Financial Instruments: Presentation Issued by The Institute of - PDF document

Accounting Standard (AS) 31 Financial Instruments: Presentation Issued by The Institute of Chartered Accountants of India New Delhi

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Contents Accounting Standard (AS) 31 Financial Instruments: Presentation OBJECTIVE Paragraphs 1-2 SCOPE 3-6 DEFINITIONS 7-31 11-20 Financial Assets and Financial Liabilities Equity Instruments 21-22 Derivative Financial Instruments 23-27 Contracts to Buy or Sell Non-Financial Items 28-31 PRESENTATION 32-88 Liabilities and Equity 32-57 No Contractual Obligation to Deliver Cash or Another 34-47 Financial Asset Settlement in the Entity’s Own Equity Instruments 48-52 Contingent Settlement Provisions 53-54 Settlement Options 55-56 Treatment in Consolidated Financial Statements 57 Compound Financial Instruments 58-67 Treasury shares 68-70 Interest, Dividends, Losses and Gains 71-78 79-88 Offsetting a Financial Asset and a Financial Liability Appendix A: Illustrative Examples Page 3

ENTITIES SUCH AS MUTUAL FUNDS AND CO- A1-A2 OPERATIVES WHOSE SHARE CAPITAL IS NOT EQUITY AS DEFINED IN AS 31 Example 1: Entities with no equity A1 Example 2: Entities with some equity A2 ACCOUNTING FOR COMPOUND FINANCIAL A3-A18 INSTRUMENTS Example 3: Separation of a compound financial instrument A3-A5 on initial recognition Example 4: Separation of a compound financial instrument A6-A7 with multiple embedded derivative features Example 5: Repurchase of a convertible instrument A8-A14 Example 6: Amendment of the terms of a convertible A15-A18 instrument to induce early conversion Appendix B: Examples of Application of Paragraphs 40 – 46 UNCONDITIONAL RIGHT TO REFUSE REDEMPTION B2-B5 (PARAGRAPH 42) Example 1 B2-B3 Example 2 B4-B5 PROHIBITIONS AGAINST REDEMPTION (PARAGRAPHS B6-19 43 AND 44) Example 3 B6-B10 Example 4 B11-B13 Example 5 B14-B15 Example 6 B16-B17 Example 7 B18-B19 Appendix C: Comparison with IAS 32, Financial Instruments: Presentation Page 4

Accounting Standard (AS) 31 Financial Instruments: Presentation (This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards 1 .) Accounting Standard (AS) 31, Financial Instruments: Presentation , issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years. This Accounting Standard will become mandatory 2 in respect of accounting periods commencing on or after 1-4-2011 for all commercial, industrial and business entities except to a Small and Medium-sized Entity, as defined below: (i) Whose equity or debt securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; (ii) which is not a bank (including co-operative bank), financial institution or any entity carrying on insurance business; (iii) whose turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year; (iv) which does not have borrowings (including public deposits) in excess of rupees ten crore at any time during the immediately preceding accounting year; and (v) which is not a holding or subsidiary entity of an entity which is not a small and medium-sized entity. For the above purpose, an entity would qualify as a Small and Medium-sized Entity, if the conditions mentioned therein are satisfied as at the end of the relevant accounting period. 1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which accounting standards are intended to apply only to items which are material. 2 This implies that, while discharging their attest function, it will be the duty of the members of the Institute to examine whether this Accounting Standard is complied with in the presentation of financial statements covered by their audit. In the event of any deviation from this Accounting Standard, it will be their duty to make adequate disclosures in their audit reports so that the users of financial statements may be aware of such deviations. Page 5

Where, in respect of an entity there is a statutory requirement for presenting any financial instrument in a particular manner as liability or equity and/ or for presenting interest, dividend, losses and gains relating to a financial instrument in a particular manner as income/ expense or as distribution of profits, the entity should present that instrument and/ or interest, dividend, losses and gains relating to the instrument in accordance with the requirements of the statute governing the entity. Untill the relevant statute is amended, the entity presenting that instrument and/ or interest, dividend, losses and gains relating to the instrument in accordance with the requirements thereof will be considered to be complying with this Accounting Standard, in view of paragraph 4.1 of the Preface to the Statements of Accounting Standards which recognises that where a requirement of an Accounting Standard is different from the applicable law, the law prevails 3 . The following is the text of the Accounting Standard. Objective 1. The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset. 2. The principles in this Standard complement the principles for recognising and measuring financial assets and financial liabilities in Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement and for disclosing information about them in Accounting Standard (AS) 32, Financial Instruments: Disclosures 4 . 3 To illustrate, as per paragraph 35(a) of the Standard, a preference share that provides for mandatory redemption by the issuer for a fixed or determinable amount at a fixed or determinable future date, or gives the holder the right to require the issuer to redeem the instrument at or after a particular date for a fixed or determinable amount, is a financial liability. However, at present, Schedule VI to the Companies Act, 1956, inter alia , requires that all preference shares should be disclosed as a part of the ‘Share Capital’. Untill Schedule VI is amended, a company classifying the preference shares as share capital will be considered to be complying with this Accounting Standard even in a case where as per this Standard the preference shares are to be shown as a liability. In the latter case, as a corollary to this, dividend on such preference shares treated as a distribution to holders thereof and not as an expense will also be considered as a compliance with this Accounting Standard. Similarly, in case of a co-operative entity those requirements of paragraphs 40 to 47 and Appendix B to the Standard would not apply which are contrary to the law governing such an entity. 4 A separate Accounting Standard (AS) 32 on Financial Instruments: Disclosures is being formulated. Page 6