Financial instrument relates to any contract or agreement that gives rise to a financial asset of one entity and financial liability (obligation) or equity instrument of another entity. The objective of this IND AS is to establish principles for offsetting financial assets and liabilities and for furnishing financial instruments as liabilities or equity.
This Standard will be applied to all financial instruments by all entities except:
- Those interests in subsidiaries, associates, or JV.
- Under employee benefit plans, employers’ rights and obligations as per IND AS 19.
- Insurance contracts & financial instruments inside the scope of IND AS 104.
- Financial instruments, contracts, and commitment under share-based payment transactions as per IND AS 102.
- Financial instrument
- Financial liability
- Financial asset
- Fair value
- Equity instrument
Classification as a financial liability (FL) or equity instrument (EI)
A financial instrument will be classified as an FL or an EI agreeing to the substance of the contract, not its legal form, and the definitions of financial liability and equity instrument. Financial liability and equity instrument classification are not subsequently changed based on changed circumstances.
An instrument is an equity instrument only if the instrument includes no contractual obligation (i.e. liability) to deliver cash/bank or another financial asset to another entity. If the instrument will or may be resolved in the issuer’s equity instruments (i.e. entity own equity shares), it is either:
- A non-derivative (e.g. convertible debentures or convertible preference shares) that includes no contractual assignment for the issuer to deliver a variable number of its equity instruments (i.e. fixed number of equity shares) or;
- A derivative (e.g. warrant/option) that will be resolved only by the issuer exchanging a fixed amount of cash (i.e. fixed consideration) or another financial asset for a set number of its equity instruments (i.e. entity own equity shares).
Contingent settlement provisions
A financial instrument may need an entity to deliver cash/ another financial asset/ settle its financial liability upon the contingent event.
Compound financial instruments
- The issuer of a non-derivative financial instrument must evaluate the terms of the financial instrument to ascertain whether it contains both a liability and an equity component.
- Such components shall be categorized separately as financial liabilities or equity instruments.
Offsetting a financial asset (FA) and a financial liability (FL). A FA and an FL shall be offset and the net amount presented in the balance sheet of the entity when and only when, an entity:
- Has a legally enforceable right to set off the recognized amounts; and
- It intends to settle on a net basis or realize the asset and simultaneously settle the liability.
- In accounting for a transfer of a FA that does not qualify for derecognition, the entity shall not offset the convey asset and the associated liability (IND AS 109).
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