of consolidation (ie direct method or step-by-step method) does not affect the assessment of the effectiveness of the hedge. Amounts reclassified to profit or loss on disposal of a foreign operation (paragraphs 16 and 17) AG8 When Subsidiary C is disposed of, the amounts reclassified to profit or loss in Parent s consolidated financial statements from its foreign currency translation reserve (FCTR) are: (a) in respect of the US$300 million external borrowing of Subsidiary A, the amount that Ind AS 109 requires to be identified, ie the total change in value in respect of foreign exchange risk that was recognised in other comprehensive income as the effective portion of the hedge; and (b) in respect of the US$300 million net investment in Subsidiary C, the amount determined by the entity s consolidation method. If Parent uses the direct method, its FCTR in respect of Subsidiary C will be determined directly by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e risk being the spot foreign exchange exposure (EUR/GBP) between Parent and Subsidiary B. (b) US$300 million hedging instrument designated as a hedge of the US$300 million of net investment in Subsidiary C with the risk being the spot foreign exchange exposure (GBP/USD) between Subsidiary B and Subsidiary C and up to 500 million hedging instrument designated as a hedge of 500 million of the net investment in Subsidiary B with the risk being the spot foreign exchange exposure (EUR/GBP) between Parent and Subsidiary B. AG11 The EUR/USD risk from Parent s net investment in Subsidiary C is a different risk from the EUR/GBP risk from Parent s net investment in Subsidiary B. However, in the case described in paragraph AG10(a), by its designation of the USD hedging instrument it holds, Parent has already fully hedged the EUR/USD risk from its net investment in Subsidiary C. If Parent also designated a GBP instrument it holds as a hedge of its 500 million net investment in Subsidiary B, 159 million of that net investment, representing the GBP equivalent of its USD net investment in Subsidiary C, would be hedged twice for GBP/EUR risk in Parent s consolidated financial statements. AG12 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not satisfy the conditions in Ind AS 21 paragraph 15, the GBP/EUR foreign exchange difference arising on translating it would be included in Parent s consolidated profit or loss. If the 159 million loan payable to Subsidiary B is considered part of Parent s net investment, that net investment would be only 341 million and the amount Parent could designate as the hedged item for GBP/EUR risk would be reduced from 500 million to 341 million accordingly. AG15 If Parent reversed the hedging relationship designated by Subsidiary B, Parent could designate the US$300 million external borrowing held by Subsidiary B as a hedge of its US$300 million net investment in Subsidiary C for the EUR/USD risk and designate the GBP hedging instrument it holds itself as a hedge of only up to 341 million of the net investment in Subsidiary B. In this case the effectiveness of both hedges would be computed by reference to Parent s functional currency (euro). Consequently, both the USD/GBP change in value of the external borrowing held by Subsidiary B and the GBP/EUR change in value of Parent s loan payable to Subsidiary B (equivalent to USD/EUR in total) would be included in the foreign currency tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when, it is extinguished in accordance with paragraph 3.3.1 of Ind AS 109. 6 When equity instruments issued to a creditor to extinguish all or part of a financial liability are recognised initially, an entity shall measure them at the fair value of the equity instruments issued, unless that fair value cannot be reliably measured. 7 If the fair value of the equity instruments issued cannot be reliably measured then the equity instruments shall be measured to reflect the fair value of the financial liability extinguished. In measuring the fair value of a financial liability extinguished that includes a demand feature (eg a demand deposit), paragraph 47 of Ind AS 113 is not applied. 8 If only part of the financial liability is extinguished, the entity shall assess whether some of the consideration paid relates to a modification of the terms of the liability that remains outstanding. If part of the consideration paid does relate to a modification of the terms of the remaining part of the liability, the entity shall allocate the consideration paid between the part of the liability extinguished and the part of the liability that remains outstanding. The entity shall consider all relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of profit and loss is used instead of Statement of Profit and Loss and comprehensive income . 2. Option to apply requirements of IAS 39 for fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities as provided in IFRS 9 has been removed in Ind AS 109. Accordingly, paragraph 6.1.3 has been deleted and following paragraphs have been modified: (i) Paragraph 5.2.3 (ii) Paragraph 5.3.2 (iii) Paragraphs 5.7.1 (iv) Paragraph 5.7.2-5.7.3 78 [ 3. Paragraphs 7.1.1 to 7.1.3 of IFRS 9 related to effective date have not been included in Ind AS 109 as these paragraphs are not relevant in Indian context. Paragraph 7.1.9 has not been included as it refers to amendments to paragraph B3.3.6 of IFRS 9, for which corresponding amendments to Ind AS 109 are under formulation. However, in order to maintain consistency with paragraph numbers of IFRS 9, these paragraph numbers are retained in Ind AS 109. ] 54 [ 4. Following paragraphs related to transition have not been included as these paragraphs are not relevant in Indian context. However, in order to maintain consistency with paragraph numbers of IFRS 9, the paragraph numbers are retained in Ind AS 109 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. 6. Omitted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, 5.1.3 Despite the requirement in paragraph 5.1.1, at initial recognition, an entity shall measure trade receivables at their transaction price (as defined in Ind AS 115) if the trade receivables do not contain a significant financing component in accordance with Ind AS 115 (or when the entity applies the practical expedient in accordance with paragraph 63 of Ind AS 115). 7. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, 5.5.1 An entity shall recognise a loss allowance for expected credit losses on a financial asset that is measured in accordance with paragraphs 4.1.2 or 4.1.2A, a lease receivable, a contract asset or a loan commitment and a financial guarantee contract to which the impairment requirements apply in accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d). 8. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, 5.5.15 Despite paragraphs 5.5.3 and 5.5.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income recognised in accordance with the principles of Ind AS115 (see paragraph 4.2.1(c)). 13. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, (c) If a financial guarantee contract was issued in connection with the sale of goods, the issuer applies Ind AS115 in determining when it recognises the revenue from the guarantee and from the sale of goods. 14. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, (a) If a guarantee provided by an entity to pay for default losses on a transferred asset prevents the transferred asset from being derecognised to the extent of the continuing involvement, the transferred asset at the date of the transfer is measured at the lower of (i) the carrying amount of the asset and (ii) the maximum amount of the consideration received in the transfer that the entity could be required to repay ( the guarantee amount ). The associated liability is initially measured at the guarantee amount plus the fair value of the guarantee (which is normally the consideration received for the guarantee). Subsequently, the initial fair value of the guarantee is recognised in profit or loss when ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income recognised in accordance with the principles of Ind AS 18.] 22. Substituted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1st day of April, 2018, before it was read as, 5 [5.1.1. At initial recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.] 23. Inserted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1st day of April, 2018 24. Substituted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1st day of April, 2018, before it was read as, 7 [ 5.5.1 An entity shall recognise a loss allowance for expected credit losses on a financial asset that is measured in accordance with paragraphs 4.1.2 or 4.1.2A, a lease receivable, a loan commitment and a financial guarantee contract to which the impairment requirements apply in accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d). ] 25. Substituted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods. ] 32. Substituted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1st day of April, 2018, before it was read as, B3.2.1 The followinge e flow chart illustrates thvaluation of whether and to what extent a financial asset is derecognised. 33. Substituted vide F. No. 01/01/2009-CL-V(Part VI) Dated 28-03-2018 , w.e.f. 1st day of April, 2018, before it was read as, 14 [(a) If a guarantee provided by an entity to pay for default losses on a transferred asset prevents the transferred asset from being derecognised to the extent of the continuing involvement, the transferred asset at the date of the transfer is measured at the lower of (i) the carrying amount of the asset and (ii) the maximum amount of the consideration received in the transfer that the entity could be required to repay ( the guarantee amount ). The associated liability is initially measured at the guarantee amount plus the fair value of the guarantee (which is normally the consideration received for the guarantee). Subsequently, the initial fair value of the guarantee is recognised in profit or loss on a time proportion basis (see Ind AS 18) and the carrying value of the asset is reduced by any loss al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t losses. That accounting policy shall be applied to all lease receivables but may be applied separately to finance and operating lease receivables. 39. Inserted vide NOTIFICATION No. [F. No. 01/01/2009-CL-V-(Part VII)] dated 30-03-2019 w.e.f. 01-04-2019 40. Substituted vide NOTIFICATION No. [F. No. 01/01/2009-CL-V-(Part VII)] dated 30-03-2019 w.e.f. 01-04-2019 before it was read as (f) An embedded derivative in a host lease contract is closely related to the host contract if the embedded derivative is (i) an inflation-related index such as an index of lease payments to a consumer price index (provided that the lease is not leveraged and the index relates to inflation in the entity s own economic environment), (ii) contingent rentals based on related sales or (iii) contingent rentals based on variable interest rates. 41. Substituted vide NOTIFICATION No. [F. No. 01/01/2009-CL-V-(Part VII)] dated 30-03-2019 w.e.f. 01-04-2019 before it was read as B5.5.34 When measuring a loss allowance for a lease receivable, the cash flows used for determining the expected credit losses should be consistent with the cash flows used in measuring the lease receivable in accordance with Ind AS 17 Leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 020 53. Substituted vide NOTIFICATION NO. G.S.R. 463(E) dated 24-07-2020 before it was read as 7.2.26 * 54. Substituted vide NOTIFICATION NO. G.S.R. 463(E) dated 24-07-2020 before it was read as 49 [ 4. Following paragraphs related to transition have not been included as these paragraphs are not relevant in Indian context. However, in order to maintain consistency with paragraph numbers of IFRS 9, the paragraph numbers are retained in Ind AS 109. (i) Paragraph 7.2.2 (ii) Paragraphs 7.2.6-7.2.7 (iii) Paragraphs 7.2.12-7.2.13 (iv) Paragraphs 7.2.14A-7.2.28. ] 55. Inserted vide NOTIFICATION NO. G.S.R. 419(E) dated 18-06-2021 56. Italics vide NOTIFICATION NO. G.S.R. 419(E) dated 18-06-2021 before it was read as impairment gain or loss 57. Italics vide NOTIFICATION NO. G.S.R. 419(E) dated 18-06-2021 before it was read as effective interest rate 58. Inserted vide NOTIFICATION NO. G.S.R. 419(E) dated 18-06-2021 59. Inserted vide NOTIFICATION NO. G.S.R. 419(E) dated 18-06-2021 60. Inserted vide NOTIFICATION NO. G.S.R. 419(E) dated 18-06-2021 61. Substituted vide NOTIFICATION NO. G.S.R. 419(E) dated 18-06-2021 before it was read as effective interest method 62. Inserted vide NOTIFICATION NO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Insurance Contracts, other than an issuer s rights and obligations arising under an insurance contract that meets the definition of a financial guarantee contract, or (ii) a contract that is within the scope of Ind AS104 because it contains a discretionary participation feature. However, this Standard applies to a derivative that is embedded in a contract within the scope of Ind AS104 if the derivative is not itself a contract within the scope of Ind AS104. Moreover, if an issuer of financial guarantee contracts has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting that is applicable to insurance contracts, the issuer may elect to apply either this Standard or Ind AS104 to such financial guarantee contracts (see paragraphs B2.5 B2.6). The issuer may make that election contract by contract, but the election for each contract is irrevocable. 72. Inserted vide Notification No. G.S.R. 492 (E) dated 12-08-2024 73. Substituted vide Notification No. G.S.R. 492 (E) dated 12-08-2024 before it was read as, 7.1.6 * 74. Substituted vide Notification No. G.S.R. 492 (E) dated 12-08-2024 before it was read as, 7.2.36-7.2.42 [Refer Appen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraph 24 of Ind AS104) and financial assets that it considers to be related and that would otherwise be measured at either fair value through other comprehensive income or amortised cost. 78. Substituted vide Notification No. G.S.R. 492 (E) dated 12-08-2024 before it was read as, 64 [ 3. Paragraphs 7.1.1 to 7.1.3 of IFRS 9 related to effective date have not been included in Ind AS 109 as these paragraphs are not relevant in Indian context. Paragraph 7.1.6 has not been included as it refers to amendments due to issuance of IFRS 17, Insurance Contracts, for which corresponding Ind AS is under formulation. Paragraph 7.1.9 has not been included as it refers to amendments to paragraph B3.3.6 of IFRS 9, for which corresponding amendments to Ind AS 109 are under formulation. However, in order to maintain consistency with paragraph numbers of IFRS 9, these paragraph numbers are retained in Ind AS 109. ] 79. Omitted vide Notification No. G.S.R. 492 (E) dated 12-08-2024 before it was read as, 65 [ 5. Paragraphs 7.2.35 to 7.2.42 of IFRS 9 relate to amendments/standard not yet effective in India, hence not included in Ind AS 109. However, in order to maintain consistency with paragraph numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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