Indian Accounting Standard (Ind AS) 39 Financial Instruments: Recognition and Measurement

Contents
Objective Scope Definitions Embedded derivatives Recognition and derecognition
Initial recognition Derecognition of a financial asset Transfers that qualify for derecognition Transfers that do not qualify for derecognition ontinuing in!ol!e"ent in transferred assets #ll transfers %egular &ay 'urchase or sale of a financial asset Derecognition of a financial lia(ility

Paragraphs
1 27 89 1013 1442
14 1537 2428 29 3035 3$37 38 3942

easurement
Initial "easure"ent of financial assets and financial lia(ilities )u(sequent "easure"ent of financial assets )u(sequent "easure"ent of financial lia(ilities *air !alue "easure"ent considerations %eclassifications +ains and losses I"'air"ent and uncollecti(ility of financial assets *inancial assets carried at a"ortised cost *inancial assets carried at cost #!aila(le,for,sale financial assets

4370
4344 454$ 47 4849 5054 5557 5870 $3$5 $$ $770

!edging
-edging instru"ents .ualifying instru"ents Designation of hedging instru"ents -edged ite"s .ualifying ite"s Designation of financial ite"s as hedged ite"s Designation of non,financial ite"s as hedged ite"s Designation of grou's of ite"s as hedged ite"s -edge accounting *air !alue hedges ash flo& hedges -edges of a net in!est"ent A""E#DI$ A% #''lication guidance )co'e Definitions Designation as at fair !alue through 'rofit or loss 1ffecti!e interest rate Deri!ati!es Transaction costs *inancial assets and financial lia(ilities held for trading -eld,to,"aturity in!est"ents 2oans and recei!a(les 1"(edded deri!ati!es Instru"ents containing e"(edded deri!ati!es %ecognition and derecognition Initial recognition Derecognition of a financial asset Transfers that qualify for derecognition Transfers that do not qualify for derecognition Continuing involvement in transferred assets All transfers Examples

71102
7277 7273 7477 7884 7880 8181# 82 8384 85102 8994 95101 102

#+1#+4# #+4/#+2$ #+4/#+40 #+5#+8 #+9#+12# #+13 #+14#+15 #+1$#+25 #+2$ #+27#+33/ #+33##+33/ #+34#+$3 #+34#+35 #+3$#+52 #+45#+4$ #+47 #+48 #+49#+50 #+51#+52

%egular &ay 'urchase or sale of a financial asset Derecognition of a financial lia(ility 3easure"ent )u(sequent "easure"ent of financial assets *air !alue "easure"ent considerations Active market: quoted price No active market: valuation technique No active market: equity instruments Inputs to valuation techniques +ains and losses I"'air"ent and uncollecti(ility of financial assets Financial assets carried at amortised cost Interest income after impairment recognition -edging -edging instru"ents ualifying instruments -edged ite"s ualifying items !esignation of financial items as hedged items !esignation of non"financial items as hedged items !esignation of groups of items as hedged items -edge accounting Assessing hedge effectiveness Fair value hedge accounting for a portfolio hedge of interest rate risk

#+53#+5$ #+57#+$3 #+$4#+93 #+$$#+$8 #+$9#+82 #+71#+73 #+74#+79 #+80#+81 #+82 #+83 #+84#+93 #+84#+92 #+93 #+94#+132 #+94#+97 #+94#+97 #+98#+101 #+98#+99/# #+99 #+99* #+100 #+101 #+102#+132 #+105#+113 #+114#+132

Initial "easure"ent of financial assets and financial lia(ilities #+$4#+$5

Appendi& '% References to matters contained in ot(er Indian Accounting Standards Appendi& C% Reassessment of Embedded Derivatives Appendi& D% !edges of a #et Investment in a )oreign Operation Appendi& E% E&tinguis(ing )inancia* +iabi*ities ,it( E-uit. Instruments Appendi& )% I++/S0RA0I1E E$A "+E

Appendi& 2% I "+E E#0A0IO# 2/IDA#CE Appendi& 3% Comparison ,it( IAS 394 Financial Instruments: Recognition and Measurement
4

Indian Accounting Standard (Ind AS) 39 Financial Instruments: Recognition and Measurement

(This Indian Accounting Standard includes paragraphs set in bold type and plain type, hich ha!e e"ual authority# $aragraphs in bold type indicate the main principles#

Objective
1 The o(5ecti!e of this )tandard is to esta(lish 'rinci'les for recognising and "easuring financial assets6 financial lia(ilities and so"e contracts to (uy or sell non,financial ite"s4 %equire"ents for 'resenting infor"ation a(out financial instru"ents are in Ind #) 326 Financial Instruments: #resentation4 %equire"ents for disclosing infor"ation a(out financial instru"ents are in Ind #) 107 Financial Instruments: !isclosures4

Scope
5 0(is Standard s(a** be app*ied b. a** entities to a** t.pes of financia* instruments e&cept% (a) t(ose interests in subsidiaries4 associates and joint ventures t(at are accounted for under Ind AS 56 %onsolidated and Separate Financial Statements, Ind AS 57 In!estments in Associates or Ind AS 33 Interests in &oint 'entures# !o,ever4 entities s(a** app*. t(is Standard to an interest in a subsidiar.4 associate or joint venture t(at according to Ind AS 564 Ind AS 574 or Ind AS 33 is accounted for under t(is Standard8 Entities s(a** a*so app*. t(is Standard to derivatives on an interest in a subsidiar.4 associate or joint venture un*ess t(e derivative meets t(e definition of an e-uit. instrument of t(e entit. in Ind AS 358

(b)

rig(ts and ob*igations under *eases to ,(ic( Ind AS 36 (eases app*ies8 !o,ever% (i) *ease receivab*es recognised b. a *essor are subject to t(e derecognition and impairment provisions of t(is Standard (see paragrap(s 39:364 974 994 ;3:;9 and Appendi& A paragrap(s A23;:A295 and A27<:A293)= finance *ease pa.ab*es recognised b. a *essee are subject to t(e derecognition provisions of t(is Standard (see paragrap(s 39:<5 and Appendi& A paragrap(s A296:A2;3)= and

(ii)

(iii) derivatives t(at are embedded in *eases are subject to t(e embedded derivatives provisions of t(is Standard (see paragrap(s 3>:33 and Appendi& A paragrap(s A256:A233)8 (c) (d) emp*o.ers? rig(ts and ob*igations under emp*o.ee benefit p*ans4 to ,(ic( Ind AS 39 )mployee *ene+its app*ies8 financia* instruments issued b. t(e entit. t(at meet t(e definition of an e-uit. instrument in Ind AS 35 (inc*uding options and ,arrants) or t(at are re-uired to be c*assified as an e-uit. instrument in accordance ,it( paragrap(s 3;A and 3;' or paragrap(s 3;C and 3;D of Ind AS 358 !o,ever4 t(e (o*der of suc( e-uit. instruments s(a** app*. t(is Standard to t(ose instruments4 un*ess t(e. meet t(e e&ception in (a) above8 rig(ts and ob*igations arising under (i) an insurance contract as defined in Ind AS 3>< Insurance %ontracts4 ot(er t(an an issuer?s rig(ts and ob*igations arising under an insurance contract t(at meets t(e definition of a financia* guarantee contract in paragrap( 94 or (ii) a contract t(at is ,it(in t(e scope of Ind AS 3>< because it contains a discretionar. participation feature8 !o,ever4 t(is Standard app*ies to a derivative t(at is embedded in a contract ,it(in t(e scope of Ind AS 3>< if t(e derivative is not itse*f a contract ,it(in t(e scope of Ind AS 3>< (see paragrap(s 3>:33 and Appendi& A paragrap(s A256:A233 of t(is Standard)8 oreover4 if an issuer of financia* guarantee contracts (as previous*. asserted e&p*icit*. t(at it regards suc( contracts as insurance contracts and (as used accounting app*icab*e to insurance contracts4 t(e issuer ma. e*ect to app*. eit(er t(is Standard or Ind AS 3>< to suc( financia* guarantee contracts (see paragrap(s A2< and A2<A)8 0(e issuer ma. ma@e t(at e*ection contract b. contract4 but t(e e*ection for eac( contract is irrevocab*e8 7%efer to #''endi8 19 an. for,ard contract bet,een an ac-uirer and a se**ing s(are(o*der to bu. or se** an ac-uiree t(at ,i** resu*t in a business combination at a future ac-uisition date8 0(e term of t(e for,ard contract s(ou*d not e&ceed a reasonab*e period norma**. necessar. to obtain an. re-uired approva*s and to comp*ete t(e transaction8

(e)

(f) (g)

(()

*oan commitments ot(er t(an t(ose *oan commitments described in paragrap( <8 An issuer of *oan commitments s(a** app*. Ind AS 36 $ro!isions, %ontingent (iabilities and %ontingent Assets to *oan commitments t(at are not ,it(in t(e scope of t(is Standard8 !o,ever4 a** *oan commitments are subject to t(e derecognition provisions of t(is Standard (see paragrap(s 39:<5 and Appendi& A paragrap(s A23;:A2;3)8 financia* instruments4 contracts and ob*igations under s(areAbased pa.ment transactions to ,(ic( Ind AS 3>< Share,based $ayment app*ies4 e&cept for contracts ,it(in t(e scope of paragrap(s 9:6 of t(is Standard4 to ,(ic( t(is Standard app*ies8 rig(ts to pa.ments to reimburse t(e entit. for e&penditure it is re-uired to ma@e to sett*e a *iabi*it. t(at it recognises as a provision in accordance ,it(Ind AS 364 or for ,(ic(4 in an ear*ier period4 it recognised a provision in accordance ,it( Ind AS 368

(i)

(j)

3 <

7%efer to #''endi8 19 0(e fo**o,ing *oan commitments are ,it(in t(e scope of t(is Standard% (a) *oan commitments t(at t(e entit. designates as financia* *iabi*ities at fair va*ue t(roug( profit or *oss8 An entit. t(at (as a past practice of se**ing t(e assets resu*ting from its *oan commitments s(ort*. after origination s(a** app*. t(is Standard to a** its *oan commitments in t(e same c*ass8 *oan commitments t(at can be sett*ed net in cas( or b. de*ivering or issuing anot(er financia* instrument8 0(ese *oan commitments are derivatives8 A *oan commitment is not regarded as sett*ed net mere*. because t(e *oan is paid out in insta*ments (for e&amp*e4 a mortgage construction *oan t(at is paid out in insta*ments in *ine ,it( t(e progress of construction)8 commitments to provide a *oan at a be*o,Amar@et interest rate8 "aragrap( <6(d) specifies t(e subse-uent measurement of *iabi*ities arising from t(ese *oan commitments8

(b)

(c)

0(is Standard s(a** be app*ied to t(ose contracts to bu. or se** a nonA financia* item t(at can be sett*ed net in cas( or anot(er financia* instrument4 or b. e&c(anging financia* instruments4 as if t(e contracts ,ere financia* instruments4 ,it( t(e e&ception of contracts t(at ,ere entered into and continue to be (e*d for t(e purpose of t(e receipt or de*iver. of a nonAfinancia* item in accordance ,it( t(e entit.?s e&pected purc(ase4 sa*e or usage re-uirements8 There are !arious &ays in &hich a contract to (uy or sell a non,financial ite" can (e settled net in cash or another financial instru"ent or (y e8changing financial instru"ents4 These include: ;a< &hen the ter"s of the contract 'er"it either 'arty to settle it net in cash or another financial instru"ent or (y e8changing financial instru"ents=

;(<

&hen the a(ility to settle net in cash or another financial instru"ent6 or (y e8changing financial instru"ents6 is not e8'licit in the ter"s of the contract6 (ut the entity has a 'ractice of settling si"ilar contracts net in cash or another financial instru"ent or (y e8changing financial instru"ents ;&hether &ith the counter'arty6 (y entering into offsetting contracts or (y selling the contract (efore its e8ercise or la'se<= &hen6 for si"ilar contracts6 the entity has a 'ractice of ta>ing deli!ery of the underlying and selling it &ithin a short 'eriod after deli!ery for the 'ur'ose of generating a 'rofit fro" short,ter" fluctuations in 'rice or dealer?s "argin= and &hen the non,financial ite" that is the su(5ect of the contract is readily con!erti(le to cash4

;c<

;d<

# contract to &hich ;(< or ;c< a''lies is not entered into for the 'ur'ose of the recei't or deli!ery of the non,financial ite" in accordance &ith the entity?s e8'ected 'urchase6 sale or usage require"ents and6 accordingly6 is &ithin the sco'e of this )tandard4 @ther contracts to &hich 'aragra'h 5 a''lies are e!aluated to deter"ine &hether they &ere entered into and continue to (e held for the 'ur'ose of the recei't or deli!ery of the non,financial ite" in accordance &ith the entity?s e8'ected 'urchase6 sale or usage require"ents and6 accordingly6 &hether they are &ithin the sco'e of this )tandard4 7 # &ritten o'tion to (uy or sell a non,financial ite" that can (e settled net in cash or another financial instru"ent6 or (y e8changing financial instru"ents6 in accordance &ith 'aragra'h $;a< or ;d< is &ithin the sco'e of this )tandard4 )uch a contract cannot (e entered into for the 'ur'ose of the recei't or deli!ery of the non,financial ite" in accordance &ith the entity?s e8'ected 'urchase6 sale or usage require"ents4

Definitions
8 The ter"s defined in Ind #) 32 are used in this )tandard &ith the "eanings s'ecified in 'aragra'h 11 of Ind #) 324 Ind #) 32 defines the follo&ing ter"s:

financial instru"ent financial asset financial lia(ility equity instru"ent

and 'ro!ides guidance on a''lying those definitions. 9 0(e fo**o,ing terms are used in t(is Standard ,it( t(e meanings specified% Definition of a derivative A derivative is a financia* instrument or ot(er contract ,it(in t(e scope of t(is Standard (see paragrap(s 5:6) ,it( a** t(ree of t(e fo**o,ing c(aracteristics%

(a)

its va*ue c(anges in response to t(e c(ange in a specified interest rate4 financia* instrument price4 commodit. price4 foreign e&c(ange rate4 inde& of prices or rates4 credit rating or credit inde&4 or ot(er variab*e4 provided in t(e case of a nonAfinancia* variab*e t(at t(e variab*e is not specific to a part. to t(e contract (sometimes ca**ed t(e Bunder*.ing?)= it re-uires no initia* net investment or an initia* net investment t(at is sma**er t(an ,ou*d be re-uired for ot(er t.pes of contracts t(at ,ou*d be e&pected to (ave a simi*ar response to c(anges in mar@et factors= and it is sett*ed at a future date8

(b)

(c)

Definitions of four categories of financia* instruments A financial asset or financial lia$ility at fair value through profit or loss is a financia* asset or financia* *iabi*it. t(at meets eit(er of t(e fo**o,ing conditions8 (a) It is c*assified as (e*d for trading8 A financia* asset or financia* *iabi*it. is c*assified as (e*d for trading if% (i) (ii) it is ac-uired or incurred principa**. for t(e purpose of se**ing or repurc(asing it in t(e near term= on initia* recognition it is part of a portfo*io of identified financia* instruments t(at are managed toget(er and for ,(ic( t(ere is evidence of a recent actua* pattern of s(ortAterm profitAta@ing= or

(iii) it is a derivative (e&cept for a derivative t(at is a financia* guarantee contract or a designated and effective (edging instrument)8 (b) /pon initia* recognition it is designated b. t(e entit. as at fair va*ue t(roug( profit or *oss8 An entit. ma. use t(is designation on*. ,(en permitted b. paragrap( 33A4 or ,(en doing so resu*ts in more re*evant information4 because eit(er (i) it e*iminates or significant*. reduces a measurement or recognition inconsistenc. (sometimes referred to as Ban accounting mismatc(?) t(at ,ou*d ot(er,ise arise from measuring assets or *iabi*ities or recognising t(e gains and *osses on t(em on different bases= or a group of financia* assets4 financia* *iabi*ities or bot( is managed and its performance is eva*uated on a fair va*ue basis4 in accordance ,it( a documented ris@ management or investment strateg.4 and information about t(e group is provided interna**. on t(at basis to t(e entit.?s @e. management personne* (as defined in Ind AS 5< Related $arty -isclosures)4 for e&amp*e t(e entit.?s board of directors and c(ief e&ecutive officer8

(ii)

In Ind AS 3>64 paragrap(s 9:33 and '< re-uire t(e entit. to provide disc*osures about financia* assets and financia* *iabi*ities it (as designated as at fair va*ue t(roug( profit or *oss4 inc*uding (o, it (as satisfied t(ese conditions8 )or instruments -ua*if.ing in accordance ,it( (ii) above4 t(at disc*osure inc*udes a narrative description of (o, designation as at fair va*ue t(roug( profit or *oss is consistent ,it( t(e entit.?s documented ris@ management or investment strateg.8 Investments in e-uit. instruments t(at do not (ave a -uoted mar@et price in an active mar@et4 and ,(ose fair va*ue cannot be re*iab*. measured (see paragrap( <;(c) and Appendi& A paragrap(s A27> and A273)4 s(a** not be designated as at fair va*ue t(roug( profit or *oss8 It s(ou*d be noted t(at paragrap(s <74 <7A4 <9 and Appendi& A paragrap(s A2;9:A2754 ,(ic( set out re-uirements for determining a re*iab*e measure of t(e fair va*ue of a financia* asset or financia*

liability, apply equally to all items that are measured at fair value,
,(et(er b. designation or ot(er,ise4 or ,(ose fair va*ue is disc*osed8 %eld"to"maturity investments are nonAderivative financia* assets ,it( fi&ed or determinab*e pa.ments and fi&ed maturit. t(at an entit. (as t(e positive intention and abi*it. to (o*d to maturit. (see Appendi& A

paragraphs AG16AG25) other than:

(a) (b) (c) t(ose t(at t(e entit. upon initia* recognition designates as at fair va*ue t(roug( profit or *oss= t(ose t(at t(e entit. designates as avai*ab*e for sa*e= and t(ose t(at meet t(e definition of *oans and receivab*es8

An entit. s(a** not c*assif. an. financia* assets as (e*d to maturit. if t(e entit. (as4 during t(e current financia* .ear or during t(e t,o preceding financia* .ears4 so*d or rec*assified more t(an an insignificant amount of (e*dAtoAmaturit. investments before maturit. (more t(an insignificant in re*ation to t(e tota* amount of (e*dAtoAmaturit. investments) ot(er t(an sa*es or rec*assifications t(at% (i) are so c*ose to maturit. or t(e financia* asset?s ca** date (for e&amp*e4 *ess t(an t(ree mont(s before maturit.) t(at c(anges in t(e mar@et rate of interest ,ou*d not (ave a significant effect on t(e financia* asset?s fair va*ue= occur after t(e entit. (as co**ected substantia**. a** of t(e financia* asset?s origina* principa* t(roug( sc(edu*ed pa.ments or prepa.ments= or

(ii)

(iii) are attributab*e to an iso*ated event t(at is be.ond t(e entit.?s contro*4 is nonArecurring and cou*d not (ave been reasonab*. anticipated b. t(e entit.8

10

&oans and receiva$les are nonAderivative financia* assets ,it( fi&ed or determinab*e pa.ments t(at are not -uoted in an active mar@et ot(er t(an% (a) t(ose t(at t(e entit. intends to se** immediate*. or in t(e near term4 ,(ic( s(a** be c*assified as (e*d for trading4 and t(ose t(at t(e entit. upon initia* recognition designates as at fair va*ue t(roug( profit or *oss= t(ose t(at t(e entit. upon initia* recognition designates as avai*ab*e for sa*e= or t(ose for ,(ic( t(e (o*der ma. not recover substantia**. a** of its initia* investment4 ot(er t(an because of credit deterioration4 ,(ic( s(a** be c*assified as avai*ab*e for sa*e8

(b) (c)

An interest ac-uired in a poo* of assets t(at are not *oans or receivab*es (for e&amp*e4 an interest in a mutua* fund or a simi*ar fund) is not a *oan or receivab*e8 Availa$le"for"sale financial assets are t(ose nonAderivative financia* assets t(at are designated as avai*ab*e for sa*e or are not c*assified as (a) *oans and receivab*es4 (b) (e*dAtoAmaturit. investments or (c) financia* assets at fair va*ue t(roug( profit or *oss8

Definition of a financia* guarantee contract

A financial guarantee contract is a contract t(at re-uires t(e issuer to ma@e specified pa.ments to reimburse t(e (o*der for a *oss it incurs because a specified debtor fai*s to ma@e pa.ment ,(en due in accordance ,it( t(e origina* or modified terms of a debt instrument8 Definitions re*ating to recognition and measurement 0(e amortised cost of a financial asset or financial lia$ility is t(e amount at ,(ic( t(e financia* asset or financia* *iabi*it. is measured at initia* recognition minus principa* repa.ments4 p*us or minus t(e cumu*ative amortisation using t(e effective interest met(od of an. difference bet,een t(at initia* amount and t(e maturit. amount4 and minus an. reduction (direct*. or t(roug( t(e use of an a**o,ance account) for impairment or unco**ectibi*it.8 0(e effective interest method is a met(od of ca*cu*ating t(e amortised cost of a financia* asset or a financia* *iabi*it. (or group of financia* assets or financia* *iabi*ities) and of a**ocating t(e interest income or interest e&pense over t(e re*evant period8 0(e effective interest rate is t(e rate t(at e&act*. discounts estimated future cas( pa.ments or receipts t(roug( t(e e&pected *ife of t(e financia* instrument or4 ,(en appropriate4 a s(orter period to t(e net carr.ing amount of t(e financia* asset or financia* *iabi*it.8 C(en ca*cu*ating t(e effective interest rate4 an entit. s(a** estimate cas( f*o,s considering a** contractua* terms of t(e financia* instrument (for e&amp*e4 prepa.ment4 ca** and simi*ar options) but s(a** not consider future credit *osses8 0(e ca*cu*ation inc*udes a** fees and points paid or

11

received bet,een parties to t(e contract t(at are an integra* part of t(e effective interest rate (see Ind AS 37 Re!enue)4 transaction costs4 and a** ot(er premiums or discounts8 0(ere is a presumption t(at t(e cas( f*o,s and t(e e&pected *ife of a group of simi*ar financia* instruments can be estimated re*iab*.8 !o,ever4 in t(ose rare cases ,(en it is not possib*e to estimate re*iab*. t(e cas( f*o,s or t(e e&pected *ife of a financia* instrument (or group of financia* instruments)4 t(e entit. s(a** use t(e contractua* cas( f*o,s over t(e fu** contractua* term of t(e financia* instrument (or group of financia* instruments)8 !erecognition is t(e remova* of a previous*. recognised financia* asset or financia* *iabi*it. from an entit.?s ba*ance s(eet8 Fair value is t(e amount for ,(ic( an asset cou*d be e&c(anged4 or a *iabi*it. sett*ed4 bet,een @no,*edgeab*e4 ,i**ing parties in an arm?s *engt( transaction83 A regular 'ay purchase or sale is a purc(ase or sa*e of a financia* asset under a contract ,(ose terms re-uire de*iver. of t(e asset ,it(in t(e time frame estab*is(ed genera**. b. regu*ation or convention in t(e mar@etp*ace concerned8 Transaction costs are incrementa* costs t(at are direct*. attributab*e to t(e ac-uisition4 issue or disposa* of a financia* asset or financia* *iabi*it. (see Appendi& A paragrap( A233)8 An incrementa* cost is one t(at ,ou*d not (ave been incurred if t(e entit. (ad not ac-uired4 issued or disposed of t(e financia* instrument8

Definitions re*ating to (edge accounting

A firm commitment is a binding agreement for t(e e&c(ange of a specified -uantit. of resources at a specified price on a specified future date or dates8 A forecast transaction is an uncommitted but anticipated future transaction8 A hedging instrument is a designated derivative or (for a (edge of t(e ris@ of c(anges in foreign currenc. e&c(ange rates on*.) a designated nonA derivative financia* asset or nonAderivative financia* *iabi*it. ,(ose fair va*ue or cas( f*o,s are e&pected to offset c(anges in t(e fair va*ue or cas( f*o,s of a designated (edged item (paragrap(s 65:66 and Appendi& A paragrap(s A29<:A296 e*aborate on t(e definition of a (edging instrument)8 A hedged item is an asset4 *iabi*it.4 firm commitment4 (ig(*. probab*e forecast transaction or net investment in a foreign operation t(at (a) e&poses t(e entit. to ris@ of c(anges in fair va*ue or future cas( f*o,s and (b) is designated as being (edged (paragrap(s 67:7< and Appendi& A paragrap(s A297:A23>3 e*aborate on t(e definition of (edged items)8
1

Paragraphs 4849 and AG69AG82 of Appendix A contain re !ire"ents for deter"ining the fair #a$!e of a financia$ asset or financia$ $ia%i$it&.

12

%edge effectiveness is t(e degree to ,(ic( c(anges in t(e fair va*ue or cas( f*o,s of t(e (edged item t(at are attributab*e to a hedged ris are offset by

!hanges in the fair value or !ash flo"s of the hedging instrument #see Appendi$ A paragraphs AG1%5AG11&)'

Embedded derivatives
10 #n e"(edded deri!ati!e is a co"'onent of a hy(rid ;co"(ined< instru"ent that also includes a non,deri!ati!e host contractA&ith the effect that so"e of the cash flo&s of the co"(ined instru"ent !ary in a &ay si"ilar to a stand,alone deri!ati!e4 #n e"(edded deri!ati!e causes so"e or all of the cash flo&s that other&ise &ould (e required (y the contract to (e "odified according to a s'ecified interest rate6 financial instru"ent 'rice6 co""odity 'rice6 foreign e8change rate6 inde8 of 'rices or rates6 credit rating or credit inde86 or other !aria(le6 'ro!ided in the case of a non,financial !aria(le that the !aria(le is not s'ecific to a 'arty to the contract4 # deri!ati!e that is attached to a financial instru"ent (ut is contractually transfera(le inde'endently of that instru"ent6 or has a different counter'arty fro" that instru"ent6 is not an e"(edded deri!ati!e6 (ut a se'arate financial instru"ent4 An embedded derivative s(a** be separated from t(e (ost contract and accounted for as a derivative under t(is Standard if4 and on*. if% (a) t(e economic c(aracteristics and ris@s of t(e embedded derivative are not c*ose*. re*ated to t(e economic c(aracteristics and ris@s of t(e (ost contract (see Appendi& A paragrap(s A23> and A233)= a separate instrument ,it( t(e same terms as t(e embedded derivative ,ou*d meet t(e definition of a derivative= and t(e (.brid (combined) instrument is not measured at fair va*ue ,it( c(anges in fair va*ue recognised in profit or *oss (ie a derivative t(at is embedded in a financia* asset or financia* *iabi*it. at fair va*ue t(roug( profit or *oss is not separated)8

33

(b) (c)

If an embedded derivative is separated4 t(e (ost contract s(a** be accounted for under t(is Standard if it is a financia* instrument4 and in accordance ,it( ot(er appropriate Standards if it is not a financia* instrument8 0(is Standard does not address ,(et(er an embedded derivative s(a** be presented separate*. in t(e ba*ance s(eet8 33A #ot,it(standing paragrap( 334 if a contract contains one or more embedded derivatives4 an entit. ma. designate t(e entire (.brid (combined) contract as a financia* asset or financia* *iabi*it. at fair va*ue t(roug( profit or *oss un*ess% (a) (b) t(e embedded derivative(s) does not significant*. modif. t(e cas( f*o,s t(at ot(er,ise ,ou*d be re-uired b. t(e contract= or it is c*ear ,it( *itt*e or no ana*.sis ,(en a simi*ar (.brid (combined) instrument is first considered t(at separation of t(e embedded derivative(s) is pro(ibited4 suc( as a prepa.ment option embedded in

13

a *oan t(at permits t(e (o*der to prepa. t(e *oan for appro&imate*. its amortised cost8 35 If an entit. is re-uired b. t(is Standard to separate an embedded derivative from its (ost contract4 but is unab*e to measure t(e embedded derivative separate*. eit(er at ac-uisition or at t(e end of a subse-uent financia* reporting period4 it s(a** designate t(e entire (.brid (combined) contract as at fair va*ue t(roug( profit or *oss8 Simi*ar*.4 if an entit. is unab*e to measure separate*. t(e embedded derivative t(at ,ou*d (ave to be separated on rec*assification of a (.brid (combined) contract out of t(e fair va*ue t(roug( profit or *oss categor.4 t(at rec*assification is pro(ibited8 In suc( circumstances t(e (.brid (combined) contract remains c*assified as at fair va*ue t(roug( profit or *oss in its entiret.8 If an entity is una(le to deter"ine relia(ly the fair !alue of an e"(edded deri!ati!e on the (asis of its ter"s and conditions ;for e8a"'le6 (ecause the e"(edded deri!ati!e is (ased on an unquoted equity instru"ent<6 the fair !alue of the e"(edded deri!ati!e is the difference (et&een the fair !alue of the hy(rid ;co"(ined< instru"ent and the fair !alue of the host contract6 if those can (e deter"ined under this )tandard4 If the entity is una(le to deter"ine the fair !alue of the e"(edded deri!ati!e using this "ethod6 'aragra'h 12 a''lies and the hy(rid ;co"(ined< instru"ent is designated as at fair !alue through 'rofit or loss4

13

Recognition and derecognition

Initia* recognition
3< An entit. s(a** recognise a financia* asset or a financia* *iabi*it. in its ba*ance s(eet ,(en4 and on*. ,(en4 t(e entit. becomes a part. to t(e contractua* provisions of t(e instrument8 (See paragrap( 37 ,it( respect to regu*ar ,a. purc(ases of financia* assets8)

Derecognition of a financia* asset

15 In consolidated financial state"ents6 'aragra'hs 1$23 and #''endi8 # 'aragra'hs #+34#+52 are a''lied at a consolidated le!el4 -ence6 an entity first consolidates all su(sidiaries in accordance &ith Ind #) 27 and #''endi8 # Consolidation()pecial #urpose Entities ofInd #) 27 and then a''lies 'aragra'hs 1$23 and #''endi8 # 'aragra'hs #+34#+52 to the resulting grou'4 'efore eva*uating ,(et(er4 and to ,(at e&tent4 derecognition is appropriate under paragrap(s 36:534 an entit. determines ,(et(er t(ose paragrap(s s(ou*d be app*ied to a part of a financia* asset (or a part of a group of simi*ar financia* assets) or a financia* asset (or a group of simi*ar financia* assets) in its entiret.4 as fo**o,s8 (a) "aragrap(s 36:53 are app*ied to a part of a financia* asset (or a part of a group of simi*ar financia* assets) if4 and on*. if4 t(e part being considered for derecognition meets one of t(e fo**o,ing t(ree conditions8

3;

14

(i)

0(e part comprises on*. specifica**. identified cas( f*o,s from a financia* asset (or a group of simi*ar financia* assets)8 )or e&amp*e4 ,(en an entit. enters into an interest rate strip ,(ereb. t(e counterpart. obtains t(e rig(t to t(e interest cas( f*o,s4 but not t(e principa* cas( f*o,s from a debt instrument4 paragrap(s 36:53 are app*ied to t(e interest cas( f*o,s8 0(e part comprises on*. a fu**. proportionate (pro rata) s(are of t(e cas( f*o,s from a financia* asset (or a group of simi*ar financia* assets)8 )or e&amp*e4 ,(en an entit. enters into an arrangement ,(ereb. t(e counterpart. obtains t(e rig(ts to a 9> per cent s(are of a** cas( f*o,s of a debt instrument4 paragrap(s 36:53 are app*ied to 9> per cent of t(ose cas( f*o,s8 If t(ere is more t(an one counterpart.4 eac( counterpart. is not re-uired to (ave a proportionate s(are of t(e cas( f*o,s provided t(at t(e transferring entit. (as a fu**. proportionate s(are8

(ii)

(iii) 0(e part comprises on*. a fu**. proportionate (pro rata) s(are of specifica**. identified cas( f*o,s from a financia* asset (or a group of simi*ar financia* assets)8 )or e&amp*e4 ,(en an entit. enters into an arrangement ,(ereb. t(e counterpart. obtains t(e rig(ts to a 9> per cent s(are of interest cas( f*o,s from a financia* asset4 paragrap(s 36:53 are app*ied to 9> per cent of t(ose interest cas( f*o,s8 If t(ere is more t(an one counterpart.4 eac( counterpart. is not re-uired to (ave a proportionate s(are of t(e specifica**. identified cas( f*o,s provided t(at t(e transferring entit. (as a fu**. proportionate s(are8 (b) In a** ot(er cases4 paragrap(s 36:53 are app*ied to t(e financia* asset in its entiret. (or to t(e group of simi*ar financia* assets in t(eir entiret.)8 )or e&amp*e4 ,(en an entit. transfers (i) t(e rig(ts to t(e first or t(e *ast 9> per cent of cas( co**ections from a financia* asset (or a group of financia* assets)4 or (ii) t(e rig(ts to 9> per cent of t(e cas( f*o,s from a group of receivab*es4 but provides a guarantee to compensate t(e bu.er for an. credit *osses up to 7 per cent of t(e principa* amount of t(e receivab*es4 paragrap(s 36:53 are app*ied to t(e financia* asset (or a group of simi*ar financia* assets) in its entiret.8

In paragrap(s 36:5;4 t(e term Bfinancia* asset? refers to eit(er a part of a financia* asset (or a part of a group of simi*ar financia* assets) as identified in (a) above or4 ot(er,ise4 a financia* asset (or a group of simi*ar financia* assets) in its entiret.8 36 An entit. s(a** derecognise a financia* asset ,(en4 and on*. ,(en% (a) t(e contractua* rig(ts to t(e cas( f*o,s from t(e financia* asset e&pire= or

15

(b)

it transfers t(e financia* asset as set out in paragrap(s 37 and 39 and t(e transfer -ua*ifies for derecognition in accordance ,it( paragrap( 5>8 (See paragrap( 37 for regu*ar ,a. sa*es of financia* assets8)

37

An entit. transfers a financia* asset if4 and on*. if4 it eit(er% (a) (b) transfers t(e contractua* rig(ts to receive t(e cas( f*o,s of t(e financia* asset= or retains t(e contractua* rig(ts to receive t(e cas( f*o,s of t(e financia* asset4 but assumes a contractua* ob*igation to pa. t(e cas( f*o,s to one or more recipients in an arrangement t(at meets t(e conditions in paragrap( 398

39

C(en an entit. retains t(e contractua* rig(ts to receive t(e cas( f*o,s of a financia* asset (t(e Borigina* asset?)4 but assumes a contractua* ob*igation to pa. t(ose cas( f*o,s to one or more entities (t(e Beventua* recipients?)4 t(e entit. treats t(e transaction as a transfer of a financia* asset if4 and on*. if4 a** of t(e fo**o,ing t(ree conditions are met8 (a) 0(e entit. (as no ob*igation to pa. amounts to t(e eventua* recipients un*ess it co**ects e-uiva*ent amounts from t(e origina* asset8 S(ortA term advances b. t(e entit. ,it( t(e rig(t of fu** recover. of t(e amount *ent p*us accrued interest at mar@et rates do not vio*ate t(is condition8 0(e entit. is pro(ibited b. t(e terms of t(e transfer contract from se**ing or p*edging t(e origina* asset ot(er t(an as securit. to t(e eventua* recipients for t(e ob*igation to pa. t(em cas( f*o,s8 0(e entit. (as an ob*igation to remit an. cas( f*o,s it co**ects on be(a*f of t(e eventua* recipients ,it(out materia* de*a.8 In addition4 t(e entit. is not entit*ed to reinvest suc( cas( f*o,s4 e&cept for investments in cas( or cas( e-uiva*ents (as defined in Ind AS 6 Statement o+ %ash Flo s) during t(e s(ort sett*ement period from t(e co**ection date to t(e date of re-uired remittance to t(e eventua* recipients4 and interest earned on suc( investments is passed to t(e eventua* recipients8

(b)

(c)

5>

C(en an entit. transfers a financia* asset (see paragrap( 37)4 it s(a** eva*uate t(e e&tent to ,(ic( it retains t(e ris@s and re,ards of o,ners(ip of t(e financia* asset8 In t(is case% (a) if t(e entit. transfers substantia**. a** t(e ris@s and re,ards of o,ners(ip of t(e financia* asset4 t(e entit. s(a** derecognise t(e financia* asset and recognise separate*. as assets or *iabi*ities an. rig(ts and ob*igations created or retained in t(e transfer8 if t(e entit. retains substantia**. a** t(e ris@s and re,ards of o,ners(ip of t(e financia* asset4 t(e entit. s(a** continue to recognise t(e financia* asset8

(b)

16

(c)

if t(e entit. neit(er transfers nor retains substantia**. a** t(e ris@s and re,ards of o,ners(ip of t(e financia* asset4 t(e entit. s(a** determine ,(et(er it (as retained contro* of t(e financia* asset8 In t(is case% (i) if t(e entit. (as not retained contro*4 it s(a** derecognise t(e financia* asset and recognise separate*. as assets or *iabi*ities an. rig(ts and ob*igations created or retained in t(e transfer8 if t(e entit. (as retained contro*4 it s(a** continue to recognise t(e financia* asset to t(e e&tent of its continuing invo*vement in t(e financia* asset (see paragrap( 3>)8

(ii)

21

The transfer of ris>s and re&ards ;see 'aragra'h 20< is e!aluated (y co"'aring the entity?s e8'osure6 (efore and after the transfer6 &ith the !aria(ility in the a"ounts and ti"ing of the net cash flo&s of the transferred asset4 #n entity has retained su(stantially all the ris>s and re&ards of o&nershi' of a financial asset if its e8'osure to the !aria(ility in the 'resent !alue of the future net cash flo&s fro" the financial asset does not change significantly as a result of the transfer ;eg (ecause the entity has sold a financial asset su(5ect to an agree"ent to (uy it (ac> at a fi8ed 'rice or the sale 'rice 'lus a lender?s return<4 #n entity has transferred su(stantially all the ris>s and re&ards of o&nershi' of a financial asset if its e8'osure to such !aria(ility is no longer significant in relation to the total !aria(ility in the 'resent !alue of the future net cash flo&s associated &ith the financial asset ;eg (ecause the entity has sold a financial asset su(5ect only to an o'tion to (uy it (ac> at its fair !alue at the ti"e of re'urchase or has transferred a fully 'ro'ortionate share of the cash flo&s fro" a larger financial asset in an arrange"ent6 such as a loan su(,'artici'ation6 that "eets the conditions in 'aragra'h 19<4 @ften it &ill (e o(!ious &hether the entity has transferred or retained su(stantially all ris>s and re&ards of o&nershi' and there &ill (e no need to 'erfor" any co"'utations4 In other cases6 it &ill (e necessary to co"'ute and co"'are the entity?s e8'osure to the !aria(ility in the 'resent !alue of the future net cash flo&s (efore and after the transfer4 The co"'utation and co"'arison is "ade using as the discount rate an a''ro'riate current "ar>et interest rate4 #ll reasona(ly 'ossi(le !aria(ility in net cash flo&s is considered6 &ith greater &eight (eing gi!en to those outco"es that are "ore li>ely to occur4 Bhether the entity has retained control ;see 'aragra'h 20;c<< of the transferred asset de'ends on the transferee?s a(ility to sell the asset4 If the transferee has the 'ractical a(ility to sell the asset in its entirety to an unrelated third 'arty and is a(le to e8ercise that a(ility unilaterally and &ithout needing to i"'ose additional restrictions on the transfer6 the entity has not retained control4 In all other cases6 the entity has retained control4

22

23

0ransfers t(at -ua*if. for derecognition (see paragrap( 5>(a) and (c)(i))
5< If an entit. transfers a financia* asset in a transfer t(at -ua*ifies for derecognition in its entiret. and retains t(e rig(t to service t(e financia* asset for a fee4 it s(a** recognise eit(er a servicing asset or a servicing *iabi*it. for t(at servicing contract8 If t(e fee to be received is not e&pected

17

to compensate t(e entit. ade-uate*. for performing t(e servicing4 a servicing *iabi*it. for t(e servicing ob*igation s(a** be recognised at its fair va*ue8 If t(e fee to be received is e&pected to be more t(an ade-uate compensation for t(e servicing4 a servicing asset s(a** be recognised for t(e servicing rig(t at an amount determined on t(e basis of an a**ocation of t(e carr.ing amount of t(e *arger financia* asset in accordance ,it( paragrap( 568 59 If4 as a resu*t of a transfer4 a financia* asset is derecognised in its entiret. but t(e transfer resu*ts in t(e entit. obtaining a ne, financia* asset or assuming a ne, financia* *iabi*it.4 or a servicing *iabi*it.4 t(e entit. s(a** recognise t(e ne, financia* asset4 financia* *iabi*it. or servicing *iabi*it. at fair va*ue8 On derecognition of a financia* asset in its entiret.4 t(e difference bet,een% (a) t(e carr.ing amount and t(e sum of (i) t(e consideration received (inc*uding an. ne, asset obtained *ess an. ne, *iabi*it. assumed) and (ii) an. cumu*ative gain or *oss t(at (ad been recognised in ot(er compre(ensive income (see paragrap( 99(b))

5;

'%(

s(a** be recognised in profit or *oss8 56 If t(e transferred asset is part of a *arger financia* asset (eg ,(en an entit. transfers interest cas( f*o,s t(at are part of a debt instrument4 see paragrap( 3;(a)) and t(e part transferred -ua*ifies for derecognition in its entiret.4 t(e previous carr.ing amount of t(e *arger financia* asset s(a** be a**ocated bet,een t(e part t(at continues to be recognised and t(e part t(at is derecognised4 based on t(e re*ative fair va*ues of t(ose parts on t(e date of t(e transfer8 )or t(is purpose4 a retained servicing asset s(a** be treated as a part t(at continues to be recognised8 0(e difference bet,een% (a) (b) t(e carr.ing amount a**ocated to t(e part derecognised and t(e sum of (i) t(e consideration received for t(e part derecognised (inc*uding an. ne, asset obtained *ess an. ne, *iabi*it. assumed) and (ii) an. cumu*ative gain or *oss a**ocated to it t(at (ad been recognised in ot(er compre(ensive income (see paragrap( 99(b))

s(a** be recognised in profit or *oss8 A cumu*ative gain or *oss t(at (ad been recognised in ot(er compre(ensive income is a**ocated bet,een t(e part t(at continues to be recognised and t(e part t(at is derecognised4 based on t(e re*ative fair va*ues of t(ose parts8 28 Bhen an entity allocates the 're!ious carrying a"ount of a larger financial asset (et&een the 'art that continues to (e recognised and the 'art that is derecognised6 the fair !alue of the 'art that continues to (e recognised needs to (e deter"ined4 Bhen the entity has a history of selling 'arts si"ilar to the 'art that continues to (e recognised or other "ar>et transactions e8ist for such 'arts6 recent 'rices of actual transactions 'ro!ide the (est esti"ate of its fair !alue4 Bhen there are no 'rice quotes or recent "ar>et transactions to su''ort the fair !alue of the 'art that continues to (e recognised6 the (est esti"ate of the fair

18

!alue is the difference (et&een the fair !alue of the larger financial asset as a &hole and the consideration recei!ed fro" the transferee for the 'art that is derecognised4

0ransfers t(at do not -ua*if. for derecognition (see paragrap( 5>(b))

59 If a transfer does not resu*t in derecognition because t(e entit. (as retained substantia**. a** t(e ris@s and re,ards of o,ners(ip of t(e transferred asset4 t(e entit. s(a** continue to recognise t(e transferred asset in its entiret. and s(a** recognise a financia* *iabi*it. for t(e consideration received8 In subse-uent periods4 t(e entit. s(a** recognise an. income on t(e transferred asset and an. e&pense incurred on t(e financia* *iabi*it.8

Continuing invo*vement in transferred assets (see paragrap( 5>(c)(ii))

3> If an entit. neit(er transfers nor retains substantia**. a** t(e ris@s and re,ards of o,ners(ip of a transferred asset4 and retains contro* of t(e transferred asset4 t(e entit. continues to recognise t(e transferred asset to t(e e&tent of its continuing invo*vement8 0(e e&tent of t(e entit.?s continuing invo*vement in t(e transferred asset is t(e e&tent to ,(ic( it is e&posed to c(anges in t(e va*ue of t(e transferred asset8 )or e&amp*e% (a) ,(en t(e entit.?s continuing invo*vement ta@es t(e form of guaranteeing t(e transferred asset4 t(e e&tent of t(e entit.?s continuing invo*vement is t(e *o,er of (i) t(e amount of t(e asset and (ii) t(e ma&imum amount of t(e consideration received t(at t(e entit. cou*d be re-uired to repa. (Bt(e guarantee amount?)8 ,(en t(e entit.?s continuing invo*vement ta@es t(e form of a ,ritten or purc(ased option (or bot() on t(e transferred asset4 t(e e&tent of t(e entit.?s continuing invo*vement is t(e amount of t(e transferred asset t(at t(e entit. ma. repurc(ase8 !o,ever4 in case of a ,ritten put option on an asset t(at is measured at fair va*ue4 t(e e&tent of t(e entit.?s continuing invo*vement is *imited to t(e *o,er of t(e fair va*ue of t(e transferred asset and t(e option e&ercise price (see paragrap( A2<7)8 ,(en t(e entit.?s continuing invo*vement ta@es t(e form of a cas(A sett*ed option or simi*ar provision on t(e transferred asset4 t(e e&tent of t(e entit.?s continuing invo*vement is measured in t(e same ,a. as t(at ,(ic( resu*ts from nonAcas( sett*ed options as set out in (b) above8

(b)

(c)

33

C(en an entit. continues to recognise an asset to t(e e&tent of its continuing invo*vement4 t(e entit. a*so recognises an associated *iabi*it.8 Despite t(e ot(er measurement re-uirements in t(is Standard4 t(e transferred asset and t(e associated *iabi*it. are measured on a basis t(at ref*ects t(e rig(ts and ob*igations t(at t(e entit. (as retained8 0(e associated *iabi*it. is measured in suc( a ,a. t(at t(e net carr.ing amount of t(e transferred asset and t(e associated *iabi*it. is%

19

(a) (b)

t(e amortised cost of t(e rig(ts and ob*igations retained b. t(e entit.4 if t(e transferred asset is measured at amortised cost= or e-ua* to t(e fair va*ue of t(e rig(ts and ob*igations retained b. t(e entit. ,(en measured on a standAa*one basis4 if t(e transferred asset is measured at fair va*ue8

35

0(e entit. s(a** continue to recognise an. income arising on t(e transferred asset to t(e e&tent of its continuing invo*vement and s(a** recognise an. e&pense incurred on t(e associated *iabi*it.8 )or t(e purpose of subse-uent measurement4 recognised c(anges in t(e fair va*ue of t(e transferred asset and t(e associated *iabi*it. are accounted for consistent*. ,it( eac( ot(er in accordance ,it( paragrap( 994 and s(a** not be offset8 If an entit.?s continuing invo*vement is in on*. a part of a financia* asset (eg ,(en an entit. retains an option to repurc(ase part of a transferred asset4 or retains a residua* interest t(at does not resu*t in t(e retention of substantia**. a** t(e ris@s and re,ards of o,ners(ip and t(e entit. retains contro*)4 t(e entit. a**ocates t(e previous carr.ing amount of t(e financia* asset bet,een t(e part it continues to recognise under continuing invo*vement4 and t(e part it no *onger recognises on t(e basis of t(e re*ative fair va*ues of t(ose parts on t(e date of t(e transfer8 )or t(is purpose4 t(e re-uirements of paragrap( 57 app*.8 0(e difference bet,een% (a) (b) t(e carr.ing amount a**ocated to t(e part t(at is no *onger recognised= and t(e sum of (i) t(e consideration received for t(e part no *onger recognised and (ii) an. cumu*ative gain or *oss a**ocated to it t(at (ad been recognised in ot(er compre(ensive income (see paragrap( 99(b))

33

3<

s(a** be recognised in profit or *oss8 A cumu*ative gain or *oss t(at (ad been recognised in ot(er compre(ensive income is a**ocated bet,een t(e part t(at continues to be recognised and t(e part t(at is no *onger recognised on t(e basis of t(e re*ative fair va*ues of t(ose parts8 35 If the transferred asset is "easured at a"ortised cost6 the o'tion in this )tandard to designate a financial lia(ility as at fair !alue through 'rofit or loss is not a''lica(le to the associated lia(ility4

A** transfers
3; If a transferred asset continues to be recognised4 t(e asset and t(e associated *iabi*it. s(a** not be offset8 Simi*ar*.4 t(e entit. s(a** not offset an. income arising from t(e transferred asset ,it( an. e&pense incurred on t(e associated *iabi*it. (see Ind AS 35 paragrap( <5)8 If a transferor provides nonAcas( co**atera* (suc( as debt or e-uit. instruments) to t(e transferee4 t(e accounting for t(e co**atera* b. t(e transferor and t(e transferee depends on ,(et(er t(e transferee (as t(e

36

20

rig(t to se** or rep*edge t(e co**atera* and on ,(et(er t(e transferor (as defau*ted8 0(e transferor and transferee s(a** account for t(e co**atera* as fo**o,s% (a) If t(e transferee (as t(e rig(t b. contract or custom to se** or rep*edge t(e co**atera*4 t(en t(e transferor s(a** rec*assif. t(at asset in its ba*ance s(eet (eg as a *oaned asset4 p*edged e-uit. instruments or repurc(ase receivab*e) separate*. from ot(er assets8 If t(e transferee se**s co**atera* p*edged to it4 it s(a** recognise t(e proceeds from t(e sa*e and a *iabi*it. measured at fair va*ue for its ob*igation to return t(e co**atera*8 If t(e transferor defau*ts under t(e terms of t(e contract and is no *onger entit*ed to redeem t(e co**atera*4 it s(a** derecognise t(e co**atera*4 and t(e transferee s(a** recognise t(e co**atera* as its asset initia**. measured at fair va*ue or4 if it (as a*read. so*d t(e co**atera*4 derecognise its ob*igation to return t(e co**atera*8 E&cept as provided in (c)4 t(e transferor s(a** continue to carr. t(e co**atera* as its asset4 and t(e transferee s(a** not recognise t(e co**atera* as an asset8

(b)

(c)

(d)

Regu*ar ,a. purc(ase or sa*e of a financia* asset

37 A regu*ar ,a. purc(ase or sa*e of financia* assets s(a** be recognised and derecognised4 as app*icab*e4 using trade date accounting or sett*ement date accounting (see Appendi& A paragrap(s A293:A29;)8

Derecognition of a financia* *iabi*it.

39 An entit. s(a** remove a financia* *iabi*it. (or a part of a financia* *iabi*it.) from its ba*ance s(eet ,(en4 and on*. ,(en4 it is e&tinguis(edDie ,(en t(e ob*igation specified in t(e contract is disc(arged or cance**ed or e&pires8 An e&c(ange bet,een an e&isting borro,er and *ender of debt instruments ,it( substantia**. different terms s(a** be accounted for as an e&tinguis(ment of t(e origina* financia* *iabi*it. and t(e recognition of a ne, financia* *iabi*it.8 Simi*ar*.4 a substantia* modification of t(e terms of an e&isting financia* *iabi*it. or a part of it (,(et(er or not attributab*e to t(e financia* difficu*t. of t(e debtor) s(a** be accounted for as an e&tinguis(ment of t(e origina* financia* *iabi*it. and t(e recognition of a ne, financia* *iabi*it.8 0(e difference bet,een t(e carr.ing amount of a financia* *iabi*it. (or part of a financia* *iabi*it.) e&tinguis(ed or transferred to anot(er part. and t(e consideration paid4 inc*uding an. nonAcas( assets transferred or *iabi*ities assumed4 s(a** be recognised in profit or *oss8 If an entity re'urchases a 'art of a financial lia(ility6 the entity shall allocate the 're!ious carrying a"ount of the financial lia(ility (et&een the 'art that continues to (e recognised and the 'art that is derecognised (ased on the relati!e fair !alues of those 'arts on the date of the re'urchase4 The difference (et&een ;a<

<>

<3

42

21

the carrying a"ount allocated to the 'art derecognised and ;(< the consideration 'aid6 including any non,cash assets transferred or lia(ilities assu"ed6 for the 'art derecognised shall (e recognised in 'rofit or loss4

easurement
Initia* measurement of financia* assets and financia* *iabi*ities
<3 C(en a financia* asset or financia* *iabi*it. is recognised initia**.4 an entit. s(a** measure it at its fair va*ue p*us4 in t(e case of a financia* asset or financia* *iabi*it. not at fair va*ue t(roug( profit or *oss4 transaction costs t(at are direct*. attributab*e to t(e ac-uisition or issue of t(e financia* asset or financia* *iabi*it.8 Bhen an entity uses settle"ent date accounting for an asset that is su(sequently "easured at cost or a"ortised cost6 the asset is recognised initially at its fair !alue on the trade date ;see #''endi8 # 'aragra'hs #+53#+5$<4

44

Subse-uent measurement of financia* assets

45 *or the 'ur'ose of "easuring a financial asset after initial recognition6 this )tandard classifies financial assets into the follo&ing four categories defined in 'aragra'h 9:

'a( '%( 'c( 'd(

financial assets at fair !alue through 'rofit or loss= held,to,"aturity in!est"ents= loans and recei!a(les= and a!aila(le,for,sale financial assets4

These categories a''ly to "easure"ent and 'rofit or loss recognition under this )tandard4 The entity "ay use other descri'tors for these categories or other categorisations &hen 'resenting infor"ation in the financial state"ents4 The entity shall disclose in the notes the infor"ation required (y Ind #) 1074 <; After initia* recognition4 an entit. s(a** measure financia* assets4 inc*uding derivatives t(at are assets4 at t(eir fair va*ues4 ,it(out an. deduction for transaction costs it ma. incur on sa*e or ot(er disposa*4 e&cept for t(e fo**o,ing financia* assets% (a) (b) (c) *oans and receivab*es as defined in paragrap( 94 ,(ic( s(a** be measured at amortised cost using t(e effective interest met(od= (e*dAtoAmaturit. investments as defined in paragrap( 94 ,(ic( s(a** be measured at amortised cost using t(e effective interest met(od= and investments in e-uit. instruments t(at do not (ave a -uoted mar@et price in an active mar@et and ,(ose fair va*ue cannot be re*iab*. measured and derivatives t(at are *in@ed to and must be sett*ed b.

22

de*iver. of suc( un-uoted e-uit. instruments4 ,(ic( s(a** be measured at cost (see Appendi& A paragrap(s A27> and A273)8 )inancia* assets t(at are designated as (edged items are subject to measurement under t(e (edge accounting re-uirements in paragrap(s 79: 3>58 A** financia* assets e&cept t(ose measured at fair va*ue t(roug( profit or *oss are subject to revie, for impairment in accordance ,it( paragrap(s 97:6> and Appendi& A paragrap(s A27<:A2938

Subse-uent measurement of financia* *iabi*ities

<6 After initia* recognition4 an entit. s(a** measure a** financia* *iabi*ities at amortised cost using t(e effective interest met(od4 e&cept for% (a) financia* *iabi*ities at fair va*ue t(roug( profit or *oss8 Suc( *iabi*ities4 inc*uding derivatives t(at are *iabi*ities4 s(a** be measured at fair va*ue e&cept for a derivative *iabi*it. t(at is *in@ed to and must be sett*ed b. de*iver. of an un-uoted e-uit. instrument ,(ose fair va*ue cannot be re*iab*. measured4 ,(ic( s(a** be measured at cost8 financia* *iabi*ities t(at arise ,(en a transfer of a financia* asset does not -ua*if. for derecognition or ,(en t(e continuing invo*vement approac( app*ies8 "aragrap(s 59 and 33 app*. to t(e measurement of suc( financia* *iabi*ities8 financia* guarantee contracts as defined in paragrap( 98 After initia* recognition4 an issuer of suc( a contract s(a** (un*ess paragrap( <6(a) or (b) app*ies) measure it at t(e (ig(er of% (i) (ii) t(e amount determined in accordance ,it( Ind AS 36= and t(e amount initia**. recognised (see paragrap( <3) *ess4 ,(en appropriate4 cumu*ative amortisation recognised in accordance ,it( Ind AS 378

(b)

(c)

(d)

commitments to provide a *oan at a be*o,Amar@et interest rate8 After initia* recognition4 an issuer of suc( a commitment s(a** (un*ess paragrap( <6(a) app*ies) measure it at t(e (ig(er of% (i) (ii) t(e amount determined in accordance ,it( Ind AS 36= and t(e amount initia**. recognised (see paragrap( <3) *ess4 ,(en appropriate4 cumu*ative amortisation recognised in accordance ,it( Ind AS 378

)inancia* *iabi*ities t(at are designated as (edged items are subject to t(e (edge accounting re-uirements in paragrap(s 79:3>58 )air va*ue measurement considerations <7 In determining t(e fair va*ue of a financia* asset or a financia* *iabi*it. for t(e purpose of app*.ing t(is Standard4 Ind AS 35 or Ind AS 3>64 an entit. s(a** app*. paragrap(s A2;9:A275 of Appendi& A8

23

"rovided t(at in determining t(e fair va*ue of t(e financia* *iabi*ities ,(ic( upon initia* recognition are designated at fair va*ue t(roug( profit or *oss4 an. c(ange in fair va*ue conse-uent to c(anges in t(e entit.?s o,n credit ris@ s(a** be ignored8 48# The (est e!idence of fair !alue is quoted 'rices in an acti!e "ar>et4 If the "ar>et for a financial instru"ent is not acti!e6 an entity esta(lishes fair !alue (y using a !aluation technique4 The o(5ecti!e of using a !aluation technique is to esta(lish &hat the transaction 'rice &ould ha!e (een on the "easure"ent date in an ar"?s length e8change "oti!ated (y nor"al (usiness considerations4 Caluation techniques include using recent ar"?s length "ar>et transactions (et&een >no&ledgea(le6 &illing 'arties6 if a!aila(le6 reference to the current fair !alue of another instru"ent that is su(stantially the sa"e6 discounted cash flo& analysis and o'tion 'ricing "odels4 If there is a !aluation technique co""only used (y "ar>et 'artici'ants to 'rice the instru"ent and that technique has (een de"onstrated to 'ro!ide relia(le esti"ates of 'rices o(tained in actual "ar>et transactions6 the entity uses that technique4 The chosen !aluation technique "a>es "a8i"u" use of "ar>et in'uts and relies as little as 'ossi(le on entity, s'ecific in'uts4 It incor'orates all factors that "ar>et 'artici'ants &ould consider in setting a 'rice and is consistent &ith acce'ted econo"ic "ethodologies for 'ricing financial instru"ents4 Deriodically6 an entity cali(rates the !aluation technique and tests it for !alidity using 'rices fro" any o(ser!a(le current "ar>et transactions in the sa"e instru"ent ;ie &ithout "odification or re'ac>aging< or (ased on any a!aila(le o(ser!a(le "ar>et data4 The fair !alue of a financial lia(ility &ith a de"and feature ;eg a de"and de'osit< is not less than the a"ount 'aya(le on de"and6 discounted fro" the first date that the a"ount could (e required to (e 'aid4

49

Rec*assifications
9> An entit.% (a) (b) s(a** not rec*assif. a derivative out of t(e fair va*ue t(roug( profit or *oss categor. ,(i*e it is (e*d or issued= s(a** not rec*assif. an. financia* instrument out of t(e fair va*ue t(roug( profit or *oss categor. if upon initia* recognition it ,as designated b. t(e entit. as at fair va*ue t(roug( profit or *oss= and ma.4 if a financia* asset is no *onger (e*d for t(e purpose of se**ing or repurc(asing it in t(e near term (not,it(standing t(at t(e financia* asset ma. (ave been ac-uired or incurred principa**. for t(e purpose of se**ing or repurc(asing it in t(e near term)4 rec*assif. t(at financia* asset out of t(e fair va*ue t(roug( profit or *oss categor. if t(e re-uirements in paragrap( 9>' or 9>D are met8

(c)

An entit. s(a** not rec*assif. an. financia* instrument into t(e fair va*ue t(roug( profit or *oss categor. after initia* recognition8 50# The follo&ing changes in circu"stances are not reclassifications for the 'ur'oses of 'aragra'h 50:

24

;a<

a deri!ati!e that &as 're!iously a designated and effecti!e hedging instru"ent in a cash flo& hedge or net in!est"ent hedge no longer qualifies as such= a deri!ati!e (eco"es a designated and effecti!e hedging instru"ent in a cash flo& hedge or net in!est"ent hedge= financial assets are reclassified &hen an insurance co"'any changes its accounting 'olicies in accordance &ith 'aragra'h 45 of Ind #) 1044

;(< ;c< 50/

# financial asset to &hich 'aragra'h 50;c< a''lies ;e8ce't a financial asset of the ty'e descri(ed in 'aragra'h 50D< "ay (e reclassified out of the fair !alue through 'rofit or loss category only in rare circu"stances4 If an entity reclassifies a financial asset out of the fair !alue through 'rofit or loss category in accordance &ith 'aragra'h 50/6 the financial asset shall (e reclassified at its fair !alue on the date of reclassification4 #ny gain or loss already recognised in 'rofit or loss shall not (e re!ersed4 The fair !alue of the financial asset on the date of reclassification (eco"es its ne& cost or a"ortised cost6 as a''lica(le4 # financial asset to &hich 'aragra'h 50;c< a''lies that &ould ha!e "et the definition of loans and recei!a(les ;if the financial asset had not (een required to (e classified as held for trading at initial recognition< "ay (e reclassified out of the fair !alue through 'rofit or loss category if the entity has the intention and a(ility to hold the financial asset for the foreseea(le future or until "aturity4 # financial asset classified as a!aila(le for sale that &ould ha!e "et the definition of loans and recei!a(les ;if it had not (een designated as a!aila(le for sale< "ay (e reclassified out of the a!aila(le,for,sale category to the loans and recei!a(les category if the entity has the intention and a(ility to hold the financial asset for the foreseea(le future or until "aturity4 If an entity reclassifies a financial asset out of the fair !alue through 'rofit or loss category in accordance &ith 'aragra'h 50D or out of the a!aila(le,for,sale category in accordance &ith 'aragra'h 5016 it shall reclassify the financial asset at its fair !alue on the date of reclassification4 *or a financial asset reclassified in accordance &ith 'aragra'h 50D6 any gain or loss already recognised in 'rofit or loss shall not (e re!ersed4 The fair !alue of the financial asset on the date of reclassification (eco"es its ne& cost or a"ortised cost6 as a''lica(le4 *or a financial asset reclassified out of the a!aila(le,for,sale category in accordance &ith 'aragra'h 5016 any 're!ious gain or loss on that asset that has (een recognised in other co"'rehensi!e inco"e in accordance &ith 'aragra'h 55;(< shall (e accounted for in accordance &ith 'aragra'h 544 If4 as a resu*t of a c(ange in intention or abi*it.4 it is no *onger appropriate to c*assif. an investment as (e*d to maturit.4 it s(a** be rec*assified as avai*ab*e for sa*e and remeasured at fair va*ue4 and t(e difference bet,een its carr.ing amount and fair va*ue s(a** be accounted for in accordance ,it( paragrap( 99(b)8 C(enever sa*es or rec*assification of more t(an an insignificant amount of (e*dAtoAmaturit. investments do not meet an. of t(e conditions in

50

50D

501

50*

93

95

25

paragrap( 94 an. remaining (e*dAtoAmaturit. investments s(a** be rec*assified as avai*ab*e for sa*e8 On suc( rec*assification4 t(e difference bet,een t(eir carr.ing amount and fair va*ue s(a** be accounted for in accordance ,it( paragrap( 99(b)8 93 If a re*iab*e measure becomes avai*ab*e for a financia* asset or financia* *iabi*it. for ,(ic( suc( a measure ,as previous*. not avai*ab*e4 and t(e asset or *iabi*it. is re-uired to be measured at fair va*ue if a re*iab*e measure is avai*ab*e (see paragrap(s <;(c) and <6)4 t(e asset or *iabi*it. s(a** be remeasured at fair va*ue4 and t(e difference bet,een its carr.ing amount and fair va*ue s(a** be accounted for in accordance ,it( paragrap( 998 If4 as a resu*t of a c(ange in intention or abi*it. or in t(e rare circumstance t(at a re*iab*e measure of fair va*ue is no *onger avai*ab*e (see paragrap(s <;(c) and <6) or because t(e Bt,o preceding financia* .ears? referred to in paragrap( 9 (ave passed4 it becomes appropriate to carr. a financia* asset or financia* *iabi*it. at cost or amortised cost rat(er t(an at fair va*ue4 t(e fair va*ue carr.ing amount of t(e financia* asset or t(e financia* *iabi*it. on t(at date becomes its ne, cost or amortised cost4 as app*icab*e8 An. previous gain or *oss on t(at asset t(at (as been recognised in ot(er compre(ensive income in accordance ,it( paragrap( 99(b) s(a** be accounted for as fo**o,s% (a) In t(e case of a financia* asset ,it( a fi&ed maturit.4 t(e gain or *oss s(a** be amortised to profit or *oss over t(e remaining *ife of t(e (e*dA toAmaturit. investment using t(e effective interest met(od8 An. difference bet,een t(e ne, amortised cost and maturit. amount s(a** a*so be amortised over t(e remaining *ife of t(e financia* asset using t(e effective interest met(od4 simi*ar to t(e amortisation of a premium and a discount8 If t(e financia* asset is subse-uent*. impaired4 an. gain or *oss t(at (as been recognised in ot(er compre(ensive income is rec*assified from e-uit. to profit or *oss in accordance ,it( paragrap( ;68 In t(e case of a financia* asset t(at does not (ave a fi&ed maturit.4 t(e gain or *oss s(a** be recognised in profit or *oss ,(en t(e financia* asset is so*d or ot(er,ise disposed of8 If t(e financia* asset is subse-uent*. impaired an. previous gain or *oss t(at (as been recognised in ot(er compre(ensive income is rec*assified from e-uit. to profit or *oss in accordance ,it( paragrap( ;68

9<

(b)

2ains and *osses

99 A gain or *oss arising from a c(ange in t(e fair va*ue of a financia* asset or financia* *iabi*it. t(at is not part of a (edging re*ations(ip (see paragrap(s 79:3>5)4 s(a** be recognised4 as fo**o,s8 (a) (b) A gain or *oss on a financia* asset or financia* *iabi*it. c*assified as at fair va*ue t(roug( profit or *oss s(a** be recognised in profit or *oss8 A gain or *oss on an avai*ab*eAforAsa*e financia* asset s(a** be recognised in ot(er compre(ensive income4 e&cept for impairment

26

*osses (see paragrap(s ;6:6>) and foreign e&c(ange gains and *osses (see Appendi& A paragrap( A273)4 unti* t(e financia* asset is derecognised8 At t(at time t(e cumu*ative gain or *oss previous*. recognised in ot(er compre(ensive income s(a** be rec*assified from e-uit. to profit or *oss as a rec*assification adjustment (see Ind AS 3 $resentation o+ Financial Statements)8 !o,ever4 interest ca*cu*ated using t(e effective interest met(od (see paragrap( 9) is recognised in profit or *oss (seeInd AS 37)8 Dividends on an avai*ab*eAforAsa*e e-uit. instrument are recognised in profit or *oss ,(en t(e entit.?s rig(t to receive pa.ment is estab*is(ed (see Ind AS 37)8 9; )or financia* assets and financia* *iabi*ities carried at amortised cost (see paragrap(s <; and <6)4 a gain or *oss is recognised in profit or *oss ,(en t(e financia* asset or financia* *iabi*it. is derecognised or impaired4 and t(roug( t(e amortisation process8 !o,ever4 for financia* assets or financia* *iabi*ities t(at are (edged items (see paragrap(s 67:7< and Appendi& A paragrap(s A297:A23>3) t(e accounting for t(e gain or *oss s(a** fo**o, paragrap(s 79:3>58 If an entit. recognises financia* assets using sett*ement date accounting (see paragrap( 37 and Appendi& A paragrap(s A293 and A29;)4 an. c(ange in t(e fair va*ue of t(e asset to be received during t(e period bet,een t(e trade date and t(e sett*ement date is not recognised for assets carried at cost or amortised cost (ot(er t(an impairment *osses)8 )or assets carried at fair va*ue4 (o,ever4 t(e c(ange in fair va*ue s(a** be recognised in profit or *oss or in ot(er compre(ensive income4 as appropriate under paragrap( 998

96

Impairment and unco**ectibi*it. of financia* assets

97 An entit. s(a** assess at t(e end of eac( reporting period ,(et(er t(ere is an. objective evidence t(at a financia* asset or group of financia* assets is impaired8 If an. suc( evidence e&ists4 t(e entit. s(a** app*. paragrap( ;3 (for financia* assets carried at amortised cost)4 paragrap( ;; (for financia* assets carried at cost) or paragrap( ;6 (for avai*ab*eAforAsa*e financia* assets) to determine t(e amount of an. impairment *oss8 # financial asset or a grou' of financial assets is i"'aired and i"'air"ent losses are incurred if6 and only if6 there is o(5ecti!e e!idence of i"'air"ent as a result of one or "ore e!ents that occurred after the initial recognition of the asset ;a Eloss e!ent?< and that loss e!ent ;or e!ents< has an i"'act on the esti"ated future cash flo&s of the financial asset or grou' of financial assets that can (e relia(ly esti"ated4 It "ay not (e 'ossi(le to identify a single6 discrete e!ent that caused the i"'air"ent4 %ather the co"(ined effect of se!eral e!ents "ay ha!e caused the i"'air"ent4 2osses e8'ected as a result of future e!ents6 no "atter ho& li>ely6 are not recognised4 @(5ecti!e e!idence that a financial asset or grou' of assets is i"'aired includes o(ser!a(le data that co"es to the attention of the holder of the asset a(out the follo&ing loss e!ents: ;a< ;(< significant financial difficulty of the issuer or o(ligor= a (reach of contract6 such as a default or delinquency in interest or 'rinci'al 'ay"ents=

59

27

;c<

the lender6 for econo"ic or legal reasons relating to the (orro&er?s financial difficulty6 granting to the (orro&er a concession that the lender &ould not other&ise consider= it (eco"ing 'ro(a(le that the (orro&er &ill enter (an>ru'tcy or other financial reorganisation= the disa''earance of an acti!e "ar>et for that financial asset (ecause of financial difficulties= or o(ser!a(le data indicating that there is a "easura(le decrease in the esti"ated future cash flo&s fro" a grou' of financial assets since the initial recognition of those assets6 although the decrease cannot yet (e identified &ith the indi!idual financial assets in the grou'6 including: ;i< ad!erse changes in the 'ay"ent status of (orro&ers in the grou' ;eg an increased nu"(er of delayed 'ay"ents or an increased nu"(er of credit card (orro&ers &ho ha!e reached their credit li"it and are 'aying the "ini"u" "onthly a"ount<= or national or local econo"ic conditions that correlate &ith defaults on the assets in the grou' ;eg an increase in the une"'loy"ent rate in the geogra'hical area of the (orro&ers6 a decrease in 'ro'erty 'rices for "ortgages in the rele!ant area6 a decrease in oil 'rices for loan assets to oil 'roducers6 or ad!erse changes in industry conditions that affect the (orro&ers in the grou'<4

;d< ;e< ;f<

;ii<

$0

The disa''earance of an acti!e "ar>et (ecause an entity?s financial instru"ents are no longer 'u(licly traded is not e!idence of i"'air"ent4 # do&ngrade of an entity?s credit rating is not6 of itself6 e!idence of i"'air"ent6 although it "ay (e e!idence of i"'air"ent &hen considered &ith other a!aila(le infor"ation4 # decline in the fair !alue of a financial asset (elo& its cost or a"ortised cost is not necessarily e!idence of i"'air"ent ;for e8a"'le6 a decline in the fair !alue of an in!est"ent in a de(t instru"ent that results fro" an increase in the ris>,free interest rate<4 In addition to the ty'es of e!ents in 'aragra'h 596 o(5ecti!e e!idence of i"'air"ent for an in!est"ent in an equity instru"ent includes infor"ation a(out significant changes &ith an ad!erse effect that ha!e ta>en 'lace in the technological6 "ar>et6 econo"ic or legal en!iron"ent in &hich the issuer o'erates6 and indicates that the cost of the in!est"ent in the equity instru"ent "ay not (e reco!ered4 # significant or 'rolonged decline in the fair !alue of an in!est"ent in an equity instru"ent (elo& its cost is also o(5ecti!e e!idence of i"'air"ent4 In so"e cases the o(ser!a(le data required to esti"ate the a"ount of an i"'air"ent loss on a financial asset "ay (e li"ited or no longer fully rele!ant to current circu"stances4 *or e8a"'le6 this "ay (e the case &hen a (orro&er is in financial difficulties and there are fe& a!aila(le historical data relating to si"ilar (orro&ers4 In such cases6 an entity uses its e8'erienced 5udge"ent to esti"ate the a"ount of any i"'air"ent loss4 )i"ilarly an entity uses its e8'erienced 5udge"ent to ad5ust o(ser!a(le data for a grou' of financial assets to reflect current circu"stances ;see 'aragra'h #+89<4 The use of reasona(le esti"ates

$1

$2

28

is an essential 'art of the 're'aration of financial state"ents and does not under"ine their relia(ility4

)inancia* assets carried at amortised cost

;3 If t(ere is objective evidence t(at an impairment *oss on *oans and receivab*es or (e*dAtoAmaturit. investments carried at amortised cost (as been incurred4 t(e amount of t(e *oss is measured as t(e difference bet,een t(e asset?s carr.ing amount and t(e present va*ue of estimated future cas( f*o,s (e&c*uding future credit *osses t(at (ave not been incurred) discounted at t(e financia* asset?s origina* effective interest rate (ie t(e effective interest rate computed at initia* recognition)8 0(e carr.ing amount of t(e asset s(a** be reduced eit(er direct*. or t(roug( use of an a**o,ance account8 0(e amount of t(e *oss s(a** be recognised in profit or *oss8 #n entity first assesses &hether o(5ecti!e e!idence of i"'air"ent e8ists indi!idually for financial assets that are indi!idually significant6 and indi!idually or collecti!ely for financial assets that are not indi!idually significant ;see 'aragra'h 59<4 If an entity deter"ines that no o(5ecti!e e!idence of i"'air"ent e8ists for an indi!idually assessed financial asset6 &hether significant or not6 it includes the asset in a grou' of financial assets &ith si"ilar credit ris> characteristics and collecti!ely assesses the" for i"'air"ent4 #ssets that are indi!idually assessed for i"'air"ent and for &hich an i"'air"ent loss is or continues to (e recognised are not included in a collecti!e assess"ent of i"'air"ent4 If4 in a subse-uent period4 t(e amount of t(e impairment *oss decreases and t(e decrease can be re*ated objective*. to an event occurring after t(e impairment ,as recognised (suc( as an improvement in t(e debtor?s credit rating)4 t(e previous*. recognised impairment *oss s(a** be reversed eit(er direct*. or b. adjusting an a**o,ance account8 0(e reversa* s(a** not resu*t in a carr.ing amount of t(e financia* asset t(at e&ceeds ,(at t(e amortised cost ,ou*d (ave been (ad t(e impairment not been recognised at t(e date t(e impairment is reversed8 0(e amount of t(e reversa* s(a** be recognised in profit or *oss8

$4

;9

)inancia* assets carried at cost

;; If t(ere is objective evidence t(at an impairment *oss (as been incurred on an un-uoted e-uit. instrument t(at is not carried at fair va*ue because its fair va*ue cannot be re*iab*. measured4 or on a derivative asset t(at is *in@ed to and must be sett*ed b. de*iver. of suc( an un-uoted e-uit. instrument4 t(e amount of t(e impairment *oss is measured as t(e difference bet,een t(e carr.ing amount of t(e financia* asset and t(e present va*ue of estimated future cas( f*o,s discounted at t(e current mar@et rate of return for a simi*ar financia* asset (see paragrap( <;(c) and Appendi& A paragrap(s A27> and A273)8 Suc( impairment *osses s(a** not be reversed8

Avai*ab*eAforAsa*e financia* assets

29

;6

C(en a dec*ine in t(e fair va*ue of an avai*ab*eAforAsa*e financia* asset (as been recognised in ot(er compre(ensive income and t(ere is objective evidence t(at t(e asset is impaired (see paragrap( 99)4 t(e cumu*ative *oss t(at (ad been recognised in ot(er compre(ensive income s(a** be rec*assified from e-uit. to profit or *oss as a rec*assification adjustment even t(oug( t(e financia* asset (as not been derecognised8 0(e amount of t(e cumu*ative *oss t(at is rec*assified from e-uit. to profit or *oss under paragrap( ;6 s(a** be t(e difference bet,een t(e ac-uisition cost (net of an. principa* repa.ment and amortisation) and current fair va*ue4 *ess an. impairment *oss on t(at financia* asset previous*. recognised in profit or *oss8 Impairment *osses recognised in profit or *oss for an investment in an e-uit. instrument c*assified as avai*ab*e for sa*e s(a** not be reversed t(roug( profit or *oss8 If4 in a subse-uent period4 t(e fair va*ue of a debt instrument c*assified as avai*ab*e for sa*e increases and t(e increase can be objective*. re*ated to an event occurring after t(e impairment *oss ,as recognised in profit or *oss4 t(e impairment *oss s(a** be reversed4 ,it( t(e amount of t(e reversa* recognised in profit or *oss8

;7

;9

6>

!edging
63 If t(ere is a designated (edging re*ations(ip bet,een a (edging instrument and a (edged item as described in paragrap(s 79:77 and Appendi& A paragrap(s A23>5:A23><4 accounting for t(e gain or *oss on t(e (edging instrument and t(e (edged item s(a** fo**o, paragrap(s 79:3>58

!edging instruments
Eua*if.ing instruments
72 This )tandard does not restrict the circu"stances in &hich a deri!ati!e "ay (e designated as a hedging instru"ent 'ro!ided the conditions in 'aragra'h 88 are "et6 e8ce't for so"e &ritten o'tions ;see #''endi8 # 'aragra'h #+94<4 -o&e!er6 a non,deri!ati!e financial asset or non,deri!ati!e financial lia(ility "ay (e designated as a hedging instru"ent only for a hedge of a foreign currency ris>4 *or hedge accounting 'ur'oses6 only instru"ents that in!ol!e a 'arty e8ternal to the re'orting entity ;ie e8ternal to the grou' or indi!idual entity that is (eing re'orted on< can (e designated as hedging instru"ents4 #lthough indi!idual entities &ithin a consolidated grou' or di!isions &ithin an entity "ay enter into hedging transactions &ith other entities &ithin the grou' or di!isions &ithin the entity6 any such intragrou' transactions are eli"inated on consolidation4 Therefore6 such hedging transactions do not qualify for hedge accounting in the consolidated financial state"ents of the grou'4 -o&e!er6 they "ay qualify for hedge accounting in the indi!idual or se'arate financial state"ents of indi!idual entities &ithin the grou' 'ro!ided that they are e8ternal to the indi!idual entity that is (eing re'orted on4

73

30

Designation of (edging instruments

74 There is nor"ally a single fair !alue "easure for a hedging instru"ent in its entirety6 and the factors that cause changes in fair !alue are co,de'endent4 Thus6 a hedging relationshi' is designated (y an entity for a hedging instru"ent in its entirety4 The only e8ce'tions 'er"itted are: ;a< se'arating the intrinsic !alue and ti"e !alue of an o'tion contract and designating as the hedging instru"ent only the change in intrinsic !alue of an o'tion and e8cluding change in its ti"e !alue= and se'arating the interest ele"ent and the s'ot 'rice of a for&ard contract4

;(<

These e8ce'tions are 'er"itted (ecause the intrinsic !alue of the o'tion and the 're"iu" on the for&ard can generally (e "easured se'arately4 # dyna"ic hedging strategy that assesses (oth the intrinsic !alue and ti"e !alue of an o'tion contract can qualify for hedge accounting4 75 # 'ro'ortion of the entire hedging instru"ent6 such as 50 'er cent of the notional a"ount6 "ay (e designated as the hedging instru"ent in a hedging relationshi'4 -o&e!er6 a hedging relationshi' "ay not (e designated for only a 'ortion of the ti"e 'eriod during &hich a hedging instru"ent re"ains outstanding4 # single hedging instru"ent "ay (e designated as a hedge of "ore than one ty'e of ris> 'ro!ided that ;a< the ris>s hedged can (e identified clearly= ;(< the effecti!eness of the hedge can (e de"onstrated= and ;c< it is 'ossi(le to ensure that there is s'ecific designation of the hedging instru"ent and different ris> 'ositions4 T&o or "ore deri!ati!es6 or 'ro'ortions of the" ;or6 in the case of a hedge of currency ris>6 t&o or "ore non,deri!ati!es or 'ro'ortions of the"6 or a co"(ination of deri!ati!es and non,deri!ati!es or 'ro'ortions of the"<6 "ay (e !ie&ed in co"(ination and 5ointly designated as the hedging instru"ent6 including &hen the ris>;s< arising fro" so"e deri!ati!es offset;s< those arising fro" others4 -o&e!er6 an interest rate collar or other deri!ati!e instru"ent that co"(ines a &ritten o'tion and a 'urchased o'tion does not qualify as a hedging instru"ent if it is6 in effect6 a net &ritten o'tion ;for &hich a net 're"iu" is recei!ed<4 )i"ilarly6 t&o or "ore instru"ents ;or 'ro'ortions of the"< "ay (e designated as the hedging instru"ent only if none of the" is a &ritten o'tion or a net &ritten o'tion4

7$

77

!edged items
Eua*if.ing items
78 # hedged ite" can (e a recognised asset or lia(ility6 an unrecognised fir" co""it"ent6 a highly 'ro(a(le forecast transaction or a net in!est"ent in a foreign o'eration4 The hedged ite" can (e ;a< a single asset6 lia(ility6 fir" co""it"ent6 highly 'ro(a(le forecast transaction or net in!est"ent in a foreign o'eration6 ;(< a grou' of assets6 lia(ilities6 fir" co""it"ents6 highly 'ro(a(le forecast transactions or net in!est"ents in foreign o'erations &ith si"ilar ris>

31

characteristics or ;c< in a 'ortfolio hedge of interest rate ris> only6 a 'ortion of the 'ortfolio of financial assets or financial lia(ilities that share the ris> (eing hedged4 79 Fnli>e loans and recei!a(les6 a held,to,"aturity in!est"ent cannot (e a hedged ite" &ith res'ect to interest,rate ris> or 're'ay"ent ris> (ecause designation of an in!est"ent as held to "aturity requires an intention to hold the in!est"ent until "aturity &ithout regard to changes in the fair !alue or cash flo&s of such an in!est"ent attri(uta(le to changes in interest rates4 -o&e!er6 a held,to,"aturity in!est"ent can (e a hedged ite" &ith res'ect to ris>s fro" changes in foreign currency e8change rates and credit ris>4 *or hedge accounting 'ur'oses6 only assets6 lia(ilities6 fir" co""it"ents or highly 'ro(a(le forecast transactions that in!ol!e a 'arty e8ternal to the entity can (e designated as hedged ite"s4 It follo&s that hedge accounting can (e a''lied to transactions (et&een entities in the sa"e grou' only in the indi!idual or se'arate financial state"ents of those entities and not in the consolidated financial state"ents of the grou'4 #s an e8ce'tion6 the foreign currency ris> of an intragrou' "onetary ite" ;eg a 'aya(leGrecei!a(le (et&een t&o su(sidiaries< "ay qualify as a hedged ite" in the consolidated financial state"ents if it results in an e8'osure to foreign e8change rate gains or losses that are not fully eli"inated on consolidation in accordance &ith Ind #) 216 The Effects of Changes in Foreign Exchange *ates4 In accordance &ith Ind #) 216 foreign e8change rate gains and losses on intragrou' "onetary ite"s are not fully eli"inated on consolidation &hen the intragrou' "onetary ite" is transacted (et&een t&o grou' entities that ha!e different functional currencies4 In addition6 the foreign currency ris> of a highly 'ro(a(le forecast intragrou' transaction "ay qualify as a hedged ite" in consolidated financial state"ents 'ro!ided that the transaction is deno"inated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency ris> &ill affect consolidated 'rofit or loss4

80

Designation of financia* items as (edged items

81 If the hedged ite" is a financial asset or financial lia(ility6 it "ay (e a hedged ite" &ith res'ect to the ris>s associated &ith only a 'ortion of its cash flo&s or fair !alue ;such as one or "ore selected contractual cash flo&s or 'ortions of the" or a 'ercentage of the fair !alue< 'ro!ided that effecti!eness can (e "easured4 *or e8a"'le6 an identifia(le and se'arately "easura(le 'ortion of the interest rate e8'osure of an interest,(earing asset or interest,(earing lia(ility "ay (e designated as the hedged ris> ;such as a ris>,free interest rate or (ench"ar> interest rate co"'onent of the total interest rate e8'osure of a hedged financial instru"ent<4 In a fair !alue hedge of the interest rate e8'osure of a 'ortfolio of financial assets or financial lia(ilities ;and only in such a hedge<6 the 'ortion hedged "ay (e designated in ter"s of an a"ount of a currency ;eg an a"ount of dollars6 euro6 'ounds or rand< rather than as indi!idual assets ;or lia(ilities<4 #lthough the 'ortfolio "ay6 for ris> "anage"ent 'ur'oses6 include assets and lia(ilities6 the a"ount designated is an a"ount of assets or an a"ount of lia(ilities4 Designation of a net a"ount including assets and lia(ilities is not 'er"itted 4 The entity "ay hedge a 'ortion of the interest rate ris> associated &ith this designated a"ount4 *or e8a"'le6 in the case of a hedge of a 'ortfolio containing 're'aya(le assets6

81#

32

the entity "ay hedge the change in fair !alue that is attri(uta(le to a change in the hedged interest rate on the (asis of e8'ected6 rather than contractual6 re'ricing dates4 Bhen the 'ortion hedged is (ased on e8'ected re'ricing dates6 the effect that changes in the hedged interest rate ha!e on those e8'ected re'ricing dates shall (e included &hen deter"ining the change in the fair !alue of the hedged ite"4 onsequently6 if a 'ortfolio that contains 're'aya(le ite"s is hedged &ith a non,'re'aya(le deri!ati!e6 ineffecti!eness arises if the dates on &hich ite"s in the hedged 'ortfolio are e8'ected to 're'ay are re!ised6 or actual 're'ay"ent dates differ fro" those e8'ected4

Designation of nonAfinancia* items as (edged items

75 If t(e (edged item is a nonAfinancia* asset or nonAfinancia* *iabi*it.4 it s(a** be designated as a (edged item (a) for foreign currenc. ris@s4 or (b) in its entiret. for a** ris@s4 because of t(e difficu*t. of iso*ating and measuring t(e appropriate portion of t(e cas( f*o,s or fair va*ue c(anges attributab*e to specific ris@s ot(er t(an foreign currenc. ris@s8

Designation of groups of items as (edged items

83 )i"ilar assets or si"ilar lia(ilities shall (e aggregated and hedged as a grou' only if the indi!idual assets or indi!idual lia(ilities in the grou' share the ris> e8'osure that is designated as (eing hedged4 *urther"ore6 the change in fair !alue attri(uta(le to the hedged ris> for each indi!idual ite" in the grou' shall (e e8'ected to (e a''ro8i"ately 'ro'ortional to the o!erall change in fair !alue attri(uta(le to the hedged ris> of the grou' of ite"s4 /ecause an entity assesses hedge effecti!eness (y co"'aring the change in the fair !alue or cash flo& of a hedging instru"ent ;or grou' of si"ilar hedging instru"ents< and a hedged ite" ;or grou' of si"ilar hedged ite"s<6 co"'aring a hedging instru"ent &ith an o!erall net 'osition ;eg the net of all fi8ed rate assets and fi8ed rate lia(ilities &ith si"ilar "aturities<6 rather than &ith a s'ecific hedged ite"6 does not qualify for hedge accounting4

84

!edge accounting
85 7; -edge accounting recognises the offsetting effects on 'rofit or loss of changes in the fair !alues of the hedging instru"ent and the hedged ite"4 !edging re*ations(ips are of t(ree t.pes% (a) fair value hedge% a (edge of t(e e&posure to c(anges in fair va*ue of a recognised asset or *iabi*it. or an unrecognised firm commitment4 or an identified portion of suc( an asset4 *iabi*it. or firm commitment4 t(at is attributab*e to a particu*ar ris@ and cou*d affect profit or *oss8 cash flo' hedge% a (edge of t(e e&posure to variabi*it. in cas( f*o,s t(at (i) is attributab*e to a particu*ar ris@ associated ,it( a recognised asset or *iabi*it. (suc( as a** or some future interest pa.ments on variab*e rate debt) or a (ig(*. probab*e forecast transaction and (ii) cou*d affect profit or *oss8 hedge of a net investment in a foreign operation as defined in Ind AS 538

(b)

(c)

33

87 77

# hedge of the foreign currency ris> of a fir" co""it"ent "ay (e accounted for as a fair !alue hedge or as a cash flo& hedge4 A (edging re*ations(ip -ua*ifies for (edge accounting under paragrap(s 79:3>5 if4 and on*. if4 a** of t(e fo**o,ing conditions are met8 (a) At t(e inception of t(e (edge t(ere is forma* designation and documentation of t(e (edging re*ations(ip and t(e entit.?s ris@ management objective and strateg. for underta@ing t(e (edge8 0(at documentation s(a** inc*ude identification of t(e (edging instrument4 t(e (edged item or transaction4 t(e nature of t(e ris@ being (edged and (o, t(e entit. ,i** assess t(e (edging instrument?s effectiveness in offsetting t(e e&posure to c(anges in t(e (edged item?s fair va*ue or cas( f*o,s attributab*e to t(e (edged ris@8 0(e (edge is e&pected to be (ig(*. effective (see Appendi& A paragrap(s A23>9:A2333) in ac(ieving offsetting c(anges in fair va*ue or cas( f*o,s attributab*e to t(e (edged ris@4 consistent*. ,it( t(e origina**. documented ris@ management strateg. for t(at particu*ar (edging re*ations(ip8 )or cas( f*o, (edges4 a forecast transaction t(at is t(e subject of t(e (edge must be (ig(*. probab*e and must present an e&posure to variations in cas( f*o,s t(at cou*d u*timate*. affect profit or *oss8 0(e effectiveness of t(e (edge can be re*iab*. measured4 ie t(e fair va*ue or cas( f*o,s of t(e (edged item t(at are attributab*e to t(e (edged ris@ and t(e fair va*ue of t(e (edging instrument can be re*iab*. measured (see paragrap(s <; and <6 and Appendi& A paragrap(s A27> and A273 for guidance on determining fair va*ue)8 0(e (edge is assessed on an ongoing basis and determined actua**. to (ave been (ig(*. effective t(roug(out t(e financia* reporting periods for ,(ic( t(e (edge ,as designated8

#b)

(c)

(d)

(e)

)air va*ue (edges

79 If a fair va*ue (edge meets t(e conditions in paragrap( 77 during t(e period4 it s(a** be accounted for as fo**o,s% (a) t(e gain or *oss from remeasuring t(e (edging instrument at fair va*ue (for a derivative (edging instrument) or t(e foreign currenc. component of its carr.ing amount measured in accordance ,it( Ind AS 53 (for a nonAderivative (edging instrument) s(a** be recognised in profit or *oss= and t(e gain or *oss on t(e (edged item attributab*e to t(e (edged ris@ s(a** adjust t(e carr.ing amount of t(e (edged item and be recognised in profit or *oss8 0(is app*ies if t(e (edged item is ot(er,ise measured at cost8 Recognition of t(e gain or *oss attributab*e to t(e (edged ris@ in profit or *oss app*ies if t(e (edged item is an avai*ab*eAforAsa*e financia* asset8

(b)

34

89#

*or a fair !alue hedge of the interest rate e8'osure of a 'ortion of a 'ortfolio of financial assets or financial lia(ilities ;and only in such a hedge<6 the require"ent in 'aragra'h 89;(< "ay (e "et (y 'resenting the gain or loss attri(uta(le to the hedged ite" either: ;a< ;(< in a single se'arate line ite" &ithin assets6 for those re'ricing ti"e 'eriods for &hich the hedged ite" is an asset= or in a single se'arate line ite" &ithin lia(ilities6 for those re'ricing ti"e 'eriods for &hich the hedged ite" is a lia(ility4

The se'arate line ite"s referred to in ;a< and ;(< a(o!e shall (e 'resented ne8t to financial assets or financial lia(ilities4 #"ounts included in these line ite"s shall (e re"o!ed fro" the (alance sheet &hen the assets or lia(ilities to &hich they relate are derecognised4 90 If only 'articular ris>s attri(uta(le to a hedged ite" are hedged6 recognised changes in the fair !alue of the hedged ite" unrelated to the hedged ris> are recognised as set out in 'aragra'h 554 An entit. s(a** discontinue prospective*. t(e (edge accounting specified in paragrap( 79 if% (a) t(e (edging instrument e&pires or is so*d4 terminated or e&ercised (for t(is purpose4 t(e rep*acement or ro**over of a (edging instrument into anot(er (edging instrument is not an e&piration or termination if suc( rep*acement or ro**over is part of t(e entit.?s documented (edging strateg.)= t(e (edge no *onger meets t(e criteria for (edge accounting in paragrap( 77= or t(e entit. revo@es t(e designation8

93

(b) (c) 95

An. adjustment arising from paragrap( 79(b) to t(e carr.ing amount of a (edged financia* instrument for ,(ic( t(e effective interest met(od is used (or4 in t(e case of a portfo*io (edge of interest rate ris@4 to t(e separate *ine item in t(e ba*ance s(eet described in paragrap( 79A) s(a** be amortised to profit or *oss8 Amortisation ma. begin as soon as an adjustment e&ists and s(a** begin no *ater t(an ,(en t(e (edged item ceases to be adjusted for c(anges in its fair va*ue attributab*e to t(e ris@ being (edged8 0(e adjustment is based on a reca*cu*ated effective interest rate at t(e date amortisation begins8 !o,ever4 if4 in t(e case of a fair va*ue (edge of t(e interest rate e&posure of a portfo*io of financia* assets or financia* *iabi*ities (and on*. in suc( a (edge)4 amortising using a reca*cu*ated effective interest rate is not practicab*e4 t(e adjustment s(a** be amortised using a straig(tA*ine met(od8 0(e adjustment s(a** be amortised fu**. b. maturit. of t(e financia* instrument or4 in t(e case of a portfo*io (edge of interest rate ris@4 b. e&pir. of t(e re*evant repricing time period8 Bhen an unrecognised fir" co""it"ent is designated as a hedged ite"6 the su(sequent cu"ulati!e change in the fair !alue of the fir" co""it"ent attri(uta(le to the hedged ris> is recognised as an asset or lia(ility &ith a corres'onding gain or loss recognised in 'rofit or loss ;see 'aragra'h 89;(<<4 The

93

35

changes in the fair !alue of the hedging instru"ent are also recognised in 'rofit or loss4 94 Bhen an entity enters into a fir" co""it"ent to acquire an asset or assu"e a lia(ility that is a hedged ite" in a fair !alue hedge6 the initial carrying a"ount of the asset or lia(ility that results fro" the entity "eeting the fir" co""it"ent is ad5usted to include the cu"ulati!e change in the fair !alue of the fir" co""it"ent attri(uta(le to the hedged ris> that &as recognised in the (alance sheet4

Cas( f*o, (edges

99 If a cas( f*o, (edge meets t(e conditions in paragrap( 77 during t(e period4 it s(a** be accounted for as fo**o,s% (a) t(e portion of t(e gain or *oss on t(e (edging instrument t(at is determined to be an effective (edge (see paragrap( 77) s(a** be recognised in ot(er compre(ensive income= and t(e ineffective portion of t(e gain or *oss on t(e (edging instrument s(a** be recognised in profit or *oss8

(b) 9$

3ore s'ecifically6 a cash flo& hedge is accounted for as follo&s: ;a< the se'arate co"'onent of equity associated &ith the hedged ite" is ad5usted to the lesser of the follo&ing ;in a(solute a"ounts<: ;i< ;ii< ;(< the cu"ulati!e gain or loss on the hedging instru"ent fro" ince'tion of the hedge= and the cu"ulati!e change in fair !alue ;'resent !alue< of the e8'ected future cash flo&s on the hedged ite" fro" ince'tion of the hedge=

any re"aining gain or loss on the hedging instru"ent or designated co"'onent of it ;that is not an effecti!e hedge< is recognised in 'rofit or loss= and if an entity?s docu"ented ris> "anage"ent strategy for a 'articular hedging relationshi' e8cludes fro" the assess"ent of hedge effecti!eness a s'ecific co"'onent of the gain or loss or related cash flo&s on the hedging instru"ent ;see 'aragra'hs 746 75 and 88;a<<6 that e8cluded co"'onent of gain or loss is recognised in accordance &ith 'aragra'h 554

;c<

96

If a (edge of a forecast transaction subse-uent*. resu*ts in t(e recognition of a financia* asset or a financia* *iabi*it.4 t(e associated gains or *osses t(at ,ere recognised in ot(er compre(ensive income in accordance ,it( paragrap( 99 s(a** be rec*assified from e-uit. to profit or *oss as a rec*assification adjustment (see Ind AS 3 ) in t(e same period or periods during ,(ic( t(e (edged forecast cas( f*o,s affect profit or *oss (suc( as in t(e periods t(at interest income or interest e&pense is recognised)8 !o,ever4 if an entit. e&pects t(at a** or a portion of a *oss recognised in ot(er compre(ensive income ,i** not be recovered in one or more future periods4 it s(a** rec*assif. into profit or *oss as a rec*assification adjustment t(e amount t(at is not e&pected to be recovered8

36

97

If a (edge of a forecast transaction subse-uent*. resu*ts in t(e recognition of a nonAfinancia* asset or a nonAfinancia* *iabi*it.4 or a forecast transaction for a nonAfinancia* asset or nonAfinancia* *iabi*it. becomes a firm commitment for ,(ic( fair va*ue (edge accounting is app*ied4 t(en t(e entit. s(a** adopt (a) or (b) be*o,% (a) It rec*assifies t(e associated gains and *osses t(at ,ere recognised in ot(er compre(ensive income in accordance ,it( paragrap( 99 to profit or *oss as a rec*assification adjustment (see Ind AS 3 ) in t(e same period or periods during ,(ic( t(e asset ac-uired or *iabi*it. assumed affects profit or *oss (suc( as in t(e periods t(at depreciation e&pense or cost of sa*es is recognised)8 !o,ever4 if an entit. e&pects t(at a** or a portion of a *oss recognised in ot(er compre(ensive income ,i** not be recovered in one or more future periods4 it s(a** rec*assif. from e-uit. to profit or *oss as a rec*assification adjustment t(e amount t(at is not e&pected to be recovered8 It removes t(e associated gains and *osses t(at ,ere recognised in ot(er compre(ensive income in accordance ,it( paragrap( 994 and inc*udes t(em in t(e initia* cost or ot(er carr.ing amount of t(e asset or *iabi*it.8

(b)

99

An entit. s(a** adopt eit(er (a) or (b) in paragrap( 97 as its accounting po*ic. and s(a** app*. it consistent*. to a** (edges to ,(ic( paragrap( 97 re*ates8 )or cas( f*o, (edges ot(er t(an t(ose covered b. paragrap(s 96 and 974 amounts t(at (ad been recognised in ot(er compre(ensive income s(a** be rec*assified from e-uit. to profit or *oss as a rec*assification adjustment (see Ind AS 3) in t(e same period or periods during ,(ic( t(e (edged forecast cas( f*o,s affect profit or *oss (for e&amp*e4 ,(en a forecast sa*e occurs)8 In an. of t(e fo**o,ing circumstances an entit. s(a** discontinue prospective*. t(e (edge accounting specified in paragrap(s 99:3>>% (a) 0(e (edging instrument e&pires or is so*d4 terminated or e&ercised (for t(is purpose4 t(e rep*acement or ro**over of a (edging instrument into anot(er (edging instrument is not an e&piration or termination if suc( rep*acement or ro**over is part of t(e entit.?s documented (edging strateg.)8 In t(is case4 t(e cumu*ative gain or *oss on t(e (edging instrument t(at (as been recognised in ot(er compre(ensive income from t(e period ,(en t(e (edge ,as effective (see paragrap( 99(a)) s(a** remain separate*. in e-uit. unti* t(e forecast transaction occurs8 C(en t(e transaction occurs4 paragrap( 964 97 or 3>> app*ies8 0(e (edge no *onger meets t(e criteria for (edge accounting in paragrap( 778 In t(is case4 t(e cumu*ative gain or *oss on t(e (edging instrument t(at (as been recognised in ot(er compre(ensive income from t(e period ,(en t(e (edge ,as effective (see paragrap( 99(a)) s(a** remain separate*. in e-uit. unti* t(e forecast transaction occurs8 C(en t(e transaction occurs4 paragrap( 964 97 or 3>> app*ies8

3>>

3>3

(b)

37

(c)

0(e forecast transaction is no *onger e&pected to occur4 in ,(ic( case an. re*ated cumu*ative gain or *oss on t(e (edging instrument t(at (as been recognised in ot(er compre(ensive income from t(e period ,(en t(e (edge ,as effective (see paragrap( 99(a)) s(a** be rec*assified from e-uit. to profit or *oss as a rec*assification adjustment8 A forecast transaction t(at is no *onger (ig(*. probab*e (see paragrap( 77(c)) ma. sti** be e&pected to occur8 0(e entit. revo@es t(e designation8 )or (edges of a forecast transaction4 t(e cumu*ative gain or *oss on t(e (edging instrument t(at (as been recognised in ot(er compre(ensive income from t(e period ,(en t(e (edge ,as effective (see paragrap( 99(a)) s(a** remain separate*. in e-uit. unti* t(e forecast transaction occurs or is no *onger e&pected to occur8 C(en t(e transaction occurs4 paragrap( 964 97 or 3>> app*ies8 If t(e transaction is no *onger e&pected to occur4 t(e cumu*ative gain or *oss t(at (ad been recognised in ot(er compre(ensive income s(a** be rec*assified from e-uit. to profit or *oss as a rec*assification adjustment8

(d)

!edges of a net investment

3>5 !edges of a net investment in a foreign operation4 inc*uding a (edge of a monetar. item t(at is accounted for as part of t(e net investment (see Ind AS 53)4 s(a** be accounted for simi*ar*. to cas( f*o, (edges% (a) t(e portion of t(e gain or *oss on t(e (edging instrument t(at is determined to be an effective (edge (see paragrap( 77) s(a** be recognised in ot(er compre(ensive income= and t(e ineffective portion s(a** be recognised in profit or *oss8

(b)

0(e gain or *oss on t(e (edging instrument re*ating to t(e effective portion of t(e (edge t(at (as been recognised in ot(er compre(ensive income s(a** be rec*assified from e-uit. to profit or *oss as a rec*assification adjustment (see Ind AS 3 ) in accordance ,it( paragrap(s <7:<9 of Ind AS 53 on t(e disposa* or period disposa* of t(e foreign operation8

38

Appendi& A App*ication 2uidance

This appendix is an integral part of the )tandard+

Scope (paragrap(s 5:6)

#+1 )o"e contracts require a 'ay"ent (ased on cli"atic6 geological or other 'hysical !aria(les4 ;Those (ased on cli"atic !aria(les are so"eti"es referred to as E&eather deri!ati!es?4< If those contracts are not &ithin the sco'e of Ind #) 396 they are &ithin the sco'e of this )tandard4 This )tandard does not relate to e"'loyee (enefit 'lans4 This )tandard does not change the require"ents relating to royalty agree"ents (ased on the !olu"e of sales or ser!ice re!enues that are accounted for under Ind #) 184 )o"eti"es6 an entity "a>es &hat it !ie&s as a Estrategic in!est"ent? in equity instru"ents issued (y another entity6 &ith the intention of esta(lishing or "aintaining a long,ter" o'erating relationshi' &ith the entity in &hich the in!est"ent is "ade4 The in!estor entity uses Ind #) 28 to deter"ine &hether the equity "ethod of accounting is a''ro'riate for such an in!est"ent4 )i"ilarly6 the in!estor entity uses Ind #) 31 to deter"ine &hether 'ro'ortionate consolidation or the equity "ethod is a''ro'riate for such an in!est"ent4 If neither the equity "ethod nor 'ro'ortionate consolidation is a''ro'riate6 the entity a''lies this )tandard to that strategic in!est"ent4

#+2

#+3

#+3# This )tandard a''lies to the financial assets and financial lia(ilities of insurers6 other than rights and o(ligations that 'aragra'h 2;e< e8cludes (ecause they arise under contracts &ithin the sco'e of Ind #) 1044 #+4 *inancial guarantee contracts "ay ha!e !arious legal for"s6 such as a guarantee6 so"e ty'es of letter of credit6 a credit default contract or an insurance contract4 Their accounting treat"ent does not de'end on their legal for"4 The follo&ing are e8a"'les of the a''ro'riate treat"ent ;see 'aragra'h 2;e<<: ;a< #lthough a financial guarantee contract "eets the definition of an insurance contract in Ind #) 104 if the ris> transferred is significant6 the issuer a''lies this )tandard4 He!ertheless6 if the issuer has 're!iously asserted e8'licitly that it regards such contracts as insurance contracts and has used accounting a''lica(le to insurance contracts6 the issuer "ay elect to a''ly either this )tandard or Ind #) 104 to such financial guarantee contracts4 If this )tandard a''lies6 'aragra'h 43 requires the issuer to recognise a financial guarantee contract initially at fair !alue4 If the financial guarantee contract &as issued to an unrelated 'arty in a stand,alone ar"?s length transaction6 its fair !alue at ince'tion is li>ely to equal the 're"iu" recei!ed6 unless there is e!idence to the contrary4 )u(sequently6 unless the financial guarantee contract &as designated at ince'tion as at fair !alue through 'rofit or loss or unless 'aragra'hs 2937 and #+47#+52 a''ly

39

;&hen a transfer of a financial asset does not qualify for derecognition or the continuing in!ol!e"ent a''roach a''lies<6 the issuer "easures it at the higher of: ;i< ;ii< the a"ount deter"ined in accordance &ith Ind #) 37= and the a"ount initially recognised less6 &hen a''ro'riate6 cu"ulati!e a"ortisation recognised in accordance &ith Ind #) 18 ;see 'aragra'h 47;c<<4

;(<

)o"e credit,related guarantees do not6 as a 'recondition for 'ay"ent6 require that the holder is e8'osed to6 and has incurred a loss on6 the failure of the de(tor to "a>e 'ay"ents on the guaranteed asset &hen due4 #n e8a"'le of such a guarantee is one that requires 'ay"ents in res'onse to changes in a s'ecified credit rating or credit inde84 )uch guarantees are not financial guarantee contracts6 as defined in this )tandard6 and are not insurance contracts6 as defined in Ind #) 1044 )uch guarantees are deri!ati!es and the issuer a''lies this )tandard to the"4 If a financial guarantee contract &as issued in connection &ith the sale of goods6 the issuer a''lies Ind #) 18 in deter"ining &hen it recognises the re!enue fro" the guarantee and fro" the sale of goods4

;c<

#+4# #ssertions that an issuer regards contracts as insurance contracts are ty'ically found throughout the issuer?s co""unications &ith custo"ers and regulators6 contracts6 (usiness docu"entation and financial state"ents4 *urther"ore6 insurance contracts are often su(5ect to accounting require"ents that are distinct fro" the require"ents for other ty'es of transaction6 such as contracts issued (y (an>s or co""ercial co"'anies4 In such cases6 an issuer?s financial state"ents ty'ically include a state"ent that the issuer has used those accounting require"ents4

Definitions (paragrap(s 7 and 9)

Designation as at fair va*ue t(roug( profit or *oss
#+4/ Daragra'h 9 of this )tandard allo&s an entity to designate a financial asset6 a financial lia(ility6 or a grou' of financial instru"ents ;financial assets6 financial lia(ilities or (oth< as at fair !alue through 'rofit or loss 'ro!ided that doing so results in "ore rele!ant infor"ation4 #+4 The decision of an entity to designate a financial asset or financial lia(ility as at fair !alue through 'rofit or loss is si"ilar to an accounting 'olicy choice ;although6 unli>e an accounting 'olicy choice6 it is not required to (e a''lied consistently to all si"ilar transactions<4 Bhen an entity has such a choice6 'aragra'h 14;(< of Ind #) 8 Accounting #olicies, Changes in Accounting Estimates and Errors requires the chosen 'olicy to result in the financial state"ents 'ro!iding relia(le and "ore rele!ant infor"ation a(out the effects of transactions6 other e!ents and conditions on the entity?s financial 'osition6 financial 'erfor"ance or cash flo&s4 In the case of designation as at fair !alue through 'rofit or loss6 'aragra'h 9 sets out the t&o circu"stances &hen the require"ent for "ore rele!ant infor"ation &ill (e "et4 #ccordingly6 to choose such designation in accordance &ith

40

'aragra'h 96 the entity needs to de"onstrate that it falls &ithin one ;or (oth< of these t&o circu"stances4 #aragraph -.$/.i/: !esignation eliminates or significantly reduces a measurement or recognition inconsistency that 'ould other'ise arise #+4D Fnder Ind #) 396 "easure"ent of a financial asset or financial lia(ility and classification of recognised changes in its !alue are deter"ined (y the ite"?s classification and &hether the ite" is 'art of a designated hedging relationshi'4 Those require"ents can create a "easure"ent or recognition inconsistency ;so"eti"es referred to as an Eaccounting "is"atch?< &hen6 for e8a"'le6 in the a(sence of designation as at fair !alue through 'rofit or loss6 a financial asset &ould (e classified as a!aila(le for sale ;&ith "ost changes in fair !alue recognised in other co"'rehensi!e inco"e< and a lia(ility the entity considers related &ould (e "easured at a"ortised cost ;&ith changes in fair !alue not recognised<4 In such circu"stances6 an entity "ay conclude that its financial state"ents &ould 'ro!ide "ore rele!ant infor"ation if (oth the asset and the lia(ility &ere classified as at fair !alue through 'rofit or loss4 #+41 The follo&ing e8a"'les sho& &hen this condition could (e "et4 In all cases6 an entity "ay use this condition to designate financial assets or financial lia(ilities as at fair !alue through 'rofit or loss only if it "eets the 'rinci'le in 'aragra'h 9;(< ;i<4 ;a< #n entity has lia(ilities &hose cash flo&s are contractually (ased on the 'erfor"ance of assets that &ould other&ise (e classified as a!aila(le for sale4 *or e8a"'le6 an insurer "ay ha!e lia(ilities containing a discretionary 'artici'ation feature that 'ay (enefits (ased on realised andGor unrealised in!est"ent returns of a s'ecified 'ool of the insurer?s assets4 If the "easure"ent of those lia(ilities reflects current "ar>et 'rices6 classifying the assets as at fair !alue through 'rofit or loss "eans that changes in the fair !alue of the financial assets are recognised in 'rofit or loss in the sa"e 'eriod as related changes in the !alue of the lia(ilities4 #n entity has lia(ilities under insurance contracts &hose "easure"ent incor'orates current infor"ation ;as 'er"itted (y Ind #) 1046 'aragra'h 24<6 and financial assets it considers related that &ould other&ise (e classified as a!aila(le for sale or "easured at a"ortised cost4 #n entity has financial assets6 financial lia(ilities or (oth that share a ris>6 such as interest rate ris>6 that gi!es rise to o''osite changes in fair !alue that tend to offset each other4 -o&e!er6 only so"e of the instru"ents &ould (e "easured at fair !alue through 'rofit or loss ;ie are deri!ati!es6 or are classified as held for trading<4 It "ay also (e the case that the require"ents for hedge accounting are not "et6 for e8a"'le (ecause the require"ents for effecti!eness in 'aragra'h 88 are not "et4 #n entity has financial assets6 financial lia(ilities or (oth that share a ris>6 such as interest rate ris>6 that gi!es rise to o''osite changes in fair !alue that tend to offset each other and the entity does not qualify for hedge accounting (ecause none of the instru"ents is a deri!ati!e4 *urther"ore6 in the a(sence of hedge accounting there is a significant inconsistency in the recognition of gains and losses4 *or e8a"'le:

;(<

;c<

;d<

41

;i<

the entity has financed a 'ortfolio of fi8ed rate assets that &ould other&ise (e classified as a!aila(le for sale &ith fi8ed rate de(entures &hose changes in fair !alue tend to offset each other4 %e'orting (oth the assets and the de(entures at fair !alue through 'rofit or loss corrects the inconsistency that &ould other&ise arise fro" "easuring the assets at fair !alue &ith changes recognised in other co"'rehensi!e inco"e and the de(entures at a"ortised cost4 the entity has financed a s'ecified grou' of loans (y issuing traded (onds &hose changes in fair !alue tend to offset each other4 If6 in addition6 the entity regularly (uys and sells the (onds (ut rarely6 if e!er6 (uys and sells the loans6 re'orting (oth the loans and the (onds at fair !alue through 'rofit or loss eli"inates the inconsistency in the ti"ing of recognition of gains and losses that &ould other&ise result fro" "easuring the" (oth at a"ortised cost and recognising a gain or loss each ti"e a (ond is re'urchased4

;ii<

#+4* In cases such as those descri(ed in the 'receding 'aragra'h6 to designate6 at initial recognition6 the financial assets and financial lia(ilities not other&ise so "easured as at fair !alue through 'rofit or loss "ay eli"inate or significantly reduce the "easure"ent or recognition inconsistency and 'roduce "ore rele!ant infor"ation4 *or 'ractical 'ur'oses6 the entity need not enter into all of the assets and lia(ilities gi!ing rise to the "easure"ent or recognition inconsistency at e8actly the sa"e ti"e4 # reasona(le delay is 'er"itted 'ro!ided that each transaction is designated as at fair !alue through 'rofit or loss at its initial recognition and6 at that ti"e6 any re"aining transactions are e8'ected to occur4 #+4+ It &ould not (e acce'ta(le to designate only so"e of the financial assets and financial lia(ilities gi!ing rise to the inconsistency as at fair !alue through 'rofit or loss if to do so &ould not eli"inate or significantly reduce the inconsistency and &ould therefore not result in "ore rele!ant infor"ation4 -o&e!er6 it &ould (e acce'ta(le to designate only so"e of a nu"(er of si"ilar financial assets or si"ilar financial lia(ilities if doing so achie!es a significant reduction ;and 'ossi(ly a greater reduction than other allo&a(le designations< in the inconsistency4 *or e8a"'le6 assu"e an entity has a nu"(er of si"ilar financial lia(ilities that su" to %s4100 and a nu"(er of si"ilar financial assets that su" to %s450 (ut are "easured on a different (asis4 The entity "ay significantly reduce the "easure"ent inconsistency (y designating at initial recognition all of the assets (ut only so"e of the lia(ilities ;for e8a"'le6 indi!idual lia(ilities &ith a co"(ined total of %s445< as at fair !alue through 'rofit or loss4 -o&e!er6 (ecause designation as at fair !alue through 'rofit or loss can (e a''lied only to the &hole of a financial instru"ent6 the entity in this e8a"'le "ust designate one or "ore lia(ilities in their entirety4 It could not designate either a co"'onent of a lia(ility ;eg changes in !alue attri(uta(le to only one ris>6 such as changes in a (ench"ar> interest rate< or a 'ro'ortion ;ie 'ercentage< of a lia(ility4 #aragraph -.$/.ii/: A group of financial assets, financial lia$ilities or $oth is managed and its performance is evaluated on a fair value $asis, in accordance 'ith a documented risk management or investment strategy #+4- #n entity "ay "anage and e!aluate the 'erfor"ance of a grou' of financial assets6 financial lia(ilities or (oth in such a &ay that "easuring that grou' at fair

42

!alue through 'rofit or loss results in "ore rele!ant infor"ation4 The focus in this instance is on the &ay the entity "anages and e!aluates 'erfor"ance6 rather than on the nature of its financial instru"ents4 #+4I The follo&ing e8a"'les sho& &hen this condition could (e "et4 In all cases6 an entity "ay use this condition to designate financial assets or financial lia(ilities as at fair !alue through 'rofit or loss only if it "eets the 'rinci'le in 'aragra'h 9;(< ;ii<4 ;a< The entity is a !enture ca'ital organisation6 "utual fund6 unit trust or si"ilar entity &hose (usiness is in!esting in financial assets &ith a !ie& to 'rofiting fro" their total return in the for" of interest or di!idends and changes in fair !alue4 Ind #) 28 and Ind #) 31 allo& such in!est"ents to (e e8cluded fro" their sco'e 'ro!ided they are "easured at fair !alue through 'rofit or loss4 #n entity "ay a''ly the sa"e accounting 'olicy to other in!est"ents "anaged on a total return (asis (ut o!er &hich its influence is insufficient for the" to (e &ithin the sco'e of Ind #) 28 or Ind #) 314 The entity has financial assets and financial lia(ilities that share one or "ore ris>s and those ris>s are "anaged and e!aluated on a fair !alue (asis in accordance &ith a docu"ented 'olicy of asset and lia(ility "anage"ent4 #n e8a"'le could (e an entity that has issued Estructured 'roducts? containing "ulti'le e"(edded deri!ati!es and "anages the resulting ris>s on a fair !alue (asis using a "i8 of deri!ati!e and non,deri!ati!e financial instru"ents4 # si"ilar e8a"'le could (e an entity that originates fi8ed interest rate loans and "anages the resulting (ench"ar> interest rate ris> using a "i8 of deri!ati!e and non,deri!ati!e financial instru"ents4 The entity is an insurer that holds a 'ortfolio of financial assets6 "anages that 'ortfolio so as to "a8i"ise its total return ;ie interest or di!idends and changes in fair !alue<6 and e!aluates its 'erfor"ance on that (asis4 The 'ortfolio "ay (e held to (ac> s'ecific lia(ilities6 equity or (oth4 If the 'ortfolio is held to (ac> s'ecific lia(ilities6 the condition in 'aragra'h 9;(<;ii< "ay (e "et for the assets regardless of &hether the insurer also "anages and e!aluates the lia(ilities on a fair !alue (asis4 The condition in 'aragra'h 9;(<;ii< "ay (e "et &hen the insurer?s o(5ecti!e is to "a8i"ise total return on the assets o!er the longer ter" e!en if a"ounts 'aid to holders of 'artici'ating contracts de'end on other factors such as the a"ount of gains realised in a shorter 'eriod ;eg a year< or are su(5ect to the insurer?s discretion4

;(<

;c<

#+4I #s noted a(o!e6 this condition relies on the &ay the entity "anages and e!aluates 'erfor"ance of the grou' of financial instru"ents under consideration4 #ccordingly6 ;su(5ect to the require"ent of designation at initial recognition< an entity that designates financial instru"ents as at fair !alue through 'rofit or loss on the (asis of this condition shall so designate all eligi(le financial instru"ents that are "anaged and e!aluated together4 #+40 Docu"entation of the entity?s strategy need not (e e8tensi!e (ut should (e sufficient to de"onstrate co"'liance &ith 'aragra'h 9;(<;ii<4 )uch docu"entation is not required for each indi!idual ite"6 (ut "ay (e on a 'ortfolio (asis4 *or e8a"'le6 if the 'erfor"ance "anage"ent syste" for a de'art"entAas a''ro!ed (y the entity?s >ey "anage"ent 'ersonnelAclearly de"onstrates that

43

its 'erfor"ance is e!aluated on a total return (asis6 no further docu"entation is required to de"onstrate co"'liance &ith 'aragra'h 9;(<;ii<4

Effective interest rate

#+5 In so"e cases6 financial assets are acquired at a dee' discount that reflects incurred credit losses4 1ntities include such incurred credit losses in the esti"ated cash flo&s &hen co"'uting the effecti!e interest rate4 Bhen a''lying the effecti!e interest "ethod6 an entity generally a"ortises any fees6 'oints 'aid or recei!ed6 transaction costs and other 're"iu"s or discounts included in the calculation of the effecti!e interest rate o!er the e8'ected life of the instru"ent4 -o&e!er6 a shorter 'eriod is used if this is the 'eriod to &hich the fees6 'oints 'aid or recei!ed6 transaction costs6 're"iu"s or discounts relate4 This &ill (e the case &hen the !aria(le to &hich the fees6 'oints 'aid or recei!ed6 transaction costs6 're"iu"s or discounts relate is re'riced to "ar>et rates (efore the e8'ected "aturity of the instru"ent4 In such a case6 the a''ro'riate a"ortisation 'eriod is the 'eriod to the ne8t such re'ricing date4 *or e8a"'le6 if a 're"iu" or discount on a floating rate instru"ent reflects interest that has accrued on the instru"ent since interest &as last 'aid6 or changes in "ar>et rates since the floating interest rate &as reset to "ar>et rates6 it &ill (e a"ortised to the ne8t date &hen the floating interest is reset to "ar>et rates4 This is (ecause the 're"iu" or discount relates to the 'eriod to the ne8t interest reset date (ecause6 at that date6 the !aria(le to &hich the 're"iu" or discount relates ;ie interest rates< is reset to "ar>et rates4 If6 ho&e!er6 the 're"iu" or discount results fro" a change in the credit s'read o!er the floating rate s'ecified in the instru"ent6 or other !aria(les that are not reset to "ar>et rates6 it is a"ortised o!er the e8'ected life of the instru"ent4 *or floating rate financial assets and floating rate financial lia(ilities6 'eriodic re, esti"ation of cash flo&s to reflect "o!e"ents in "ar>et rates of interest alters the effecti!e interest rate4 If a floating rate financial asset or floating rate financial lia(ility is recognised initially at an a"ount equal to the 'rinci'al recei!a(le or 'aya(le on "aturity6 re,esti"ating the future interest 'ay"ents nor"ally has no significant effect on the carrying a"ount of the asset or lia(ility4 If an entity re!ises its esti"ates of 'ay"ents or recei'ts6 the entity shall ad5ust the carrying a"ount of the financial asset or financial lia(ility ;or grou' of financial instru"ents< to reflect actual and re!ised esti"ated cash flo&s4 The entity recalculates the carrying a"ount (y co"'uting the 'resent !alue of esti"ated future cash flo&s at the financial instru"ent?s original effecti!e interest rate or6 &hen a''lica(le6 the re!ised effecti!e interest rate calculated in accordance &ith 'aragra'h 924 The ad5ust"ent is recognised in 'rofit or loss as inco"e or e8'ense4 If a financial asset is reclassified in accordance &ith 'aragra'h 50/6 50D or 5016 and the entity su(sequently increases its esti"ates of future cash recei'ts as a result of increased reco!era(ility of those cash recei'ts6 the effect of that increase shall (e recognised as an ad5ust"ent to the effecti!e interest rate fro" the date of the change in esti"ate rather than as an ad5ust"ent to the carrying a"ount of the asset at the date of the change in esti"ate4

#+$

#+7

#+8

Derivatives

44

#+9

Ty'ical e8a"'les of deri!ati!es are futures and for&ard6 s&a' and o'tion contracts4 # deri!ati!e usually has a notional a"ount6 &hich is an a"ount of currency6 a nu"(er of shares6 a nu"(er of units of &eight or !olu"e or other units s'ecified in the contract4 -o&e!er6 a deri!ati!e instru"ent does not require the holder or &riter to in!est or recei!e the notional a"ount at the ince'tion of the contract4 #lternati!ely6 a deri!ati!e could require a fi8ed 'ay"ent or 'ay"ent of an a"ount that can change ;(ut not 'ro'ortionally &ith a change in the underlying< as a result of so"e future e!ent that is unrelated to a notional a"ount4 *or e8a"'le6 a contract "ay require a fi8ed 'ay"ent of %s416000 if si8, "onth 3I/@% increases (y 100 (asis 'oints4 )uch a contract is a deri!ati!e e!en though a notional a"ount is not s'ecified4

#+10 The definition of a deri!ati!e in this )tandard includes contracts that are settled gross (y deli!ery of the underlying ite" ;eg a for&ard contract to 'urchase a fi8ed rate de(t instru"ent<4 #n entity "ay ha!e a contract to (uy or sell a non, financial ite" that can (e settled net in cash or another financial instru"ent or (y e8changing financial instru"ents ;eg a contract to (uy or sell a co""odity at a fi8ed 'rice at a future date<4 )uch a contract is &ithin the sco'e of this )tandard unless it &as entered into and continues to (e held for the 'ur'ose of deli!ery of a non,financial ite" in accordance &ith the entity?s e8'ected 'urchase6 sale or usage require"ents ;see 'aragra'hs 57<4 #+11 @ne of the defining characteristics of a deri!ati!e is that it has an initial net in!est"ent that is s"aller than &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors4 #n o'tion contract "eets that definition (ecause the 're"iu" is less than the in!est"ent that &ould (e required to o(tain the underlying financial instru"ent to &hich the o'tion is lin>ed4 # currency s&a' that requires an initial e8change of different currencies of equal fair !alues "eets the definition (ecause it has a Jero initial net in!est"ent4 #+12 # regular &ay 'urchase or sale gi!es rise to a fi8ed 'rice co""it"ent (et&een trade date and settle"ent date that "eets the definition of a deri!ati!e4 -o&e!er6 (ecause of the short duration of the co""it"ent it is not recognised as a deri!ati!e financial instru"ent4 %ather6 this )tandard 'ro!ides for s'ecial accounting for such regular &ay contracts ;see 'aragra'hs 38 and #+53#+5$<4 #+12# The definition of a deri!ati!e refers to non,financial !aria(les that are not s'ecific to a 'arty to the contract4 These include an inde8 of earthqua>e losses in a 'articular region and an inde8 of te"'eratures in a 'articular city4 Hon,financial !aria(les s'ecific to a 'arty to the contract include the occurrence or non, occurrence of a fire that da"ages or destroys an asset of a 'arty to the contract4 # change in the fair !alue of a non,financial asset is s'ecific to the o&ner if the fair !alue reflects not only changes in "ar>et 'rices for such assets ;a financial !aria(le< (ut also the condition of the s'ecific non,financial asset held ;a non, financial !aria(le<4 *or e8a"'le6 if a guarantee of the residual !alue of a s'ecific car e8'oses the guarantor to the ris> of changes in the car?s 'hysical condition6 the change in that residual !alue is s'ecific to the o&ner of the car4

0ransaction costs

45

#+13 Transaction costs include fees and co""issions 'aid to agents ;including e"'loyees acting as selling agents<6 ad!isers6 (ro>ers and dealers6 le!ies (y regulatory agencies and securities e8changes6 and transfer ta8es and duties4 Transaction costs do not include de(t 're"iu"s or discounts6 financing costs or internal ad"inistrati!e or holding costs4

)inancia* assets and financia* *iabi*ities (e*d for trading

#+14 Trading generally reflects acti!e and frequent (uying and selling6 and financial instru"ents held for trading generally are used &ith the o(5ecti!e of generating a 'rofit fro" short,ter" fluctuations in 'rice or dealer?s "argin4 #+15*inancial lia(ilities held for trading include:

'a( '%( 'c(

deri!ati!e lia(ilities that are not accounted for as hedging instru"ents= o(ligations to deli!er financial assets (orro&ed (y a short seller ;ie an entity that sells financial assets it has (orro&ed and does not yet o&n<= financial lia(ilities that are incurred &ith an intention to re'urchase the" in the near ter" ;eg a quoted de(t instru"ent that the issuer "ay (uy (ac> in the near ter" de'ending on changes in its fair !alue<= and financial lia(ilities that are 'art of a 'ortfolio of identified financial instru"ents that are "anaged together and for &hich there is e!idence of a recent 'attern of short,ter" 'rofit,ta>ing4

'd(

The fact that a lia(ility is used to fund trading acti!ities does not in itself "a>e that lia(ility one that is held for trading4

!e*dAtoAmaturit. investments
#+1$ #n entity does not ha!e a 'ositi!e intention to hold to "aturity an in!est"ent in a financial asset &ith a fi8ed "aturity if: ;a< the entity intends to hold the financial asset for an undefined 'eriod= the entity stands ready to sell the financial asset ;other than if a situation arises that is non,recurring and could not ha!e (een reasona(ly antici'ated (y the entity< in res'onse to changes in "ar>et interest rates or ris>s6 liquidity needs6 changes in the a!aila(ility of and the yield on alternati!e in!est"ents6 changes in financing sources and ter"s or changes in foreign currency ris>= or the issuer has a right to settle the financial asset at an a"ount significantly (elo& its a"ortised cost4

'%(

'c(

#+17 # de(t instru"ent &ith a !aria(le interest rate can satisfy the criteria for a held,to, "aturity in!est"ent4 1quity instru"ents cannot (e held,to,"aturity in!est"ents either (ecause they ha!e an indefinite life ;such as ordinary shares< or (ecause the a"ounts the holder "ay recei!e can !ary in a "anner that is not 'redeter"ined ;such as for share o'tions6 &arrants and si"ilar rights<4 Bith res'ect to the definition of held,to,"aturity in!est"ents6 fi8ed or deter"ina(le 'ay"ents and fi8ed "aturity "ean that a contractual arrange"ent

46

defines the a"ounts and dates of 'ay"ents to the holder6 such as interest and 'rinci'al 'ay"ents4 # significant ris> of non,'ay"ent does not 'reclude classification of a financial asset as held to "aturity as long as its contractual 'ay"ents are fi8ed or deter"ina(le and the other criteria for that classification are "et4 If the ter"s of a 'er'etual de(t instru"ent 'ro!ide for interest 'ay"ents for an indefinite 'eriod6 the instru"ent cannot (e classified as held to "aturity (ecause there is no "aturity date4 #+18 The criteria for classification as a held,to,"aturity in!est"ent are "et for a financial asset that is calla(le (y the issuer if the holder intends and is a(le to hold it until it is called or until "aturity and the holder &ould reco!er su(stantially all of its carrying a"ount4 The call o'tion of the issuer6 if e8ercised6 si"'ly accelerates the asset?s "aturity4 -o&e!er6 if the financial asset is calla(le on a (asis that &ould result in the holder not reco!ering su(stantially all of its carrying a"ount6 the financial asset cannot (e classified as a held,to,"aturity in!est"ent4 The entity considers any 're"iu" 'aid and ca'italised transaction costs in deter"ining &hether the carrying a"ount &ould (e su(stantially reco!ered4 #+19 # financial asset that is 'utta(le ;ie the holder has the right to require that the issuer re'ay or redee" the financial asset (efore "aturity< cannot (e classified as a held,to,"aturity in!est"ent (ecause 'aying for a 'ut feature in a financial asset is inconsistent &ith e8'ressing an intention to hold the financial asset until "aturity4 #+20 *or "ost financial assets6 fair !alue is a "ore a''ro'riate "easure than a"ortised cost4 The held,to,"aturity classification is an e8ce'tion6 (ut only if the entity has a 'ositi!e intention and the a(ility to hold the in!est"ent to "aturity4 Bhen an entity?s actions cast dou(t on its intention and a(ility to hold such in!est"ents to "aturity6 'aragra'h 9 'recludes the use of the e8ce'tion for a reasona(le 'eriod of ti"e4 #+21 # disaster scenario that is only re"otely 'ossi(le6 such as a run on a (an> or a si"ilar situation affecting an insurer6 is not so"ething that is assessed (y an entity in deciding &hether it has the 'ositi!e intention and a(ility to hold an in!est"ent to "aturity4 #+22 )ales (efore "aturity could satisfy the condition in 'aragra'h 9Aand therefore not raise a question a(out the entity?s intention to hold other in!est"ents to "aturityAif they are attri(uta(le to any of the follo&ing: ;a< a significant deterioration in the issuer?s credit&orthiness4 *or e8a"'le6 a sale follo&ing a do&ngrade in a credit rating (y an e8ternal rating agency &ould not necessarily raise a question a(out the entity?s intention to hold other in!est"ents to "aturity if the do&ngrade 'ro!ides e!idence of a significant deterioration in the issuer?s credit&orthiness 5udged (y reference to the credit rating at initial recognition4 )i"ilarly6 if an entity uses internal ratings for assessing e8'osures6 changes in those internal ratings "ay hel' to identify issuers for &hich there has (een a significant deterioration in credit&orthiness6 'ro!ided the entity?s a''roach to assigning internal ratings and changes in those ratings gi!e a consistent6 relia(le and o(5ecti!e "easure of the credit quality of the issuers4 If there is e!idence

47

that a financial asset is i"'aired ;see 'aragra'hs 58 and 59<6 the deterioration in credit&orthiness is often regarded as significant4 ;(< a change in ta8 la& that eli"inates or significantly reduces the ta8,e8e"'t status of interest on the held,to,"aturity in!est"ent ;(ut not a change in ta8 la& that re!ises the "arginal ta8 rates a''lica(le to interest inco"e<4 a "a5or (usiness co"(ination or "a5or dis'osition ;such as a sale of a seg"ent that necessitates the sale or transfer of held,to,"aturity in!est"ents to "aintain the entity?s e8isting interest rate ris> 'osition or credit ris> 'olicy ;although the (usiness co"(ination is an e!ent &ithin the entity?s control6 the changes to its in!est"ent 'ortfolio to "aintain an interest rate ris> 'osition or credit ris> 'olicy "ay (e consequential rather than antici'ated<4 a change in statutory or regulatory require"ents significantly "odifying either &hat constitutes a 'er"issi(le in!est"ent or the "a8i"u" le!el of 'articular ty'es of in!est"ents6 there(y causing an entity to dis'ose of a held,to,"aturity in!est"ent4 a significant increase in the industry?s regulatory ca'ital require"ents that causes the entity to do&nsiJe (y selling held,to,"aturity in!est"ents4 a significant increase in the ris> &eights of held,to,"aturity in!est"ents used for regulatory ris>,(ased ca'ital 'ur'oses4

;c<

;d<

;e< ;f<

#+23 #n entity does not ha!e a de"onstrated a(ility to hold to "aturity an in!est"ent in a financial asset &ith a fi8ed "aturity if: ;a< ;(< it does not ha!e the financial resources a!aila(le to continue to finance the in!est"ent until "aturity= or it is su(5ect to an e8isting legal or other constraint that could frustrate its intention to hold the financial asset to "aturity4 ;-o&e!er6 an issuer?s call o'tion does not necessarily frustrate an entity?s intention to hold a financial asset to "aturityAsee 'aragra'h #+184<

#+24

ircu"stances other than those descri(ed in 'aragra'hs #+1$#+23 can indicate that an entity does not ha!e a 'ositi!e intention or the a(ility to hold an in!est"ent to "aturity4

#+25 #n entity assesses its intention and a(ility to hold its held,to,"aturity in!est"ents to "aturity not only &hen those financial assets are initially recognised6 (ut also at the end of each su(sequent re'orting 'eriod4

+oans and receivab*es

#+2$ #ny non,deri!ati!e financial asset &ith fi8ed or deter"ina(le 'ay"ents ;including loan assets6 trade recei!a(les6 in!est"ents in de(t instru"ents and de'osits held in (an>s< could 'otentially "eet the definition of loans and recei!a(les4 -o&e!er6 a financial asset that is quoted in an acti!e "ar>et ;such as a quoted de(t instru"ent6 see 'aragra'h #+71< does not qualify for classification as a loan or recei!a(le4 *inancial assets that do not "eet the definition of loans and recei!a(les "ay (e classified as held,to,"aturity in!est"ents if they "eet the conditions for that classification ;see 'aragra'hs 9 and #+1$#+25<4 @n initial

48

recognition of a financial asset that &ould other&ise (e classified as a loan or recei!a(le6 an entity "ay designate it as a financial asset at fair !alue through 'rofit or loss6 or a!aila(le for sale4

Embedded derivatives (paragrap(s 3>:33)

#+27 If a host contract has no stated or 'redeter"ined "aturity and re'resents a residual interest in the net assets of an entity6 then its econo"ic characteristics and ris>s are those of an equity instru"ent6 and an e"(edded deri!ati!e &ould need to 'ossess equity characteristics related to the sa"e entity to (e regarded as closely related4 If the host contract is not an equity instru"ent and "eets the definition of a financial instru"ent6 then its econo"ic characteristics and ris>s are those of a de(t instru"ent4 #+28 #n e"(edded non,o'tion deri!ati!e ;such as an e"(edded for&ard or s&a'< is se'arated fro" its host contract on the (asis of its stated or i"'lied su(stanti!e ter"s6 so as to result in it ha!ing a fair !alue of Jero at initial recognition4 #n e"(edded o'tion,(ased deri!ati!e ;such as an e"(edded 'ut6 call6 ca'6 floor or s&a'tion< is se'arated fro" its host contract on the (asis of the stated ter"s of the o'tion feature4 The initial carrying a"ount of the host instru"ent is the residual a"ount after se'arating the e"(edded deri!ati!e4 #+29 +enerally6 "ulti'le e"(edded deri!ati!es in a single instru"ent are treated as a single co"'ound e"(edded deri!ati!e4 -o&e!er6 e"(edded deri!ati!es that are classified as equity ;see Ind #) 32< are accounted for se'arately fro" those classified as assets or lia(ilities4 In addition6 if an instru"ent has "ore than one e"(edded deri!ati!e and those deri!ati!es relate to different ris> e8'osures and are readily se'ara(le and inde'endent of each other6 they are accounted for se'arately fro" each other4 #+30 The econo"ic characteristics and ris>s of an e"(edded deri!ati!e are not closely related to the host contract ;'aragra'h 11;a<< in the follo&ing e8a"'les4 In these e8a"'les6 assu"ing the conditions in 'aragra'h 11;(< and ;c< are "et6 an entity accounts for the e"(edded deri!ati!e se'arately fro" the host contract4 ;a< # 'ut o'tion e"(edded in an instru"ent that ena(les the holder to require the issuer to reacquire the instru"ent for an a"ount of cash or other assets that !aries on the (asis of the change in an equity or co""odity 'rice or inde8 is not closely related to a host de(t instru"ent4 # call o'tion e"(edded in an equity instru"ent that ena(les the issuer to reacquire that equity instru"ent at a s'ecified 'rice is not closely related to the host equity instru"ent fro" the 'ers'ecti!e of the holder ;fro" the issuer?s 'ers'ecti!e6 the call o'tion is an equity instru"ent 'ro!ided it "eets the conditions for that classification under Ind #) 326 in &hich case it is e8cluded fro" the sco'e of this )tandard<4 #n o'tion or auto"atic 'ro!ision to e8tend the re"aining ter" to "aturity of a de(t instru"ent is not closely related to the host de(t instru"ent unless there is a concurrent ad5ust"ent to the a''ro8i"ate current "ar>et rate of interest at the ti"e of the e8tension4 If an entity issues a de(t instru"ent and the holder of that de(t instru"ent &rites a call o'tion on the de(t instru"ent to a third 'arty6 the issuer regards the call o'tion as e8tending

;(<

;c<

49

the ter" to "aturity of the de(t instru"ent 'ro!ided the issuer can (e required to 'artici'ate in or facilitate the re"ar>eting of the de(t instru"ent as a result of the call o'tion (eing e8ercised4 ;d< 1quity,inde8ed interest or 'rinci'al 'ay"ents e"(edded in a host de(t instru"ent or insurance contractA(y &hich the a"ount of interest or 'rinci'al is inde8ed to the !alue of equity instru"entsAare not closely related to the host instru"ent (ecause the ris>s inherent in the host and the e"(edded deri!ati!e are dissi"ilar4 o""odity,inde8ed interest or 'rinci'al 'ay"ents e"(edded in a host de(t instru"ent or insurance contractA(y &hich the a"ount of interest or 'rinci'al is inde8ed to the 'rice of a co""odity ;such as gold<Aare not closely related to the host instru"ent (ecause the ris>s inherent in the host and the e"(edded deri!ati!e are dissi"ilar4 #n equity con!ersion feature e"(edded in a con!erti(le de(t instru"ent is not closely related to the host de(t instru"ent fro" the 'ers'ecti!e of the holder of the instru"ent ;fro" the issuer?s 'ers'ecti!e6 the equity con!ersion o'tion is an equity instru"ent and e8cluded fro" the sco'e of this )tandard 'ro!ided it "eets the conditions for that classification under Ind #) 32<4 # call6 'ut6 or 're'ay"ent o'tion e"(edded in a host de(t contract or host insurance contract is not closely related to the host contract unless:

;e<

;f<

;g<

'i(

the o'tion?s e8ercise 'rice is a''ro8i"ately equal on each e8ercise date to the a"ortised cost of the host de(t instru"ent or the carrying a"ount of the host insurance contract= or the e8ercise 'rice of a 're'ay"ent o'tion rei"(urses the lender for an a"ount u' to the a''ro8i"ate 'resent !alue of lost interest for the re"aining ter" of the host contract4 2ost interest is the 'roduct of the 'rinci'al a"ount 're'aid "ulti'lied (y the interest rate differential4 The interest rate differential is the e8cess of the effecti!e interest rate of the host contract o!er the effecti!e interest rate the entity &ould recei!e at the 're'ay"ent date if it rein!ested the 'rinci'al a"ount 're'aid in a si"ilar contract for the re"aining ter" of the host contract4

'ii(

The assess"ent of &hether the call or 'ut o'tion is closely related to the host de(t contract is "ade (efore se'arating the equity ele"ent of a con!erti(le de(t instru"ent in accordance &ith Ind #) 324 ;h< redit deri!ati!es that are e"(edded in a host de(t instru"ent and allo& one 'arty ;the E(eneficiary?< to transfer the credit ris> of a 'articular reference asset6 &hich it "ay not o&n6 to another 'arty ;the Eguarantor?< are not closely related to the host de(t instru"ent4 )uch credit deri!ati!es allo& the guarantor to assu"e the credit ris> associated &ith the reference asset &ithout directly o&ning it4

#+31 #n e8a"'le of a hy(rid instru"ent is a financial instru"ent that gi!es the holder a right to 'ut the financial instru"ent (ac> to the issuer in e8change for an

50

a"ount of cash or other financial assets that !aries on the (asis of the change in an equity or co""odity inde8 that "ay increase or decrease ;a E'utta(le instru"ent?<4 Fnless the issuer on initial recognition designates the 'utta(le instru"ent as a financial lia(ility at fair !alue through 'rofit or loss6 it is required to se'arate an e"(edded deri!ati!e ;ie the inde8ed 'rinci'al 'ay"ent< under 'aragra'h 11 (ecause the host contract is a de(t instru"ent under 'aragra'h #+27 and the inde8ed 'rinci'al 'ay"ent is not closely related to a host de(t instru"ent under 'aragra'h #+30;a<4 /ecause the 'rinci'al 'ay"ent can increase and decrease6 the e"(edded deri!ati!e is a non,o'tion deri!ati!e &hose !alue is inde8ed to the underlying !aria(le4 #+32 In the case of a 'utta(le instru"ent that can (e 'ut (ac> at any ti"e for cash equal to a 'ro'ortionate share of the net asset !alue of an entity ;such as units of an o'en,ended "utual fund or so"e unit,lin>ed in!est"ent 'roducts<6 the effect of se'arating an e"(edded deri!ati!e and accounting for each co"'onent is to "easure the co"(ined instru"ent at the rede"'tion a"ount that is 'aya(le at the end of the re'orting 'eriod if the holder e8ercised its right to 'ut the instru"ent (ac> to the issuer4 #+33 The econo"ic characteristics and ris>s of an e"(edded deri!ati!e are closely related to the econo"ic characteristics and ris>s of the host contract in the follo&ing e8a"'les4 In these e8a"'les6 an entity does not account for the e"(edded deri!ati!e se'arately fro" the host contract4 ;a< #n e"(edded deri!ati!e in &hich the underlying is an interest rate or interest rate inde8 that can change the a"ount of interest that &ould other&ise (e 'aid or recei!ed on an interest,(earing host de(t contract or insurance contract is closely related to the host contract unless the co"(ined instru"ent can (e settled in such a &ay that the holder &ould not reco!er su(stantially all of its recognised in!est"ent or the e"(edded deri!ati!e could at least dou(le the holder?s initial rate of return on the host contract and could result in a rate of return that is at least t&ice &hat the "ar>et return &ould (e for a contract &ith the sa"e ter"s as the host contract4 #n e"(edded floor or ca' on the interest rate on a de(t contract or insurance contract is closely related to the host contract6 'ro!ided the ca' is at or a(o!e the "ar>et rate of interest and the floor is at or (elo& the "ar>et rate of interest &hen the contract is issued6 and the ca' or floor is not le!eraged in relation to the host contract4 )i"ilarly6 'ro!isions included in a contract to 'urchase or sell an asset ;eg a co""odity< that esta(lish a ca' and a floor on the 'rice to (e 'aid or recei!ed for the asset are closely related to the host contract if (oth the ca' and floor &ere out of the "oney at ince'tion and are not le!eraged4 #n e"(edded foreign currency deri!ati!e that 'ro!ides a strea" of 'rinci'al or interest 'ay"ents that are deno"inated in a foreign currency and is e"(edded in a host de(t instru"ent ;eg a dual currency (ond< is closely related to the host de(t instru"ent4 )uch a deri!ati!e is not se'arated fro" the host instru"ent (ecause Ind #) 21 requires foreign currency gains and losses on "onetary ite"s to (e recognised in 'rofit or loss4

;(<

;c<

51

;d<

#n e"(edded foreign currency deri!ati!e in a host contract that is an insurance contract or not a financial instru"ent ;such as a contract for the 'urchase or sale of a non,financial ite" &here the 'rice is deno"inated in a foreign currency< is closely related to the host contract 'ro!ided it is not le!eraged6 does not contain an o'tion feature6 and requires 'ay"ents deno"inated in one of the follo&ing currencies: ;i< ;ii< the functional currency of any su(stantial 'arty to that contract= the currency in &hich the 'rice of the related good or ser!ice that is acquired or deli!ered is routinely deno"inated in co""ercial transactions around the &orld ;such as the F) dollar for crude oil transactions<= or a currency that is co""only used in contracts to 'urchase or sell non, financial ite"s in the econo"ic en!iron"ent in &hich the transaction ta>es 'lace ;eg a relati!ely sta(le and liquid currency that is co""only used in local (usiness transactions or e8ternal trade<4

;iii<

;e<

#n e"(edded 're'ay"ent o'tion in an interest,only or 'rinci'al,only stri' is closely related to the host contract 'ro!ided the host contract ;i< initially resulted fro" se'arating the right to recei!e contractual cash flo&s of a financial instru"ent that6 in and of itself6 did not contain an e"(edded deri!ati!e6 and ;ii< does not contain any ter"s not 'resent in the original host de(t contract4 #n e"(edded deri!ati!e in a host lease contract is closely related to the host contract if the e"(edded deri!ati!e is ;i< an inflation,related inde8 such as an inde8 of lease 'ay"ents to a consu"er 'rice inde8 ;'ro!ided that the lease is not le!eraged and the inde8 relates to inflation in the entity?s o&n econo"ic en!iron"ent<6 ;ii< contingent rentals (ased on related sales or ;iii< contingent rentals (ased on !aria(le interest rates4 # unit,lin>ing feature e"(edded in a host financial instru"ent or host insurance contract is closely related to the host instru"ent or host contract if the unit,deno"inated 'ay"ents are "easured at current unit !alues that reflect the fair !alues of the assets of the fund4 # unit,lin>ing feature is a contractual ter" that requires 'ay"ents deno"inated in units of an internal or e8ternal in!est"ent fund4 # deri!ati!e e"(edded in an insurance contract is closely related to the host insurance contract if the e"(edded deri!ati!e and host insurance contract are so interde'endent that an entity cannot "easure the e"(edded deri!ati!e se'arately ;ie &ithout considering the host contract<4

;f<

;g<

;h<

Instruments containing embedded derivatives

#+33# Bhen an entity (eco"es a 'arty to a hy(rid ;co"(ined< instru"ent that contains one or "ore e"(edded deri!ati!es6 'aragra'h 11 requires the entity to identify any such e"(edded deri!ati!e6 assess &hether it is required to (e se'arated fro" the host contract and6 for those that are required to (e se'arated6 "easure the deri!ati!es at fair !alue at initial recognition and su(sequently4 These require"ents can (e "ore co"'le86 or result in less relia(le "easures6

52

than "easuring the entire instru"ent at fair !alue through 'rofit or loss4 *or that reason this )tandard 'er"its the entire instru"ent to (e designated as at fair !alue through 'rofit or loss4 #+33/ )uch designation "ay (e used &hether 'aragra'h 11 requires the e"(edded deri!ati!es to (e se'arated fro" the host contract or 'rohi(its such se'aration4 -o&e!er6 'aragra'h 11# &ould not 5ustify designating the hy(rid ;co"(ined< instru"ent as at fair !alue through 'rofit or loss in the cases set out in 'aragra'h 11#;a< and ;(< (ecause doing so &ould not reduce co"'le8ity or increase relia(ility4

Recognition and derecognition (paragrap(s 3<:<5)

Initia* recognition (paragrap( 3<)
#+34 #s a consequence of the 'rinci'le in 'aragra'h 146 an entity recognises all of its contractual rights and o(ligations under deri!ati!es in its (alance sheet as assets and lia(ilities6 res'ecti!ely6 e8ce't for deri!ati!es that 're!ent a transfer of financial assets fro" (eing accounted for as a sale ;see 'aragra'h #+49<4 If a transfer of a financial asset does not qualify for derecognition6 the transferee does not recognise the transferred asset as its asset ;see 'aragra'h #+50<4 #+35 The follo&ing are e8a"'les of a''lying the 'rinci'le in 'aragra'h 14: ;a< unconditional recei!a(les and 'aya(les are recognised as assets or lia(ilities &hen the entity (eco"es a 'arty to the contract and6 as a consequence6 has a legal right to recei!e or a legal o(ligation to 'ay cash4 assets to (e acquired and lia(ilities to (e incurred as a result of a fir" co""it"ent to 'urchase or sell goods or ser!ices are generally not recognised until at least one of the 'arties has 'erfor"ed under the agree"ent4 *or e8a"'le6 an entity that recei!es a fir" order does not generally recognise an asset ;and the entity that 'laces the order does not recognise a lia(ility< at the ti"e of the co""it"ent (ut6 rather6 delays recognition until the ordered goods or ser!ices ha!e (een shi''ed6 deli!ered or rendered4 If a fir" co""it"ent to (uy or sell non,financial ite"s is &ithin the sco'e of this )tandard under 'aragra'hs 576 its net fair !alue is recognised as an asset or lia(ility on the co""it"ent date ;see ;c< (elo&<4 In addition6 if a 're!iously unrecognised fir" co""it"ent is designated as a hedged ite" in a fair !alue hedge6 any change in the net fair !alue attri(uta(le to the hedged ris> is recognised as an asset or lia(ility after the ince'tion of the hedge ;see 'aragra'hs 93 and 94<4 a for&ard contract that is &ithin the sco'e of this )tandard ;see 'aragra'hs 27< is recognised as an asset or a lia(ility on the co""it"ent date6 rather than on the date on &hich settle"ent ta>es 'lace4 Bhen an entity (eco"es a 'arty to a for&ard contract6 the fair !alues of the right and o(ligation are often equal6 so that the net fair !alue of the for&ard is Jero4 If the net fair !alue of the right and o(ligation is not Jero6 the contract is recognised as an asset or lia(ility4

;(<

;c<

53

;d<

o'tion contracts that are &ithin the sco'e of this )tandard ;see 'aragra'hs 27< are recognised as assets or lia(ilities &hen the holder or &riter (eco"es a 'arty to the contract4 'lanned future transactions6 no "atter ho& li>ely8s6 are not assets and lia(ilities (ecause the entity has not (eco"e a 'arty to a contract4

;e<

Derecognition of a financia* asset (paragrap(s 39:36)

#+3$ The follo&ing flo& chart illustrates the e!aluation of &hether and to &hat e8tent a financial asset is derecognised4 onsolidate all ;su(sidiaries ;including any )D1< 7Daragra'h 159

Deter"ine &hether the derecognition 'rinci'les (elo& are a''lied to a 'art or all of an asset ;or grou' of si"ilar assets< 7'aragra'h1$9

-a!e the rights to the cash flo&s fro" the asset e8'iredL 7'aragra'h 17;a<9

Kes

Derecognise the asset

Ho
-as the entity transferred its rights to recei!e the cash flo&s fro" the assetL 7'aragra'h 18;a<9

Ho

Kes

-as the entity assu"ed an o(ligation to 'ay the cash flo&s fro" the asset that "eets the conditions in 'aragra'h 19L 7'aragra'h18;(<9

Ho

ontinue to recogniJe the asset

54

Kes
-as the entity transferred su(stantially all ris>s and re&ards L 7'aragra'h20;a<9

Kes

Derecognise the asset

-as the entity Ho retained su(stantially all ris>s and re&ardsL 7'aragra'h 20;(<9

Kes

ontinue to recogniJe the asset

Ho
-as the entity retained control of the assetL 7'aragra'h 20M9

Ho

Derecognise the asset

Kes
ontinue to recogniJe the assent of the entity?s continuing in!ol!e"ent

Arrangements under 'hich an entity retains the contractual rights to receive the cash flo's of a financial asset, $ut assumes a contractual o$ligation to pay the cash flo's to one or more recipients .paragraph 01.$// #+37 The situation descri(ed in 'aragra'h 18;(< ;&hen an entity retains the contractual rights to recei!e the cash flo&s of the financial asset6 (ut assu"es a contractual o(ligation to 'ay the cash flo&s to one or "ore reci'ients< occurs6 for e8a"'le6 if the entity is a s'ecial 'ur'ose entity or trust6 and issues to in!estors (eneficial interests in the underlying financial assets that it o&ns and 'ro!ides ser!icing of those financial assets4 In that case6 the financial assets qualify for derecognition if the conditions in 'aragra'hs 19 and 20 are "et4 #+38 In a''lying 'aragra'h 196 the entity could (e6 for e8a"'le6 the originator of the financial asset6 or it could (e a grou' that includes a consolidated s'ecial 'ur'ose entity that has acquired the financial asset and 'asses on cash flo&s to unrelated third 'arty in!estors4 Evaluation of the transfer of risks and re'ards of o'nership .paragraph 23/

55

#+39 18a"'les of &hen an entity has transferred su(stantially all the ris>s and re&ards of o&nershi' are:

'a( '%(
;c<

an unconditional sale of a financial asset= a sale of a financial asset together &ith an o'tion to re'urchase the financial asset at its fair !alue at the ti"e of re'urchase= and a sale of a financial asset together &ith a 'ut or call o'tion that is dee'ly out of the "oney ;ie an o'tion that is so far out of the "oney it is highly unli>ely to go into the "oney (efore e8'iry<4

#+40 18a"'les of &hen an entity has retained su(stantially all the ris>s and re&ards of o&nershi' are: ;a< ;(< ;c< ;d< a sale and re'urchase transaction &here the re'urchase 'rice is a fi8ed 'rice or the sale 'rice 'lus a lender?s return= a securities lending agree"ent= a sale of a financial asset together &ith a total return s&a' that transfers the "ar>et ris> e8'osure (ac> to the entity= a sale of a financial asset together &ith a dee' in,the,"oney 'ut or call o'tion ;ie an o'tion that is so far in the "oney that it is highly unli>ely to go out of the "oney (efore e8'iry<= and a sale of short,ter" recei!a(les in &hich the entity guarantees to co"'ensate the transferee for credit losses that are li>ely to occur4

;e<

#+41 If an entity deter"ines that as a result of the transfer6 it has transferred su(stantially all the ris>s and re&ards of o&nershi' of the transferred asset6 it does not recognise the transferred asset again in a future 'eriod6 unless it reacquires the transferred asset in a ne& transaction4

Evaluation of the transfer of control

#+42 #n entity has not retained control of a transferred asset if the transferee has the 'ractical a(ility to sell the transferred asset4 #n entity has retained control of a transferred asset if the transferee does not ha!e the 'ractical a(ility to sell the transferred asset4 # transferee has the 'ractical a(ility to sell the transferred asset if it is traded in an acti!e "ar>et (ecause the transferee could re'urchase the transferred asset in the "ar>et if it needs to return the asset to the entity4 *or e8a"'le6 a transferee "ay ha!e the 'ractical a(ility to sell a transferred asset if the transferred asset is su(5ect to an o'tion that allo&s the entity to re'urchase it6 (ut the transferee can readily o(tain the transferred asset in the "ar>et if the o'tion is e8ercised4 # transferee does not ha!e the 'ractical a(ility to sell the transferred asset if the entity retains such an o'tion and the transferee cannot readily o(tain the transferred asset in the "ar>et if the entity e8ercises its o'tion4 #+43 The transferee has the 'ractical a(ility to sell the transferred asset only if the transferee can sell the transferred asset in its entirety to an unrelated third 'arty and is a(le to e8ercise that a(ility unilaterally and &ithout i"'osing additional restrictions on the transfer4 The critical question is &hat the transferee is a(le to

56

do in 'ractice6 not &hat contractual rights the transferee has concerning &hat it can do &ith the transferred asset or &hat contractual 'rohi(itions e8ist4 In 'articular: ;a< ;(< a contractual right to dis'ose of the transferred asset has little 'ractical effect if there is no "ar>et for the transferred asset= and an a(ility to dis'ose of the transferred asset has little 'ractical effect if it cannot (e e8ercised freely4 *or that reason: ;i< the transferee?s a(ility to dis'ose of the transferred asset "ust (e inde'endent of the actions of others ;ie it "ust (e a unilateral a(ility<= and the transferee "ust (e a(le to dis'ose of the transferred asset &ithout needing to attach restricti!e conditions or Estrings? to the transfer ;eg conditions a(out ho& a loan asset is ser!iced or an o'tion gi!ing the transferee the right to re'urchase the asset<4

;ii<

#+44 That the transferee is unli>ely to sell the transferred asset does not6 of itself6 "ean that the transferor has retained control of the transferred asset4 -o&e!er6 if a 'ut o'tion or guarantee constrains the transferee fro" selling the transferred asset6 then the transferor has retained control of the transferred asset4 *or e8a"'le6 if a 'ut o'tion or guarantee is sufficiently !alua(le it constrains the transferee fro" selling the transferred asset (ecause the transferee &ould6 in 'ractice6 not sell the transferred asset to a third 'arty &ithout attaching a si"ilar o'tion or other restricti!e conditions4 Instead6 the transferee &ould hold the transferred asset so as to o(tain 'ay"ents under the guarantee or 'ut o'tion4 Fnder these circu"stances the transferor has retained control of the transferred asset4

0ransfers t(at -ua*if. for derecognition

#+45 #n entity "ay retain the right to a 'art of the interest 'ay"ents on transferred assets as co"'ensation for ser!icing those assets4 The 'art of the interest 'ay"ents that the entity &ould gi!e u' u'on ter"ination or transfer of the ser!icing contract is allocated to the ser!icing asset or ser!icing lia(ility4 The 'art of the interest 'ay"ents that the entity &ould not gi!e u' is an interest,only stri' recei!a(le4 *or e8a"'le6 if the entity &ould not gi!e u' any interest u'on ter"ination or transfer of the ser!icing contract6 the entire interest s'read is an interest,only stri' recei!a(le4 *or the 'ur'oses of a''lying 'aragra'h 276 the fair !alues of the ser!icing asset and interest,only stri' recei!a(le are used to allocate the carrying a"ount of the recei!a(le (et&een the 'art of the asset that is derecognised and the 'art that continues to (e recognised4 If there is no ser!icing fee s'ecified or the fee to (e recei!ed is not e8'ected to co"'ensate the entity adequately for 'erfor"ing the ser!icing6 a lia(ility for the ser!icing o(ligation is recognised at fair !alue4 #+4$ In esti"ating the fair !alues of the 'art that continues to (e recognised and the 'art that is derecognised for the 'ur'oses of a''lying 'aragra'h 276 an entity a''lies the fair !alue "easure"ent require"ents in 'aragra'hs 4849 and #+$9#+82 in addition to 'aragra'h 284

0ransfers t(at do not -ua*if. for derecognition

57

#+47 The follo&ing is an a''lication of the 'rinci'le outlined in 'aragra'h 294 If a guarantee 'ro!ided (y the entity for default losses on the transferred asset 're!ents a transferred asset fro" (eing derecognised (ecause the entity has retained su(stantially all the ris>s and re&ards of o&nershi' of the transferred asset6 the transferred asset continues to (e recognised in its entirety and the consideration recei!ed is recognised as a lia(ility4

Continuing invo*vement in transferred assets

#+48 The follo&ing are e8a"'les of ho& an entity "easures a transferred asset and the associated lia(ility under 'aragra'h 304 All assets ;a< If a guarantee 'ro!ided (y an entity to 'ay for default losses on a transferred asset 're!ents the transferred asset fro" (eing derecognised to the e8tent of the continuing in!ol!e"ent6 the transferred asset at the date of the transfer is "easured at the lo&er of ;i< the carrying a"ount of the asset and ;ii< the "a8i"u" a"ount of the consideration recei!ed in the transfer that the entity could (e required to re'ay ;Ethe guarantee a"ount?<4 The associated lia(ility is initially "easured at the guarantee a"ount 'lus the fair !alue of the guarantee ;&hich is nor"ally the consideration recei!ed for the guarantee<4 )u(sequently6 the initial fair !alue of the guarantee is recognised in 'rofit or loss on a ti"e 'ro'ortion (asis ;see Ind #) 18< and the carrying !alue of the asset is reduced (y any i"'air"ent losses4

Assets measured at amortised cost ;(< If a 'ut o'tion o(ligation &ritten (y an entity or call o'tion right held (y an entity 're!ents a transferred asset fro" (eing derecognised and the entity "easures the transferred asset at a"ortised cost6 the associated lia(ility is "easured at its cost ;ie the consideration recei!ed< ad5usted for the a"ortisation of any difference (et&een that cost and the a"ortised cost of the transferred asset at the e8'iration date of the o'tion4 *or e8a"'le6 assu"e that the a"ortised cost and carrying a"ount of the asset on the date of the transfer is %s498 and that the consideration recei!ed is %s4954 The a"ortised cost of the asset on the o'tion e8ercise date &ill (e %s41004 The initial carrying a"ount of the associated lia(ility is %s495 and the difference (et&een %s495 and %s4100 is recognised in 'rofit or loss using the effecti!e interest "ethod4 If the o'tion is e8ercised6 any difference (et&een the carrying a"ount of the associated lia(ility and the e8ercise 'rice is recognised in 'rofit or loss4

Assets measured at fair value ;c< If a call o'tion right retained (y an entity 're!ents a transferred asset fro" (eing derecognised and the entity "easures the transferred asset at fair !alue6 the asset continues to (e "easured at its fair !alue4 The associated lia(ility is "easured at ;i< the o'tion e8ercise 'rice less the ti"e !alue of the o'tion if the o'tion is in or at the "oney6 or ;ii< the fair !alue of the transferred asset less the ti"e !alue of the o'tion if the o'tion is out of the "oney4 The ad5ust"ent to the "easure"ent of the associated lia(ility

58

ensures that the net carrying a"ount of the asset and the associated lia(ility is the fair !alue of the call o'tion right4 *or e8a"'le6 if the fair !alue of the underlying asset is %s4806 the o'tion e8ercise 'rice is %s495 and the ti"e !alue of the o'tion is %s456 the carrying a"ount of the associated lia(ility is %s475 ;%s480 %s45< and the carrying a"ount of the transferred asset is %s480 ;ie its fair !alue<4 ;d< If a 'ut o'tion &ritten (y an entity 're!ents a transferred asset fro" (eing derecognised and the entity "easures the transferred asset at fair !alue6 the associated lia(ility is "easured at the o'tion e8ercise 'rice 'lus the ti"e !alue of the o'tion4 The "easure"ent of the asset at fair !alue is li"ited to the lo&er of the fair !alue and the o'tion e8ercise 'rice (ecause the entity has no right to increases in the fair !alue of the transferred asset a(o!e the e8ercise 'rice of the o'tion4 This ensures that the net carrying a"ount of the asset and the associated lia(ility is the fair !alue of the 'ut o'tion o(ligation4 *or e8a"'le6 if the fair !alue of the underlying asset is %s41206 the o'tion e8ercise 'rice is %s4100 and the ti"e !alue of the o'tion is %s456 the carrying a"ount of the associated lia(ility is %s4105 ;%s4100 N %s45< and the carrying a"ount of the asset is %s4100 ;in this case the o'tion e8ercise 'rice<4 If a collar6 in the for" of a 'urchased call and &ritten 'ut6 're!ents a transferred asset fro" (eing derecognised and the entity "easures the asset at fair !alue6 it continues to "easure the asset at fair !alue4 The associated lia(ility is "easured at ;i< the su" of the call e8ercise 'rice and fair !alue of the 'ut o'tion less the ti"e !alue of the call o'tion6 if the call o'tion is in or at the "oney6 or ;ii< the su" of the fair !alue of the asset and the fair !alue of the 'ut o'tion less the ti"e !alue of the call o'tion if the call o'tion is out of the "oney4 The ad5ust"ent to the associated lia(ility ensures that the net carrying a"ount of the asset and the associated lia(ility is the fair !alue of the o'tions held and &ritten (y the entity4 *or e8a"'le6 assu"e an entity transfers a financial asset that is "easured at fair !alue &hile si"ultaneously 'urchasing a call &ith an e8ercise 'rice of %s4120 and &riting a 'ut &ith an e8ercise 'rice of %s4804 #ssu"e also that the fair !alue of the asset is %s4100 at the date of the transfer4 The ti"e !alue of the 'ut and call are %s41 and %s45 res'ecti!ely4 In this case6 the entity recognises an asset of %s4100 ;the fair !alue of the asset< and a lia(ility of %s49$ 7;%s4100 N %s41< %s4594 This gi!es a net asset !alue of %s446 &hich is the fair !alue of the o'tions held and &ritten (y the entity4

;e<

A** transfers
#+49 To the e8tent that a transfer of a financial asset does not qualify for derecognition6 the transferor?s contractual rights or o(ligations related to the transfer are not accounted for se'arately as deri!ati!es if recognising (oth the deri!ati!e and either the transferred asset or the lia(ility arising fro" the transfer &ould result in recognising the sa"e rights or o(ligations t&ice4 *or e8a"'le6 a call o'tion retained (y the transferor "ay 're!ent a transfer of financial assets fro" (eing accounted for as a sale4 In that case6 the call o'tion is not se'arately recognised as a deri!ati!e asset4

59

#+50 To the e8tent that a transfer of a financial asset does not qualify for derecognition6 the transferee does not recognise the transferred asset as its asset4 The transferee derecognises the cash or other consideration 'aid and recognises a recei!a(le fro" the transferor4 If the transferor has (oth a right and an o(ligation to reacquire control of the entire transferred asset for a fi8ed a"ount ;such as under a re'urchase agree"ent<6 the transferee "ay account for its recei!a(le as a loan or recei!a(le4

E&amp*es
#+51 The follo&ing e8a"'les illustrate the a''lication of the derecognition 'rinci'les of this )tandard4 ;a< *epurchase agreements and securities lending+ If a financial asset is sold under an agree"ent to re'urchase it at a fi8ed 'rice or at the sale 'rice 'lus a lender?s return or if it is loaned under an agree"ent to return it to the transferor6 it is not derecognised (ecause the transferor retains su(stantially all the ris>s and re&ards of o&nershi'4 If the transferee o(tains the right to sell or 'ledge the asset6 the transferor reclassifies the asset in its (alance sheet6 for e8a"'le6 as a loaned asset or re'urchase recei!a(le4 *epurchase agreements and securities lending(assets that are su$stantially the same+ If a financial asset is sold under an agree"ent to re'urchase the sa"e or su(stantially the sa"e asset at a fi8ed 'rice or at the sale 'rice 'lus a lender?s return or if a financial asset is (orro&ed or loaned under an agree"ent to return the sa"e or su(stantially the sa"e asset to the transferor6 it is not derecognised (ecause the transferor retains su(stantially all the ris>s and re&ards of o&nershi'4 *epurchase agreements and securities lending(right of su$stitution+ If a re'urchase agree"ent at a fi8ed re'urchase 'rice or a 'rice equal to the sale 'rice 'lus a lender?s return6 or a si"ilar securities lending transaction6 'ro!ides the transferee &ith a right to su(stitute assets that are si"ilar and of equal fair !alue to the transferred asset at the re'urchase date6 the asset sold or lent under a re'urchase or securities lending transaction is not derecognised (ecause the transferor retains su(stantially all the ris>s and re&ards of o&nershi'4 *epurchase right of first refusal at fair value+ If an entity sells a financial asset and retains only a right of first refusal to re'urchase the transferred asset at fair !alue if the transferee su(sequently sells it6 the entity derecognises the asset (ecause it has transferred su(stantially all the ris>s and re&ards of o&nershi'4 4ash sale transaction+ The re'urchase of a financial asset shortly after it has (een sold is so"eti"es referred to as a &ash sale4 )uch a re'urchase does not 'reclude derecognition 'ro!ided that the original transaction "et the derecognition require"ents4 -o&e!er6 if an agree"ent to sell a financial asset is entered into concurrently &ith an agree"ent to re'urchase the sa"e asset at a fi8ed 'rice or the sale 'rice 'lus a lender?s return6 then the asset is not derecognised4

;(<

;c<

;d<

;e<

60

;f<

#ut options and call options that are deeply in the money+ If a transferred financial asset can (e called (ac> (y the transferor and the call o'tion is dee'ly in the "oney6 the transfer does not qualify for derecognition (ecause the transferor has retained su(stantially all the ris>s and re&ards of o&nershi'4 )i"ilarly6 if the financial asset can (e 'ut (ac> (y the transferee and the 'ut o'tion is dee'ly in the "oney6 the transfer does not qualify for derecognition (ecause the transferor has retained su(stantially all the ris>s and re&ards of o&nershi' 4 #ut options and call options that are deeply out of the money+ # financial asset that is transferred su(5ect only to a dee' out,of,the,"oney 'ut o'tion held (y the transferee or a dee' out,of,the,"oney call o'tion held (y the transferor is derecognised4 This is (ecause the transferor has transferred su(stantially all the ris>s and re&ards of o&nershi'4 *eadily o$taina$le assets su$5ect to a call option that is neither deeply in the money nor deeply out of the money 4 If an entity holds a call o'tion on an asset that is readily o(taina(le in the "ar>et and the o'tion is neither dee'ly in the "oney nor dee'ly out of the "oney6 the asset is derecognised4 This is (ecause the entity ;i< has neither retained nor transferred su(stantially all the ris>s and re&ards of o&nershi'6 and ;ii< has not retained control4 -o&e!er6 if the asset is not readily o(taina(le in the "ar>et6 derecognition is 'recluded to the e8tent of the a"ount of the asset that is su(5ect to the call o'tion (ecause the entity has retained control of the asset4 A not readily o$taina$le asset su$5ect to a put option 'ritten $y an entity that is neither deeply in the money nor deeply out of the money+ If an entity transfers a financial asset that is not readily o(taina(le in the "ar>et6 and &rites a 'ut o'tion that is not dee'ly out of the "oney6 the entity neither retains nor transfers su(stantially all the ris>s and re&ards of o&nershi' (ecause of the &ritten 'ut o'tion4 The entity retains control of the asset if the 'ut o'tion is sufficiently !alua(le to 're!ent the transferee fro" selling the asset6 in &hich case the asset continues to (e recognised to the e8tent of the transferor?s continuing in!ol!e"ent ;see 'aragra'h #+44<4 The entity transfers control of the asset if the 'ut o'tion is not sufficiently !alua(le to 're!ent the transferee fro" selling the asset6 in &hich case the asset is derecognised4 Assets su$5ect to a fair value put or call option or a for'ard repurchase agreement+ # transfer of a financial asset that is su(5ect only to a 'ut or call o'tion or a for&ard re'urchase agree"ent that has an e8ercise or re'urchase 'rice equal to the fair !alue of the financial asset at the ti"e of re'urchase results in derecognition (ecause of the transfer of su(stantially all the ris>s and re&ards of o&nershi'4 Cash settled call or put options+ #n entity e!aluates the transfer of a financial asset that is su(5ect to a 'ut or call o'tion or a for&ard re'urchase agree"ent that &ill (e settled net in cash to deter"ine &hether it has retained or transferred su(stantially all the ris>s and re&ards of o&nershi'4 If the entity has not retained su(stantially all the ris>s and re&ards of o&nershi' of the transferred asset6 it deter"ines &hether it has retained control of the transferred asset4 That the 'ut or the call or the for&ard

;g<

;h<

;i<

;5<

;><

61

re'urchase agree"ent is settled net in cash does not auto"atically "ean that the entity has transferred control ;see 'aragra'hs #+44 and ;g<6 ;h< and ;i< a(o!e<4 ;l< *emoval of accounts provision+ # re"o!al of accounts 'ro!ision is an unconditional re'urchase ;call< o'tion that gi!es an entity the right to reclai" assets transferred su(5ect to so"e restrictions4 Dro!ided that such an o'tion results in the entity neither retaining nor transferring su(stantially all the ris>s and re&ards of o&nershi'6 it 'recludes derecognition only to the e8tent of the a"ount su(5ect to re'urchase ;assu"ing that the transferee cannot sell the assets<4 *or e8a"'le6 if the carrying a"ount and 'roceeds fro" the transfer of loan assets are %s41006000 and any indi!idual loan could (e called (ac> (ut the aggregate a"ount of loans that could (e re'urchased could not e8ceed %s41060006 %s4906000 of the loans &ould qualify for derecognition4

;"< Clean"up calls+ #n entity6 &hich "ay (e a transferor6 that ser!ices transferred assets "ay hold a clean,u' call to 'urchase re"aining transferred assets &hen the a"ount of outstanding assets falls to a s'ecified le!el at &hich the cost of ser!icing those assets (eco"es (urdenso"e in relation to the (enefits of ser!icing4 Dro!ided that such a clean,u' call results in the entity neither retaining nor transferring su(stantially all the ris>s and re&ards of o&nershi' and the transferee cannot sell the assets6 it 'recludes derecognition only to the e8tent of the a"ount of the assets that is su(5ect to the call o'tion4 ;n< )u$ordinated retained interests and credit guarantees+ #n entity "ay 'ro!ide the transferee &ith credit enhance"ent (y su(ordinating so"e or all of its interest retained in the transferred asset4 #lternati!ely6 an entity "ay 'ro!ide the transferee &ith credit enhance"ent in the for" of a credit guarantee that could (e unli"ited or li"ited to a s'ecified a"ount4 If the entity retains su(stantially all the ris>s and re&ards of o&nershi' of the transferred asset6 the asset continues to (e recognised in its entirety4 If the entity retains so"e6 (ut not su(stantially all6 of the ris>s and re&ards of o&nershi' and has retained control6 derecognition is 'recluded to the e8tent of the a"ount of cash or other assets that the entity could (e required to 'ay4 Total return s'aps+ #n entity "ay sell a financial asset to a transferee and enter into a total return s&a' &ith the transferee6 &here(y all of the interest 'ay"ent cash flo&s fro" the underlying asset are re"itted to the entity in e8change for a fi8ed 'ay"ent or !aria(le rate 'ay"ent and any increases or declines in the fair !alue of the underlying asset are a(sor(ed (y the entity4 In such a case6 derecognition of all of the asset is 'rohi(ited4 Interest rate s'aps+ #n entity "ay transfer to a transferee a fi8ed rate financial asset and enter into an interest rate s&a' &ith the transferee to recei!e a fi8ed interest rate and 'ay a !aria(le interest rate (ased on a notional a"ount that is equal to the 'rinci'al a"ount of the transferred financial asset4 The interest rate s&a' does not 'reclude derecognition of the transferred asset 'ro!ided the 'ay"ents on the s&a' are not conditional on 'ay"ents (eing "ade on the transferred asset4

;o<

;'<

62

;q<

Amortising interest rate s'aps+ #n entity "ay transfer to a transferee a fi8ed rate financial asset that is 'aid off o!er ti"e6 and enter into an a"ortising interest rate s&a' &ith the transferee to recei!e a fi8ed interest rate and 'ay a !aria(le interest rate (ased on a notional a"ount4 If the notional a"ount of the s&a' a"ortises so that it equals the 'rinci'al a"ount of the transferred financial asset outstanding at any 'oint in ti"e6 the s&a' &ould generally result in the entity retaining su(stantial 're'ay"ent ris>6 in &hich case the entity either continues to recognise all of the transferred asset or continues to recognise the transferred asset to the e8tent of its continuing in!ol!e"ent4 on!ersely6 if the a"ortisation of the notional a"ount of the s&a' is not lin>ed to the 'rinci'al a"ount outstanding of the transferred asset6 such a s&a' &ould not result in the entity retaining 're'ay"ent ris> on the asset4 -ence6 it &ould not 'reclude derecognition of the transferred asset 'ro!ided the 'ay"ents on the s&a' are not conditional on interest 'ay"ents (eing "ade on the transferred asset and the s&a' does not result in the entity retaining any other significant ris>s and re&ards of o&nershi' on the transferred asset4

#+52 This 'aragra'h illustrates the a''lication of the continuing in!ol!e"ent a''roach &hen the entity?s continuing in!ol!e"ent is in a 'art of a financial asset4 #ssu"e an entity has a 'ortfolio of 're'aya(le loans &hose cou'on and effecti!e interest rate is 10 'er cent and &hose 'rinci'al a"ount and a"ortised cost is %s41060004 It enters into a transaction in &hich6 in return for a 'ay"ent of %s4961156 the transferee o(tains the right to %s496000 of any collections of 'rinci'al 'lus interest thereon at 945 'er cent4 The entity retains rights to %s416000 of any collections of 'rinci'al 'lus interest thereon at 10 'er cent6 'lus the e8cess s'read of 045 'er cent on the re"aining %s496000 of 'rinci'al4 ollections fro" 're'ay"ents are allocated (et&een the entity and the transferee 'ro'ortionately in the ratio of 1:96 (ut any defaults are deducted fro" the entity?s interest of %s416000 until that interest is e8hausted4 The fair !alue of the loans at the date of the transaction is %s4106100 and the esti"ated fair !alue of the e8cess s'read of 045 'er cent is %s4404 The entity deter"ines that it has transferred so"e significant ris>s and re&ards of o&nershi' ;for e8a"'le6 significant 're'ay"ent ris>< (ut has also retained so"e significant ris>s and re&ards of o&nershi' ;(ecause of its su(ordinated retained interest< and has retained control4 It therefore a''lies the continuing in!ol!e"ent a''roach4 To a''ly this )tandard6 the entity analyses the transaction as ;a< a retention of a fully 'ro'ortionate retained interest of %s4160006 'lus ;(< the su(ordination of that retained interest to 'ro!ide credit enhance"ent to the transferee for credit losses4 The entity calculates that %s496090 ;90 'er cent O %s4106100< of the consideration recei!ed of %s496115 re'resents the consideration for a fully 'ro'ortionate 90 'er cent share4 The re"ainder of the consideration recei!ed ;%s425< re'resents consideration recei!ed for su(ordinating its retained interest to 'ro!ide credit enhance"ent to the transferee for credit losses4 In addition6 the e8cess s'read of 045 'er cent re'resents consideration recei!ed for the credit enhance"ent4 #ccordingly6 the total consideration recei!ed for the credit

63

enhance"ent is %s4$5 ;%s425 N %s440<4 The entity calculates the gain or loss on the sale of the 90 'er cent share of cash flo&s4 #ssu"ing that se'arate fair !alues of the 90 'er cent 'art transferred and the 10 'er cent 'art retained are not a!aila(le at the date of the transfer6 the entity allocates the carrying a"ount of the asset in accordance &ith 'aragra'h 28 as follo&s: Estimated fair value Dortion transferred Dortion retained 0ota* 96090 16010 3>43>> #ercentage 90P 10P Allocated carrying amount 96000 16000 3>4>>>

The entity co"'utes its gain or loss on the sale of the 90 'er cent share of the cash flo&s (y deducting the allocated carrying a"ount of the 'ortion transferred fro" the consideration recei!ed6 ie %s490 ;%s496090 %s496000<4 The carrying a"ount of the 'ortion retained (y the entity is %s4160004 In addition6 the entity recognises the continuing in!ol!e"ent that results fro" the su(ordination of its retained interest for credit losses4 #ccordingly6 it recognises an asset of %s416000 ;the "a8i"u" a"ount of the cash flo&s it &ould not recei!e under the su(ordination<6 and an associated lia(ility of %s4160$5 ;&hich is the "a8i"u" a"ount of the cash flo&s it &ould not recei!e under the su(ordination6 ie %s416000 'lus the fair !alue of the su(ordination of %s4$5<4 The entity uses all of the a(o!e infor"ation to account for the transaction as follo&s: @riginal asset #sset recognised for su(ordination or the residual interest #sset for the consideration recei!ed in the for" of e8cess s'read Drofit or loss ;gain on transfer< 2ia(ility ash recei!ed 0ota* !e$it 16000 40 Credit 96000

96115 3>4399

90 160$5 3>4399

I""ediately follo&ing the transaction6 the carrying a"ount of the asset is %s426040 co"'rising %s4160006 re'resenting the allocated cost of the 'ortion retained6 and %s4160406 re'resenting the entity?s additional continuing in!ol!e"ent fro" the su(ordination of its retained interest for credit losses

64

;&hich includes the e8cess s'read of %s440<4 In su(sequent 'eriods6 the entity recognises the consideration recei!ed for the credit enhance"ent ;%s4$5< on a ti"e 'ro'ortion (asis6 accrues interest on the recognised asset using the effecti!e interest "ethod and recognises any credit i"'air"ent on the recognised assets4 #s an e8a"'le of the latter6 assu"e that in the follo&ing year there is a credit i"'air"ent loss on the underlying loans of %s43004 The entity reduces its recognised asset (y %s4$00 ;%s4300 relating to its retained interest and %s4300 relating to the additional continuing in!ol!e"ent that arises fro" the su(ordination of its retained interest for credit losses<6 and reduces its recognised lia(ility (y %s43004 The net result is a charge to 'rofit or loss for credit i"'air"ent of %s43004

Regu*ar ,a. purc(ase or sa*e of a financia* asset (paragrap( 37)

#+53 # regular &ay 'urchase or sale of financial assets is recognised using either trade date accounting or settle"ent date accounting as descri(ed in 'aragra'hs #+55 and #+5$4 The "ethod used is a''lied consistently for all 'urchases and sales of financial assets that (elong to the sa"e category of financial assets defined in 'aragra'h 94 *or this 'ur'ose assets that are held for trading for" a se'arate category fro" assets designated at fair !alue through 'rofit or loss4 #+54 # contract that requires or 'er"its net settle"ent of the change in the !alue of the contract is not a regular &ay contract4 Instead6 such a contract is accounted for as a deri!ati!e in the 'eriod (et&een the trade date and the settle"ent date4 #+55 The trade date is the date that an entity co""its itself to 'urchase or sell an asset4 Trade date accounting refers to ;a< the recognition of an asset to (e recei!ed and the lia(ility to 'ay for it on the trade date6 and ;(< derecognition of an asset that is sold6 recognition of any gain or loss on dis'osal and the recognition of a recei!a(le fro" the (uyer for 'ay"ent on the trade date4 +enerally6 interest does not start to accrue on the asset and corres'onding lia(ility until the settle"ent date &hen title 'asses4 #+5$ The settle"ent date is the date that an asset is deli!ered to or (y an entity4 )ettle"ent date accounting refers to ;a< the recognition of an asset on the day it is recei!ed (y the entity6 and ;(< the derecognition of an asset and recognition of any gain or loss on dis'osal on the day that it is deli!ered (y the entity4 Bhen settle"ent date accounting is a''lied an entity accounts for any change in the fair !alue of the asset to (e recei!ed during the 'eriod (et&een the trade date and the settle"ent date in the sa"e &ay as it accounts for the acquired asset4 In other &ords6 the change in !alue is not recognised for assets carried at cost or a"ortised cost= it is recognised in 'rofit or loss for assets classified as financial assets at fair !alue through 'rofit or loss= and it is recognised in other co"'rehensi!e inco"e for assets classified as a!aila(le for sale4

Derecognition of a financia* *iabi*it. (paragrap(s 39:<5)

#+57 # financial lia(ility ;or 'art of it< is e8tinguished &hen the de(tor either:

65

;a< ;(<

discharges the lia(ility ;or 'art of it< (y 'aying the creditor6 nor"ally &ith cash6 other financial assets6 goods or ser!ices= or is legally released fro" 'ri"ary res'onsi(ility for the lia(ility ;or 'art of it< either (y 'rocess of la& or (y the creditor4 ;If the de(tor has gi!en a guarantee this condition "ay still (e "et4<

#+58 If an issuer of a de(t instru"ent re'urchases that instru"ent6 the de(t is e8tinguished e!en if the issuer is a "ar>et "a>er in that instru"ent or intends to resell it in the near ter"4 #+59 Day"ent to a third 'arty6 including a trust ;so"eti"es called Ein,su(stance defeasance?<6 does not6 (y itself6 relie!e the de(tor of its 'ri"ary o(ligation to the creditor6 in the a(sence of legal release4 #+$0 If a de(tor 'ays a third 'arty to assu"e an o(ligation and notifies its creditor that the third 'arty has assu"ed its de(t o(ligation6 the de(tor does not derecognise the de(t o(ligation unless the condition in 'aragra'h #+57;(< is "et4 If the de(tor 'ays a third 'arty to assu"e an o(ligation and o(tains a legal release fro" its creditor6 the de(tor has e8tinguished the de(t4 -o&e!er6 if the de(tor agrees to "a>e 'ay"ents on the de(t to the third 'arty or direct to its original creditor6 the de(tor recognises a ne& de(t o(ligation to the third 'arty4 #+$1 #lthough legal release6 &hether 5udicially or (y the creditor6 results in derecognition of a lia(ility6 the entity "ay recognise a ne& lia(ility if the derecognition criteria in 'aragra'hs 1537 are not "et for the financial assets transferred4 If those criteria are not "et6 the transferred assets are not derecognised6 and the entity recognises a ne& lia(ility relating to the transferred assets4 #+$2 *or the 'ur'ose of 'aragra'h 406 the ter"s are su(stantially different if the discounted 'resent !alue of the cash flo&s under the ne& ter"s6 including any fees 'aid net of any fees recei!ed and discounted using the original effecti!e interest rate6 is at least 10 'er cent different fro" the discounted 'resent !alue of the re"aining cash flo&s of the original financial lia(ility4 If an e8change of de(t instru"ents or "odification of ter"s is accounted for as an e8tinguish"ent6 any costs or fees incurred are recognised as 'art of the gain or loss on the e8tinguish"ent4 If the e8change or "odification is not accounted for as an e8tinguish"ent6 any costs or fees incurred ad5ust the carrying a"ount of the lia(ility and are a"ortised o!er the re"aining ter" of the "odified lia(ility4 #+$3 In so"e cases6 a creditor releases a de(tor fro" its 'resent o(ligation to "a>e 'ay"ents6 (ut the de(tor assu"es a guarantee o(ligation to 'ay if the 'arty assu"ing 'ri"ary res'onsi(ility defaults4 In this circu"stance the de(tor: ;a< ;(< recognises a ne& financial lia(ility (ased on the fair !alue of its o(ligation for the guarantee= and recognises a gain or loss (ased on the difference (et&een ;i< any 'roceeds 'aid and ;ii< the carrying a"ount of the original financial lia(ility less the fair !alue of the ne& financial lia(ility4

66

easurement (paragrap(s <3:6>)

Initia* measurement of financia* assets and financia* *iabi*ities (paragrap( <3)
#+$4 The fair !alue of a financial instru"ent on initial recognition is nor"ally the transaction 'rice ;ie the fair !alue of the consideration gi!en or recei!ed6 see also 'aragra'h #+7$<4 -o&e!er6 if 'art of the consideration gi!en or recei!ed is for so"ething other than the financial instru"ent6 the fair !alue of the financial instru"ent is esti"ated6 using a !aluation technique ;see 'aragra'hs #+74 #+79<4 *or e8a"'le6 the fair !alue of a long,ter" loan or recei!a(le that carries no interest can (e esti"ated as the 'resent !alue of all future cash recei'ts discounted using the 're!ailing "ar>et rate;s< of interest for a si"ilar instru"ent ;si"ilar as to currency6 ter"6 ty'e of interest rate and other factors< &ith a si"ilar credit rating4 #ny additional a"ount lent is an e8'ense or a reduction of inco"e unless it qualifies for recognition as so"e other ty'e of asset4 #+$5 If an entity originates a loan that (ears an off,"ar>et interest rate ;eg 5 'er cent &hen the "ar>et rate for si"ilar loans is 8 'er cent<6 and recei!es an u'front fee as co"'ensation6 the entity recognises the loan at its fair !alue6 ie net of the fee it recei!es4 The entity accretes the discount to 'rofit or loss using the effecti!e interest rate "ethod4

Subse-uent measurement of financia* assets (paragrap(s <9 and <;)

#+$$ If a financial instru"ent that &as 're!iously recognised as a financial asset is "easured at fair !alue and its fair !alue falls (elo& Jero6 it is a financial lia(ility "easured in accordance &ith 'aragra'h 474 #+$7 The follo&ing e8a"'le illustrates the accounting for transaction costs on the initial and su(sequent "easure"ent of an a!aila(le,for,sale financial asset4 #n asset is acquired for %s4100 'lus a 'urchase co""ission of %s424 Initially6 the asset is recognised at %s41024 The end of the re'orting 'eriod occurs one day later6 &hen the quoted "ar>et 'rice of the asset is %s41004 If the asset &ere sold6 a co""ission of %s43 &ould (e 'aid4 @n that date6 the asset is "easured at %s4100 ;&ithout regard to the 'ossi(le co""ission on sale< and a loss of %s42 is recognised in other co"'rehensi!e inco"e4 If the a!aila(le,for,sale financial asset has fi8ed or deter"ina(le 'ay"ents6 the transaction costs are a"ortised to 'rofit or loss using the effecti!e interest "ethod4 If the a!aila(le,for,sale financial asset does not ha!e fi8ed or deter"ina(le 'ay"ents6 the transaction costs are recognised in 'rofit or loss &hen the asset is derecognised or (eco"es i"'aired4 #+$8 Instru"ents that are classified as loans and recei!a(les are "easured at a"ortised cost &ithout regard to the entity?s intention to hold the" to "aturity4

)air va*ue measurement considerations (paragrap(s <7:<9)

#+$9 Fnderlying the definition of fair !alue is a 'resu"'tion that an entity is a going concern &ithout any intention or need to liquidate6 to curtail "aterially the scale

67

of its o'erations or to underta>e a transaction on ad!erse ter"s4 *air !alue is not6 therefore6 the a"ount that an entity &ould recei!e or 'ay in a forced transaction6 in!oluntary liquidation or distress sale4 -o&e!er6 fair !alue reflects the credit quality of the instru"ent4 #+70 This )tandard uses the ter"s E(id 'rice? and Eas>ing 'rice? ;so"eti"es referred to as Ecurrent offer 'rice?< in the conte8t of quoted "ar>et 'rices6 and the ter" Ethe (id,as> s'read? to include only transaction costs4 @ther ad5ust"ents to arri!e at fair !alue ;eg for counter'arty credit ris>< are not included in the ter" E(id,as> s'read?4

Active mar@et% -uoted price

#+71 # financial instru"ent is regarded as quoted in an acti!e "ar>et if quoted 'rices are readily and regularly a!aila(le fro" an e8change6 dealer6 (ro>er6 industry grou'6 'ricing ser!ice or regulatory agency6 and those 'rices re'resent actual and regularly occurring "ar>et transactions on an ar"?s length (asis4 *air !alue is defined in ter"s of a 'rice agreed (y a &illing (uyer and a &illing seller in an ar"?s length transaction4 The o(5ecti!e of deter"ining fair !alue for a financial instru"ent that is traded in an acti!e "ar>et is to arri!e at the 'rice at &hich a transaction &ould occur at the end of the re'orting 'eriod in that instru"ent ;ie &ithout "odifying or re'ac>aging the instru"ent< in the "ost ad!antageous acti!e "ar>et to &hich the entity has i""ediate access4 -o&e!er6 the entity ad5usts the 'rice in the "ore ad!antageous "ar>et to reflect any differences in counter'arty credit ris> (et&een instru"ents traded in that "ar>et and the one (eing !alued4 The e8istence of 'u(lished 'rice quotations in an acti!e "ar>et is the (est e!idence of fair !alue and &hen they e8ist they are used to "easure the financial asset or financial lia(ility4 #+72 The a''ro'riate quoted "ar>et 'rice for an asset held or lia(ility to (e issued is usually the current (id 'rice and6 for an asset to (e acquired or lia(ility held6 the as>ing 'rice4 Bhen an entity has assets and lia(ilities &ith offsetting "ar>et ris>s6 it "ay use "id,"ar>et 'rices as a (asis for esta(lishing fair !alues for the offsetting ris> 'ositions and a''ly the (id or as>ing 'rice to the net o'en 'osition as a''ro'riate4 Bhen current (id and as>ing 'rices are una!aila(le6 the 'rice of the "ost recent transaction 'ro!ides e!idence of the current fair !alue as long as there has not (een a significant change in econo"ic circu"stances since the ti"e of the transaction4 If conditions ha!e changed since the ti"e of the transaction ;eg a change in the ris>,free interest rate follo&ing the "ost recent 'rice quote for a cor'orate (ond<6 the fair !alue reflects the change in conditions (y reference to current 'rices or rates for si"ilar financial instru"ents6 as a''ro'riate4 )i"ilarly6 if the entity can de"onstrate that the last transaction 'rice is not fair !alue ;eg (ecause it reflected the a"ount that an entity &ould recei!e or 'ay in a forced transaction6 in!oluntary liquidation or distress sale<6 that 'rice is ad5usted4 The fair !alue of a 'ortfolio of financial instru"ents is the 'roduct of the nu"(er of units of the instru"ent and its quoted "ar>et 'rice4 If a 'u(lished 'rice quotation in an acti!e "ar>et does not e8ist for a financial instru"ent in its entirety6 (ut acti!e "ar>ets e8ist for its co"'onent 'arts6 fair !alue is deter"ined on the (asis of the rele!ant "ar>et 'rices for the co"'onent 'arts4 #+73 If a rate ;rather than a 'rice< is quoted in an acti!e "ar>et6 the entity uses that "ar>et,quoted rate as an in'ut into a !aluation technique to deter"ine fair !alue4

68

If the "ar>et,quoted rate does not include credit ris> or other factors that "ar>et 'artici'ants &ould include in !aluing the instru"ent6 the entity ad5usts for those factors4

#o active mar@et% va*uation tec(ni-ue

#+74 If the "ar>et for a financial instru"ent is not acti!e6 an entity esta(lishes fair !alue (y using a !aluation technique4 Caluation techniques include using recent ar"?s length "ar>et transactions (et&een >no&ledgea(le6 &illing 'arties6 if a!aila(le6 reference to the current fair !alue of another instru"ent that is su(stantially the sa"e6 discounted cash flo& analysis and o'tion 'ricing "odels4 If there is a !aluation technique co""only used (y "ar>et 'artici'ants to 'rice the instru"ent and that technique has (een de"onstrated to 'ro!ide relia(le esti"ates of 'rices o(tained in actual "ar>et transactions6 the entity uses that technique4 #+75 The o(5ecti!e of using a !aluation technique is to esta(lish &hat the transaction 'rice &ould ha!e (een on the "easure"ent date in an ar"?s length e8change "oti!ated (y nor"al (usiness considerations4 *air !alue is esti"ated on the (asis of the results of a !aluation technique that "a>es "a8i"u" use of "ar>et in'uts6 and relies as little as 'ossi(le on entity,s'ecific in'uts4 # !aluation technique &ould (e e8'ected to arri!e at a realistic esti"ate of the fair !alue if ;a< it reasona(ly reflects ho& the "ar>et could (e e8'ected to 'rice the instru"ent and ;(< the in'uts to the !aluation technique reasona(ly re'resent "ar>et e8'ectations and "easures of the ris>,return factors inherent in the financial instru"ent4 #+7$ Therefore6 a !aluation technique ;a< incor'orates all factors that "ar>et 'artici'ants &ould consider in setting a 'rice and ;(< is consistent &ith acce'ted econo"ic "ethodologies for 'ricing financial instru"ents4 Deriodically6 an entity cali(rates the !aluation technique and tests it for !alidity using 'rices fro" any o(ser!a(le current "ar>et transactions in the sa"e instru"ent ;ie &ithout "odification or re'ac>aging< or (ased on any a!aila(le o(ser!a(le "ar>et data4 #n entity o(tains "ar>et data consistently in the sa"e "ar>et &here the instru"ent &as originated or 'urchased4 The (est e!idence of the fair !alue of a financial instru"ent at initial recognition is the transaction 'rice ;ie the fair !alue of the consideration gi!en or recei!ed< unless the fair !alue of that instru"ent is e!idenced (y co"'arison &ith other o(ser!a(le current "ar>et transactions in the sa"e instru"ent ;ie &ithout "odification or re'ac>aging< or (ased on a !aluation technique &hose !aria(les include only data fro" o(ser!a(le "ar>ets4 #+7$# The su(sequent "easure"ent of the financial asset or financial lia(ility and the su(sequent recognition of gains and losses shall (e consistent &ith the require"ents of this )tandard4 The a''lication of 'aragra'h #+7$ "ay result in no gain or loss (eing recognised on the initial recognition of a financial asset or financial lia(ility4 In such a case6 Ind #) 39 requires that a gain or loss shall (e recognised after initial recognition only to the e8tent that it arises fro" a change in a factor ;including ti"e< that "ar>et 'artici'ants &ould consider in setting a 'rice4 #+77 The initial acquisition or origination of a financial asset or incurrence of a financial lia(ility is a "ar>et transaction that 'ro!ides a foundation for esti"ating the fair

69

!alue of the financial instru"ent4 In 'articular6 if the financial instru"ent is a de(t instru"ent ;such as a loan<6 its fair !alue can (e deter"ined (y reference to the "ar>et conditions that e8isted at its acquisition or origination date and current "ar>et conditions or interest rates currently charged (y the entity or (y others for si"ilar de(t instru"ents ;ie si"ilar re"aining "aturity6 cash flo& 'attern6 currency6 credit ris>6 collateral and interest (asis<4 #lternati!ely6 'ro!ided there is no change in the credit ris> of the de(tor and a''lica(le credit s'reads after the origination of the de(t instru"ent6 an esti"ate of the current "ar>et interest rate "ay (e deri!ed (y using a (ench"ar> interest rate reflecting a (etter credit quality than the underlying de(t instru"ent6 holding the credit s'read constant6 and ad5usting for the change in the (ench"ar> interest rate fro" the origination date4 If conditions ha!e changed since the "ost recent "ar>et transaction6 the corres'onding change in the fair !alue of the financial instru"ent (eing !alued is deter"ined (y reference to current 'rices or rates for si"ilar financial instru"ents6 ad5usted as a''ro'riate6 for any differences fro" the instru"ent (eing !alued4 #+78 The sa"e infor"ation "ay not (e a!aila(le at each "easure"ent date4 *or e8a"'le6 at the date that an entity "a>es a loan or acquires a de(t instru"ent that is not acti!ely traded6 the entity has a transaction 'rice that is also a "ar>et 'rice4 -o&e!er6 no ne& transaction infor"ation "ay (e a!aila(le at the ne8t "easure"ent date and6 although the entity can deter"ine the general le!el of "ar>et interest rates6 it "ay not >no& &hat le!el of credit or other ris> "ar>et 'artici'ants &ould consider in 'ricing the instru"ent on that date4 #n entity "ay not ha!e infor"ation fro" recent transactions to deter"ine the a''ro'riate credit s'read o!er the (asic interest rate to use in deter"ining a discount rate for a 'resent !alue co"'utation4 It &ould (e reasona(le to assu"e6 in the a(sence of e!idence to the contrary6 that no changes ha!e ta>en 'lace in the s'read that e8isted at the date the loan &as "ade4 -o&e!er6 the entity &ould (e e8'ected to "a>e reasona(le efforts to deter"ine &hether there is e!idence that there has (een a change in such factors4 Bhen e!idence of a change e8ists6 the entity &ould consider the effects of the change in deter"ining the fair !alue of the financial instru"ent4 #+79 In a''lying discounted cash flo& analysis6 an entity uses one or "ore discount rates equal to the 're!ailing rates of return for financial instru"ents ha!ing su(stantially the sa"e ter"s and characteristics6 including the credit quality of the instru"ent6 the re"aining ter" o!er &hich the contractual interest rate is fi8ed6 the re"aining ter" to re'ay"ent of the 'rinci'al and the currency in &hich 'ay"ents are to (e "ade4 )hort,ter" recei!a(les and 'aya(les &ith no stated interest rate "ay (e "easured at the original in!oice a"ount if the effect of discounting is i""aterial4

#o active mar@et% e-uit. instruments

#+80 The fair !alue of in!est"ents in equity instru"ents that do not ha!e a quoted "ar>et 'rice in an acti!e "ar>et and deri!ati!es that are lin>ed to and "ust (e settled (y deli!ery of such an unquoted equity instru"ent ;see 'aragra'hs 4$;c< and 47< is relia(ly "easura(le if ;a< the !aria(ility in the range of reasona(le fair !alue esti"ates is not significant for that instru"ent or ;(< the 'ro(a(ilities of the !arious esti"ates &ithin the range can (e reasona(ly assessed and used in esti"ating fair !alue4

70

#+81 There are "any situations in &hich the !aria(ility in the range of reasona(le fair !alue esti"ates of in!est"ents in equity instru"ents that do not ha!e a quoted "ar>et 'rice and deri!ati!es that are lin>ed to and "ust (e settled (y deli!ery of such an unquoted equity instru"ent ;see 'aragra'hs 4$;c< and 47< is li>ely not to (e significant4 Hor"ally it is 'ossi(le to esti"ate the fair !alue of a financial asset that an entity has acquired fro" an outside 'arty4 -o&e!er6 if the range of reasona(le fair !alue esti"ates is significant and the 'ro(a(ilities of the !arious esti"ates cannot (e reasona(ly assessed6 an entity is 'recluded fro" "easuring the instru"ent at fair !alue4

Inputs to va*uation tec(ni-ues

#+82 #n a''ro'riate technique for esti"ating the fair !alue of a 'articular financial instru"ent &ould incor'orate o(ser!a(le "ar>et data a(out the "ar>et conditions and other factors that are li>ely to affect the instru"ent?s fair !alue4 The fair !alue of a financial instru"ent &ill (e (ased on one or "ore of the follo&ing factors ;and 'erha's others<4 ;a< The time value of money .ie interest at the $asic or risk"free rate/+ /asic interest rates can usually (e deri!ed fro" o(ser!a(le go!ern"ent (ond 'rices and are often quoted in financial 'u(lications4 These rates ty'ically !ary &ith the e8'ected dates of the 'ro5ected cash flo&s along a yield cur!e of interest rates for different ti"e horiJons4 *or 'ractical reasons6 an entity "ay use a &ell,acce'ted and readily o(ser!a(le general rate6 such as 3I/@% or a s&a' rate6 as the (ench"ar> rate4 ;/ecause a rate such as 3I/@% is not the ris>,free interest rate6 the credit ris> ad5ust"ent a''ro'riate to the 'articular financial instru"ent is deter"ined on the (asis of its credit ris> in relation to the credit ris> in this (ench"ar> rate4< In so"e countries6 the central go!ern"ent?s (onds "ay carry a significant credit ris> and "ay not 'ro!ide a sta(le (ench"ar> (asic interest rate for instru"ents deno"inated in that currency4 )o"e entities in these countries "ay ha!e a (etter credit standing and a lo&er (orro&ing rate than the central go!ern"ent4 In such a case6 (asic interest rates "ay (e "ore a''ro'riately deter"ined (y reference to interest rates for the highest rated cor'orate (onds issued in the currency of that 5urisdiction4 Credit risk+ The effect on fair !alue of credit ris> ;ie the 're"iu" o!er the (asic interest rate for credit ris>< "ay (e deri!ed fro" o(ser!a(le "ar>et 'rices for traded instru"ents of different credit quality or fro" o(ser!a(le interest rates charged (y lenders for loans of !arious credit ratings4 Foreign currency exchange prices+ #cti!e currency e8change "ar>ets e8ist for "ost "a5or currencies6 and 'rices are quoted daily in financial 'u(lications4 Commodity prices+ There are o(ser!a(le co""odities4 "ar>et 'rices for "any

;(<

;c<

;d< ;e<

Equity prices+ Drices ;and inde8es of 'rices< of traded equity instru"ents are readily o(ser!a(le in so"e "ar>ets4 Dresent !alue (ased techniques "ay (e used to esti"ate the current "ar>et 'rice of equity instru"ents for &hich there are no o(ser!a(le 'rices4

71

;f<

6olatility .ie magnitude of future changes in price of the financial instrument or other item/+ 3easures of the !olatility of acti!ely traded ite"s can nor"ally (e reasona(ly esti"ated on the (asis of historical "ar>et data or (y using !olatilities i"'lied in current "ar>et 'rices4 #repayment risk and surrender risk+ 18'ected 're'ay"ent 'atterns for financial assets and e8'ected surrender 'atterns for financial lia(ilities can (e esti"ated on the (asis of historical data4 ;The fair !alue of a financial lia(ility that can (e surrendered (y the counter'arty cannot (e less than the 'resent !alue of the surrender a"ountAsee 'aragra'h 494< )ervicing costs for a financial asset or a financial lia$ility+ osts of ser!icing can (e esti"ated using co"'arisons &ith current fees charged (y other "ar>et 'artici'ants4 If the costs of ser!icing a financial asset or financial lia(ility are significant and other "ar>et 'artici'ants &ould face co"'ara(le costs6 the issuer &ould consider the" in deter"ining the fair !alue of that financial asset or financial lia(ility4 It is li>ely that the fair !alue at ince'tion of a contractual right to future fees equals the origination costs 'aid for the"6 unless future fees and related costs are out of line &ith "ar>et co"'ara(les4

;g<

;h<

2ains and *osses (paragrap(s 99:96)

#+83 #n entity a''lies Ind #) 21 to financial assets and financial lia(ilities that are "onetary ite"s in accordance &ith Ind #) 21 and deno"inated in a foreign currency4 FnderInd #) 216 any foreign e8change gains and losses on "onetary assets and "onetary lia(ilities are recognised in 'rofit or loss4 #n e8ce'tion is a "onetary ite" that is designated as a hedging instru"ent in either a cash flo& hedge ;see 'aragra'hs 95101< or a hedge of a net in!est"ent ;see 'aragra'h 102<4 *or the 'ur'ose of recognising foreign e8change gains and losses under Ind #) 216 a "onetary a!aila(le,for,sale financial asset is treated as if it &ere carried at a"ortised cost in the foreign currency4 #ccordingly6 for such a financial asset6 e8change differences resulting fro" changes in a"ortised cost are recognised in 'rofit or loss and other changes in carrying a"ount are recognised in accordance &ith 'aragra'h 55;(<4 *or a!aila(le,for,sale financial assets that are not "onetary ite"s under Ind #) 21 ;for e8a"'le6 equity instru"ents<6 the gain or loss that is recognised in other co"'rehensi!e inco"e under 'aragra'h 55;(< includes any related foreign e8change co"'onent4 If there is a hedging relationshi' (et&een a non,deri!ati!e "onetary asset and a non,deri!ati!e "onetary lia(ility6 changes in the foreign currency co"'onent of those financial instru"ents are recognised in 'rofit or loss4

Impairment and unco**ectibi*it. of financia* assets (paragrap(s 97:6>)

)inancia* assets carried at amortised cost (paragrap(s ;3:;9)
#+84 I"'air"ent of a financial asset carried at a"ortised cost is "easured using the financial instru"ent?s original effecti!e interest rate (ecause discounting at the current "ar>et rate of interest &ould6 in effect6 i"'ose fair !alue "easure"ent on financial assets that are other&ise "easured at a"ortised cost4 If the ter"s of a

72

loan6 recei!a(le or held,to,"aturity in!est"ent are renegotiated or other&ise "odified (ecause of financial difficulties of the (orro&er or issuer6 i"'air"ent is "easured using the original effecti!e interest rate (efore the "odification of ter"s4 ash flo&s relating to short,ter" recei!a(les are not discounted if the effect of discounting is i""aterial4 If a loan6 recei!a(le or held,to,"aturity in!est"ent has a !aria(le interest rate6 the discount rate for "easuring any i"'air"ent loss under 'aragra'h $3 is the current effecti!e interest rate;s< deter"ined under the contract4 #s a 'ractical e8'edient6 a creditor "ay "easure i"'air"ent of a financial asset carried at a"ortised cost on the (asis of an instru"ent?s fair !alue using an o(ser!a(le "ar>et 'rice4 The calculation of the 'resent !alue of the esti"ated future cash flo&s of a collateralised financial asset reflects the cash flo&s that "ay result fro" foreclosure less costs for o(taining and selling the collateral6 &hether or not foreclosure is 'ro(a(le4 #+85 The 'rocess for esti"ating i"'air"ent considers all credit e8'osures6 not only those of lo& credit quality4 *or e8a"'le6 if an entity uses an internal credit grading syste" it considers all credit grades6 not only those reflecting a se!ere credit deterioration4 #+8$ The 'rocess for esti"ating the a"ount of an i"'air"ent loss "ay result either in a single a"ount or in a range of 'ossi(le a"ounts4 In the latter case6 the entity recognises an i"'air"ent loss equal to the (est esti"ate &ithin the range2 ta>ing into account all rele!ant infor"ation a!aila(le (efore the financial state"ents are issued a(out conditions e8isting at the end of the re'orting 'eriod4 #+87 *or the 'ur'ose of a collecti!e e!aluation of i"'air"ent6 financial assets are grou'ed on the (asis of si"ilar credit ris> characteristics that are indicati!e of the de(tors? a(ility to 'ay all a"ounts due according to the contractual ter"s ;for e8a"'le6 on the (asis of a credit ris> e!aluation or grading 'rocess that considers asset ty'e6 industry6 geogra'hical location6 collateral ty'e6 'ast,due status and other rele!ant factors<4 The characteristics chosen are rele!ant to the esti"ation of future cash flo&s for grou's of such assets (y (eing indicati!e of the de(tors? a(ility to 'ay all a"ounts due according to the contractual ter"s of the assets (eing e!aluated4 -o&e!er6 loss 'ro(a(ilities and other loss statistics differ at a grou' le!el (et&een ;a< assets that ha!e (een indi!idually e!aluated for i"'air"ent and found not to (e i"'aired and ;(< assets that ha!e not (een indi!idually e!aluated for i"'air"ent6 &ith the result that a different a"ount of i"'air"ent "ay (e required4 If an entity does not ha!e a grou' of assets &ith si"ilar ris> characteristics6 it does not "a>e the additional assess"ent4 #+88 I"'air"ent losses recognised on a grou' (asis re'resent an interi" ste' 'ending the identification of i"'air"ent losses on indi!idual assets in the grou' of financial assets that are collecti!ely assessed for i"'air"ent4 #s soon as infor"ation is a!aila(le that s'ecifically identifies losses on indi!idually i"'aired assets in a grou'6 those assets are re"o!ed fro" the grou'4 #+89 *uture cash flo&s in a grou' of financial assets that are collecti!ely e!aluated for i"'air"ent are esti"ated on the (asis of historical loss e8'erience for assets
2

)nd A* 37+ paragraph 39 contains g!idance on ho, to deter"ine the %est esti"ate in a range of possi%$e o!tco"es.

73

&ith credit ris> characteristics si"ilar to those in the grou'4 1ntities that ha!e no entity,s'ecific loss e8'erience or insufficient e8'erience6 use 'eer grou' e8'erience for co"'ara(le grou's of financial assets4 -istorical loss e8'erience is ad5usted on the (asis of current o(ser!a(le data to reflect the effects of current conditions that did not affect the 'eriod on &hich the historical loss e8'erience is (ased and to re"o!e the effects of conditions in the historical 'eriod that do not e8ist currently4 1sti"ates of changes in future cash flo&s reflect and are directionally consistent &ith changes in related o(ser!a(le data fro" 'eriod to 'eriod ;such as changes in une"'loy"ent rates6 'ro'erty 'rices6 co""odity 'rices6 'ay"ent status or other factors that are indicati!e of incurred losses in the grou' and their "agnitude<4 The "ethodology and assu"'tions used for esti"ating future cash flo&s are re!ie&ed regularly to reduce any differences (et&een loss esti"ates and actual loss e8'erience4 #+90 #s an e8a"'le of a''lying 'aragra'h #+896 an entity "ay deter"ine6 on the (asis of historical e8'erience6 that one of the "ain causes of default on credit card loans is the death of the (orro&er4 The entity "ay o(ser!e that the death rate is unchanged fro" one year to the ne8t4 He!ertheless6 so"e of the (orro&ers in the entity?s grou' of credit card loans "ay ha!e died in that year6 indicating that an i"'air"ent loss has occurred on those loans6 e!en if6 at the year,end6 the entity is not yet a&are &hich s'ecific (orro&ers ha!e died4 It &ould (e a''ro'riate for an i"'air"ent loss to (e recognised for these Eincurred (ut not re'orted? losses4 -o&e!er6 it &ould not (e a''ro'riate to recognise an i"'air"ent loss for deaths that are e8'ected to occur in a future 'eriod6 (ecause the necessary loss e!ent ;the death of the (orro&er< has not yet occurred4 #+91 Bhen using historical loss rates in esti"ating future cash flo&s6 it is i"'ortant that infor"ation a(out historical loss rates is a''lied to grou's that are defined in a "anner consistent &ith the grou's for &hich the historical loss rates &ere o(ser!ed4 Therefore6 the "ethod used should ena(le each grou' to (e associated &ith infor"ation a(out 'ast loss e8'erience in grou's of assets &ith si"ilar credit ris> characteristics and rele!ant o(ser!a(le data that reflect current conditions4 #+92 *or"ula,(ased a''roaches or statistical "ethods "ay (e used to deter"ine i"'air"ent losses in a grou' of financial assets ;eg for s"aller (alance loans< as long as they are consistent &ith the require"ents in 'aragra'hs $3$5 and #+87#+914 #ny "odel used &ould incor'orate the effect of the ti"e !alue of "oney6 consider the cash flo&s for all of the re"aining life of an asset ;not only the ne8t year<6 consider the age of the loans &ithin the 'ortfolio and not gi!e rise to an i"'air"ent loss on initial recognition of a financial asset4

Interest income after impairment recognition

#+93 @nce a financial asset or a grou' of si"ilar financial assets has (een &ritten do&n as a result of an i"'air"ent loss6 interest inco"e is thereafter recognised using the rate of interest used to discount the future cash flo&s for the 'ur'ose of "easuring the i"'air"ent loss4

!edging (paragrap(s 63:3>5)

!edging instruments (paragrap(s 65:66)
74

Eua*if.ing instruments (paragrap(s 65 and 63)

#+94 The 'otential loss on an o'tion that an entity &rites could (e significantly greater than the 'otential gain in !alue of a related hedged ite"4 In other &ords6 a &ritten o'tion is not effecti!e in reducing the 'rofit or loss e8'osure of a hedged ite"4 Therefore6 a &ritten o'tion does not qualify as a hedging instru"ent unless it is designated as an offset to a 'urchased o'tion6 including one that is e"(edded in another financial instru"ent ;for e8a"'le6 a &ritten call o'tion used to hedge a calla(le lia(ility<4 In contrast6 a 'urchased o'tion has 'otential gains equal to or greater than losses and therefore has the 'otential to reduce 'rofit or loss e8'osure fro" changes in fair !alues or cash flo&s4 #ccordingly6 it can qualify as a hedging instru"ent4 #+95 # held,to,"aturity in!est"ent carried at a"ortised cost "ay (e designated as a hedging instru"ent in a hedge of foreign currency ris>4 #+9$ #n in!est"ent in an unquoted equity instru"ent that is not carried at fair !alue (ecause its fair !alue cannot (e relia(ly "easured or a deri!ati!e that is lin>ed to and "ust (e settled (y deli!ery of such an unquoted equity instru"ent ;see 'aragra'hs 4$;c< and 47< cannot (e designated as a hedging instru"ent4 #+97 #n entity?s o&n equity instru"ents are not financial assets or financial lia(ilities of the entity and therefore cannot (e designated as hedging instru"ents4

!edged items (paragrap(s 67:7<)

Eua*if.ing items (paragrap(s 67:7>)
#+98 # fir" co""it"ent to acquire a (usiness in a (usiness co"(ination cannot (e a hedged ite"6 e8ce't for foreign e8change ris>6 (ecause the other ris>s (eing hedged cannot (e s'ecifically identified and "easured4 These other ris>s are general (usiness ris>s4 #+99 #n equity "ethod in!est"ent cannot (e a hedged ite" in a fair !alue hedge (ecause the equity "ethod recognises in 'rofit or loss the in!estor?s share of the associate?s 'rofit or loss6 rather than changes in the in!est"ent?s fair !alue4 *or a si"ilar reason6 an in!est"ent in a consolidated su(sidiary cannot (e a hedged ite" in a fair !alue hedge (ecause consolidation recognises in 'rofit or loss the su(sidiary?s 'rofit or loss6 rather than changes in the in!est"ent?s fair !alue4 # hedge of a net in!est"ent in a foreign o'eration is different (ecause it is a hedge of the foreign currency e8'osure6 not a fair !alue hedge of the change in the !alue of the in!est"ent4 #+99# Daragra'h 80 states that in consolidated financial state"ents the foreign currency ris> of a highly 'ro(a(le forecast intragrou' transaction "ay qualify as a hedged ite" in a cash flo& hedge6 'ro!ided the transaction is deno"inated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency ris> &ill affect consolidated 'rofit or loss4 *or this 'ur'ose an entity can (e a 'arent6 su(sidiary6 associate6 5oint !enture or (ranch4 If the foreign currency ris> of a forecast intragrou' transaction does not affect consolidated 'rofit or loss6 the intragrou' transaction cannot qualify as a hedged ite"4 This is usually the case for royalty 'ay"ents6 interest 'ay"ents or

75

"anage"ent charges (et&een "e"(ers of the sa"e grou' unless there is a related e8ternal transaction4 -o&e!er6 &hen the foreign currency ris> of a forecast intragrou' transaction &ill affect consolidated 'rofit or loss6 the intragrou' transaction can qualify as a hedged ite"4 #n e8a"'le is forecast sales or 'urchases of in!entories (et&een "e"(ers of the sa"e grou' if there is an on&ard sale of the in!entory to a 'arty e8ternal to the grou'4 )i"ilarly6 a forecast intragrou' sale of 'lant and equi'"ent fro" the grou' entity that "anufactured it to a grou' entity that &ill use the 'lant and equi'"ent in its o'erations "ay affect consolidated 'rofit or loss4 This could occur6 for e8a"'le6 (ecause the 'lant and equi'"ent &ill (e de'reciated (y the 'urchasing entity and the a"ount initially recognised for the 'lant and equi'"ent "ay change if the forecast intragrou' transaction is deno"inated in a currency other than the functional currency of the 'urchasing entity4 #+99/ If a hedge of a forecast intragrou' transaction qualifies for hedge accounting6 any gain or loss that is recognised in other co"'rehensi!e inco"e in accordance &ith 'aragra'h 95;a< shall (e reclassified fro" equity to 'rofit or loss as a reclassification ad5ust"ent in the sa"e 'eriod or 'eriods during &hich the foreign currency ris> of the hedged transaction affects consolidated 'rofit or loss4 #+99/# #n entity can designate all changes in the cash flo&s or fair !alue of a hedged ite" in a hedging relationshi'4 #n entity can also designate only changes in the cash flo&s or fair !alue of a hedged ite" a(o!e or (elo& a s'ecified 'rice or other !aria(le ;a one,sided ris><4 The intrinsic !alue of a 'urchased o'tion hedging instru"ent ;assu"ing that it has the sa"e 'rinci'al ter"s as the designated ris><6 (ut not its ti"e !alue6 reflects a one,sided ris> in a hedged ite"4 *or e8a"'le6 an entity can designate the !aria(ility of future cash flo& outco"es resulting fro" a 'rice increase of a forecast co""odity 'urchase4 In such a situation6 only cash flo& losses that result fro" an increase in the 'rice a(o!e the s'ecified le!el are designated4 The hedged ris> does not include the ti"e !alue of a 'urchased o'tion (ecause the ti"e !alue is not a co"'onent of the forecast transaction that affects 'rofit or loss ;'aragra'h 8$;(<<4

Designation of financia* items as (edged items (paragrap(s 73 and 73A)

#+99 If a 'ortion of the cash flo&s of a financial asset or financial lia(ility is designated as the hedged ite"6 that designated 'ortion "ust (e less than the total cash flo&s of the asset or lia(ility4 *or e8a"'le6 in the case of a lia(ility &hose effecti!e interest rate is (elo& 3I/@%6 an entity cannot designate ;a< a 'ortion of the lia(ility equal to the 'rinci'al a"ount 'lus interest at 3I/@% and ;(< a negati!e residual 'ortion4 -o&e!er6 the entity "ay designate all of the cash flo&s of the entire financial asset or financial lia(ility as the hedged ite" and hedge the" for only one 'articular ris> ;eg only for changes that are attri(uta(le to changes in 3I/@%<4 *or e8a"'le6 in the case of a financial lia(ility &hose effecti!e interest rate is 100 (asis 'oints (elo& 3I/@%6 an entity can designate as the hedged ite" the entire lia(ility ;ie 'rinci'al 'lus interest at 3I/@% "inus 100 (asis 'oints< and hedge the change in the fair !alue or cash flo&s of that entire lia(ility that is attri(uta(le to changes in 3I/@%4 The entity "ay also choose a hedge ratio of other than one to one in order to i"'ro!e the

76

effecti!eness of the hedge as descri(ed in 'aragra'h #+1004 #+99D In addition6 if a fi8ed rate financial instru"ent is hedged so"e ti"e after its origination and interest rates ha!e changed in the "eanti"e6 the entity can designate a 'ortion equal to a (ench"ar> rate that is higher than the contractual rate 'aid on the ite"4 The entity can do so 'ro!ided that the (ench"ar> rate is less than the effecti!e interest rate calculated on the assu"'tion that the entity had 'urchased the instru"ent on the day it first designates the hedged ite"4 *or e8a"'le6 assu"e an entity originates a fi8ed rate financial asset of %s4100 that has an effecti!e interest rate of $ 'er cent at a ti"e &hen 3I/@% is 4 'er cent4 It (egins to hedge that asset so"e ti"e later &hen 3I/@% has increased to 8 'er cent and the fair !alue of the asset has decreased to %s4904 The entity calculates that if it had 'urchased the asset on the date it first designates it as the hedged ite" for its then fair !alue of %s4906 the effecti!e yield &ould ha!e (een 945 'er cent4 /ecause 3I/@% is less than this effecti!e yield6 the entity can designate a 3I/@% 'ortion of 8 'er cent that consists 'artly of the contractual interest cash flo&s and 'artly of the difference (et&een the current fair !alue ;ie %s490< and the a"ount re'aya(le on "aturity ;ie %s4100<4 #+991Daragra'h 81 'er"its an entity to designate so"ething other than the entire fair !alue change or cash flo& !aria(ility of a financial instru"ent4 *or e8a"'le: ;a< ;(< all of the cash flo&s of a financial instru"ent "ay (e designated for cash flo& or fair !alue changes attri(uta(le to so"e ;(ut not all< ris>s= or so"e ;(ut not all< of the cash flo&s of a financial instru"ent "ay (e designated for cash flo& or fair !alue changes attri(uta(le to all or only so"e ris>s ;ie a E'ortion? of the cash flo&s of the financial instru"ent "ay (e designated for changes attri(uta(le to all or only so"e ris>s<4

#+99* To (e eligi(le for hedge accounting6 the designated ris>s and 'ortions "ust (e se'arately identifia(le co"'onents of the financial instru"ent6 and changes in the cash flo&s or fair !alue of the entire financial instru"ent arising fro" changes in the designated ris>s and 'ortions "ust (e relia(ly "easura(le4 *or e8a"'le: ;a< for a fi8ed rate financial instru"ent hedged for changes in fair !alue attri(uta(le to changes in a ris>,free or (ench"ar> interest rate6 the ris>, free or (ench"ar> rate is nor"ally regarded as (oth a se'arately identifia(le co"'onent of the financial instru"ent and relia(ly "easura(le4 inflation is not se'arately identifia(le and relia(ly "easura(le and cannot (e designated as a ris> or a 'ortion of a financial instru"ent unless the require"ents in ;c< are "et4 a contractually s'ecified inflation 'ortion of the cash flo&s of a recognised inflation,lin>ed (ond ;assu"ing there is no require"ent to account for an e"(edded deri!ati!e se'arately< is se'arately identifia(le and relia(ly "easura(le as long as other cash flo&s of the instru"ent are not affected (y the inflation 'ortion4

;(<

;c<

Designation of nonAfinancia* items as (edged items (paragrap( 75)

77

#+100 hanges in the 'rice of an ingredient or co"'onent of a non,financial asset or non,financial lia(ility generally do not ha!e a 'redicta(le6 se'arately "easura(le effect on the 'rice of the ite" that is co"'ara(le to the effect of6 say6 a change in "ar>et interest rates on the 'rice of a (ond4 Thus6 a non,financial asset or non, financial lia(ility is a hedged ite" only in its entirety or for foreign e8change ris>4 If there is a difference (et&een the ter"s of the hedging instru"ent and the hedged ite" ;such as for a hedge of the forecast 'urchase of /raJilian coffee using a for&ard contract to 'urchase olo"(ian coffee on other&ise si"ilar ter"s<6 the hedging relationshi' nonetheless can qualify as a hedge relationshi' 'ro!ided all the conditions in 'aragra'h 88 are "et6 including that the hedge is e8'ected to (e highly effecti!e4 *or this 'ur'ose6 the a"ount of the hedging instru"ent "ay (e greater or less than that of the hedged ite" if this i"'ro!es the effecti!eness of the hedging relationshi'4 *or e8a"'le6 a regression analysis could (e 'erfor"ed to esta(lish a statistical relationshi' (et&een the hedged ite" ;eg a transaction in /raJilian coffee< and the hedging instru"ent ;eg a transaction in olo"(ian coffee<4 If there is a !alid statistical relationshi' (et&een the t&o !aria(les ;ie (et&een the unit 'rices of /raJilian coffee and olo"(ian coffee<6 the slo'e of the regression line can (e used to esta(lish the hedge ratio that &ill "a8i"ise e8'ected effecti!eness4 *or e8a"'le6 if the slo'e of the regression line is 14026 a hedge ratio (ased on 0498 quantities of hedged ite"s to 1400 quantities of the hedging instru"ent "a8i"ises e8'ected effecti!eness4 -o&e!er6 the hedging relationshi' "ay result in ineffecti!eness that is recognised in 'rofit or loss during the ter" of the hedging relationshi'4

Designation of groups of items as (edged items (paragrap(s 73 and 7<)

#+101 # hedge of an o!erall net 'osition ;eg the net of all fi8ed rate assets and fi8ed rate lia(ilities &ith si"ilar "aturities<6 rather than of a s'ecific hedged ite"6 does not qualify for hedge accounting4 -o&e!er6 al"ost the sa"e effect on 'rofit or loss of hedge accounting for this ty'e of hedging relationshi' can (e achie!ed (y designating as the hedged ite" 'art of the underlying ite"s4 *or e8a"'le6 if a (an> has %s4100 of assets and %s490 of lia(ilities &ith ris>s and ter"s of a si"ilar nature and hedges the net %s410 e8'osure6 it can designate as the hedged ite" %s410 of those assets4 This designation can (e used if such assets and lia(ilities are fi8ed rate instru"ents6 in &hich case it is a fair !alue hedge6 or if they are !aria(le rate instru"ents6 in &hich case it is a cash flo& hedge4 )i"ilarly6 if an entity has a fir" co""it"ent to "a>e a 'urchase in a foreign currency of %s4100 and a fir" co""it"ent to "a>e a sale in the foreign currency of %s4906 it can hedge the net a"ount of %s410 (y acquiring a deri!ati!e and designating it as a hedging instru"ent associated &ith %s410 of the fir" 'urchase co""it"ent of %s41004

!edge accounting (paragrap(s 79:3>5)

#+102 #n e8a"'le of a fair !alue hedge is a hedge of e8'osure to changes in the fair !alue of a fi8ed rate de(t instru"ent as a result of changes in interest rates4 )uch a hedge could (e entered into (y the issuer or (y the holder4

78

#+103 #n e8a"'le of a cash flo& hedge is the use of a s&a' to change floating rate de(t to fi8ed rate de(t ;ie a hedge of a future transaction &here the future cash flo&s (eing hedged are the future interest 'ay"ents<4 #+104 # hedge of a fir" co""it"ent ;eg a hedge of the change in fuel 'rice relating to an unrecognised contractual co""it"ent (y an electric utility to 'urchase fuel at a fi8ed 'rice< is a hedge of an e8'osure to a change in fair !alue4 #ccordingly6 such a hedge is a fair !alue hedge4 -o&e!er6 under 'aragra'h 87 a hedge of the foreign currency ris> of a fir" co""it"ent could alternati!ely (e accounted for as a cash flo& hedge4

Assessing (edge effectiveness

#+105 # hedge is regarded as highly effecti!e only if (oth of the follo&ing conditions are "et: ;a< #t the ince'tion of the hedge and in su(sequent 'eriods6 the hedge is e8'ected to (e highly effecti!e in achie!ing offsetting changes in fair !alue or cash flo&s attri(uta(le to the hedged ris> during the 'eriod for &hich the hedge is designated4 )uch an e8'ectation can (e de"onstrated in !arious &ays6 including a co"'arison of 'ast changes in the fair !alue or cash flo&s of the hedged ite" that are attri(uta(le to the hedged ris> &ith 'ast changes in the fair !alue or cash flo&s of the hedging instru"ent6 or (y de"onstrating a high statistical correlation (et&een the fair !alue or cash flo&s of the hedged ite" and those of the hedging instru"ent4 The entity "ay choose a hedge ratio of other than one to one in order to i"'ro!e the effecti!eness of the hedge as descri(ed in 'aragra'h #+1004 The actual results of the hedge are &ithin a range of 80125 'er cent4 *or e8a"'le6 if actual results are such that the loss on the hedging instru"ent is %s4120 and the gain on the cash instru"ent is %s41006 offset can (e "easured (y 120G1006 &hich is 120 'er cent6 or (y 100G1206 &hich is 83 'er cent4 In this e8a"'le6 assu"ing the hedge "eets the condition in ;a<6 the entity &ould conclude that the hedge has (een highly effecti!e4

;(<

#+10$ 1ffecti!eness is assessed6 at a "ini"u"6 at the ti"e an entity 're'ares its annual or interi" financial state"ents4 #+107 This )tandard does not s'ecify a single "ethod for assessing hedge effecti!eness4 The "ethod an entity ado'ts for assessing hedge effecti!eness de'ends on its ris> "anage"ent strategy4 *or e8a"'le6 if the entity?s ris> "anage"ent strategy is to ad5ust the a"ount of the hedging instru"ent 'eriodically to reflect changes in the hedged 'osition6 the entity needs to de"onstrate that the hedge is e8'ected to (e highly effecti!e only for the 'eriod until the a"ount of the hedging instru"ent is ne8t ad5usted4 In so"e cases6 an entity ado'ts different "ethods for different ty'es of hedges4 #n entity?s docu"entation of its hedging strategy includes its 'rocedures for assessing effecti!eness4 Those 'rocedures state &hether the assess"ent includes all of the gain or loss on a hedging instru"ent or &hether the instru"ent?s ti"e !alue is e8cluded4 #+107# If an entity hedges less than 100 'er cent of the e8'osure on an ite"6 such as 85 'er cent6 it shall designate the hedged ite" as (eing 85 'er cent of the

79

e8'osure and shall "easure ineffecti!eness (ased on the change in that designated 85 'er cent e8'osure4 -o&e!er6 &hen hedging the designated 85 'er cent e8'osure6 the entity "ay use a hedge ratio of other than one to one if that i"'ro!es the e8'ected effecti!eness of the hedge6 as e8'lained in 'aragra'h #+1004 #+108 If the 'rinci'al ter"s of the hedging instru"ent and of the hedged asset6 lia(ility6 fir" co""it"ent or highly 'ro(a(le forecast transaction are the sa"e6 the changes in fair !alue and cash flo&s attri(uta(le to the ris> (eing hedged "ay (e li>ely to offset each other fully6 (oth &hen the hedge is entered into and after&ards4 *or e8a"'le6 an interest rate s&a' is li>ely to (e an effecti!e hedge if the notional and 'rinci'al a"ounts6 ter"6 re'ricing dates6 dates of interest and 'rinci'al recei'ts and 'ay"ents6 and (asis for "easuring interest rates are the sa"e for the hedging instru"ent and the hedged ite"4 In addition6 a hedge of a highly 'ro(a(le forecast 'urchase of a co""odity &ith a for&ard contract is li>ely to (e highly effecti!e if: ;a< ;(< ;c< the for&ard contract is for the 'urchase of the sa"e quantity of the sa"e co""odity at the sa"e ti"e and location as the hedged forecast 'urchase= the fair !alue of the for&ard contract at ince'tion is Jero= and either the change in the discount or 're"iu" on the for&ard contract is e8cluded fro" the assess"ent of effecti!eness and recognised in 'rofit or loss or the change in e8'ected cash flo&s on the highly 'ro(a(le forecast transaction is (ased on the for&ard 'rice for the co""odity4

#+109)o"eti"es the hedging instru"ent offsets only 'art of the hedged ris>4 *or e8a"'le6 a hedge &ould not (e fully effecti!e if the hedging instru"ent and hedged ite" are deno"inated in different currencies that do not "o!e in tande"4 #lso6 a hedge of interest rate ris> using a deri!ati!e &ould not (e fully effecti!e if 'art of the change in the fair !alue of the deri!ati!e is attri(uta(le to the counter'arty?s credit ris>4 #+110 To qualify for hedge accounting6 the hedge "ust relate to a s'ecific identified and designated ris>6 and not "erely to the entity?s general (usiness ris>s6 and "ust ulti"ately affect the entity?s 'rofit or loss4 # hedge of the ris> of o(solescence of a 'hysical asset or the ris> of e8'ro'riation of 'ro'erty (y a go!ern"ent is not eligi(le for hedge accounting= effecti!eness cannot (e "easured (ecause those ris>s are not "easura(le relia(ly4 #+110#Daragra'h 74;a< 'er"its an entity to se'arate the intrinsic !alue and ti"e !alue of an o'tion contract and designate as the hedging instru"ent only the change in the intrinsic !alue of the o'tion contract4 )uch a designation "ay result in a hedging relationshi' that is 'erfectly effecti!e in achie!ing offsetting changes in cash flo&s attri(uta(le to a hedged one,sided ris> of a forecast transaction6 if the 'rinci'al ter"s of the forecast transaction and hedging instru"ent are the sa"e4 #+110/ If an entity designates a 'urchased o'tion in its entirety as the hedging instru"ent of a one,sided ris> arising fro" a forecast transaction6 the hedging relationshi' &ill not (e 'erfectly effecti!e4 This is (ecause the 're"iu" 'aid for the o'tion includes ti"e !alue and6 as stated in 'aragra'h #+99/#6 a designated one,sided ris> does not include the ti"e !alue of an o'tion4

80

Therefore6 in this situation6 there &ill (e no offset (et&een the cash flo&s relating to the ti"e !alue of the o'tion 're"iu" 'aid and the designated hedged ris>4 #+111 In the case of interest rate ris>6 hedge effecti!eness "ay (e assessed (y 're'aring a "aturity schedule for financial assets and financial lia(ilities that sho&s the net interest rate e8'osure for each ti"e 'eriod6 'ro!ided that the net e8'osure is associated &ith a s'ecific asset or lia(ility ;or a s'ecific grou' of assets or lia(ilities or a s'ecific 'ortion of the"< gi!ing rise to the net e8'osure6 and hedge effecti!eness is assessed against that asset or lia(ility4 #+112 In assessing the effecti!eness of a hedge6 an entity generally considers the ti"e !alue of "oney4 The fi8ed interest rate on a hedged ite" need not e8actly "atch the fi8ed interest rate on a s&a' designated as a fair !alue hedge4 Hor does the !aria(le interest rate on an interest,(earing asset or lia(ility need to (e the sa"e as the !aria(le interest rate on a s&a' designated as a cash flo& hedge4 # s&a'?s fair !alue deri!es fro" its net settle"ents4 The fi8ed and !aria(le rates on a s&a' can (e changed &ithout affecting the net settle"ent if (oth are changed (y the sa"e a"ount4 #+113 If an entity does not "eet hedge effecti!eness criteria6 the entity discontinues hedge accounting fro" the last date on &hich co"'liance &ith hedge effecti!eness &as de"onstrated4 -o&e!er6 if the entity identifies the e!ent or change in circu"stances that caused the hedging relationshi' to fail the effecti!eness criteria6 and de"onstrates that the hedge &as effecti!e (efore the e!ent or change in circu"stances occurred6 the entity discontinues hedge accounting fro" the date of the e!ent or change in circu"stances4

)air va*ue (edge accounting for a portfo*io (edge of interest rate ris@
#+114 *or a fair !alue hedge of interest rate ris> associated &ith a 'ortfolio of financial assets or financial lia(ilities6 an entity &ould "eet the require"ents of this )tandard if it co"'lies &ith the 'rocedures set out in ;a<;i< and 'aragra'hs #+115#+132 (elo&4 ;a< #s 'art of its ris> "anage"ent 'rocess the entity identifies a 'ortfolio of ite"s &hose interest rate ris> it &ishes to hedge4 The 'ortfolio "ay co"'rise only assets6 only lia(ilities or (oth assets and lia(ilities4 The entity "ay identify t&o or "ore 'ortfolios ;eg the entity "ay grou' its a!aila(le, for,sale assets into a se'arate 'ortfolio<6 in &hich case it a''lies the guidance (elo& to each 'ortfolio se'arately4 The entity analyses the 'ortfolio into re'ricing ti"e 'eriods (ased on e8'ected6 rather than contractual6 re'ricing dates4 The analysis into re'ricing ti"e 'eriods "ay (e 'erfor"ed in !arious &ays including scheduling cash flo&s into the 'eriods in &hich they are e8'ected to occur6 or scheduling notional 'rinci'al a"ounts into all 'eriods until re'ricing is e8'ected to occur4 @n the (asis of this analysis6 the entity decides the a"ount it &ishes to hedge4 The entity designates as the hedged ite" an a"ount of assets or lia(ilities ;(ut not a net a"ount< fro" the identified 'ortfolio equal to the

;(<

;c<

81

a"ount it &ishes to designate as (eing hedged4 This a"ount also deter"ines the 'ercentage "easure that is used for testing effecti!eness in accordance &ith 'aragra'h #+12$;(<4 ;d< The entity designates the interest rate ris> it is hedging4 This ris> could (e a 'ortion of the interest rate ris> in each of the ite"s in the hedged 'osition6 such as a (ench"ar> interest rate ;eg 3I/@%<4 The entity designates one or "ore hedging instru"ents for each re'ricing ti"e 'eriod4 Fsing the designations "ade in ;c<;e< a(o!e6 the entity assesses at ince'tion and in su(sequent 'eriods6 &hether the hedge is e8'ected to (e highly effecti!e during the 'eriod for &hich the hedge is designated4 Deriodically6 the entity "easures the change in the fair !alue of the hedged ite" ;as designated in ;c<< that is attri(uta(le to the hedged ris> ;as designated in ;d<<6 on the (asis of the e8'ected re'ricing dates deter"ined in ;(<4 Dro!ided that the hedge is deter"ined actually to ha!e (een highly effecti!e &hen assessed using the entity?s docu"ented "ethod of assessing effecti!eness6 the entity recognises the change in fair !alue of the hedged ite" as a gain or loss in 'rofit or loss and in one of t&o line ite"s in the (alance sheet as descri(ed in 'aragra'h 89#4 The change in fair !alue need not (e allocated to indi!idual assets or lia(ilities4 The entity "easures the change in fair !alue of the hedging instru"ent;s< ;as designated in ;e<< and recognises it as a gain or loss in 'rofit or loss4 The fair !alue of the hedging instru"ent;s< is recognised as an asset or lia(ility in the (alance sheet4 #ny ineffecti!eness3 &ill (e recognised in 'rofit or loss as the difference (et&een the change in fair !alue referred to in ;g< and that referred to in ;h<4

;e< ;f<

;g<

;h<

;i<

#+115 This a''roach is descri(ed in "ore detail (elo&4 The a''roach shall (e a''lied only to a fair !alue hedge of the interest rate ris> associated &ith a 'ortfolio of financial assets or financial lia(ilities4 #+11$ The 'ortfolio identified in 'aragra'h #+114;a< could contain assets and lia(ilities4 #lternati!ely6 it could (e a 'ortfolio containing only assets6 or only lia(ilities4 The 'ortfolio is used to deter"ine the a"ount of the assets or lia(ilities the entity &ishes to hedge4 -o&e!er6 the 'ortfolio is not itself designated as the hedged ite"4 #+117 In a''lying 'aragra'h #+114;(<6 the entity deter"ines the e8'ected re'ricing date of an ite" as the earlier of the dates &hen that ite" is e8'ected to "ature or to re'rice to "ar>et rates4 The e8'ected re'ricing dates are esti"ated at the ince'tion of the hedge and throughout the ter" of the hedge6 (ased on historical e8'erience and other a!aila(le infor"ation6 including infor"ation and e8'ectations regarding 're'ay"ent rates6 interest rates and the interaction (et&een the"4 1ntities that ha!e no entity,s'ecific e8'erience or insufficient
3

-he sa"e "ateria$it& considerations app$& in this context as app$& thro!gho!t the )ndian Acco!nting *tandards.

82

e8'erience use 'eer grou' e8'erience for co"'ara(le financial instru"ents4 These esti"ates are re!ie&ed 'eriodically and u'dated in the light of e8'erience4 In the case of a fi8ed rate ite" that is 're'aya(le6 the e8'ected re'ricing date is the date on &hich the ite" is e8'ected to 're'ay unless it re'rices to "ar>et rates on an earlier date4 *or a grou' of si"ilar ite"s6 the analysis into ti"e 'eriods (ased on e8'ected re'ricing dates "ay ta>e the for" of allocating a 'ercentage of the grou'6 rather than indi!idual ite"s6 to each ti"e 'eriod4 #n entity "ay a''ly other "ethodologies for such allocation 'ur'oses4 *or e8a"'le6 it "ay use a 're'ay"ent rate "ulti'lier for allocating a"ortising loans to ti"e 'eriods (ased on e8'ected re'ricing dates4 -o&e!er6 the "ethodology for such an allocation shall (e in accordance &ith the entity?s ris> "anage"ent 'rocedures and o(5ecti!es4 #+118 #s an e8a"'le of the designation set out in 'aragra'h #+114;c<6 if in a 'articular re'ricing ti"e 'eriod an entity esti"ates that it has fi8ed rate assets of %s4100 and fi8ed rate lia(ilities of %s480 and decides to hedge all of the net 'osition of %s4206 it designates as the hedged ite" assets in the a"ount of %s420 ;a 'ortion of the assets<44 The designation is e8'ressed as an Ea"ount of a currency? ;eg an a"ount of dollars6 euro6 'ounds or rand< rather than as indi!idual assets4 It follo&s that all of the assets ;or lia(ilities< fro" &hich the hedged a"ount is dra&nAie all of the %s4100 of assets in the a(o!e e8a"'leA"ust (e: ;a< ;(< ite"s &hose fair !alue changes in res'onse to changes in the interest rate (eing hedged= and ite"s that could ha!e qualified for fair !alue hedge accounting if they had (een designated as hedged indi!idually4 In 'articular6 (ecause the )tandard5 s'ecifies that the fair !alue of a financial lia(ility &ith a de"and feature ;such as de"and de'osits and so"e ty'es of ti"e de'osits< is not less than the a"ount 'aya(le on de"and6 discounted fro" the first date that the a"ount could (e required to (e 'aid6 such an ite" cannot qualify for fair !alue hedge accounting for any ti"e 'eriod (eyond the shortest 'eriod in &hich the holder can de"and 'ay"ent4 In the a(o!e e8a"'le6 the hedged 'osition is an a"ount of assets4 -ence6 such lia(ilities are not a 'art of the designated hedged ite"6 (ut are used (y the entity to deter"ine the a"ount of the asset that is designated as (eing hedged4 If the 'osition the entity &ished to hedge &as an a"ount of lia(ilities6 the a"ount re'resenting the designated hedged ite" "ust (e dra&n fro" fi8ed rate lia(ilities other than lia(ilities that the entity can (e required to re'ay in an earlier ti"e 'eriod6 and the 'ercentage "easure used for assessing hedge effecti!eness in accordance &ith 'aragra'h #+12$;(< &ould (e calculated as a 'ercentage of these other lia(ilities4 *or e8a"'le6 assu"e that an entity esti"ates that in a 'articular re'ricing ti"e 'eriod it has fi8ed rate lia(ilities of %s41006 co"'rising %s440 of de"and de'osits and %s4$0 of lia(ilities &ith no de"and feature6 and %s470 of fi8ed rate assets4 If the entity decides to hedge all of the net 'osition of %s4306 it designates as the

-he *tandard per"its an entit& to designate an& a"o!nt of the a#ai$a%$e !a$if&ing assets or $ia%i$ities+ ie in this exa"p$e an& a"o!nt of assets %et,een .s.0 and .s.100.
5

see paragraph 49

83

hedged ite" lia(ilities of %s430 or 50 'er cent$ of the lia(ilities &ith no de"and feature4 #+119 The entity also co"'lies &ith the other designation and docu"entation require"ents set out in 'aragra'h 88;a<4 *or a 'ortfolio hedge of interest rate ris>6 this designation and docu"entation s'ecifies the entity?s 'olicy for all of the !aria(les that are used to identify the a"ount that is hedged and ho& effecti!eness is "easured6 including the follo&ing: ;a< ;(< &hich assets and lia(ilities are to (e included in the 'ortfolio hedge and the (asis to (e used for re"o!ing the" fro" the 'ortfolio4 ho& the entity esti"ates re'ricing dates6 including &hat interest rate assu"'tions underlie esti"ates of 're'ay"ent rates and the (asis for changing those esti"ates4 The sa"e "ethod is used for (oth the initial esti"ates "ade at the ti"e an asset or lia(ility is included in the hedged 'ortfolio and for any later re!isions to those esti"ates4 the nu"(er and duration of re'ricing ti"e 'eriods4 ho& often the entity &ill test effecti!eness and &hich of the t&o "ethods in 'aragra'h #+12$ it &ill use4 the "ethodology used (y the entity to deter"ine the a"ount of assets or lia(ilities that are designated as the hedged ite" and6 accordingly6 the 'ercentage "easure used &hen the entity tests effecti!eness using the "ethod descri(ed in 'aragra'h #+12$;(<4 &hen the entity tests effecti!eness using the "ethod descri(ed in 'aragra'h #+12$;(<6 &hether the entity &ill test effecti!eness for each re'ricing ti"e 'eriod indi!idually6 for all ti"e 'eriods in aggregate6 or (y using so"e co"(ination of the t&o4 The 'olicies s'ecified in designating and docu"enting the hedging relationshi' shall (e in accordance &ith the entity?s ris> "anage"ent 'rocedures and o(5ecti!es4 hanges in 'olicies shall not (e "ade ar(itrarily4 They shall (e 5ustified on the (asis of changes in "ar>et conditions and other factors and (e founded on and consistent &ith the entity?s ris> "anage"ent 'rocedures and o(5ecti!es4 #+120 The hedging instru"ent referred to in 'aragra'h #+114;e< "ay (e a single deri!ati!e or a 'ortfolio of deri!ati!es all of &hich contain e8'osure to the hedged interest rate ris> designated in 'aragra'h #+114;d< ;eg a 'ortfolio of interest rate s&a's all of &hich contain e8'osure to 3I/@%<4 )uch a 'ortfolio of deri!ati!es "ay contain offsetting ris> 'ositions4 -o&e!er6 it "ay not include &ritten o'tions or net &ritten o'tions6 (ecause the )tandard7 does not 'er"it such o'tions to (e designated as hedging instru"ents ;e8ce't &hen a &ritten o'tion is designated as an offset to a 'urchased o'tion<4 If the hedging instru"ent hedges the a"ount designated in 'aragra'h #+114;c< for "ore than one re'ricing ti"e 'eriod6 it is
6

;c< ;d< ;e<

;f<

.s.30 / '.s.100 .s.40( 0 50 per cent see paragraphs 77 and AG94

84

allocated to all of the ti"e 'eriods that it hedges4 -o&e!er6 the &hole of the hedging instru"ent "ust (e allocated to those re'ricing ti"e 'eriods (ecause the )tandard8 does not 'er"it a hedging relationshi' to (e designated for only a 'ortion of the ti"e 'eriod during &hich a hedging instru"ent re"ains outstanding4 #+121 Bhen the entity "easures the change in the fair !alue of a 're'aya(le ite" in accordance &ith 'aragra'h #+114;g<6 a change in interest rates affects the fair !alue of the 're'aya(le ite" in t&o &ays: it affects the fair !alue of the contractual cash flo&s and the fair !alue of the 're'ay"ent o'tion that is contained in a 're'aya(le ite"4 Daragra'h 81 of the )tandard 'er"its an entity to designate a 'ortion of a financial asset or financial lia(ility6 sharing a co""on ris> e8'osure6 as the hedged ite"6 'ro!ided effecti!eness can (e "easured4 *or 're'aya(le ite"s6 'aragra'h 81# 'er"its this to (e achie!ed (y designating the hedged ite" in ter"s of the change in the fair !alue that is attri(uta(le to changes in the designated interest rate on the (asis of expected6 rather than contractual6 re'ricing dates4 -o&e!er6 the effect that changes in the hedged interest rate ha!e on those e8'ected re'ricing dates shall (e included &hen deter"ining the change in the fair !alue of the hedged ite"4 onsequently6 if the e8'ected re'ricing dates are re!ised ;eg to reflect a change in e8'ected 're'ay"ents<6 or if actual re'ricing dates differ fro" those e8'ected6 ineffecti!eness &ill arise as descri(ed in 'aragra'h #+12$4 on!ersely6 changes in e8'ected re'ricing dates that ;a< clearly arise fro" factors other than changes in the hedged interest rate6 ;(< are uncorrelated &ith changes in the hedged interest rate and ;c< can (e relia(ly se'arated fro" changes that are attri(uta(le to the hedged interest rate ;eg changes in 're'ay"ent rates clearly arising fro" a change in de"ogra'hic factors or ta8 regulations rather than changes in interest rate< are e8cluded &hen deter"ining the change in the fair !alue of the hedged ite"6 (ecause they are not attri(uta(le to the hedged ris>4 If there is uncertainty a(out the factor that ga!e rise to the change in e8'ected re'ricing dates or the entity is not a(le to se'arate relia(ly the changes that arise fro" the hedged interest rate fro" those that arise fro" other factors6 the change is assu"ed to arise fro" changes in the hedged interest rate4 #+122 The )tandard does not s'ecify the techniques used to deter"ine the a"ount referred to in 'aragra'h #+114;g<6 na"ely the change in the fair !alue of the hedged ite" that is attri(uta(le to the hedged ris>4 If statistical or other esti"ation techniques are used for such "easure"ent6 "anage"ent "ust e8'ect the result to a''ro8i"ate closely that &hich &ould ha!e (een o(tained fro" "easure"ent of all the indi!idual assets or lia(ilities that constitute the hedged ite"4 It is not a''ro'riate to assu"e that changes in the fair !alue of the hedged ite" equal changes in the !alue of the hedging instru"ent4 #+123Daragra'h 89# requires that if the hedged ite" for a 'articular re'ricing ti"e 'eriod is an asset6 the change in its !alue is 'resented in a se'arate line ite" &ithin assets4 on!ersely6 if the hedged ite" for a 'articular re'ricing ti"e 'eriod is a lia(ility6 the change in its !alue is 'resented in a se'arate line ite" &ithin lia(ilities4 These are the se'arate line ite"s referred to in 'aragra'h #+114;g<4 )'ecific allocation to indi!idual assets ;or lia(ilities< is not required4
8

see paragraph 75

85

#+124Daragra'h #+114;i< notes that ineffecti!eness arises to the e8tent that the change in the fair !alue of the hedged ite" that is attri(uta(le to the hedged ris> differs fro" the change in the fair !alue of the hedging deri!ati!e4 )uch a difference "ay arise for a nu"(er of reasons6 including: ;a< ;(< ;c< ;d< actual re'ricing dates (eing different fro" those e8'ected6 or e8'ected re'ricing dates (eing re!ised= ite"s in the hedged 'ortfolio (eco"ing i"'aired or (eing derecognised= the 'ay"ent dates of the hedging instru"ent and the hedged ite" (eing different= and other causes ;eg &hen a fe& of the hedged ite"s (ear interest at a rate (elo& the (ench"ar> rate for &hich they are designated as (eing hedged6 and the resulting ineffecti!eness is not so great that the 'ortfolio as a &hole fails to qualify for hedge accounting<4 )uch ineffecti!eness9 shall (e identified and recognised in 'rofit or loss4 #+125 +enerally6 the effecti!eness of the hedge &ill (e i"'ro!ed: ;a< ;(< if the entity schedules ite"s &ith different 're'ay"ent characteristics in a &ay that ta>es account of the differences in 're'ay"ent (eha!iour4 &hen the nu"(er of ite"s in the 'ortfolio is larger4 Bhen only a fe& ite"s are contained in the 'ortfolio6 relati!ely high ineffecti!eness is li>ely if one of the ite"s 're'ays earlier or later than e8'ected4 on!ersely6 &hen the 'ortfolio contains "any ite"s6 the 're'ay"ent (eha!iour can (e 'redicted "ore accurately4 &hen the re'ricing ti"e 'eriods used are narro&er ;eg 1,"onth as o''osed to 3,"onth re'ricing ti"e 'eriods<4 Harro&er re'ricing ti"e 'eriods reduce the effect of any "is"atch (et&een the re'ricing and 'ay"ent dates ;&ithin the re'ricing ti"e 'eriod< of the hedged ite" and those of the hedging instru"ent4 the greater the frequency &ith &hich the a"ount of the hedging instru"ent is ad5usted to reflect changes in the hedged ite" ;eg (ecause of changes in 're'ay"ent e8'ectations<4

;c<

;d<

#+12$ #n entity tests effecti!eness 'eriodically4 If esti"ates of re'ricing dates change (et&een one date on &hich an entity assesses effecti!eness and the ne8t6 it shall calculate the a"ount of effecti!eness either: ;a< as the difference (et&een the change in the fair !alue of the hedging instru"ent ;see 'aragra'h #+114;h<< and the change in the !alue of the entire hedged ite" that is attri(uta(le to changes in the hedged interest rate ;including the effect that changes in the hedged interest rate ha!e on the fair !alue of any e"(edded 're'ay"ent o'tion<= or

-he sa"e "ateria$it& considerations app$& in this context as app$& thro!gho!t the )ndian Acco!nting *tandards.

86

;(<

using the follo&ing a''ro8i"ation4 The entity: ;i< calculates the 'ercentage of the assets ;or lia(ilities< in each re'ricing ti"e 'eriod that &as hedged6 on the (asis of the esti"ated re'ricing dates at the last date it tested effecti!eness4 a''lies this 'ercentage to its re!ised esti"ate of the a"ount in that re'ricing ti"e 'eriod to calculate the a"ount of the hedged ite" (ased on its re!ised esti"ate4 calculates the change in the fair !alue of its re!ised esti"ate of the hedged ite" that is attri(uta(le to the hedged ris> and 'resents it as set out in 'aragra'h #+114;g<4 recognises ineffecti!eness equal to the difference (et&een the a"ount deter"ined in ;iii< and the change in the fair !alue of the hedging instru"ent ;see 'aragra'h #+114;h<<4

;ii<

;iii<

;i!<

#+127 Bhen "easuring effecti!eness6 the entity distinguishes re!isions to the esti"ated re'ricing dates of e8isting assets ;or lia(ilities< fro" the origination of ne& assets ;or lia(ilities<6 &ith only the for"er gi!ing rise to ineffecti!eness4 #ll re!isions to esti"ated re'ricing dates ;other than those e8cluded in accordance &ith 'aragra'h #+121<6 including any reallocation of e8isting ite"s (et&een ti"e 'eriods6 are included &hen re!ising the esti"ated a"ount in a ti"e 'eriod in accordance &ith 'aragra'h #+12$;(<;ii< and hence &hen "easuring effecti!eness4 @nce ineffecti!eness has (een recognised as set out a(o!e6 the entity esta(lishes a ne& esti"ate of the total assets ;or lia(ilities< in each re'ricing ti"e 'eriod6 including ne& assets ;or lia(ilities< that ha!e (een originated since it last tested effecti!eness6 and designates a ne& a"ount as the hedged ite" and a ne& 'ercentage as the hedged 'ercentage4 The 'rocedures set out in 'aragra'h #+12$;(< are then re'eated at the ne8t date it tests effecti!eness4 #+128 Ite"s that &ere originally scheduled into a re'ricing ti"e 'eriod "ay (e derecognised (ecause of earlier than e8'ected 're'ay"ent or &rite,offs caused (y i"'air"ent or sale4 Bhen this occurs6 the a"ount of change in fair !alue included in the se'arate line ite" referred to in 'aragra'h #+114;g< that relates to the derecognised ite" shall (e re"o!ed fro" the (alance sheet6 and included in the gain or loss that arises on derecognition of the ite"4 *or this 'ur'ose6 it is necessary to >no& the re'ricing ti"e 'eriod;s< into &hich the derecognised ite" &as scheduled6 (ecause this deter"ines the re'ricing ti"e 'eriod;s< fro" &hich to re"o!e it and hence the a"ount to re"o!e fro" the se'arate line ite" referred to in 'aragra'h #+114;g<4 Bhen an ite" is derecognised6 if it can (e deter"ined in &hich ti"e 'eriod it &as included6 it is re"o!ed fro" that ti"e 'eriod4 If not6 it is re"o!ed fro" the earliest ti"e 'eriod if the derecognition resulted fro" higher than e8'ected 're'ay"ents6 or allocated to all ti"e 'eriods containing the derecognised ite" on a syste"atic and rational (asis if the ite" &as sold or (eca"e i"'aired4 #+129 In addition6 any a"ount relating to a 'articular ti"e 'eriod that has not (een derecognised &hen the ti"e 'eriod e8'ires is recognised in 'rofit or loss at that ti"e ;see 'aragra'h 89#<4 *or e8a"'le6 assu"e an entity schedules ite"s into three re'ricing ti"e 'eriods4 #t the 're!ious redesignation6 the change in fair

87

!alue re'orted in the single line ite" in the (alance sheet &as an asset of %s4254 That a"ount re'resents a"ounts attri(uta(le to 'eriods 16 2 and 3 of %s476 %s48 and %s4106 res'ecti!ely4 #t the ne8t redesignation6 the assets attri(uta(le to 'eriod 1 ha!e (een either realised or rescheduled into other 'eriods4 Therefore6 %s47 is derecognised fro" the (alance sheet and recognised in 'rofit or loss4 %s48 and %s410 are no& attri(uta(le to 'eriods 1 and 26 res'ecti!ely4 These re"aining 'eriods are then ad5usted6 as necessary6 for changes in fair !alue as descri(ed in 'aragra'h #+114;g<4 #+130 #s an illustration of the require"ents of the 're!ious t&o 'aragra'hs6 assu"e that an entity scheduled assets (y allocating a 'ercentage of the 'ortfolio into each re'ricing ti"e 'eriod4 #ssu"e also that it scheduled %s4100 into each of the first t&o ti"e 'eriods4 Bhen the first re'ricing ti"e 'eriod e8'ires6 %s4110 of assets are derecognised (ecause of e8'ected and une8'ected re'ay"ents4 In this case6 all of the a"ount contained in the se'arate line ite" referred to in 'aragra'h #+114;g< that relates to the first ti"e 'eriod is re"o!ed fro" the (alance sheet6 'lus 10 'er cent of the a"ount that relates to the second ti"e 'eriod4 #+131 If the hedged a"ount for a re'ricing ti"e 'eriod is reduced &ithout the related assets ;or lia(ilities< (eing derecognised6 the a"ount included in the se'arate line ite" referred to in 'aragra'h #+114;g< that relates to the reduction shall (e a"ortised in accordance &ith 'aragra'h 924 #+132 #n entity "ay &ish to a''ly the a''roach set out in 'aragra'hs #+114#+131 to a 'ortfolio hedge that had 're!iously (een accounted for as a cash flo& hedge in accordance &ith Ind #) 394 )uch an entity &ould re!o>e the 're!ious designation of a cash flo& hedge in accordance &ith 'aragra'h 101;d<6 and a''ly the require"ents set out in that 'aragra'h4 It &ould also redesignate the hedge as a fair !alue hedge and a''ly the a''roach set out in 'aragra'hs #+114#+131 'ros'ecti!ely to su(sequent accounting 'eriods4

88

Appendi$ (
)eferen!es to matters !ontained in other *ndian A!!ounting +tandards
This Appendix is an integral part of Indian Accounting )tandard .Ind A)/ 7-4 This a''endi8 lists the a''endices &hich are 'art of other Indian #ccounting )tandards and "a>es reference to Ind #) 396 Financial Instruments: *ecognition and 8easurement 0+ #''endi8 # )ervice Concession 11Construction Contracts Arrangements contained in Ind #)

24 #''endi8 / Evaluating the )u$stance of Transactions Involving the &egal Form of a &ease contained in Ind #) 176 &eases+

89

Appendi& C Reassessment o+ )mbedded -eri!ati!es

.This appendix is an integral part of Ind A) 7-/

'ac@ground
1 Ind #) 39 'aragra'h 10 descri(es an e"(edded deri!ati!e as Ea co"'onent of a hy(rid ;co"(ined< instru"ent that also includes a non,deri!ati!e host contractA &ith the effect that so"e of the cash flo&s of the co"(ined instru"ent !ary in a &ay si"ilar to a stand,alone deri!ati!e4? Ind #) 39 'aragra'h 11 requires an e"(edded deri!ati!e to (e se'arated fro" the host contract and accounted for as a deri!ati!e if6 and only if: ;a< the econo"ic characteristics and ris>s of the e"(edded deri!ati!e are not closely related to the econo"ic characteristics and ris>s of the host contract= a se'arate instru"ent &ith the sa"e ter"s as the e"(edded deri!ati!e &ould "eet the definition of a deri!ati!e= and the hy(rid ;co"(ined< instru"ent is not "easured at fair !alue &ith changes in fair !alue recognised in 'rofit or loss ;ie a deri!ati!e that is e"(edded in a financial asset or financial lia(ility at fair !alue through 'rofit or loss is not se'arated<4

;(< ;c<

Scope
3 4 5 )u(5ect to 'aragra'hs 4 and 5 (elo&6 this #''endi8 a''lies to all e"(edded deri!ati!es &ithin the sco'e of Ind #) 394 This #''endi8 does not address re"easure"ent issues arising fro" a reassess"ent of e"(edded deri!ati!es4 This #''endi8 does not a''ly to e"(edded deri!ati!es in contracts acquired in: ;a< a (usiness co"(ination ;as defined in Ind #) 103 ;(< a co"(ination of entities or (usinesses under co""on control as descri(ed in 'aragra'hs /1/4 of Ind #) 103= or

90

;c< the for"ation of a 5oint !enture as defined in Ind #) 31 Interests in 9oint 6entures or their 'ossi(le reassess"ent at the date of acquisition410

Issues
$ Ind #) 39 requires an entity6 &hen it first (eco"es a 'arty to a contract6 to assess &hether any e"(edded deri!ati!es contained in the contract are required to (e se'arated fro" the host contract and accounted for as deri!ati!es under the )tandard4 This #''endi8 addresses the follo&ing issues: ;a< Ind #) 39 require such an assess"ent to (e "ade only &hen the entity first (eco"es a 'arty to the contract6 or should the assess"ent (e reconsidered throughout the life of the contractL )hould a first,ti"e ado'ter "a>e its assess"ent on the (asis of the conditions that e8isted &hen the entity first (eca"e a 'arty to the contract6 or those 're!ailing &hen the entity ado'ts Indian #ccounting )tandards for the first ti"eL

;(<

Accounting "rincip*e
7 #n entity shall assess &hether an e"(edded deri!ati!e is required to (e se'arated fro" the host contract and accounted for as a deri!ati!e &hen the entity first (eco"es a 'arty to the contract4 )u(sequent reassess"ent is 'rohi(ited unless there is either ;a< a change in the ter"s of the contract that significantly "odifies the cash flo&s that other&ise &ould (e required under the contract or ;(< a reclassification of a financial asset out of the fair !alue through 'rofit or loss category6 in &hich cases an reassess"ent is required4 #n entity deter"ines &hether a "odification to cash flo&s is significant (y considering the e8tent to &hich the e8'ected future cash flo&s associated &ith the e"(edded deri!ati!e6 the host contract or (oth ha!e changed and &hether the change is significant relati!e to the 're!iously e8'ected cash flo&s on the contract4 The assess"ent &hether an e"(edded deri!ati!e is required to (e se'arated fro" the host contract and accounted for as a deri!ati!e on reclassification of a financial asset out of the fair !alue through 'rofit or loss category in accordance &ith 'aragra'h 7 shall (e "ade on the (asis of the circu"stances that e8isted on the later date of: ;a< ;(< &hen the entity first (eca"e a 'arty to the contract= and a change in the ter"s of the contract that significantly "odified the cash flo&s that other&ise &ould ha!e (een required under the contract4

7#

*or the 'ur'ose of this assess"ent 'aragra'h 11;c< of Ind #) 39 shall not (e a''lied ;ie the hy(rid ;co"(ined< contract shall (e treated as if it had not (een "easured at fair !alue &ith changes in fair !alue recognised in 'rofit or loss<4 If Ind #) 103 addresses the acquisition of contracts &ith e"(edded deri!ati!es in a (usiness co"(ination4
10

91

an entity is una(le to "a>e this assess"ent the hy(rid ;co"(ined< contract shall re"ain classified as at fair !alue through 'rofit or loss in its entirety4 8 # first,ti"e ado'ter shall assess &hether an e"(edded deri!ati!e is required to (e se'arated fro" the host contract and accounted for as a deri!ati!e on the (asis of the conditions that e8isted at the later of the date it first (eca"e a 'arty to the contract and the date a reassess"ent is required (y 'aragra'h 74

92

Appendi& D .edges o+ a /et In!estment in a Foreign 0peration

.This appendix is an integral part of Ind A) 7-/

'ac@ground
1 3any re'orting entities ha!e in!est"ents in foreign o'erations ;as defined in Ind #) 21 'aragra'h 8<4 )uch foreign o'erations "ay (e su(sidiaries6 associates6 5oint !entures or (ranches4 Ind #) 21 requires an entity to deter"ine the functional currency of each of its foreign o'erations as the currency of the 'ri"ary econo"ic en!iron"ent of that o'eration4 Bhen translating the results and financial 'osition of a foreign o'eration into a 'resentation currency6 the entity is required to recognise foreign e8change differences in other co"'rehensi!e inco"e until it dis'oses of the foreign o'eration4 -edge accounting of the foreign currency ris> arising fro" a net in!est"ent in a foreign o'eration &ill a''ly only &hen the net assets of that foreign o'eration are included in the financial state"ents411 The ite" (eing hedged &ith res'ect to the foreign currency ris> arising fro" the net in!est"ent in a foreign o'eration "ay (e an a"ount of net assets equal to or less than the carrying a"ount of the net assets of the foreign o'eration4 Ind #) 39 requires the designation of an eligi(le hedged ite" and eligi(le hedging instru"ents in a hedge accounting relationshi'4 If there is a designated hedging relationshi'6 in the case of a net in!est"ent hedge6 the gain or loss on the hedging instru"ent that is deter"ined to (e an effecti!e hedge of the net in!est"ent is recognised in other co"'rehensi!e inco"e and is included &ith the foreign e8change differences arising on translation of the results and financial 'osition of the foreign o'eration4 #n entity &ith "any foreign o'erations "ay (e e8'osed to a nu"(er of foreign currency ris>s4 This #''endi8 'ro!ides guidance on identifying the foreign currency ris>s that qualify as a hedged ris> in the hedge of a net in!est"ent in a foreign o'eration4 Ind #) 39 allo&s an entity to designate either a deri!ati!e or a non,deri!ati!e financial instru"ent ;or a co"(ination of deri!ati!e and non,deri!ati!e financial instru"ents< as hedging instru"ents for foreign currency ris>4 This #''endi8 'ro!ides guidance on &here6 &ithin a grou'6 hedging instru"ents that are

11

This &ill (e the case for consolidated financial state"ents6 financial state"ents in &hich in!est"ents are accounted for using the equity "ethod6 financial state"ents in &hich !enturers? interests in 5oint !entures are 'ro'ortionately consolidated and financial state"ents that include a (ranch4

93

hedges of a net in!est"ent in a foreign o'eration can (e held to qualify for hedge accounting4 $ Ind #) 21 and Ind #) 39 require cu"ulati!e a"ounts recognised in other co"'rehensi!e inco"e relating to (oth the foreign e8change differences arising on translation of the results and financial 'osition of the foreign o'eration and the gain or loss on the hedging instru"ent that is deter"ined to (e an effecti!e hedge of the net in!est"ent to (e reclassified fro" equity to 'rofit or loss as a reclassification ad5ust"ent &hen the 'arent dis'oses of the foreign o'eration4 This #''endi8 'ro!ides guidance on ho& an entity should deter"ine the a"ounts to (e reclassified fro" equity to 'rofit or loss for (oth the hedging instru"ent and the hedged ite"4

Scope
7 This #''endi8 a''lies to an entity that hedges the foreign currency ris> arising fro" its net in!est"ents in foreign o'erations and &ishes to qualify for hedge accounting in accordance &ith Ind #) 394 *or con!enience this #''endi8 refers to such an entity as a 'arent entity and to the financial state"ents in &hich the net assets of foreign o'erations are included as consolidated financial state"ents4 #ll references to a 'arent entity a''ly equally to an entity that has a net in!est"ent in a foreign o'eration that is a 5oint !enture6 an associate or a (ranch4 This #''endi8 a''lies only to hedges of net in!est"ents in foreign o'erations= it should not (e a''lied (y analogy to other ty'es of hedge accounting4

Issues
9 In!est"ents in foreign o'erations "ay (e held directly (y a 'arent entity or indirectly (y its su(sidiary or su(sidiaries4 The issues addressed in this #''endi8 are: ;a< the nature of the hedged risk and the amount of the hedged item for 'hich a hedging relationship may $e designated: ;i< &hether the 'arent entity "ay designate as a hedged ris> only the foreign e8change differences arising fro" a difference (et&een the functional currencies of the 'arent entity and its foreign o'eration6 or &hether it "ay also designate as the hedged ris> the foreign e8change differences arising fro" the difference (et&een the 'resentation currency of the 'arent entity?s consolidated financial state"ents and the functional currency of the foreign o'eration= if the 'arent entity holds the foreign o'eration indirectly6 &hether the hedged ris> "ay include only the foreign e8change differences arising fro" differences in functional currencies (et&een the foreign o'eration and its i""ediate 'arent entity6 or &hether the hedged ris> "ay also include any foreign e8change differences (et&een the functional currency of the foreign o'eration and any inter"ediate or ulti"ate 'arent entity ;ie &hether the fact that the net in!est"ent in

;ii<

94

the foreign o'eration is held through an inter"ediate 'arent affects the econo"ic ris> to the ulti"ate 'arent<4 ;(< 'here in a group the hedging instrument can $e held: ;i< &hether a qualifying hedge accounting relationshi' can (e esta(lished only if the entity hedging its net in!est"ent is a 'arty to the hedging instru"ent or &hether any entity in the grou'6 regardless of its functional currency6 can hold the hedging instru"ent= &hether the nature of the hedging instru"ent ;deri!ati!e or non, deri!ati!e< or the "ethod of consolidation affects the assess"ent of hedge effecti!eness4

;ii<

;c<

'hat amounts should $e reclassified from equity to profit or loss as reclassification ad5ustments on disposal of the foreign operation: ;i< &hen a foreign o'eration that &as hedged is dis'osed of6 &hat a"ounts fro" the 'arent entity?s foreign currency translation reser!e in res'ect of the hedging instru"ent and in res'ect of that foreign o'eration should (e reclassified fro" equity to 'rofit or loss in the 'arent entity?s consolidated financial state"ents= &hether the "ethod of consolidation affects the deter"ination of the a"ounts to (e reclassified fro" equity to 'rofit or loss4

;ii<

Accounting "rincip*e
#ature of t(e (edged ris@ and amount of t(e (edged item for ,(ic( a (edging re*ations(ip ma. be designated
10 -edge accounting "ay (e a''lied only to the foreign e8change differences arising (et&een the functional currency of the foreign o'eration and the 'arent entity?s functional currency4 In a hedge of the foreign currency ris>s arising fro" a net in!est"ent in a foreign o'eration6 the hedged ite" can (e an a"ount of net assets equal to or less than the carrying a"ount of the net assets of the foreign o'eration in the consolidated financial state"ents of the 'arent entity4 The carrying a"ount of the net assets of a foreign o'eration that "ay (e designated as the hedged ite" in the consolidated financial state"ents of a 'arent de'ends on &hether any lo&er le!el 'arent of the foreign o'eration has a''lied hedge accounting for all or 'art of the net assets of that foreign o'eration and that accounting has (een "aintained in the 'arent?s consolidated financial state"ents4 The hedged ris> "ay (e designated as the foreign currency e8'osure arising (et&een the functional currency of the foreign o'eration and the functional currency of any 'arent entity ;the i""ediate6 inter"ediate or ulti"ate 'arent entity< of that foreign o'eration4 The fact that the net in!est"ent is held through an inter"ediate 'arent does not affect the nature of the econo"ic ris> arising fro" the foreign currency e8'osure to the ulti"ate 'arent entity4

11

12

95

13

#n e8'osure to foreign currency ris> arising fro" a net in!est"ent in a foreign o'eration "ay qualify for hedge accounting only once in the consolidated financial state"ents4 Therefore6 if the sa"e net assets of a foreign o'eration are hedged (y "ore than one 'arent entity &ithin the grou' ;for e8a"'le6 (oth a direct and an indirect 'arent entity< for the sa"e ris>6 only one hedging relationshi' &ill qualify for hedge accounting in the consolidated financial state"ents of the ulti"ate 'arent4 # hedging relationshi' designated (y one 'arent entity in its consolidated financial state"ents need not (e "aintained (y another higher le!el 'arent entity4 -o&e!er6 if it is not "aintained (y the higher le!el 'arent entity6 the hedge accounting a''lied (y the lo&er le!el 'arent "ust (e re!ersed (efore the higher le!el 'arent?s hedge accounting is recognised4

C(ere t(e (edging instrument can be (e*d

14 # deri!ati!e or a non,deri!ati!e instru"ent ;or a co"(ination of deri!ati!e and non,deri!ati!e instru"ents< "ay (e designated as a hedging instru"ent in a hedge of a net in!est"ent in a foreign o'eration4 The hedging instru"ent;s< "ay (e held (y any entity or entities &ithin the grou'6 as long as the designation6 docu"entation and effecti!eness require"ents of Ind #) 39 'aragra'h 88 that relate to a net in!est"ent hedge are satisfied4 In 'articular6 the hedging strategy of the grou' should (e clearly docu"ented (ecause of the 'ossi(ility of different designations at different le!els of the grou'4 *or the 'ur'ose of assessing effecti!eness6 the change in !alue of the hedging instru"ent in res'ect of foreign e8change ris> is co"'uted (y reference to the functional currency of the 'arent entity against &hose functional currency the hedged ris> is "easured6 in accordance &ith the hedge accounting docu"entation4 De'ending on &here the hedging instru"ent is held6 in the a(sence of hedge accounting the total change in !alue "ight (e recognised in 'rofit or loss6 in other co"'rehensi!e inco"e6 or (oth4 -o&e!er6 the assess"ent of effecti!eness is not affected (y &hether the change in !alue of the hedging instru"ent is recognised in 'rofit or loss or in other co"'rehensi!e inco"e4 #s 'art of the a''lication of hedge accounting6 the total effecti!e 'ortion of the change is included in other co"'rehensi!e inco"e4 The assess"ent of effecti!eness is not affected (y &hether the hedging instru"ent is a deri!ati!e or a non,deri!ati!e instru"ent or (y the "ethod of consolidation4

15

Disposa* of a (edged foreign operation

1$ Bhen a foreign o'eration that &as hedged is dis'osed of6 the a"ount reclassified to 'rofit or loss as a reclassification ad5ust"ent fro" the foreign currency translation reser!e in the consolidated financial state"ents of the 'arent in res'ect of the hedging instru"ent is the a"ount that Ind #) 39 'aragra'h 102 requires to (e identified4 That a"ount is the cu"ulati!e gain or loss on the hedging instru"ent that &as deter"ined to (e an effecti!e hedge4 The a"ount reclassified to 'rofit or loss fro" the foreign currency translation reser!e in the consolidated financial state"ents of a 'arent in res'ect of the net in!est"ent in that foreign o'eration in accordance &ith Ind #) 21 'aragra'h 48 is the a"ount included in that 'arent?s foreign currency translation reser!e in

17

96

res'ect of that foreign o'eration4 In the ulti"ate 'arent?s consolidated financial state"ents6 the aggregate net a"ount recognised in the foreign currency translation reser!e in res'ect of all foreign o'erations is not affected (y the consolidation "ethod4 -o&e!er6 &hether the ulti"ate 'arent uses the direct or the ste',(y,ste' "ethod of consolidation12 "ay affect the a"ount included in its foreign currency translation reser!e in res'ect of an indi!idual foreign o'eration4 The use of the ste',(y,ste' "ethod of consolidation "ay result in the reclassification to 'rofit or loss of an a"ount different fro" that used to deter"ine hedge effecti!eness4 This difference "ay (e eli"inated (y deter"ining the a"ount relating to that foreign o'eration that &ould ha!e arisen if the direct "ethod of consolidation had (een used4 3a>ing this ad5ust"ent is not required (y Ind #) 214 -o&e!er6 it is an accounting 'olicy choice that should (e follo&ed consistently for all net in!est"ents4

12

The direct "ethod is the "ethod of consolidation in &hich the financial state"ents of the foreign o'eration are translated directly into the functional currency of the ulti"ate 'arent4 The ste',(y,ste' "ethod is the "ethod of consolidation in &hich the financial state"ents of the foreign o'eration are first translated into the functional currency of any inter"ediate 'arent;s< and then translated into the functional currency of the ulti"ate 'arent ;or the 'resentation currency if different<4

97

App*ication guidance to Appendi& D

This application guidance is an integral part of the Appendix !+ #+1 This a''lication guidance illustrates the a''lication of the #''endi8 D using the cor'orate structure illustrated (elo&4 In all cases the hedging relationshi's descri(ed &ould (e tested for effecti!eness in accordance &ith Ind #) 396 although this testing is not discussed in this a''endi84 Darent6 (eing the ulti"ate 'arent entity6 'resents its consolidated financial state"ents in its functional currency of euro ;1F%<4 1ach of the su(sidiaries is &holly o&ned4 Darent?s Q500 "illion net in!est"ent in )u(sidiary / ;functional currency 'ounds sterling ;+/D<< includes the Q159 "illion equi!alent of )u(sidiary /?s F)R300 "illion net in!est"ent in )u(sidiary ;functional currency F) dollars ;F)D<<4 In other &ords6 )u(sidiary /?s net assets other than its in!est"ent in )u(sidiary are Q341 "illion4

#ature of (edged ris@ for ,(ic( a (edging re*ations(ip ma. be designated (paragrap(s 3>:33)
#+2 Darent can hedge its net in!est"ent in each of )u(sidiaries #6 / and for the foreign e8change ris> (et&een their res'ecti!e functional currencies ;Ia'anese yen ;IDK<6 'ounds sterling and F) dollars< and euro4 In addition6 Darent can hedge the F)DG+/D foreign e8change ris> (et&een the functional currencies of )u(sidiary / and )u(sidiary 4 In its consolidated financial state"ents6 )u(sidiary / can hedge its net in!est"ent in )u(sidiary for the foreign e8change ris> (et&een their functional currencies of F) dollars and 'ounds sterling4 In the follo&ing e8a"'les the designated ris> is the s'ot foreign e8change ris> (ecause the hedging instru"ents are not deri!ati!es4 If the hedging instru"ents &ere for&ard contracts6 Darent could designate the for&ard foreign e8change ris>4

98

Amount of (edged item for ,(ic( a (edging re*ations(ip ma. be designated (paragrap(s 3>:33)
#+3 Darent &ishes to hedge the foreign e8change ris> fro" its net in!est"ent in )u(sidiary 4 #ssu"e that )u(sidiary # has an e8ternal (orro&ing of F)R300 "illion4 The net assets of )u(sidiary # at the start of the re'orting 'eriod are S4006000 "illion including the 'roceeds of the e8ternal (orro&ing of F)R300 "illion4 The hedged ite" can (e an a"ount of net assets equal to or less than the carrying a"ount of Darent?s net in!est"ent in )u(sidiary ;F)R300 "illion< in its consolidated financial state"ents4 In its consolidated financial state"ents Darent can designate the F)R300 "illion e8ternal (orro&ing in )u(sidiary # as a hedge of the 1F%GF)D s'ot foreign e8change ris> associated &ith its net in!est"ent in the F)R300 "illion net assets of )u(sidiary 4 In this case6 (oth the 1F%GF)D foreign e8change difference on the F)R300 "illion e8ternal (orro&ing in )u(sidiary # and the 1F%GF)D foreign e8change difference on the F)R300 "illion net in!est"ent in )u(sidiary are included in the foreign currency translation reser!e in Darent?s consolidated financial state"ents after the a''lication of hedge accounting4 In the a(sence of hedge accounting6 the total F)DG1F% foreign e8change difference on the F)R300 "illion e8ternal (orro&ing in )u(sidiary # &ould (e recognised in Darent?s consolidated financial state"ents as follo&s: F)DGIDK s'ot foreign e8change rate change6 translated to euro6 in 'rofit or loss6 and IDKG1F% s'ot foreign e8change rate change in other co"'rehensi!e inco"e4

#+4

#+5

99

Instead of the designation in 'aragra'h #+46 in its consolidated financial state"ents Darent can designate the F)R300 "illion e8ternal (orro&ing in )u(sidiary # as a hedge of the +/DGF)D s'ot foreign e8change ris> (et&een )u(sidiary and )u(sidiary /4 In this case6 the total F)DG1F% foreign e8change difference on the F)R300 "illion e8ternal (orro&ing in )u(sidiary # &ould instead (e recognised in Darent?s consolidated financial state"ents as follo&s: #+$ the +/DGF)D s'ot foreign e8change rate change in the foreign currency translation reser!e relating to )u(sidiary 6 +/DGIDK s'ot foreign e8change rate change6 translated to euro6 in 'rofit or loss6 and IDKG1F% s'ot foreign e8change rate change in other co"'rehensi!e inco"e4

Darent cannot designate the F)R300 "illion e8ternal (orro&ing in )u(sidiary # as a hedge of (oth the 1F%GF)D s'ot foreign e8change ris> and the +/DGF)D s'ot foreign e8change ris> in its consolidated financial state"ents4 # single hedging instru"ent can hedge the sa"e designated ris> only once4 )u(sidiary / cannot a''ly hedge accounting in its consolidated financial state"ents (ecause the hedging instru"ent is held outside the grou' co"'rising )u(sidiary / and )u(sidiary 4

C(ere in a group can t(e (edging instrument be (e*d (paragrap(s 3< and 39)F
#+7 #s noted in 'aragra'h #+56 the total change in !alue in res'ect of foreign e8change ris> of the F)R300 "illion e8ternal (orro&ing in )u(sidiary # &ould (e recorded in (oth 'rofit or loss ;F)DGIDK s'ot ris>< and other co"'rehensi!e inco"e ;1F%GIDK s'ot ris>< in Darent?s consolidated financial state"ents in the a(sence of hedge accounting4 /oth a"ounts are included for the 'ur'ose of assessing the effecti!eness of the hedge designated in 'aragra'h #+4 (ecause the change in !alue of (oth the hedging instru"ent and the hedged ite" are co"'uted (y reference to the euro functional currency of Darent against the F) dollar functional currency of )u(sidiary 6 in accordance &ith the hedge docu"entation4 The "ethod of consolidation ;ie direct "ethod or ste',(y,ste' "ethod< does not affect the assess"ent of the effecti!eness of the hedge4

Amounts rec*assified to profit or *oss on disposa* of a foreign operation (paragrap(s 3; and 36)
#+8 Bhen )u(sidiary is dis'osed of6 the a"ounts reclassified to 'rofit or loss in Darent?s consolidated financial state"ents fro" its foreign currency translation reser!e ;* T%< are: ;a< in res'ect of the F)R300 "illion e8ternal (orro&ing of )u(sidiary #6 the a"ount that Ind #) 39 requires to (e identified6 ie the total change in !alue in res'ect of foreign e8change ris> that &as recognised in other co"'rehensi!e inco"e as the effecti!e 'ortion of the hedge= and in res'ect of the F)R300 "illion net in!est"ent in )u(sidiary 6 the a"ount deter"ined (y the entity?s consolidation "ethod4 If Darent uses the direct

;(<

100

"ethod6 its * T% in res'ect of )u(sidiary &ill (e deter"ined directly (y the 1F%GF)D foreign e8change rate4 If Darent uses the ste',(y,ste' "ethod6 its * T% in res'ect of )u(sidiary &ill (e deter"ined (y the * T% recognised (y )u(sidiary / reflecting the +/DGF)D foreign e8change rate6 translated to Darent?s functional currency using the 1F%G+/D foreign e8change rate4 Darent?s use of the ste',(y,ste' "ethod of consolidation in 'rior 'eriods does not require it to or 'reclude it fro" deter"ining the a"ount of * T% to (e reclassified &hen it dis'oses of )u(sidiary to (e the a"ount that it &ould ha!e recognised if it had al&ays used the direct "ethod6 de'ending on its accounting 'olicy4

!edging more t(an one foreign operation (paragrap(s 334 33 and 39)
#+9 The follo&ing e8a"'les illustrate that in the consolidated financial state"ents of Darent6 the ris> that can (e hedged is al&ays the ris> (et&een its functional currency ;euro< and the functional currencies of )u(sidiaries / and 4 Ho "atter ho& the hedges are designated6 the "a8i"u" a"ounts that can (e effecti!e hedges to (e included in the foreign currency translation reser!e in Darent?s consolidated financial state"ents &hen (oth foreign o'erations are hedged are F)R300 "illion for 1F%GF)D ris> and Q341 "illion for 1F%G+/D ris>4 @ther changes in !alue due to changes in foreign e8change rates are included in Darent?s consolidated 'rofit or loss4 @f course6 it &ould (e 'ossi(le for Darent to designate F)R300 "illion only for changes in the F)DG+/D s'ot foreign e8change rate or Q500 "illion only for changes in the +/DG1F% s'ot foreign e8change rate4

"arent (o*ds bot( /SD and 2'" (edging instruments

#+10 Darent "ay &ish to hedge the foreign e8change ris> in relation to its net in!est"ent in )u(sidiary / as &ell as that in relation to )u(sidiary 4 #ssu"e that Darent holds suita(le hedging instru"ents deno"inated in F) dollars and 'ounds sterling that it could designate as hedges of its net in!est"ents in )u(sidiary / and )u(sidiary 4 The designations Darent can "a>e in its consolidated financial state"ents include6 (ut are not li"ited to6 the follo&ing: ;a< F)R300 "illion hedging instru"ent designated as a hedge of the F)R300 "illion of net in!est"ent in )u(sidiary &ith the ris> (eing the s'ot foreign e8change e8'osure ;1F%GF)D< (et&een Darent and )u(sidiary and u' to Q341 "illion hedging instru"ent designated as a hedge of Q341 "illion of the net in!est"ent in )u(sidiary / &ith the ris> (eing the s'ot foreign e8change e8'osure ;1F%G+/D< (et&een Darent and )u(sidiary /4 F)R300 "illion hedging instru"ent designated as a hedge of the F)R300 "illion of net in!est"ent in )u(sidiary &ith the ris> (eing the s'ot foreign e8change e8'osure ;+/DGF)D< (et&een )u(sidiary / and )u(sidiary and u' to Q500 "illion hedging instru"ent designated as a hedge of Q500 "illion of the net in!est"ent in )u(sidiary / &ith the ris> (eing the s'ot foreign e8change e8'osure ;1F%G+/D< (et&een Darent and )u(sidiary /4

;(<

101

#+11 The 1F%GF)D ris> fro" Darent?s net in!est"ent in )u(sidiary is a different ris> fro" the 1F%G+/D ris> fro" Darent?s net in!est"ent in )u(sidiary /4 -o&e!er6 in the case descri(ed in 'aragra'h #+10;a<6 (y its designation of the F)D hedging instru"ent it holds6 Darent has already fully hedged the 1F%GF)D ris> fro" its net in!est"ent in )u(sidiary 4 If Darent also designated a +/D instru"ent it holds as a hedge of its Q500 "illion net in!est"ent in )u(sidiary /6 Q159 "illion of that net in!est"ent6 re'resenting the +/D equi!alent of its F)D net in!est"ent in )u(sidiary 6 &ould (e hedged t&ice for +/DG1F% ris> in Darent?s consolidated financial state"ents4 #+12 In the case descri(ed in 'aragra'h #+10;(<6 if Darent designates the hedged ris> as the s'ot foreign e8change e8'osure ;+/DGF)D< (et&een )u(sidiary / and )u(sidiary 6 only the +/DGF)D 'art of the change in the !alue of its F)R300 "illion hedging instru"ent is included in Darent?s foreign currency translation reser!e relating to )u(sidiary 4 The re"ainder of the change ;equi!alent to the +/DG1F% change on Q159 "illion< is included in Darent?s consolidated 'rofit or loss6 as in 'aragra'h #+54 /ecause the designation of the F)DG+/D ris> (et&een )u(sidiaries / and does not include the +/DG1F% ris>6 Darent is also a(le to designate u' to Q500 "illion of its net in!est"ent in )u(sidiary / &ith the ris> (eing the s'ot foreign e8change e8'osure ;+/DG1F%< (et&een Darent and )u(sidiary /4

Subsidiar. ' (o*ds t(e /SD (edging instrument

#+13 #ssu"e that )u(sidiary / holds F)R300 "illion of e8ternal de(t the 'roceeds of &hich &ere transferred to Darent (y an inter,co"'any loan deno"inated in 'ounds sterling4 /ecause (oth its assets and lia(ilities increased (y Q159 "illion6 )u(sidiary /?s net assets are unchanged4 )u(sidiary / could designate the e8ternal de(t as a hedge of the +/DGF)D ris> of its net in!est"ent in )u(sidiary in its consolidated financial state"ents4 Darent could "aintain )u(sidiary /?s designation of that hedging instru"ent as a hedge of its F)R300 "illion net in!est"ent in )u(sidiary for the +/DGF)D ris> ;see 'aragra'h 13< and Darent could designate the +/D hedging instru"ent it holds as a hedge of its entire Q500 "illion net in!est"ent in )u(sidiary /4 The first hedge6 designated (y )u(sidiary /6 &ould (e assessed (y reference to )u(sidiary /?s functional currency ;'ounds sterling< and the second hedge6 designated (y Darent6 &ould (e assessed (y reference to Darent?s functional currency ;euro<4 In this case6 only the +/DGF)D ris> fro" Darent?s net in!est"ent in )u(sidiary has (een hedged in Darent?s consolidated financial state"ents (y the F)D hedging instru"ent6 not the entire 1F%GF)D ris>4 Therefore6 the entire 1F%G+/D ris> fro" Darent?s Q500 "illion net in!est"ent in )u(sidiary / "ay (e hedged in the consolidated financial state"ents of Darent4 #+14 -o&e!er6 the accounting for Darent?s Q159 "illion loan 'aya(le to )u(sidiary / "ust also (e considered4 If Darent?s loan 'aya(le is not considered 'art of its net in!est"ent in )u(sidiary / (ecause it does not satisfy the conditions in Ind #) 21 'aragra'h 156 the +/DG1F% foreign e8change difference arising on translating it &ould (e included in Darent?s consolidated 'rofit or loss4 If the Q159 "illion loan 'aya(le to )u(sidiary / is considered 'art of Darent?s net in!est"ent6 that net in!est"ent &ould (e only Q341 "illion and the a"ount

102

Darent could designate as the hedged ite" for +/DG1F% ris> &ould (e reduced fro" Q500 "illion to Q341 "illion accordingly4 #+15 If Darent re!ersed the hedging relationshi' designated (y )u(sidiary /6 Darent could designate the F)R300 "illion e8ternal (orro&ing held (y )u(sidiary / as a hedge of its F)R300 "illion net in!est"ent in )u(sidiary for the 1F%GF)D ris> and designate the +/D hedging instru"ent it holds itself as a hedge of only u' to Q341 "illion of the net in!est"ent in )u(sidiary /4 In this case the effecti!eness of (oth hedges &ould (e co"'uted (y reference to Darent?s functional currency ;euro<4 onsequently6 (oth the F)DG+/D change in !alue of the e8ternal (orro&ing held (y )u(sidiary / and the +/DG1F% change in !alue of Darent?s loan 'aya(le to )u(sidiary / ;equi!alent to F)DG1F% in total< &ould (e included in the foreign currency translation reser!e in Darent?s consolidated financial state"ents4 /ecause Darent has already fully hedged the 1F%GF)D ris> fro" its net in!est"ent in )u(sidiary 6 it can hedge only u' to Q341 "illion for the 1F%G+/D ris> of its net in!est"ent in )u(sidiary /4

103

**ustrative e&amp*e
This example accompanies, $ut is not part of, Appendix !+

Disposa* of a foreign operation (paragrap(s 3; and 36)

I11 This e8a"'le illustrates the a''lication of 'aragra'hs 1$ and 17 in connection &ith the reclassification ad5ust"ent on the dis'osal of a foreign o'eration4

'ac@ground
I12 This e8a"'le assu"es the grou' structure set out in the a''lication guidance and that Darent used a F)D (orro&ing in )u(sidiary # to hedge the 1F%GF)D ris> of the net in!est"ent in )u(sidiary in Darent?s consolidated financial state"ents4 Darent uses the ste',(y,ste' "ethod of consolidation4 #ssu"e the hedge &as fully effecti!e and the full F)DG1F% accu"ulated change in the !alue of the hedging instru"ent (efore dis'osal of )u(sidiary is T24 "illion ;gain<4 This is "atched e8actly (y the fall in !alue of the net in!est"ent in )u(sidiary 6 &hen "easured against the functional currency of Darent ;euro<4 If the direct "ethod of consolidation is used6 the fall in the !alue of Darent?s net in!est"ent in )u(sidiary of T24 "illion &ould (e reflected totally in the foreign currency translation reser!e relating to )u(sidiary in Darent?s consolidated financial state"ents4 -o&e!er6 (ecause Darent uses the ste',(y,ste' "ethod6 this fall in the net in!est"ent !alue in )u(sidiary of T24 "illion &ould (e reflected (oth in )u(sidiary /?s foreign currency translation reser!e relating to )u(sidiary and in Darent?s foreign currency translation reser!e relating to )u(sidiary /4 The aggregate a"ount recognised in the foreign currency translation reser!e in res'ect of )u(sidiaries / and is not affected (y the consolidation "ethod4 #ssu"e that using the direct "ethod of consolidation6 the foreign currency translation reser!es for )u(sidiaries / and in Darent?s consolidated financial state"ents are T$2 "illion gain and T24 "illion loss res'ecti!ely= using the ste', (y,ste' "ethod of consolidation those a"ounts are T49 "illion gain and T11 "illion loss res'ecti!ely4

I13

I14

Rec*assification
I15 Bhen the in!est"ent in )u(sidiary is dis'osed of6 Ind #) 39 requires the full T24 "illion gain on the hedging instru"ent to (e reclassified to 'rofit or loss4 Fsing the ste',(y,ste' "ethod6 the a"ount to (e reclassified to 'rofit or loss in res'ect of the net in!est"ent in )u(sidiary &ould (e only T11 "illion loss4 Darent could ad5ust the foreign currency translation reser!es of (oth )u(sidiaries / and (y T13 "illion in order to "atch the a"ounts reclassified in res'ect of the hedging instru"ent and the net in!est"ent as &ould ha!e (een the case if the direct "ethod of consolidation had (een used6 if that &as its accounting

104

'olicy4 #n entity that had not hedged its net in!est"ent could "a>e the sa"e reclassification4

105

Appendi& E E&tinguis(ing )inancia* +iabi*ities ,it( E-uit. Instruments

.This appendix is an integral part of Ind A) 7-/
Internationa*

)inancia*

'ac@ground
1 # de(tor and creditor "ight renegotiate the ter"s of a financial lia(ility &ith the result that the de(tor e8tinguishes the lia(ility fully or 'artially (y issuing equity instru"ents to the creditor4 These transactions are so"eti"es referred to as Ede(t for equity s&a's?4

Scope
2 This #''endi8 addresses the accounting (y an entity &hen the ter"s of a financial lia(ility are renegotiated and result in the entity issuing equity instru"ents to a creditor of the entity to e8tinguish all or 'art of the financial lia(ility4 It does not address the accounting (y the creditor4 #n entity shall not a''ly this #''endi8 to transactions in situations &here: ;a< ;(< the creditor is also a direct or indirect shareholder and is acting in its ca'acity as a direct or indirect e8isting shareholder4 the creditor and the entity are controlled (y the sa"e 'arty or 'arties (efore and after the transaction and the su(stance of the transaction includes an equity distri(ution (y6 or contri(ution to6 the entity4 e8tinguishing the financial lia(ility (y issuing equity shares is in accordance &ith the original ter"s of the financial lia(ility4

;c<

Issues
4 This #''endi8 addresses the follo&ing issues: ;a< #re an entity?s equity instru"ents issued to e8tinguish all or 'art of a financial lia(ility Econsideration 'aid? in accordance &ith 'aragra'h 41 of Ind #) 39L -o& should an entity initially "easure the equity instru"ents issued to e8tinguish such a financial lia(ilityL -o& should an entity account for any difference (et&een the carrying a"ount of the financial lia(ility e8tinguished and the initial "easure"ent a"ount of the equity instru"ents issuedL

;(< ;c<

106

Accounting princip*es
5 The issue of an entity?s equity instru"ents to a creditor to e8tinguish all or 'art of a financial lia(ility is consideration 'aid in accordance &ith 'aragra'h 41 of Ind #) 394 #n entity shall re"o!e a financial lia(ility ;or 'art of a financial lia(ility< fro" its (alance sheet &hen6 and only &hen6 it is e8tinguished in accordance &ith 'aragra'h 39 of Ind #) 394 Bhen equity instru"ents issued to a creditor to e8tinguish all or 'art of a financial lia(ility are recognised initially6 an entity shall "easure the" at the fair !alue of the equity instru"ents issued6 unless that fair !alue cannot (e relia(ly "easured4 If the fair !alue of the equity instru"ents issued cannot (e relia(ly "easured then the equity instru"ents shall (e "easured to reflect the fair !alue of the financial lia(ility e8tinguished4 In "easuring the fair !alue of a financial lia(ility e8tinguished that includes a de"and feature ;eg a de"and de'osit<6 'aragra'h 49 of Ind #) 39 is not a''lied4 If only 'art of the financial lia(ility is e8tinguished6 the entity shall assess &hether so"e of the consideration 'aid relates to a "odification of the ter"s of the lia(ility that re"ains outstanding4 If 'art of the consideration 'aid does relate to a "odification of the ter"s of the re"aining 'art of the lia(ility6 the entity shall allocate the consideration 'aid (et&een the 'art of the lia(ility e8tinguished and the 'art of the lia(ility that re"ains outstanding4 The entity shall consider all rele!ant facts and circu"stances relating to the transaction in "a>ing this allocation4 The difference (et&een the carrying a"ount of the financial lia(ility ;or 'art of a financial lia(ility< e8tinguished6 and the consideration 'aid6 shall (e recognised in 'rofit or loss6 in accordance &ith 'aragra'h 41 of Ind #) 394 The equity instru"ents issued shall (e recognised initially and "easured at the date the financial lia(ility ;or 'art of that lia(ility< is e8tinguished4 Bhen only 'art of the financial lia(ility is e8tinguished6 consideration shall (e allocated in accordance &ith 'aragra'h 84 The consideration allocated to the re"aining lia(ility shall for" 'art of the assess"ent of &hether the ter"s of that re"aining lia(ility ha!e (een su(stantially "odified4 If the re"aining lia(ility has (een su(stantially "odified6 the entity shall account for the "odification as the e8tinguish"ent of the original lia(ility and the recognition of a ne& lia(ility as required (y 'aragra'h 40 of Ind #) 394 #n entity shall disclose a gain or loss recognised in accordance &ith 'aragra'hs 9 and 10 as a se'arate line ite" in 'rofit or loss or in the notes4

10

11

107

Appendi& ) Ind AS 39 Financial Instruments: Recognition and Measurement I**ustrative e&amp*e

This example accompanies, $ut is not part of,Ind A) 7-+

)acts
I11 @n 1 Ianuary 20U16 1ntity # identifies a 'ortfolio co"'rising assets and lia(ilities &hose interest rate ris> it &ishes to hedge4 The lia(ilities include de"anda(le de'osit lia(ilities that the de'ositor "ay &ithdra& at any ti"e &ithout notice4 *or ris> "anage"ent 'ur'oses6 the entity !ie&s all of the ite"s in the 'ortfolio as fi8ed rate ite"s4 *or ris> "anage"ent 'ur'oses6 1ntity # analyses the assets and lia(ilities in the 'ortfolio into re'ricing ti"e 'eriods (ased on e8'ected re'ricing dates4 The entity uses "onthly ti"e 'eriods and schedules ite"s for the ne8t fi!e years ;ie it has $0 se'arate "onthly ti"e 'eriods<413 The assets in the 'ortfolio are 're'aya(le assets that 1ntity # allocates into ti"e 'eriods (ased on the e8'ected 're'ay"ent dates6 (y allocating a 'ercentage of all of the assets6 rather than indi!idual ite"s6 into each ti"e 'eriod4 The 'ortfolio also includes de"anda(le lia(ilities that the entity e8'ects6 on a 'ortfolio (asis6 to re'ay (et&een one "onth and fi!e years and6 for ris> "anage"ent 'ur'oses6 are scheduled into ti"e 'eriods on this (asis4 @n the (asis of this analysis6 1ntity # decides &hat a"ount it &ishes to hedge in each ti"e 'eriod4 This e8a"'le deals only &ith the re'ricing ti"e 'eriod e8'iring in three "onths? ti"e6 ie the ti"e 'eriod "aturing on 31 3arch 20U1 ;a si"ilar 'rocedure &ould (e a''lied for each of the other 59 ti"e 'eriods<4 1ntity # has scheduled assets of %s4100 "illion and lia(ilities of %s480 "illion into this ti"e 'eriod4 #ll of the lia(ilities are re'aya(le on de"and4 1ntity # decides6 for ris> "anage"ent 'ur'oses6 to hedge the net 'osition of %s420 "illion and accordingly enters into an interest rate s&a' on 1 Ianuary 20U1 to 'ay a fi8ed rate and recei!e 3I/@%6 &ith a notional 'rinci'al14 a"ount of %s420 "illion and a fi8ed life of three "onths4

I12

I13

I14

13

)n this exa"p$e principa$ cash f$o,s ha#e %een sched!$ed into ti"e periods %!t the re$ated interest cash f$o,s ha#e %een inc$!ded ,hen ca$c!$ating the change in the fair #a$!e of the hedged ite". 1ther "ethods of sched!$ing assets and $ia%i$ities are a$so possi%$e. A$so+ in this exa"p$e+ "onth$& repricing ti"e periods ha#e %een !sed. An entit& "a& choose narro,er or ,ider ti"e periods.

108

I15

This e8a"'le "a>es the follo&ing si"'lifying assu"'tions: ;a< ;(< ;c< the cou'on on the fi8ed leg of the s&a' is equal to the fi8ed cou'on on the asset= the cou'on on the fi8ed leg of the s&a' (eco"es 'aya(le on the sa"e dates as the interest 'ay"ents on the asset= and the interest on the !aria(le leg of the s&a' is the o!ernight 3I/@% rate4 #s a result6 the entire fair !alue change of the s&a' arises fro" the fi8ed leg only6 (ecause the !aria(le leg is not e8'osed to changes in fair !alue due to changes in interest rates4 In cases &hen these si"'lifying assu"'tions do not hold6 greater ineffecti!eness &ill arise4 ;The ineffecti!eness arising fro" ;a< could (e eli"inated (y designating as the hedged ite" a 'ortion of the cash flo&s on the asset that are equi!alent to the fi8ed leg of the s&a'4<

I1$ I17

It is also assu"ed that 1ntity # tests effecti!eness on a "onthly (asis4 The fair !alue of an equi!alent non,'re'aya(le asset of %s420 "illion6 ignoring changes in !alue that are not attri(uta(le to interest rate "o!e"ents6 at !arious ti"es during the 'eriod of the hedge is as follo&s2

3 Gan 33 Gan 3 )eb 57 )eb 33 ar *air !alue ;asset< 5>$3 5>$3 5>$3 5>$3 5>$3 ;%s4< 2060006000 2060476408 2060476408 2060236795 Hil
I18 The fair !alue of the s&a' at !arious ti"es during the 'eriod of the hedge is as follo&s:

3 Gan 5>$3 *air !alue ;lia(ility< ;%s4<

33 Gan 5>$3

3 )eb 5>$3

57 )eb 5>$3

33 ar 5>$3 Hil

Hil ;476408<

;476408< ;236795<

Accounting treatment
I19 @n 1 Ianuary 20U16 1ntity # designates as the hedged ite" an a"ount of %s420 "illion of assets in the three,"onth ti"e 'eriod4 It designates as the hedged ris> the change in the !alue of the hedged ite" ;ie the %s420 "illion of assets< that is attri(uta(le to changes in 3I/@% 4 It also co"'lies &ith the other designation require"ents set out in 'aragra'hs 88;d< and #+119 of the )tandard4 1ntity # designates as the hedging instru"ent the interest rate s&a' descri(ed in 'aragra'h I144 End of mont( 3 (33 Ganuar. 5>$3)
14

I110

-he exa"p$e !ses a s,ap as the hedging instr!"ent. An entit& "a& !se for,ard rate agree"ents or other deri#ati#es as hedging instr!"ents.

109

I111

@n 31 Ianuary 20U1 ;at the end of "onth 1< &hen 1ntity # tests effecti!eness6 3I/@% has decreased4 /ased on historical 're'ay"ent e8'erience6 1ntity # esti"ates that6 as a consequence6 're'ay"ents &ill occur faster than 're!iously esti"ated4 #s a result it re,esti"ates the a"ount of assets scheduled into this ti"e 'eriod ;e8cluding ne& assets originated during the "onth< as %s49$ "illion4 The fair !alue of the designated interest rate s&a' &ith a notional 'rinci'al of %s420 "illion is ;%s4476408<15 ;the s&a' is a lia(ility<4 1ntity # co"'utes the change in the fair !alue of the hedged ite"6 ta>ing into account the change in esti"ated 're'ay"ents6 as follo&s4 ;a< *irst6 it calculates the 'ercentage of the initial esti"ate of the assets in the ti"e 'eriod that &as hedged4 This is 20 'er cent ;%s420 "illion V %s4100 "illion<4 )econd6 it a''lies this 'ercentage ;20 'er cent< to its re!ised esti"ate of the a"ount in that ti"e 'eriod ;%s49$ "illion< to calculate the a"ount that is the hedged ite" (ased on its re!ised esti"ate4 This is %s41942 "illion4 Third6 it calculates the change in the fair !alue of this re!ised esti"ate of the hedged ite" ;%s41942 "illion< that is attri(uta(le to changes in 3I/@%4 This is %s4456511 ;%s44764081$ O ;%s41942 "illion V %s420 "illion<<4

I112 I113

;(<

;c<

I114

1ntity # "a>es the follo&ing accounting entries relating to this ti"e 'eriod: Dr ash r Drofit inco"e<17 or loss ;interest %s41726097 %s41726097

To recognise the interest received on the hedged amount .*s+0-+2 million/+ Dr Drofit or loss ;interest e8'ense< r Drofit or loss ;interest inco"e< r ash %s417962$8 %s417962$8 Hil

To recognise the interest received and paid on the s'ap designated as the hedging instrument+ Dr Drofit or loss ;loss< r Deri!ati!e lia(ility To recognise the change in the fair value of the s'ap+ Dr )e'arate line ite" in the (alance sheet %s4456511 %s4476408 %s4476408

15

see 'aragra'h I184

ie %s42060476408 %s420600060004 )ee 'aragra'h I174 This e8a"'le does not sho& ho& a"ounts of interest inco"e and interest e8'ense are calculated4
16 17

110

r Drofit or loss ;gain< To recognise the change in the fair value of the hedged amount+ I115

%s4456511

The net result on 'rofit or loss ;e8cluding interest inco"e and interest e8'ense< is to recognise a loss of ;%s416897<4 This re'resents ineffecti!eness in the hedging relationshi' that arises fro" the change in esti"ated 're'ay"ent dates4

'eginning of mont( 5
I11$ @n 1 *e(ruary 20U1 1ntity # sells a 'ro'ortion of the assets in the !arious ti"e 'eriods4 1ntity # calculates that it has sold 81G3 'er cent of the entire 'ortfolio of assets4 /ecause the assets &ere allocated into ti"e 'eriods (y allocating a 'ercentage of the assets ;rather than indi!idual assets< into each ti"e 'eriod6 1ntity # deter"ines that it cannot ascertain into &hich s'ecific ti"e 'eriods the sold assets &ere scheduled4 -ence it uses a syste"atic and rational (asis of allocation4 /ased on the fact that it sold a re'resentati!e selection of the assets in the 'ortfolio6 1ntity # allocates the sale 'ro'ortionately o!er all ti"e 'eriods4 @n this (asis6 1ntity # co"'utes that it has sold 81G3 'er cent of the assets allocated to the three,"onth ti"e 'eriod6 ie %s48 "illion ;81G3 'er cent of %s49$ "illion<4 The 'roceeds recei!ed are %s48601864006 equal to the fair !alue of the assets418 @n derecognition of the assets6 1ntity # also re"o!es fro" the se'arate line ite" in the (alance sheet an a"ount that re'resents the change in the fair !alue of the hedged assets that it has no& sold4 This is 81G3 'er cent of the total line ite" (alance of %s44565116 ie %s4367934 1ntity # "a>es the follo&ing accounting entries to recognise the sale of the asset and the re"o!al of 'art of the (alance in the se'arate line ite" in the (alance sheet: Dr ash r #sset r )e'arate line ite" in the (alance sheet r Drofit or loss ;gain< %s4860186400 %s4860006000 %s436793 %s4146$07

I117

I118

To recognise the sale of the asset at fair value and to recognise a gain on sale+ /ecause the change in the a"ount of the assets is not attri(uta(le to a change in the hedged interest rate no ineffecti!eness arises4

18

-he a"o!nt rea$ised on sa$e of the asset is the fair #a$!e of a prepa&a%$e asset+ ,hich is $ess than the fair #a$!e of the e !i#a$ent non3prepa&a%$e asset sho,n in paragraph )47.

111

I119

1ntity # no& has %s488 "illion of assets and %s480 "illion of lia(ilities in this ti"e 'eriod4 -ence the net a"ount 1ntity # &ants to hedge is no& %s48 "illion and6 accordingly6 it designates %s48 "illion as the hedged a"ount4 1ntity # decides to ad5ust the hedging instru"ent (y designating only a 'ro'ortion of the original s&a' as the hedging instru"ent4 #ccordingly6 it designates as the hedging instru"ent %s48 "illion or 40 'er cent of the notional a"ount of the original s&a' &ith a re"aining life of t&o "onths and a fair !alue of %s41869$3419 It also co"'lies &ith the other designation require"ents in 'aragra'hs 88;a< and #+119 of the )tandard4 The %s412 "illion of the notional a"ount of the s&a' that is no longer designated as the hedging instru"ent is either classified as held for trading &ith changes in fair !alue recognised in 'rofit or loss6 or is designated as the hedging instru"ent in a different hedge420 #s at 1 *e(ruary 20U1 and after accounting for the sale of assets6 the se'arate line ite" in the (alance sheet is %s4416718 ;%s4456511 %s436793<6 &hich re'resents the cu"ulati!e change in fair !alue of %s4174$21 "illion of assets4 -o&e!er6 as at 1 *e(ruary 20U16 1ntity # is hedging only %s48 "illion of assets that ha!e a cu"ulati!e change in fair !alue of %s41869$3422 The re"aining se'arate line ite" in the (alance sheet of %s422675523 relates to an a"ount of assets that 1ntity # still holds (ut is no longer hedging4 #ccordingly 1ntity # a"ortises this a"ount o!er the re"aining life of the ti"e 'eriod6 ie it a"ortises %s4226755 o!er t&o "onths4 1ntity # deter"ines that it is not 'ractica(le to use a "ethod of a"ortisation (ased on a recalculated effecti!e yield and hence uses a straight,line "ethod4

I120

I121

I122

End of mont( 5 (57 )ebruar. 5>$3) I123 @n 28 *e(ruary 20U1 &hen 1ntity # ne8t tests effecti!eness6 3I/@% is unchanged4 1ntity # does not re!ise its 're'ay"ent e8'ectations4 The fair !alue of the designated interest rate s&a' &ith a notional 'rinci'al of %s48 "illion is ;%s496518<24 ;the s&a' is a lia(ility<4 #lso6 1ntity # calculates the fair !alue of the %s48 "illion of the hedged assets as at 28 *e(ruary 20U1 as %s4860096518425 1ntity # "a>es the follo&ing accounting entries relating to the hedge in this ti"e 'eriod: Dr
19

I124

ash

%s4716707

%s4476408 O 40 'er cent

20

The entity could instead enter into an offsetting s&a' &ith a notional 'rinci'al of %s412 "illion to ad5ust its 'osition and designate as the hedging instru"ent all %s420 "illion of the e8isting s&a' and all %s412 "illion of the ne& offsetting s&a'4
21

22

%s41942 "illion ;81G3P O %s41942 "illion< %s4416718 O ;%s48 "illion V %s4174$ "illion< %s4416718 %s41869$3 %s4236795 7see 'aragra'h I189 O ;%s48 "illion V %s420 "illion< %s42060236795 7see 'aragra'h I179 O ;%s48 "illion V %s420 "illion<

23

24

25

112

r Drofit or loss ;interest inco"e< Dr Drofit or loss ;interest e8'ense< r Drofit or loss ;interest inco"e< r ash %s4716707

%s4716707

To recognise the interest received on the hedged amount .*s+1 million/+ %s4$26115 %s496592

To recognise the interest received and paid on the portion of the s'ap designated as the hedging instrument .*s+1 million/+ Dr Deri!ati!e lia(ility r Drofit or loss ;gain< %s496445 %s496445

To recognise the change in the fair value of the portion of the s'ap designated as the hedging instrument .*s+1 million/ .*s+-,:01 ; *s+01,-<7/+ Dr Drofit or loss ;loss< r )e'arate line ite" in the (alance sheet %s496445 %s496445

To recognise the change in the fair value of the hedged amount .*s+1,33-,:01 ; *s+1,301,-<7/ I125 I12$ The net effect on 'rofit or loss ;e8cluding interest inco"e and interest e8'ense< is nil reflecting that the hedge is fully effecti!e4 1ntity # "a>es the follo&ing accounting entry to a"ortise the line ite" (alance for this ti"e 'eriod: Dr Drofit or loss ;loss< r )e'arate line ite" in the (alance sheet To recognise the amortisation charge for the period+ End of mont( 3 I127 During the third "onth there is no further change in the a"ount of assets or lia(ilities in the three,"onth ti"e 'eriod4 @n 31 3arch 20U1 the assets and the s&a' "ature and all (alances are recognised in 'rofit or loss4 1ntity # "a>es the follo&ing accounting entries relating to this ti"e 'eriod: Dr ash r #sset ;(alance sheet< r Drofit or loss ;interest inco"e< %s4860716707 %s4860006000 %s4716707 %s4116378 %s41163782$

I128

To recognise the interest and cash received on maturity of the hedged amount
26

.s.22+755 / 2

113

.*s+1 million/+ Dr Drofit or loss ;interest e8'ense< r Drofit or loss ;interest inco"e< r ash %s4716707 %s4$26115 %s496592

To recognise the interest received and paid on the portion of the s'ap designated as the hedging instrument .*s+1 million/+ Dr Deri!ati!e lia(ility r Drofit or loss ;gain< %s496518 %s496518

To recognise the expiry of the portion of the s'ap designated as the hedging instrument .*s+1 million/+ Dr Drofit or loss ;loss< r )e'arate line ite" in the (alance sheet %s496518 %s496518

To remove the remaining line item $alance on expiry of the time period+ I129 I130 The net effect on 'rofit or loss ;e8cluding interest inco"e and interest e8'ense< is nil reflecting that the hedge is fully effecti!e4 1ntity # "a>es the follo&ing accounting entry to a"ortise the line ite" (alance for this ti"e 'eriod: Dr Drofit or loss ;loss< r )e'arate line ite" in the (alance sheet To recognise the amortisation charge for the period+ %s4116377 %s411637727

Summar.
I131 The ta(les (elo& su""arise: ;a< ;(< ;c< ;d< changes in the se'arate line ite" in the (alance sheet= the fair !alue of the deri!ati!e= the 'rofit or loss effect of the hedge for the entire three,"onth 'eriod of the hedge= and interest inco"e and interest e8'ense relating to the a"ount designated as hedged4 3 Gan 5>$3 33 Gan 5>$3 3 )eb 5>$3 57 )eb 5>$3 33 ar 5>$3

Description

27

.s.22+755 / 2

114

Rs8 Amount of asset (edged 5>4>>>4>>>

Rs8 3945>>4>>>

Rs8 74>>>4>>>

Rs8 74>>>4>>>

Rs8 74>>>4>>>

'a( C(anges in t(e separate *ine item in t(e ba*ance s(eet

/rought for&ard: /alance to (e a"ortised %e"aining (alance 2ess: #d5ust"ent on sale of asset #d5ust"ent for change in fair !alue of the hedged asset #"ortisation Carried for,ard% 'a*ance to be amortised #i* #i* 554699 3749;3 334366 94937 #i* #i* Hil Hil Hil Hil Hil Hil Hil 456511 ;36793< 226755 1869$3 Hil 116377 96518 Hil

Hil

456511

Hil

;96445<

;96518<

Hil

Hil

Hil

;116378<

;116377<

Remaining #i* <94933 ba*ance (b) 0(e fair va*ue of t(e derivative 3 Gan 5>$3 %s42060006000 %s41260006000 Hil Hil 33 Gan 5>$3 476408

3 )eb 5>$3 286445

57 )eb 5>$3

33 ar 5>$3

Ho longer designated as the hedging instru"ent4 96518 94937 Hil #i*

%s4860006000 0ota* (d)

Hil #i*

<64<>7

1869$3 <64<>7

"rofit or *oss effect of t(e (edge 3 Gan 5>$3 33 Gan 5>$3 456511 3 )eb 5>$3 HG# 57 )eb 5>$3 ;96445< 33 ar 5>$3 ;96518<

hange in line ite": asset

Hil

115

hange in line ite": asset hange in deri!ati!e fair !alue #et effect Amortisation Hil ;476408< HG# 96445 96518

#i* #i*

(34796) #i*

#HA #HA

#i* (334367)

#i* (334366)

In addition6 there is a gain on sale of assets of %s4146$07 at 1 *e(ruary 20U14 (c) Interest income and interest e&pense re*ating to t(e amount designated as (edged "rofit or *oss recognised for t(e amount (edged Interest income on the asset on the s&a' Hil Hil 1726097 17962$8 HG# HG# 716707 $26115 716707 $26115 3 Gan 5>$3 33 Gan 5>$3 3 )eb 5>$3 57 )eb 5>$3 33 ar 5>$3

Interest e&pense on the s&a' Hil ;17962$8< HG# ;716707< ;716707<

116

Appendi& 2 2uidance on imp*ementing Ind AS 39 Financial Instruments: Recognition and Measurement

2/IDA#CE O# I "+E E#0I#2 Ind AS 39 FI/A/%IA( I/STR1M)/TS: R)%02/ITI0/ A/- M)AS1R)M)/T SEC0IO# A SCO"E A83 "ractice of sett*ing net% for,ard contract to purc(ase a commodit. A85 Option to put a nonAfinancia* asset SEC0IO# ' DE)I#I0IO#S '83 Definition of a financia* instrument% go*d bu**ion '85 Definition of a derivative% e&amp*es of derivatives and under*.ings Definition of a derivative% sett*ement at a future date4 interest rate '83 s,ap ,it( net or gross sett*ement Definition of a derivative% prepaid interest rate s,ap (fi&ed rate '8< pa.ment ob*igation prepaid at inception or subse-uent*.) Definition of a derivative% prepaid pa.Avariab*e4 receiveAfi&ed interest '89 rate s,ap '8; Definition of a derivative% offsetting *oans '86 Definition of a derivative% option not e&pected to be e&ercised Definition of a derivative% foreign currenc. contract based on sa*es '87 vo*ume '89 Definition of a derivative% prepaid for,ard '83> Definition of a derivative% initia* net investment Definition of (e*d for trading% portfo*io ,it( a recent actua* pattern of '833 s(ortAterm profitAta@ing '835 Definition of (e*d for trading% ba*ancing a portfo*io '833 Definition of (e*dAtoAmaturit. financia* assets% inde&A*in@ed principa* '83< Definition of (e*dAtoAmaturit. financia* assets% inde& *in@ed interest Definition of (e*dAtoAmaturit. financia* assets% sa*e fo**o,ing rating '839 do,ngrade '83; Definition of (e*dAtoAmaturit. financia* assets% permitted sa*es Definition of (e*dAtoAmaturit. investments% sa*es in response to entit. '836 specific capita* re-uirements Definition of (e*dAtoAmaturit. financia* assets% p*edged co**atera*4 '837 repurc(ase agreements (repos) and securities *ending agreements '839 Definition of (e*dAtoAmaturit. financia* assets% Btainting? '85> Definition of (e*dAtoAmaturit. investments% subAcategorisation for t(e

117

purpose of app*.ing t(e Btainting? ru*e Definition of (e*dAtoAmaturit. investments% app*ication of t(e Btainting? '853 ru*e on conso*idation '855 Definition of *oans and receivab*es% e-uit. instrument '853 Definition of *oans and receivab*es% ban@s? deposits in ot(er ban@s Definition of amortised cost% perpetua* debt instruments ,it( fi&ed or '85< mar@et based variab*e rate Definition of amortised cost% perpetua* debt instruments ,it( '859 decreasing interest rate '85; E&amp*e of ca*cu*ating amortised cost% financia* asset E&amp*e of ca*cu*ating amortised cost% debt instruments ,it( stepped '856 interest pa.ments '857 Regu*ar ,a. contracts% no estab*is(ed mar@et '859 Regu*ar ,a. contracts% for,ard contract '83> Regu*ar ,a. contracts% ,(ic( customar. sett*ement provisions app*.F '833 Regu*ar ,a. contracts% s(are purc(ase b. ca** option Recognition and derecognition of financia* *iabi*ities using trade date '835 or sett*ement date accounting SEC0IO# C E 'EDDED DERI1A0I1ES C83 Embedded derivatives% separation of (ost debt instrument C85 Embedded derivatives% separation of embedded option C83 Embedded derivatives% accounting for a convertib*e bond C8< Embedded derivatives% e-uit. @ic@er C89 Embedded derivatives% debt or e-uit. (ost contract C8; Embedded derivatives% s.nt(etic instruments Embedded derivatives% purc(ases and sa*es contracts in foreign C86 currenc. instruments Embedded foreign currenc. derivatives% unre*ated foreign currenc. C87 provision Embedded foreign currenc. derivatives% currenc. of internationa* C89 commerce Embedded derivatives% (o*der permitted4 but not re-uired4 to sett*e C83> ,it(out recovering substantia**. a** of its recognised investment C833 Embedded derivatives% re*iab*e determination of fair va*ue SEC0IO# D RECO2#I0IO# A#D DERECO2#I0IO# D83 Initia* recognition D4141 %ecognition: cash collateral D85 Regu*ar ,a. purc(ase or sa*e of a financia* asset Trade date !s settle"ent date: a"ounts to (e recorded for a D4241 'urchase

118

D4242 Trade date !s settle"ent date: a"ounts to (e recorded for a sale D4243 )ettle"ent date accounting: e8change of non,cash financial assets SEC0IO# E EAS/RE E#0 E83 Initia* measurement of financia* assets and financia* *iabi*ities 14141 Initial "easure"ent: transaction costs E85 )air va*ue measurement considerations 14241 *air !alue "easure"ent considerations for in!est"ent funds 14242 *air !alue "easure"ent: large holding E83 2ains and *osses 14341 #!aila(le,for,sale financial assets: e8change of shares 14342 Ind #) 39 and Ind #) 21 #!aila(le,for,sale financial assets: se'aration of currency co"'onent Ind #) 39 and Ind #) 21 18change differences arising on translation of foreign entities: equity or inco"eL Ind #) 39 and Ind #) 21 Interaction (et&een Ind #) 39 and Ind #) 21

14343 14344

E8< Impairment and unco**ectibi*it. of financia* assets 14441 @(5ecti!e e!idence of i"'air"ent 14442 I"'air"ent: future losses 14443 #ssess"ent of i"'air"ent: 'rinci'al and interest 14444 #ssess"ent of i"'air"ent: fair !alue hedge 14445 I"'air"ent: 'ro!ision "atri8 1444$ I"'air"ent: e8cess losses 14447 %ecognition of i"'air"ent on a 'ortfolio (asis 14448 I"'air"ent: recognition of collateral 14449 I"'air"ent of non,"onetary a!aila(le,for,sale financial asset I"'air"ent: &hether the a!aila(le,for,sale reser!e in equity can (e 144410 negati!e SEC0IO# ) !ED2I#2 )83 !edging instruments -edging the fair !alue e8'osure of a (ond deno"inated in a foreign *4141 currency *4142 -edging &ith a non deri!ati!e financial asset or lia(ility -edge accounting: use of &ritten o'tions in co"(ined hedging *4143 instru"ents *4144 Internal hedges *4145 @ffsetting internal deri!ati!e contracts used to "anage interest rate 119

ris> @ffsetting internal deri!ati!e contracts used to "anage foreign *414$ currency ris> *4147 Internal deri!ati!es: e8a"'les of a''lying .uestion *414$ *4148 o"(ination of &ritten and 'urchased o'tions *4149 Delta,neutral hedging strategy *41410 -edging instru"ent: out of the "oney 'ut o'tion -edging instru"ent: 'ro'ortion of the cash flo&s of a cash *41411 instru"ent *41412 -edges of "ore than one ty'e of ris> -edging instru"ent: dual foreign currency for&ard e8change *41413 contract *41414 oncurrent offsetting s&a's and use of one as a hedging instru"ent )85 !edged items *4241 Bhether a deri!ati!e can (e designated as a hedged ite" *4242 ash flo& hedge: antici'ated issue of fi8ed rate de(t *4243 -edge accounting: core de'osit intangi(les -edge accounting: hedging of future foreign currency re!enue *4244 strea"s *4245 ash flo& hedges: Eall in one? hedge *424$ -edge relationshi's: entity,&ide ris> *4247 ash flo& hedge: forecast transaction related to an entity?s equity *4248 -edge accounting: ris> of a transaction not occurring -eld,to,"aturity in!est"ents: hedging !aria(le interest rate *4249 'ay"ents *42410 -edged ite"s: 'urchase of held,to,"aturity in!est"ent ash flo& hedges: rein!est"ent of funds o(tained fro" held,to, *42411 "aturity in!est"ents *42412 -edge accounting: 're'aya(le financial asset *42413 *air !alue hedge: ris> that could affect 'rofit or loss *42414 Intragrou' and intra,entity hedging transactions *42415 Internal contracts: single offsetting e8ternal deri!ati!e *4241$ Internal contracts: e8ternal deri!ati!e contracts that are settled net *42417 Dartial ter" hedging *42418 -edging instru"ent: cross,currency interest rate s&a' -edged ite"s: hedge of foreign currency ris> of 'u(licly traded *42419 shares *42420 -edge accounting: stoc> inde8 *42421 -edge accounting: netting of assets and lia(ilities

120

)83 !edge accounting *4341 ash flo& hedge: fi8ed interest rate cash flo&s *4342 ash flo& hedge: rein!est"ent of fi8ed interest rate cash flo&s *4343 *oreign currency hedge *4344 *oreign currency cash flo& hedge *4345 *air !alue hedge: !aria(le rate de(t instru"ent *434$ *air !alue hedge: in!entory *4347 -edge accounting: forecast transaction *4348 %etros'ecti!e designation of hedges *4349 -edge accounting: designation at the ince'tion of the hedge *43410 -edge accounting: identification of hedged forecast transaction *43411 ash flo& hedge: docu"entation of ti"ing of forecast transaction )8< !edge effectiveness *4441 -edging on an after,ta8 (asis *4442 -edge effecti!eness: assess"ent on cu"ulati!e (asis *4443 -edge effecti!eness: counter'arty credit ris> *4444 -edge effecti!eness: effecti!eness tests *4445 -edge effecti!eness: less than 100 'er cent offset *4447 #ssu"ing 'erfect hedge effecti!eness )89 Cas( f*o, (edges -edge accounting: non,deri!ati!e "onetary asset or non deri!ati!e *4541 "onetary lia(ility used as a hedging instru"ent *4542 ash flo& hedges: 'erfor"ance of hedging instru"ent ;1< *4543 ash flo& hedges: 'erfor"ance of hedging instru"ent ;2< ash flo& hedges: forecast transaction occurs (efore the s'ecified *4544 'eriod ash flo& hedges: "easuring effecti!eness for a hedge of a *4545 forecast transaction in a de(t instru"ent ash flo& hedges: fir" co""it"ent to 'urchase in!entory in a *454$ foreign currency )8; !edges% ot(er issues -edge accounting: "anage"ent of interest rate ris> in financial *4$41 institutions -edge accounting considerations &hen interest rate ris> is *4$42 "anaged on a net (asis *4$43 Illustrati!e e8a"'le of a''lying the a''roach in .uestion *4$42 -edge accounting: 're"iu" or discount on for&ard e8change *4$44 contract Ind #) 39 and Ind #) 21 *air !alue hedge of asset "easured at *4$45 cost 121

SEC0IO# 2 O0!ER +41 Disclosure of changes in fair !alue Ind #) 39 and Ind #) 7 -edge accounting: state"ents of cash +42 flo&s

122

2uidance on imp*ementing Ind AS 39 Financial Instruments: Recognition and Measurement

This guidance accompanies, $ut is not part of,Ind A) 7-+

Section A Scope
A83 "ractice of sett*ing net% for,ard contract to purc(ase a commodit.
Entit. $IJ enters into a fi&ed price for,ard contract to purc(ase one mi**ion @i*ograms of copper in accordance ,it( its e&pected usage re-uirements8 0(e contract permits $IJ to ta@e p(.sica* de*iver. of t(e copper at t(e end of t,e*ve mont(s or to pa. or receive a net sett*ement in cas(4 based on t(e c(ange in fair va*ue of copper8 Is t(e contract accounted for as a derivativeF Bhile such a contract "eets the definition of a deri!ati!e6 it is not necessarily accounted for as a deri!ati!e4 The contract is a deri!ati!e instru"ent (ecause there is no initial net in!est"ent6 the contract is (ased on the 'rice of co''er6 and it is to (e settled at a future date4 -o&e!er6 if UKW intends to settle the contract (y ta>ing deli!ery and has no history for si"ilar contracts of settling net in cash or of ta>ing deli!ery of the co''er and selling it &ithin a short 'eriod after deli!ery for the 'ur'ose of generating a 'rofit fro" short,ter" fluctuations in 'rice or dealer?s "argin6 the contract is not accounted for as a deri!ati!e under Ind #) 394 Instead6 it is accounted for as an e8ecutory contract4

A85 Option to put a nonAfinancia* asset

Entit. $IJ o,ns an office bui*ding8 $IJ enters into a put option ,it( an investor t(at permits $IJ to put t(e bui*ding to t(e investor for Rs839> mi**ion8 0(e current va*ue of t(e bui*ding is Rs8369 mi**ion8 0(e option e&pires in five .ears8 0(e option4 if e&ercised4 ma. be sett*ed t(roug( p(.sica* de*iver. or net cas(4 at $IJ?s option8 !o, do bot( $IJ and t(e investor account for t(e optionF UKW?s accounting de'ends on UKW?s intention and 'ast 'ractice for settle"ent4 #lthough the contract "eets the definition of a deri!ati!e6 UKW does not account for it as a deri!ati!e if UKW intends to settle the contract (y deli!ering the (uilding if UKW e8ercises its o'tion and there is no 'ast 'ractice of settling net ;Ind #) 3945 and Ind #) 394#+10<4 The in!estor6 ho&e!er6 cannot conclude that the o'tion &as entered into to "eet the in!estor?s e8'ected 'urchase6 sale or usage require"ents (ecause the in!estor does not ha!e the a(ility to require deli!ery ;Ind #) 3947<4 In addition6 the o'tion "ay (e settled net in cash4 Therefore6 the in!estor has to account for the contract as a deri!ati!e4 %egardless of 'ast 'ractices6 the in!estor?s intention does not affect &hether settle"ent is (y deli!ery or in cash4 The in!estor has &ritten an o'tion6 and a &ritten o'tion in &hich the holder has a choice of 'hysical settle"ent or net cash settle"ent can ne!er satisfy the nor"al deli!ery require"ent for the e8e"'tion fro" Ind #) 39 (ecause the o'tion &riter does not ha!e the a(ility to require deli!ery4 -o&e!er6 if the contract &ere a for&ard contract rather than an o'tion6 and if the contract required 'hysical deli!ery and the re'orting entity had no 'ast 'ractice of settling net in

123

cash or of ta>ing deli!ery of the (uilding and selling it &ithin a short 'eriod after deli!ery for the 'ur'ose of generating a 'rofit fro" short,ter" fluctuations in 'rice or dealer?s "argin6 the contract &ould not (e accounted for as a deri!ati!e4

Section ' Definitions

'83 Definition of a financia* instrument% go*d bu**ion
Is go*d bu**ion a financia* instrument (*i@e cas() or is it a commodit.F It is a co""odity4 #lthough (ullion is highly liquid6 there is no contractual right to recei!e cash or another financial asset inherent in (ullion4

'85 Definition of a derivative% e&amp*es of derivatives and under*.ings

C(at are e&amp*es of common derivative contracts and t(e identified under*.ingF Ind #) 39 defines a deri!ati!e as follo&s: A deri!ati!e is a financia* instrument or ot(er contract ,it(in t(e scope of t(is Standard ,it( a** t(ree of t(e fo**o,ing c(aracteristics% ;a< its va*ue c(anges in response to t(e c(ange in a specified interest rate4 financia* instrument price4 commodit. price4 foreign e&c(ange rate4 inde& of prices or rates4 credit rating or credit inde&4 or ot(er variab*e4 provided in t(e case of a nonAfinancia* variab*e t(at t(e variab*e is not specific to a part. to t(e contract (sometimes ca**ed t(e Bunder*.ing?)= it re-uires no initia* net investment or an initia* net investment t(at is sma**er t(an ,ou*d be re-uired for ot(er t.pes of contracts t(at ,ou*d be e&pected to (ave a simi*ar response to c(anges in mar@et factors= and it is sett*ed at a future date8 0.pe of contract

;(<

;c<

ain pricingAsett*ement variab*e (under*.ing variab*e) Interest rate s&a' Interest rates urrency s&a' ;foreign e8change s&a'< urrency rates o""odity s&a' o""odity 'rices 1quity s&a' 1quity 'rices ;equity of another entity< redit rating6 credit inde8 or credit redit s&a' 'rice Total fair !alue of the reference asset Total return s&a' and interest rates Durchased or &ritten treasury (ond Interest rates o'tion ;call or 'ut< Durchased or &ritten currency o'tion ;call urrency rates

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or 'ut< Durchased or &ritten co""odity o'tion ;call or 'ut< Durchased or &ritten stoc> o'tion ;call or 'ut< Interest rate futures lin>ed to go!ern"ent de(t ;treasury futures< urrency futures o""odity futures Interest rate for&ard lin>ed to go!ern"ent de(t ;treasury for&ard< urrency for&ard o""odity for&ard 1quity for&ard

o""odity 'rices 1quity 'rices ;equity of another entity< Interest rates urrency rates o""odity 'rices Interest rates urrency rates o""odity 'rices 1quity 'rices ;equity of another entity<

The a(o!e list 'ro!ides e8a"'les of contracts that nor"ally qualify as deri!ati!es under Ind #) 394 The list is not e8hausti!e4 #ny contract that has an underlying "ay (e a deri!ati!e4 3oreo!er6 e!en if an instru"ent "eets the definition of a deri!ati!e contract6 s'ecial 'ro!isions of Ind #) 39 "ay a''ly6 for e8a"'le6 if it is a &eather deri!ati!e ;seeInd #) 394#+1<6 a contract to (uy or sell a non,financial ite" such as co""odity ;see Ind #) 3945 and Ind #) 394#+10< or a contract settled in an entity?s o&n shares ;see Ind #) 32421Ind #) 32424<4 Therefore6 an entity "ust e!aluate the contract to deter"ine &hether the other characteristics of a deri!ati!e are 'resent and &hether s'ecial 'ro!isions a''ly4

'83 Definition of a derivative% sett*ement at a future date4 interest rate s,ap ,it( net or gross sett*ement
)or t(e purpose of determining ,(et(er an interest rate s,ap is a derivative financia* instrument under Ind AS 394 does it ma@e a difference ,(et(er t(e parties pa. t(e interest pa.ments to eac( ot(er (gross sett*ement) or sett*e on a net basisF Ho4 The definition of a deri!ati!e does not de'end on gross or net settle"ent4 To illustrate: 1ntity #/ enters into an interest rate s&a' &ith a counter'arty ;UKW< that requires #/ to 'ay a fi8ed rate of 8 'er cent and recei!e a !aria(le a"ount (ased on three,"onth 3I/@%6 reset on a quarterly (asis4 The fi8ed and !aria(le a"ounts are deter"ined (ased on a %s4100 "illion notional a"ount4 #/ and UKW do not e8change the notional a"ount4 #/ 'ays or recei!es a net cash a"ount each quarter (ased on the difference (et&een 8 'er cent and three,"onth 3I/@%4 #lternati!ely6 settle"ent "ay (e on a gross (asis4 The contract "eets the definition of a deri!ati!e regardless of &hether there is net or gross settle"ent (ecause its !alue changes in res'onse to changes in an underlying !aria(le ;3I/@%<6 there is no initial net in!est"ent6 and settle"ents occur at future dates4

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'8< Definition of a derivative% prepaid interest rate s,ap (fi&ed rate pa.ment ob*igation prepaid at inception or subse-uent*.)
If a part. prepa.s its ob*igation under a pa.Afi&ed4 receiveAvariab*e interest rate s,ap at inception4 is t(e s,ap a derivative financia* instrumentF Kes4 To illustrate: 1ntity ) enters into a %s4100 "illion notional a"ount fi!e,year 'ay,fi8ed6 recei!e,!aria(le interest rate s&a' &ith ounter'arty 4 The interest rate of the !aria(le 'art of the s&a' is reset on a quarterly (asis to three,"onth 3I/@%,4 The interest rate of the fi8ed 'art of the s&a' is 10 'er cent 'er year4 1ntity ) 're'ays its fi8ed o(ligation under the s&a' of %s450 "illion ;%s4100 "illion O 10 'er cent O 5 years< at ince'tion6 discounted using "ar>et interest rates6 &hile retaining the right to recei!e interest 'ay"ents on the %s4100 "illion reset quarterly (ased on three,"onth 3I/@% o!er the life of the s&a'4 The initial net in!est"ent in the interest rate s&a' is significantly less than the notional a"ount on &hich the !aria(le 'ay"ents under the !aria(le leg &ill (e calculated4 The contract requires an initial net in!est"ent that is s"aller than &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors6 such as a !aria(le rate (ond4 Therefore6 the contract fulfils the Eno initial net in!est"ent or an initial net in!est"ent that is s"aller than &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors? 'ro!ision of Ind #) 394 1!en though 1ntity ) has no future 'erfor"ance o(ligation6 the ulti"ate settle"ent of the contract is at a future date and the !alue of the contract changes in res'onse to changes in the 3I/@% inde84 #ccordingly6 the contract is regarded as a deri!ati!e contract4 Cou*d t(e ans,er c(ange if t(e fi&ed rate pa.ment ob*igation is prepaid subse-uent to initia* recognitionF If the fi8ed leg is 're'aid during the ter"6 that &ould (e regarded as a ter"ination of the old s&a' and an origination of a ne& instru"ent that is e!aluated under Ind #) 394

'89 Definition of a derivative% prepaid pa.Avariab*e4 receiveAfi&ed interest rate s,ap

If a part. prepa.s its ob*igation under a pa.Avariab*e4 receiveAfi&ed interest rate s,ap at inception of t(e contract or subse-uent*.4 is t(e s,ap a derivative financia* instrumentF Ho4 # 're'aid 'ay,!aria(le6 recei!e,fi8ed interest rate s&a' is not a deri!ati!e if it is 're'aid at ince'tion and it is no longer a deri!ati!e if it is 're'aid after ince'tion (ecause it 'ro!ides a return on the 're'aid ;in!ested< a"ount co"'ara(le to the return on a de(t instru"ent &ith fi8ed cash flo&s4 The 're'aid a"ount fails the Eno initial net in!est"ent or an initial net in!est"ent that is s"aller than &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors? criterion of a deri!ati!e4 To illustrate: 1ntity ) enters into a %s4100 "illion notional a"ount fi!e,year 'ay,!aria(le6 recei!e,fi8ed interest rate s&a' &ith ounter'arty 4 The !aria(le leg of the s&a' is

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reset on a quarterly (asis to three,"onth 3I/@%4 The fi8ed interest 'ay"ents under the s&a' are calculated as 10 'er cent ti"es the s&a'?s notional a"ount6 ie %s410 "illion 'er year4 1ntity ) 're'ays its o(ligation under the !aria(le leg of the s&a' at ince'tion at current "ar>et rates6 &hile retaining the right to recei!e fi8ed interest 'ay"ents of 10 'er cent on %s4100 "illion 'er year4 The cash inflo&s under the contract are equi!alent to those of a financial instru"ent &ith a fi8ed annuity strea" since 1ntity ) >no&s it &ill recei!e %s410 "illion 'er year o!er the life of the s&a'4 Therefore6 all else (eing equal6 the initial in!est"ent in the contract should equal that of other financial instru"ents that consist of fi8ed annuities4 Thus6 the initial net in!est"ent in the 'ay,!aria(le6 recei!e,fi8ed interest rate s&a' is equal to the in!est"ent required in a non,deri!ati!e contract that has a si"ilar res'onse to changes in "ar>et conditions4 *or this reason6 the instru"ent fails the Eno initial net in!est"ent or an initial net in!est"ent that is s"aller than &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors? criterion of Ind #) 394 Therefore6 the contract is not accounted for as a deri!ati!e under Ind #) 394 /y discharging the o(ligation to 'ay !aria(le interest rate 'ay"ents6 1ntity ) in effect 'ro!ides a loan to ounter'arty 4

'8; Definition of a derivative% offsetting *oans

Entit. A ma@es a fiveA.ear fi&ed rate *oan to Entit. '4 ,(i*e ' at t(e same time ma@es a fiveA.ear variab*e rate *oan for t(e same amount to A8 0(ere are no transfers of principa* at inception of t(e t,o *oans4 since A and ' (ave a netting agreement8 Is t(is a derivative under Ind AS 39F Kes4 This "eets the definition of a deri!ati!e ;that is to say6 there is an underlying !aria(le6 no initial net in!est"ent or an initial net in!est"ent that is s"aller than &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors6 and future settle"ent<4 The contractual effect of the loans is the equi!alent of an interest rate s&a' arrange"ent &ith no initial net in!est"ent4 Hon,deri!ati!e transactions are aggregated and treated as a deri!ati!e &hen the transactions result6 in su(stance6 in a deri!ati!e4 Indicators of this &ould include: they are entered into at the sa"e ti"e and in conte"'lation of one another they ha!e the sa"e counter'arty they relate to the sa"e ris> there is no a''arent econo"ic need or su(stanti!e (usiness 'ur'ose for structuring the transactions se'arately that could not also ha!e (een acco"'lished in a single transaction4 The sa"e ans&er &ould a''ly if 1ntity # and 1ntity / did not ha!e a netting agree"ent6 (ecause the definition of a deri!ati!e instru"ent in Ind #) 3949 does not require net settle"ent4

'86 Definition of a derivative% option not e&pected to be e&ercised

0(e definition of a derivative in Ind AS 3989 re-uires t(at t(e instrument Bis sett*ed at a future date?8 Is t(is criterion met even if an option is e&pected not to be e&ercised4 for e&amp*e4 because it is out of t(e mone.F

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Kes4 #n o'tion is settled u'on e8ercise or at its "aturity4 18'iry at "aturity is a for" of settle"ent e!en though there is no additional e8change of consideration4

'87 Definition of a derivative% foreign currenc. contract based on sa*es vo*ume

Entit. $IJ4 ,(ose functiona* currenc. is t(e /S do**ar4 se**s products in )rance denominated in euro8 $IJ enters into a contract ,it( an investment ban@ to convert euro to /S do**ars at a fi&ed e&c(ange rate8 0(e contract re-uires $IJ to remit euro based on its sa*es vo*ume in )rance in e&c(ange for /S do**ars at a fi&ed e&c(ange rate of ;8>>8 Is t(at contract a derivativeF Kes4 The contract has t&o underlying !aria(les ;the foreign e8change rate and the !olu"e of sales<6 no initial net in!est"ent or an initial net in!est"ent that is s"aller than &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors6 and a 'ay"ent 'ro!ision4 Ind #) 39 does not e8clude fro" its sco'e deri!ati!es that are (ased on sales !olu"e4

'89 Definition of a derivative% prepaid for,ard

An entit. enters into a for,ard contract to purc(ase s(ares of stoc@ in one .ear at t(e for,ard price8 It prepa.s at inception based on t(e current price of t(e s(ares8 Is t(e for,ard contract a derivativeF Ho4 The for&ard contract fails the Eno initial net in!est"ent or an initial net in!est"ent that is s"aller than &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors? test for a deri!ati!e4 To illustrate: 1ntity UKW enters into a for&ard contract to 'urchase one "illion T ordinary shares in one year4 The current "ar>et 'rice of T is %s450 'er share= the one,year for&ard 'rice of T is %s455 'er share4 UKW is required to 're'ay the for&ard contract at ince'tion &ith a %s450 "illion 'ay"ent4 The initial in!est"ent in the for&ard contract of %s450 "illion is less than the notional a"ount a''lied to the underlying6 one "illion shares at the for&ard 'rice of %s455 'er share6 ie %s455 "illion4 -o&e!er6 the initial net in!est"ent a''ro8i"ates the in!est"ent that &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors (ecause T?s shares could (e 'urchased at ince'tion for the sa"e 'rice of %s4504 #ccordingly6 the 're'aid for&ard contract does not "eet the initial net in!est"ent criterion of a deri!ati!e instru"ent4

'83> Definition of a derivative% initia* net investment

an. derivative instruments4 suc( as futures contracts and e&c(ange traded ,ritten options4 re-uire margin accounts8 Is t(e margin account part of t(e initia* net investmentF Ho4 The "argin account is not 'art of the initial net in!est"ent in a deri!ati!e instru"ent4 3argin accounts are a for" of collateral for the counter'arty or clearing house and "ay ta>e the for" of cash6 securities or other s'ecified assets6 ty'ically liquid assets4 3argin accounts are se'arate assets that are accounted for se'arately4

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'833 Definition of (e*d for trading% portfo*io ,it( a recent actua* pattern of s(ortAterm profitAta@ing
0(e definition of a financia* asset or financia* *iabi*it. (e*d for trading states t(at Ba financia* asset or financia* *iabi*it. is c*assified as (e*d for trading if it is K part of a portfo*io of identified financia* instruments t(at are managed toget(er and for ,(ic( t(ere is evidence of a recent actua* pattern of s(ortAterm profitAta@ing?8 C(at is a Bportfo*io? for t(e purposes of app*.ing t(is definitionF #lthough the ter" E'ortfolio? is not e8'licitly defined in Ind #) 396 the conte8t in &hich it is used suggests that a 'ortfolio is a grou' of financial assets or financial lia(ilities that are "anaged as 'art of that grou' ;Ind #) 3949<4 If there is e!idence of a recent actual 'attern of short,ter" 'rofit,ta>ing on financial instru"ents included in such a 'ortfolio6 those financial instru"ents qualify as held for trading e!en though an indi!idual financial instru"ent "ay in fact (e held for a longer 'eriod of ti"e4

'835 Definition of (e*d for trading% ba*ancing a portfo*io

Entit. A (as an investment portfo*io of debt and e-uit. instruments8 0(e documented portfo*io management guide*ines specif. t(at t(e e-uit. e&posure of t(e portfo*io s(ou*d be *imited to bet,een 3> and 9> per cent of tota* portfo*io va*ue8 0(e investment manager of t(e portfo*io is aut(orised to ba*ance t(e portfo*io ,it(in t(e designated guide*ines b. bu.ing and se**ing e-uit. and debt instruments8 Is Entit. A permitted to c*assif. t(e instruments as avai*ab*e for sa*eF It de'ends on 1ntity #?s intentions and 'ast 'ractice4 If the 'ortfolio "anager is authorised to (uy and sell instru"ents to (alance the ris>s in a 'ortfolio6 (ut there is no intention to trade and there is no 'ast 'ractice of trading for short,ter" 'rofit6 the instru"ents can (e classified as a!aila(le for sale4 If the 'ortfolio "anager acti!ely (uys and sells instru"ents to generate short,ter" 'rofits6 the financial instru"ents in the 'ortfolio are classified as held for trading4

'833 Definition of (e*dAtoAmaturit. financia* assets% inde&A*in@ed principa*

Entit. A purc(ases a fiveA.ear e-uit.Ainde&A*in@ed note ,it( an origina* issue price of Rs83> at a mar@et price of Rs835 at t(e time of purc(ase8 0(e note re-uires no interest pa.ments before maturit.8 At maturit.4 t(e note re-uires pa.ment of t(e origina* issue price of Rs83> p*us a supp*ementa* redemption amount t(at depends on ,(et(er a specified s(are price inde& e&ceeds a predetermined *eve* at t(e maturit. date8 If t(e s(are inde& does not e&ceed or is e-ua* to t(e predetermined *eve*4 no supp*ementa* redemption amount is paid8 If t(e s(are inde& e&ceeds t(e predetermined *eve*4 t(e supp*ementa* redemption amount e-ua*s t(e product of 3839 and t(e difference bet,een t(e *eve* of t(e s(are inde& at maturit. and t(e *eve* of t(e s(are inde& ,(en t(e note ,as issued divided b. t(e *eve* of t(e s(are inde& at t(e time of issue8 Entit. A (as t(e positive intention and abi*it. to (o*d t(e note to maturit.8 Can Entit. A c*assif. t(e note as a (e*dAtoA maturit. investmentF

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Kes4 The note can (e classified as a held,to,"aturity in!est"ent (ecause it has a fi8ed 'ay"ent of %s410 and fi8ed "aturity and 1ntity # has the 'ositi!e intention and a(ility to hold it to "aturity ;Ind #) 3949<4 -o&e!er6 the equity inde8 feature is a call o'tion not closely related to the de(t host6 &hich "ust (e se'arated as an e"(edded deri!ati!e under Ind #) 394114 The 'urchase 'rice of %s412 is allocated (et&een the host de(t instru"ent and the e"(edded deri!ati!e4 *or e8a"'le6 if the fair !alue of the e"(edded o'tion at acquisition is %s446 the host de(t instru"ent is "easured at %s48 on initial recognition4 In this case6 the discount of %s42 that is i"'licit in the host (ond ;'rinci'al of %s410 "inus the original carrying a"ount of %s48< is a"ortised to 'rofit or loss o!er the ter" to "aturity of the note using the effecti!e interest "ethod4

'83< Definition of (e*dAtoAmaturit. financia* assets% inde&A*in@ed interest

Can a bond ,it( a fi&ed pa.ment at maturit. and a fi&ed maturit. date be c*assified as a (e*dAtoAmaturit. investment if t(e bond?s interest pa.ments are inde&ed to t(e price of a commodit. or e-uit.4 and t(e entit. (as t(e positive intention and abi*it. to (o*d t(e bond to maturit.F Kes4 -o&e!er6 the co""odity,inde8ed or equity,inde8ed interest 'ay"ents result in an e"(edded deri!ati!e that is se'arated and accounted for as a deri!ati!e at fair !alue ;Ind #) 39411<4 Ind #) 39412 is not a''lica(le since it should (e straightfor&ard to se'arate the host de(t in!est"ent ;the fi8ed 'ay"ent at "aturity< fro" the e"(edded deri!ati!e ;the inde8,lin>ed interest 'ay"ents<4

'839 Definition of (e*dAtoAmaturit. financia* assets% sa*e fo**o,ing rating do,ngrade

Cou*d a sa*e of a (e*dAtoAmaturit. investment fo**o,ing a do,ngrade of t(e issuer?s credit rating b. a rating agenc. raise a -uestion about t(e entit.?s intention to (o*d ot(er investments to maturit.F Hot necessarily4 # do&ngrade is li>ely to indicate a decline in the issuer?s credit&orthiness4 Ind #) 39 s'ecifies that a sale due to a significant deterioration in the issuer?s credit&orthiness could satisfy the condition in Ind #) 39 and therefore not raise a question a(out the entity?s intention to hold other in!est"ents to "aturity4 -o&e!er6 the deterioration in credit&orthiness "ust (e significant 5udged (y reference to the credit rating at initial recognition4 #lso6 the rating do&ngrade "ust not ha!e (een reasona(ly antici'ated &hen the entity classified the in!est"ent as held to "aturity in order to "eet the condition inInd #) 394 # credit do&ngrade of a notch &ithin a class or fro" one rating class to the i""ediately lo&er rating class could often (e regarded as reasona(ly antici'ated4 If the rating do&ngrade in co"(ination &ith other infor"ation 'ro!ides e!idence of i"'air"ent6 the deterioration in credit&orthiness often &ould (e regarded as significant4

'83; Definition of (e*dAtoAmaturit. financia* assets% permitted sa*es

Cou*d sa*es of (e*dAtoAmaturit. financia* assets due to a c(ange in management compromise t(e c*assification of ot(er financia* assets as (e*d to maturit.F

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Kes4 # change in "anage"ent is not identified under Ind #) 394#+22 as an instance &here sales or transfers fro" held,to,"aturity do not co"'ro"ise the classification as held to "aturity4 )ales in res'onse to such a change in "anage"ent &ould6 therefore6 call into question the entity?s intention to hold in!est"ents to "aturity4 To illustrate: 1ntity U has a 'ortfolio of financial assets that is classified as held to "aturity4 In the current 'eriod6 at the direction of the (oard of directors6 the senior "anage"ent tea" has (een re'laced4 The ne& "anage"ent &ishes to sell a 'ortion of the held,to,"aturity financial assets in order to carry out an e8'ansion strategy designated and a''ro!ed (y the (oard4 #lthough the 're!ious "anage"ent tea" had (een in 'lace since the entity?s ince'tion and 1ntity U had ne!er (efore undergone a "a5or restructuring6 the sale ne!ertheless calls into question 1ntity U?s intention to hold re"aining held,to,"aturity financial assets to "aturity4

'836 Definition of (e*dAtoAmaturit. investments% sa*es in response to entity,speci+ic capita* re-uirements

In some countries4 regu*ators of ban@s or ot(er industries ma. set entity,speci+ic capita* re-uirements t(at are based on an assessment of t(e ris@ in t(at particu*ar entit.8Ind AS 398A255(e) indicates t(at an entit. t(at se**s (e*dAtoAmaturit. investments in response to an unanticipated significant increase b. t(e regu*ator in t(e industry3s capita* re-uirements ma. do so under Ind AS 39 ,it(out necessari*. raising a -uestion about its intention to (o*d ot(er investments to maturit.8 Cou*d sa*es of (e*dAtoAmaturit. investments t(at are due to a significant increase in entity,speci+ic capita* re-uirements imposed b. regu*ators (ie capita* re-uirements app*icab*e to a particu*ar entit.4 but not to t(e industr.) raise suc( doubtF Kes6 such sales Etaint? the entity?s intention to hold other financial assets as held to "aturity unless it can (e de"onstrated that the sales fulfil the condition in Ind #) 3949 in that they result fro" an increase in ca'ital require"ents6 &hich is an isolated e!ent that is (eyond the entity?s control6 is non,recurring and could not ha!e (een reasona(ly antici'ated (y the entity4 ??

'837 Definition of (e*dAtoAmaturit. financia* assets% p*edged co**atera*4 repurc(ase agreements (repos) and securities *ending agreements
An entit. cannot (ave a demonstrated abi*it. to (o*d to maturit. an investment if it is subject to a constraint t(at cou*d frustrate its intention to (o*d t(e financia* asset to maturit.8 Does t(is mean t(at a debt instrument t(at (as been p*edged as co**atera*4 or transferred to anot(er part. under a repo or securities *ending transaction4 and continues to be recognised cannot be c*assified as a (e*dAtoA maturit. investmentF Ho4 #n entity?s intention and a(ility to hold de(t instru"ents to "aturity is not necessarily constrained if those instru"ents ha!e (een 'ledged as collateral or are su(5ect to a re'urchase agree"ent or securities lending agree"ent4 -o&e!er6 an entity does not ha!e the 'ositi!e intention and a(ility to hold the de(t instru"ents until "aturity if it does not e8'ect to (e a(le to "aintain or reco!er access to the instru"ents4

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'839 Definition of (e*dAtoAmaturit. financia* assets% Btainting?

In response to unso*icited tender offers4 Entit. A se**s a significant amount of financia* assets c*assified as (e*d to maturit. on economica**. favourab*e terms8 Entit. A does not c*assif. an. financia* assets ac-uired after t(e date of t(e sa*e as (e*d to maturit.8 !o,ever4 it does not rec*assif. t(e remaining (e*dAtoAmaturit. investments since it maintains t(at it sti** intends to (o*d t(em to maturit.8 Is Entit. A in comp*iance ,it( Ind AS 39F Ho4 Bhene!er a sale or transfer of "ore than an insignificant a"ount of financial assets classified as held to "aturity ;-T3< results in the conditions in Ind #) 3949 and Ind #) 394#+22 not (eing satisfied6 no instru"ents should (e classified in that category4 #ccordingly6 any re"aining -T3 assets are reclassified as a!aila(le,for,sale financial assets4 The reclassification is recorded in the re'orting 'eriod in &hich the sales or transfers occurred and is accounted for as a change in classification under Ind #) 394514 Ind #) 3949 "a>es it clear that at least t&o full financial years "ust 'ass (efore an entity can again classify financial assets as -T34

'85> Definition of (e*dAtoAmaturit. investments% subA categorisation for t(e purpose of app*.ing t(e Btainting? ru*e
Can an entit. app*. t(e conditions for (e*dAtoAmaturit. c*assification in Ind AS 3989 separate*. to different categories of (e*dAtoAmaturit. financia* assets4 suc( as debt instruments denominated in /S do**ars and debt instruments denominated in euroF Ho4 The Etainting rule? in Ind #) 3949 is clear4 If an entity has sold or reclassified "ore than an insignificant a"ount of held,to,"aturity in!est"ents6 it cannot classify any financial assets as held,to,"aturity financial assets4

'853 Definition of (e*dAtoAmaturit. investments% app*ication of t(e Btainting? ru*e on conso*idation

Can an entit. app*. t(e conditions in Ind AS 3989 separate*. to (e*dAtoAmaturit. financia* assets (e*d b. different entities in a conso*idated group4 for e&amp*e4 if t(ose group entities are in different countries ,it( different *ega* or economic environmentsF Ho4 If an entity has sold or reclassified "ore than an insignificant a"ount of in!est"ents classified as held,to,"aturity in the consolidated financial state"ents6 it cannot classify any financial assets as held,to,"aturity financial assets in the consolidated financial state"ents unless the conditions in Ind #) 3949 are "et4

'855 Definition of *oans and receivab*es% e-uit. instrument

Can an e-uit. instrument4 suc( as a preference s(are4 ,it( fi&ed or determinab*e pa.ments be c*assified ,it(in *oans and receivab*es b. t(e (o*derF Kes4 If a non,deri!ati!e equity instru"ent &ould (e recorded as a lia(ility (y the issuer6 and it has fi8ed or deter"ina(le 'ay"ents and is not quoted in an acti!e "ar>et6 it can (e classified &ithin loans and recei!a(les (y the holder6 'ro!ided the definition is other&ise "et4 Ind #) 32415Ind #) 32422 'ro!ide guidance a(out the classification of a

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financial instru"ent as a lia(ility or as equity fro" the 'ers'ecti!e of the issuer of a financial instru"ent4 If an instru"ent "eets the definition of an equity instru"ent under Ind #) 326 it cannot (e classified &ithin loans and recei!a(les (y the holder4

'853 Definition of *oans and receivab*es% ban@s? deposits in ot(er ban@s

'an@s ma@e term deposits ,it( a centra* ban@ or ot(er ban@s8 Sometimes4 t(e proof of deposit is negotiab*e4 sometimes not8 Even if negotiab*e4 t(e depositor ban@ ma. or ma. not intend to se** it8 Cou*d suc( a deposit fa** ,it(in *oans and receivab*es under Ind AS 3989F )uch a de'osit "eets the definition of loans and recei!a(les6 &hether or not the 'roof of de'osit is negotia(le6 unless the de'ositor (an> intends to sell the instru"ent i""ediately or in the near ter"6 in &hich case the de'osit is classified as a financial asset held for trading4

'85< Definition of amortised cost% perpetua* debt instruments ,it( fi&ed or mar@etAbased variab*e rate
Sometimes entities purc(ase or issue debt instruments t(at are re-uired to be measured at amortised cost and in respect of ,(ic( t(e issuer (as no ob*igation to repa. t(e principa* amount8 Interest ma. be paid eit(er at a fi&ed rate or at a variab*e rate8 Cou*d t(e difference bet,een t(e initia* amount paid or received and Lero (Bt(e maturit. amount?) be amortised immediate*. on initia* recognition for t(e purpose of determining amortised cost if t(e rate of interest is fi&ed or specified as a mar@etAbased variab*e rateF Ho4 )ince there are no re'ay"ents of 'rinci'al6 there is no a"ortisation of the difference (et&een the initial a"ount and the "aturity a"ount if the rate of interest is fi8ed or s'ecified as a "ar>et,(ased !aria(le rate4 /ecause interest 'ay"ents are fi8ed or "ar>et,(ased and &ill (e 'aid in 'er'etuity6 the a"ortised cost ;the 'resent !alue of the strea" of future cash 'ay"ents discounted at the effecti!e interest rate< equals the 'rinci'al a"ount in each 'eriod ;Ind #) 3949<4

'859 Definition of amortised cost% perpetua* debt instruments ,it( decreasing interest rate
If t(e stated rate of interest on a perpetua* debt instrument decreases over time4 ,ou*d amortised cost e-ua* t(e principa* amount in eac( periodF Ho4 *ro" an econo"ic 'ers'ecti!e6 so"e or all of the interest 'ay"ents are re'ay"ents of the 'rinci'al a"ount4 *or e8a"'le6 the interest rate "ay (e stated as 1$ 'er cent for the first ten years and as Jero 'er cent in su(sequent 'eriods4 In that case6 the initial a"ount is a"ortised to Jero o!er the first ten years using the effecti!e interest "ethod6 since a 'ortion of the interest 'ay"ents re'resents re'ay"ents of the 'rinci'al a"ount4 The a"ortised cost is Jero after year 10 (ecause the 'resent !alue of the strea" of future cash 'ay"ents in su(sequent 'eriods is Jero ;there are no further cash 'ay"ents of either 'rinci'al or interest in su(sequent 'eriods<4

'85; E&amp*e of ca*cu*ating amortised cost% financia* asset

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)inancia* assets t(at are e&c*uded from fair va*uation and (ave a fi&ed maturit. s(ou*d be measured at amortised cost8 !o, is amortised cost ca*cu*atedF Fnder Ind #) 396 a"ortised cost is calculated using the effecti!e interest "ethod4 The effecti!e interest rate inherent in a financial instru"ent is the rate that e8actly discounts the esti"ated cash flo&s associated &ith the financial instru"ent through the e8'ected life of the instru"ent or6 &here a''ro'riate6 a shorter 'eriod to the net carrying a"ount at initial recognition4 The co"'utation includes all fees and 'oints 'aid or recei!ed that are an integral 'art of the effecti!e interest rate6 directly attri(uta(le transaction costs and all other 're"iu"s or discounts4 The follo&ing e8a"'le illustrates ho& a"ortised cost is calculated using the effecti!e interest "ethod4 1ntity # 'urchases a de(t instru"ent &ith fi!e years re"aining to "aturity for its fair !alue of %s416000 ;including transaction costs<4 The instru"ent has a 'rinci'al a"ount of %s416250 and carries fi8ed interest of 447 'er cent that is 'aid annually ;%s416250 O 447 'er cent X %s459 'er year<4 The contract also s'ecifies that the (orro&er has an o'tion to 're'ay the instru"ent and that no 'enalty &ill (e charged for 're'ay"ent4 #t ince'tion6 the entity e8'ects the (orro&er not to 're'ay4 It can (e sho&n that in order to allocate interest recei'ts and the initial discount o!er the ter" of the de(t instru"ent at a constant rate on the carrying a"ount6 they "ust (e accrued at the rate of 10 'er cent annually4 The ta(le (elo& 'ro!ides infor"ation a(out the a"ortised cost6 interest inco"e and cash flo&s of the de(t instru"ent in each re'orting 'eriod4 Iear (a) Amortised cost at t(e beginning of t(e .ear 16000 16041 1608$ 1613$ 16190 (b M a N 3>O) Interest income 100 104 109 113 119 (c) Cas( f*o,s 59 59 59 59 16250 N 59 (d M a P b : c) Amortised cost at t(e end of t(e .ear 16041 1608$ 1613$ 16190

20U0 20U1 20U2 20U3 20U4

@n the first day of 20U2 the entity re!ises its esti"ate of cash flo&s4 It no& e8'ects that 50 'er cent of the 'rinci'al &ill (e 're'aid at the end of 20U2 and the re"aining 50 'er cent at the end of 20U44 In accordance &ith Ind #) 394#+86 the o'ening (alance of the de(t instru"ent in 20U2 is ad5usted4 The ad5usted a"ount is calculated (y discounting the a"ount the entity e8'ects to recei!e in 20U2 and su(sequent years using the original effecti!e interest rate ;10 'er cent<4 This results in the ne& o'ening (alance in 20U2 of %s411384 The ad5ust"ent of %s452 ;%s416138 %s41608$< is recorded in 'rofit or loss in 20U24 The ta(le (elo& 'ro!ides infor"ation a(out the a"ortised cost6 interest inco"e and cash flo&s as they &ould (e ad5usted ta>ing into account the change in esti"ate. Iear (a) (b M a N 3>O) Amortised cost Interest income at t(e beginning of t(e .ear 16000 100 (c) Cas( f*o,s 59 (d M a P b : c) Amortised cost at t(e end of t(e .ear 16041

20U0

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20U1 20U2 20U3 20U4

16041 1608$ N 52 5$8 595

104 114 57 $0

59 $25 N 59 30 $25 N 30

1608$ 5$8 595

If the de(t instru"ent (eco"es i"'aired6 say6 at the end of 20U36 the i"'air"ent loss is calculated as the difference (et&een the carrying a"ount ;%s4595< and the 'resent !alue of esti"ated future cash flo&s discounted at the original effecti!e interest rate ;10 'er cent<4

'856 E&amp*e of ca*cu*ating amortised cost% debt instruments ,it( stepped interest pa.ments
Sometimes entities purc(ase or issue debt instruments ,it( a predetermined rate of interest t(at increases or decreases progressive*. (Bstepped interest?) over t(e term of t(e debt instrument8 If a debt instrument ,it( stepped interest and no embedded derivative is issued at Rs83459> and (as a maturit. amount of Rs83459>4 ,ou*d t(e amortised cost e-ua* Rs83459> in eac( reporting period over t(e term of t(e debt instrumentF Ho4 #lthough there is no difference (et&een the initial a"ount and "aturity a"ount6 an entity uses the effecti!e interest "ethod to allocate interest 'ay"ents o!er the ter" of the de(t instru"ent to achie!e a constant rate on the carrying a"ount ;Ind #) 3949<4 The follo&ing e8a"'le illustrates ho& a"ortised cost is calculated using the effecti!e interest "ethod for an instru"ent &ith a 'redeter"ined rate of interest that increases or decreases o!er the ter" of the de(t instru"ent ;Este''ed interest?<4 @n 1 Ianuary 20U06 1ntity # issues a de(t instru"ent for a 'rice of %s4162504 The 'rinci'al a"ount is %s416250 and the de(t instru"ent is re'aya(le on 31 Dece"(er 20U44 The rate of interest is s'ecified in the de(t agree"ent as a 'ercentage of the 'rinci'al a"ount as follo&s: $40 'er cent in 20U0 ;%s475<6 840 'er cent in 2001 ;%s4100<6 1040 'er cent in 20U2 ;%s4125<6 1240 'er cent in 20U3 ;%s4150<6 and 1$44 'er cent in 20U4 ;%s4205<4 In this case6 the interest rate that e8actly discounts the strea" of future cash 'ay"ents through "aturity is 10 'er cent4 Therefore6 cash interest 'ay"ents are reallocated o!er the ter" of the de(t instru"ent for the 'ur'oses of deter"ining a"ortised cost in each 'eriod4 In each 'eriod6 the a"ortised cost at the (eginning of the 'eriod is "ulti'lied (y the effecti!e interest rate of 10 'er cent and added to the a"ortised cost4 #ny cash 'ay"ents in the 'eriod are deducted fro" the resulting nu"(er4 #ccordingly6 the a"ortised cost in each 'eriod is as follo&s: Iear (a) Amortised cost at t(e beginning of t(e .ear 16250 16300 16330 16338 16322 (b M a N 3>O) Interest income 125 130 133 134 133 (c) Cas( f*o,s 75 100 125 150 16250 N 205 (d M a P b : c) Amortised cost at t(e end of t(e .ear 16300 16330 16338 16322

20U0 20U1 20U2 20U3 20U4

'857 Regu*ar ,a. contracts% no estab*is(ed mar@et

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Can a contract to purc(ase a financia* asset be a regu*ar ,a. contract if t(ere is no estab*is(ed mar@et for trading suc( a contractF Kes4 Ind #) 3949 refers to ter"s that require deli!ery of the asset &ithin the ti"e fra"e esta(lished generally (y regulation or con!ention in the "ar>et'lace concerned4 3ar>et'lace6 as that ter" is used in Ind #) 39496 is not li"ited to a for"al stoc> e8change or organised o!er,the,counter "ar>et4 %ather6 it "eans the en!iron"ent in &hich the financial asset is custo"arily e8changed4 #n acce'ta(le ti"e fra"e &ould (e the 'eriod reasona(ly and custo"arily required for the 'arties to co"'lete the transaction and 're'are and e8ecute closing docu"ents4 *or e8a"'le6 a "ar>et for 'ri!ate issue financial instru"ents can (e a "ar>et'lace4

'859 Regu*ar ,a. contracts% for,ard contract

Entit. A'C enters into a for,ard contract to purc(ase one mi**ion of ?s ordinar. s(ares in t,o mont(s for Rs83> per s(are8 0(e contract is ,it( an individua* and is not an e&c(angeAtraded contract8 0(e contract re-uires A'C to ta@e p(.sica* de*iver. of t(e s(ares and pa. t(e counterpart. Rs83> mi**ion in cas(8 ?s s(ares trade in an active pub*ic mar@et at an average of 3>>4>>> s(ares a da.8 Regu*ar ,a. de*iver. is t(ree da.s8 Is t(e for,ard contract regarded as a regu*ar ,a. contractF Ho4 The contract "ust (e accounted for as a deri!ati!e (ecause it is not settled in the &ay esta(lished (y regulation or con!ention in the "ar>et'lace concerned4

'83> Regu*ar ,a. contracts% ,(ic( customar. sett*ement provisions app*.F

If an entit.?s financia* instruments trade in more t(an one active mar@et4 and t(e sett*ement provisions differ in t(e various active mar@ets4 ,(ic( provisions app*. in assessing ,(et(er a contract to purc(ase t(ose financia* instruments is a regu*ar ,a. contractF The 'ro!isions that a''ly are those in the "ar>et in &hich the 'urchase actually ta>es 'lace4
To illustrate: 1ntity UKW 'urchases one "illion shares of 1ntity #/

on a F) stoc> e8change6 for e8a"'le6 through a (ro>er4 The settle"ent date of the contract is si8 (usiness days later4 Trades for equity shares on F) e8changes custo"arily settle in three (usiness days4 /ecause the trade settles in si8 (usiness days6 it does not "eet the e8e"'tion as a regular &ay trade4 -o&e!er6 if UKW did the sa"e transaction on a foreign e8change that has a custo"ary settle"ent 'eriod of si8 (usiness days6 the contract &ould "eet the e8e"'tion for a regular &ay trade4

'833 Regu*ar ,a. contracts% s(are purc(ase b. ca** option

Entit. A purc(ases a ca** option in a pub*ic mar@et permitting it to purc(ase 3>> s(ares of Entit. $IJ at an. time over t(e ne&t t(ree mont(s at a price of Rs83>> per s(are8 If Entit. A e&ercises its option4 it (as 3< da.s to sett*e t(e

136

transaction according to regu*ation or convention in t(e options mar@et8 $IJ s(ares are traded in an active pub*ic mar@et t(at re-uires t(reeAda. sett*ement8 Is t(e purc(ase of s(ares b. e&ercising t(e option a regu*ar ,a. purc(ase of s(aresF Kes4 The settle"ent of an o'tion is go!erned (y regulation or con!ention in the "ar>et'lace for o'tions and6 therefore6 u'on e8ercise of the o'tion it is no longer accounted for as a deri!ati!e (ecause settle"ent (y deli!ery of the shares &ithin 14 days is a regular &ay transaction4

'835 Recognition and derecognition of financia* *iabi*ities using trade date or sett*ement date accounting
Ind AS 39 (as specia* ru*es about recognition and derecognition of financia* assets using trade date or sett*ement date accounting8 Do t(ese ru*es app*. to transactions in financia* instruments t(at are c*assified as financia* *iabi*ities4 suc( as transactions in deposit *iabi*ities and trading *iabi*itiesF Ho4 Ind #) 39 does not contain any s'ecific require"ents a(out trade date accounting and settle"ent date accounting in the case of transactions in financial instru"ents that are classified as financial lia(ilities4 Therefore6 the general recognition and derecognition require"ents inInd #) 39414 and Ind #) 39439 a''ly4 Ind #) 39414 states that financial lia(ilities are recognised on the date the entity E(eco"es a 'arty to the contractual 'ro!isions of the instru"ent?4 )uch contracts generally are not recognised unless one of the 'arties has 'erfor"ed or the contract is a deri!ati!e contract not e8e"'ted fro" the sco'e of Ind #) 394 Ind #) 39439 s'ecifies that financial lia(ilities are derecognised only &hen they are e8tinguished6 ie &hen the o(ligation s'ecified in the contract is discharged or cancelled or e8'ires4

Section C Embedded derivatives

C83 Embedded derivatives% separation of (ost debt instrument
If an embedded nonAoption derivative is re-uired to be separated from a (ost debt instrument4 (o, are t(e terms of t(e (ost debt instrument and t(e embedded derivative identifiedF )or e&amp*e4 ,ou*d t(e (ost debt instrument be a fi&ed rate instrument4 a variab*e rate instrument or a Lero coupon instrumentF The ter"s of the host de(t instru"ent reflect the stated or i"'lied su(stanti!e ter"s of the hy(rid instru"ent4 In the a(sence of i"'lied or stated ter"s6 the entity "a>es its o&n 5udge"ent of the ter"s4 -o&e!er6 an entity "ay not identify a co"'onent that is not s'ecified or "ay not esta(lish ter"s of the host de(t instru"ent in a "anner that &ould result in the se'aration of an e"(edded deri!ati!e that is not already clearly 'resent in the hy(rid instru"ent6 that is to say6 it cannot create a cash flo& that does not e8ist4 *or e8a"'le6 if a fi!e,year de(t instru"ent has fi8ed interest 'ay"ents of %s4406000 annually and a 'rinci'al 'ay"ent at "aturity of %s4160006000 "ulti'lied (y the change in an equity 'rice inde86 it &ould (e ina''ro'riate to identify a floating rate host contract and an e"(edded equity s&a' that has an offsetting floating rate leg in lieu of identifying a fi8ed rate host4 In that e8a"'le6 the host contract is a fi8ed rate de(t instru"ent that 'ays %s4406000 annually (ecause there are no floating interest rate cash flo&s in the hy(rid instru"ent4

137

In addition6 the ter"s of an e"(edded non,o'tion deri!ati!e6 such as a for&ard or s&a'6 "ust (e deter"ined so as to result in the e"(edded deri!ati!e ha!ing a fair !alue of Jero at the ince'tion of the hy(rid instru"ent4 If it &ere 'er"itted to se'arate e"(edded non,o'tion deri!ati!es on other ter"s6 a single hy(rid instru"ent could (e deco"'osed into an infinite !ariety of co"(inations of host de(t instru"ents and e"(edded deri!ati!es6 for e8a"'le6 (y se'arating e"(edded deri!ati!es &ith ter"s that create le!erage6 asy""etry or so"e other ris> e8'osure not already 'resent in the hy(rid instru"ent4 Therefore6 it is ina''ro'riate to se'arate an e"(edded non,o'tion deri!ati!e on ter"s that result in a fair !alue other than Jero at the ince'tion of the hy(rid instru"ent4 The deter"ination of the ter"s of the e"(edded deri!ati!e is (ased on the conditions e8isting &hen the financial instru"ent &as issued4

C85 Embedded derivatives% separation of embedded option

0(e response to Euestion C83 states t(at t(e terms of an embedded nonAoption derivative s(ou*d be determined so as to resu*t in t(e embedded derivative (aving a fair va*ue of Lero at t(e initia* recognition of t(e (.brid instrument8 C(en an embedded optionAbased derivative is separated4 must t(e terms of t(e embedded option be determined so as to resu*t in t(e embedded derivative (aving eit(er a fair va*ue of Lero or an intrinsic va*ue of Lero (t(at is to sa.4 be at t(e mone.) at t(e inception of t(e (.brid instrumentF Ho4 The econo"ic (eha!iour of a hy(rid instru"ent &ith an o'tion,(ased e"(edded deri!ati!e de'ends critically on the stri>e 'rice ;or stri>e rate< s'ecified for the o'tion feature in the hy(rid instru"ent6 as discussed (elo&4 Therefore6 the se'aration of an o'tion,(ased e"(edded deri!ati!e ;including any e"(edded 'ut6 call6 ca'6 floor6 ca'tion6 floortion or s&a'tion feature in a hy(rid instru"ent< should (e (ased on the stated ter"s of the o'tion feature docu"ented in the hy(rid instru"ent4 #s a result6 the e"(edded deri!ati!e &ould not necessarily ha!e a fair !alue or intrinsic !alue equal to Jero at the initial recognition of the hy(rid instru"ent4 If an entity &ere required to identify the ter"s of an e"(edded o'tion,(ased deri!ati!e so as to achie!e a fair !alue of the e"(edded deri!ati!e of Jero6 the stri>e 'rice ;or stri>e rate< generally &ould ha!e to (e deter"ined so as to result in the o'tion (eing infinitely out of the "oney4 This &ould i"'ly a Jero 'ro(a(ility of the o'tion feature (eing e8ercised4 -o&e!er6 since the 'ro(a(ility of the o'tion feature in a hy(rid instru"ent (eing e8ercised generally is not Jero6 it &ould (e inconsistent &ith the li>ely econo"ic (eha!iour of the hy(rid instru"ent to assu"e an initial fair !alue of Jero4 )i"ilarly6 if an entity &ere required to identify the ter"s of an e"(edded o'tion,(ased deri!ati!e so as to achie!e an intrinsic !alue of Jero for the e"(edded deri!ati!e6 the stri>e 'rice ;or stri>e rate< &ould ha!e to (e assu"ed to equal the 'rice ;or rate< of the underlying !aria(le at the initial recognition of the hy(rid instru"ent4 In this case6 the fair !alue of the o'tion &ould consist only of ti"e !alue4 -o&e!er6 such an assu"'tion &ould not (e consistent &ith the li>ely econo"ic (eha!iour of the hy(rid instru"ent6 including the 'ro(a(ility of the o'tion feature (eing e8ercised6 unless the agreed stri>e 'rice &as indeed equal to the 'rice ;or rate< of the underlying !aria(le at the initial recognition of the hy(rid instru"ent4 The econo"ic nature of an o'tion,(ased e"(edded deri!ati!e is funda"entally different fro" a for&ard,(ased e"(edded deri!ati!e ;including for&ards and s&a's<6 (ecause the ter"s of a for&ard are such that a 'ay"ent (ased on the difference (et&een the 'rice of the underlying and the for&ard 'rice &ill occur at a s'ecified date6 &hile the ter"s of an

138

o'tion are such that a 'ay"ent (ased on the difference (et&een the 'rice of the underlying and the stri>e 'rice of the o'tion "ay or "ay not occur de'ending on the relationshi' (et&een the agreed stri>e 'rice and the 'rice of the underlying at a s'ecified date or dates in the future4 #d5usting the stri>e 'rice of an o'tion,(ased e"(edded deri!ati!e6 therefore6 alters the nature of the hy(rid instru"ent4 @n the other hand6 if the ter"s of a non,o'tion e"(edded deri!ati!e in a host de(t instru"ent &ere deter"ined so as to result in a fair !alue of any a"ount other than Jero at the ince'tion of the hy(rid instru"ent6 that a"ount &ould essentially re'resent a (orro&ing or lending4 #ccordingly6 as discussed in the ans&er to .uestion 416 it is not a''ro'riate to se'arate a non, o'tion e"(edded deri!ati!e in a host de(t instru"ent on ter"s that result in a fair !alue other than Jero at the initial recognition of the hy(rid instru"ent4

C83 Embedded derivatives% accounting for a convertib*e bond

C(at is t(e accounting treatment of an investment in a bond (financia* asset) t(at is convertib*e into s(ares of t(e issuing entit. or anot(er entit. before maturit.F #n in!est"ent in a con!erti(le (ond that is con!erti(le (efore "aturity generally cannot (e classified as a held,to,"aturity in!est"ent (ecause that &ould (e inconsistent &ith 'aying for the con!ersion featureAthe right to con!ert into equity shares (efore "aturity4 #n in!est"ent in a con!erti(le (ond can (e classified as an a!aila(le,for,sale financial asset 'ro!ided it is not 'urchased for trading 'ur'oses4 The equity con!ersion o'tion is an e"(edded deri!ati!e4 If the (ond is classified as a!aila(le for sale ;ie fair !alue changes recognised in other co"'rehensi!e inco"e until the (ond is sold<6 the equity con!ersion o'tion ;the e"(edded deri!ati!e< is se'arated4 The a"ount 'aid for the (ond is s'lit (et&een the de(t instru"ent &ithout the con!ersion o'tion and the equity con!ersion o'tion4 hanges in the fair !alue of the equity con!ersion o'tion are recognised in 'rofit or loss unless the o'tion is 'art of a cash flo& hedging relationshi'4 If the con!erti(le (ond is "easured at fair !alue &ith changes in fair !alue recognised in 'rofit or loss6 se'arating the e"(edded deri!ati!e fro" the host (ond is not 'er"itted4

C8< Embedded derivatives% e-uit. @ic@er

In some instances4 venture capita* entities providing subordinated *oans agree t(at if and ,(en t(e borro,er *ists its s(ares on a stoc@ e&c(ange4 t(e venture capita* entit. is entit*ed to receive s(ares of t(e borro,ing entit. free of c(arge or at a ver. *o, price (an Be-uit. @ic@er?) in addition to interest and repa.ment of principa*8 As a resu*t of t(e e-uit. @ic@er feature4 t(e interest on t(e subordinated *oan is *o,er t(an it ,ou*d ot(er,ise be8 Assuming t(at t(e subordinated *oan is not measured at fair va*ue ,it( c(anges in fair va*ue recognised in profit or *oss (Ind AS 39833(c))4 does t(e e-uit. @ic@er feature meet t(e definition of an embedded derivative even t(oug( it is contingent upon t(e future *isting of t(e borro,erF Kes4 The econo"ic characteristics and ris>s of an equity return are not closely related to the econo"ic characteristics and ris>s of a host de(t instru"ent ;Ind #) 39411;a<<4 The equity >ic>er "eets the definition of a deri!ati!e (ecause it has a !alue that changes in res'onse to the change in the 'rice of the shares of the (orro&er6 it requires no initial net

139

in!est"ent or an initial net in!est"ent that is s"aller than &ould (e required for other ty'es of contracts that &ould (e e8'ected to ha!e a si"ilar res'onse to changes in "ar>et factors6 and it is settled at a future date ;Ind #) 39411;(< and Ind #) 3949;a<<4 The equity >ic>er feature "eets the definition of a deri!ati!e e!en though the right to recei!e shares is contingent u'on the future listing of the (orro&er4 Ind #) 394#+9 states that a deri!ati!e could require a 'ay"ent as a result of so"e future e!ent that is unrelated to a notional a"ount4 #n equity >ic>er feature is si"ilar to such a deri!ati!e e8ce't that it does not gi!e a right to a fi8ed 'ay"ent6 (ut an o'tion right6 if the future e!ent occurs4

C89 Embedded derivatives% debt or e-uit. (ost contract

Entit. A purc(ases a fiveA.ear Bdebt? instrument issued b. Entit. ' ,it( a principa* amount of Rs83 mi**ion t(at is inde&ed to t(e s(are price of Entit. C8 At maturit.4 Entit. A ,i** receive from Entit. ' t(e principa* amount p*us or minus t(e c(ange in t(e fair va*ue of 3>4>>> s(ares of Entit. C8 0(e current s(are price is Rs833>8 #o separate interest pa.ments are made b. Entit. '8 0(e purc(ase price is Rs83 mi**ion8 Entit. A c*assifies t(e debt instrument as avai*ab*e for sa*e8 Entit. A conc*udes t(at t(e instrument is a (.brid instrument ,it( an embedded derivative because of t(e e-uit.Ainde&ed principa*8 )or t(e purposes of separating an embedded derivative4 is t(e (ost contract an e-uit. instrument or a debt instrumentF The host contract is a de(t instru"ent (ecause the hy(rid instru"ent has a stated "aturity6 ie it does not "eet the definition of an equity instru"ent ;Ind #) 32411 andInd #) 3241$<4 It is accounted for as a Jero cou'on de(t instru"ent4 Thus6 in accounting for the host instru"ent6 1ntity # i"'utes interest on %s41 "illion o!er fi!e years using the a''lica(le "ar>et interest rate at initial recognition4 The e"(edded non,o'tion deri!ati!e is se'arated so as to ha!e an initial fair !alue of Jero ;see .uestion 41<4

C8; Embedded derivatives% s.nt(etic instruments

Entit. A ac-uires a fiveA.ear f*oating rate debt instrument issued b. Entit. '8 At t(e same time4 it enters into a fiveA.ear pa.Avariab*e4 receiveAfi&ed interest rate s,ap ,it( Entit. C8 Entit. A regards t(e combination of t(e debt instrument and s,ap as a s.nt(etic fi&ed rate instrument and c*assifies t(e instrument as a (e*dA toAmaturit. investment4 since it (as t(e positive intention and abi*it. to (o*d it to maturit.8 Entit. A contends t(at separate accounting for t(e s,ap is inappropriate since Ind AS 398A233(a) re-uires an embedded derivative to be c*assified toget(er ,it( its (ost instrument if t(e derivative is *in@ed to an interest rate t(at can c(ange t(e amount of interest t(at ,ou*d ot(er,ise be paid or received on t(e (ost debt contract8 Is t(e entit.?s ana*.sis correctF Ho4 1"(edded deri!ati!e instru"ents are ter"s and conditions that are included in non, deri!ati!e host contracts4 It is generally ina''ro'riate to treat t&o or "ore se'arate financial instru"ents as a single co"(ined instru"ent ;Esynthetic instru"ent? accounting< for the 'ur'ose of a''lying Ind #) 394 1ach of the financial instru"ents has its o&n ter"s and conditions and each "ay (e transferred or settled se'arately4 Therefore6 the de(t instru"ent and the s&a' are classified se'arately4 The transactions descri(ed here differ fro" the transactions discussed in .uestion /4$6 &hich had no su(stance a'art fro" the resulting interest rate s&a'4

140

C86 Embedded derivatives% purc(ases and sa*es contracts in

foreign currenc. instruments

A supp*. contract provides for pa.ment in a currenc. ot(er t(an (a) t(e functiona* currenc. of eit(er part. to t(e contract4 (b) t(e currenc. in ,(ic( t(e product is routine*. denominated in commercia* transactions around t(e ,or*d and (c) t(e currenc. t(at is common*. used in contracts to purc(ase or se** nonAfinancia* items in t(e economic environment in ,(ic( t(e transaction ta@es p*ace8 Is t(ere an embedded derivative t(at s(ou*d be separated under Ind AS 39F Kes4 To illustrate: a Hor&egian entity agrees to sell oil to an entity in *rance4 The oil contract is deno"inated in )&iss francs6 although oil contracts are routinely deno"inated in F) dollars in co""ercial transactions around the &orld6 and Hor&egian >rone are co""only used in contracts to 'urchase or sell non,financial ite"s in Hor&ay4 Heither entity carries out any significant acti!ities in )&iss francs4 In this case6 the Hor&egian entity regards the su''ly contract as a host contract &ith an e"(edded foreign currency for&ard to 'urchase )&iss francs4 The *rench entity regards the su''ly contact as a host contract &ith an e"(edded foreign currency for&ard to sell )&iss francs4 1ach entity includes fair !alue changes on the currency for&ard in 'rofit or loss unless the re'orting entity designates it as a cash flo& hedging instru"ent6 if a''ro'riate4

C87 Embedded foreign currenc. derivatives% unre*ated foreign currenc. provision

Entit. A4 ,(ic( measures items in its financia* statements on t(e basis of t(e euro (its functiona* currenc.)4 enters into a contract ,it( Entit. '4 ,(ic( (as t(e #or,egian @rone as its functiona* currenc.4 to purc(ase oi* in si& mont(s for 34>>> /S do**ars8 0(e (ost oi* contract is not ,it(in t(e scope of Ind AS 39 because it ,as entered into and continues to be for t(e purpose of de*iver. of a nonAfinancia* item in accordance ,it( t(e entit.?s e&pected purc(ase4 sa*e or usage re-uirements (Ind AS 3989 and Ind AS 39 8A23>)8 0(e oi* contract inc*udes a *everaged foreign e&c(ange provision t(at states t(at t(e parties4 in addition to t(e provision of4 and pa.ment for4 oi* ,i** e&c(ange an amount e-ua* to t(e f*uctuation in t(e e&c(ange rate of t(e /S do**ar and #or,egian @rone app*ied to a notiona* amount of 3>>4>>> /S do**ars8 /nder Ind AS 398334 is t(at embedded derivative (t(e *everaged foreign e&c(ange provision) regarded as c*ose*. re*ated to t(e (ost oi* contractF Ho6 that le!eraged foreign e8change 'ro!ision is se'arated fro" the host oil contract (ecause it is not closely related to the host oil contract ;Ind #) 394#+33;d<<4 The 'ay"ent 'ro!ision under the host oil contract of 16000 F) dollars can (e !ie&ed as a foreign currency deri!ati!e (ecause the F) dollar is neither 1ntity #?s nor 1ntity /?s functional currency4 This foreign currency deri!ati!e &ould not (e se'arated (ecause it follo&s fro" Ind #) 394#+33;d< that a crude oil contract that requires 'ay"ent in F) dollars is not regarded as a host contract &ith a foreign currency deri!ati!e4 The le!eraged foreign e8change 'ro!ision that states that the 'arties &ill e8change an a"ount equal to the fluctuation in the e8change rate of the F) dollar and Hor&egian >rone a''lied to a notional a"ount of 1006000 F) dollars is in addition to the required

141

'ay"ent for the oil transaction4 It is unrelated to the host oil contract and therefore se'arated fro" the host oil contract and accounted for as an e"(edded deri!ati!e under Ind #) 394114

C89 Embedded foreign currenc. derivatives% currenc. of internationa* commerce

Ind AS 398A233(d) refers to t(e currenc. in ,(ic( t(e price of t(e re*ated goods or services is routine*. denominated in commercia* transactions around t(e ,or*d8 Cou*d it be a currenc. t(at is used for a certain product or service in commercia* transactions ,it(in t(e *oca* area of one of t(e substantia* parties to t(e contractF Ho4 The currency in &hich the 'rice of the related goods or ser!ices is routinely deno"inated in co""ercial transactions around the &orld is only a currency that is used for si"ilar transactions all around the &orld6 not 5ust in one local area4 *or e8a"'le6 if cross,(order transactions in natural gas in Horth #"erica are routinely deno"inated in F) dollars and such transactions are routinely deno"inated in euro in 1uro'e6 neither the F) dollar nor the euro is a currency in &hich the goods or ser!ices are routinely deno"inated in co""ercial transactions around the &orld4

C83> Embedded derivatives% (o*der permitted4 but not re-uired4 to sett*e ,it(out recovering substantia**. a** of its recognised investment
If t(e terms of a combined instrument permit4 but do not re-uire4 t(e (o*der to sett*e t(e combined instrument in a manner t(at causes it not to recover substantia**. a** of its recognised investment and t(e issuer does not (ave suc( a rig(t (for e&amp*e4 a puttab*e debt instrument)4 does t(e contract satisf. t(e condition in Ind AS 398A233(a) t(at t(e (o*der ,ou*d not recover substantia**. a** of its recognised investmentF Ho4 The condition that Ethe holder &ould not reco!er su(stantially all of its recognised in!est"ent? is not satisfied if the ter"s of the co"(ined instru"ent 'er"it6 (ut do not require6 the in!estor to settle the co"(ined instru"ent in a "anner that causes it not to reco!er su(stantially all of its recognised in!est"ent and the issuer has no such right4 #ccordingly6 an interest,(earing host contract &ith an e"(edded interest rate deri!ati!e &ith such ter"s is regarded as closely related to the host contract4 The condition that Ethe holder &ould not reco!er su(stantially all of its recognised in!est"ent? a''lies to situations in &hich the holder can (e forced to acce't settle"ent at an a"ount that causes the holder not to reco!er su(stantially all of its recognised in!est"ent4

C833 Embedded derivatives% re*iab*e determination of fair va*ue

If an embedded derivative t(at is re-uired to be separated cannot be re*iab*. measured because it ,i** be sett*ed b. an un-uoted e-uit. instrument ,(ose fair va*ue cannot be re*iab*. measured4 is t(e embedded derivative measured at costF Ho4 In this case6 the entire co"(ined contract is treated as a financial instru"ent held for trading ;Ind #) 39412<4 If the fair !alue of the co"(ined instru"ent can (e relia(ly "easured6 the co"(ined contract is "easured at fair !alue4 The entity "ight conclude6 ho&e!er6 that the equity co"'onent of the co"(ined instru"ent "ay (e sufficiently

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significant to 'reclude it fro" o(taining a relia(le esti"ate of the entire instru"ent4 In that case6 the co"(ined instru"ent is "easured at cost less i"'air"ent4

Section D Recognition and derecognition

D83 Initia* recognition

D8383 Recognition% cas( co**atera*

Entit. ' transfers cas( to Entit. A as co**atera* for anot(er transaction ,it( Entit. A (for e&amp*e4 a securities borro,ing transaction)8 0(e cas( is not *ega**. segregated from Entit. A?s assets8 S(ou*d Entit. A recognise t(e cas( co**atera* it (as received as an assetF Kes4 The ulti"ate realisation of a financial asset is its con!ersion into cash and6 therefore6 no further transfor"ation is required (efore the econo"ic (enefits of the cash transferred (y 1ntity / can (e realised (y 1ntity #4 Therefore6 1ntity # recognises the cash as an asset and a 'aya(le to 1ntity / &hile 1ntity / derecognises the cash and recognises a recei!a(le fro" 1ntity #4

D85 Regu*ar ,a. purc(ase or sa*e of a financia* asset

D8583 0rade date vs sett*ement date% amounts to be recorded for a purc(ase !o, are t(e trade date and sett*ement date accounting princip*es in t(e Standard app*ied to a purc(ase of a financia* assetF The follo&ing e8a"'le illustrates the a''lication of the trade date and settle"ent date accounting 'rinci'les in the )tandard for a 'urchase of a financial asset4 @n 29 Dece"(er 20U16 an entity co""its itself to 'urchase a financial asset for %s4160006 &hich is its fair !alue on co""it"ent ;trade< date4 Transaction costs are i""aterial4 @n 31 Dece"(er 20U1 ;financial year,end< and on 4 Ianuary 20U2 ;settle"ent date< the fair !alue of the asset is %s416002 and %s4160036 res'ecti!ely4 The a"ounts to (e recorded for the asset &ill de'end on ho& it is classified and &hether trade date or settle"ent date accounting is used6 as sho&n in the t&o ta(les (elo&4 'a*ances Sett*ement date accounting !e*dAtoAmaturit. Avai*ab*eAforAsa*e Assets at fair va*ue investments assets remeasured t(roug( profit or carried at to fair va*ue ,it( *oss remeasured amortised cost c(anges in ot(er to fair va*ue ,it( compre(ensive c(anges in profit income or *oss 2 ;2< 2

59 December 5>$3 *inancial asset *inancial lia(ility 33 December 5>$3 %ecei!a(le *inancial asset *inancial lia(ility 1quity ;fair !alue

143

ad5ust"ent< %etained earnings ;through 'rofit or loss< < Ganuar. 5>$5 %ecei!a(le *inancial asset *inancial lia(ility 1quity ;fair !alue ad5ust"ent< %etained earnings ;through 'rofit or loss< ;2<

16000

16003 ;3<

16003 ;3<

'a*ances

0rade date accounting !e*dAtoAmaturit. Avai*ab*eAforAsa*e Assets at fair va*ue investments assets remeasured t(roug( profit or carried at to fair va*ue ,it( *oss remeasured amortised cost c(anges in ot(er to fair va*ue ,it( compre(ensive c(anges in profit income or *oss 16000 ;16000< 16000 ;16000< 16000 ;16000< 16002 ;16000< ;2< 16000 ;16000< 16002 ;16000< ;2<

59 December 5>$3 *inancial asset *inancial lia(ility 33 December 5>$3 %ecei!a(le *inancial asset *inancial lia(ility 1quity ;fair !alue ad5ust"ent< %etained earnings ;through 'rofit or loss< < Ganuar. 5>$5 %ecei!a(le *inancial asset *inancial lia(ility 1quity ;fair !alue ad5ust"ent< %etained earnings ;through 'rofit or loss<

16000

16003 ;3<Y

16003 ;3<

D8585 0rade date vs sett*ement date% amounts to be recorded for a sa*e

144

!o, are t(e trade date and sett*ement date accounting princip*es in t(e Standard app*ied to a sa*e of a financia* assetF The follo&ing e8a"'le illustrates the a''lication of the trade date and settle"ent date accounting 'rinci'les in the )tandard for a sale of a financial asset4 @n 29 Dece"(er 20U2 ;trade date< an entity enters into a contract to sell a financial asset for its current fair !alue of %s4160104 The asset &as acquired one year earlier for %s416000 and its a"ortised cost is %s4160004 @n 31 Dece"(er 20U2 ;financial year,end<6 the fair !alue of the asset is %s4160124 @n 4 Ianuary 20U3 ;settle"ent date<6 the fair !alue is %s4160134 The a"ounts to (e recorded &ill de'end on ho& the asset is classified and &hether trade date or settle"ent date accounting is used as sho&n in the t&o ta(les (elo& ;any interest that "ight ha!e accrued on the asset is disregarded<4 # change in the fair !alue of a financial asset that is sold on a regular &ay (asis is not recorded in the financial state"ents (et&een trade date and settle"ent date e!en if the entity a''lies settle"ent date accounting (ecause the seller?s right to changes in the fair !alue ceases on the trade date4 'a*ances Sett*ement date accounting !e*dAtoAmaturit. Avai*ab*eAforAsa*e Assets at fair va*ue investments assets remeasured t(roug( profit or carried at to fair va*ue ,it( *oss remeasured amortised cost c(anges in ot(er to fair va*ue ,it( compre(ensive c(anges in profit income or *oss 16000 16010 10 16010 10

59 December 5>$5 %ecei!a(le *inancial asset 1quity ;fair !alue ad5ust"ent< %etained earnings ;through 'rofit or loss< 33 December 5>$5 %ecei!a(le *inancial asset 1quity ;fair !alue ad5ust"ent< %etained earnings ;through 'rofit or loss< < Ganuar. 5>$3 1quity ;fair !alue ad5ust"ent< %etained earnings ;through 'rofit or loss<

16000

16010 10

16010 10

10

10

10

145

'a*ances

Sett*ement date accounting !e*dAtoAmaturit. Avai*ab*eAforAsa*e investments assets remeasured carried at to fair va*ue ,it( amortised cost c(anges in ot(er compre(ensive income 16010 10

Assets at fair va*ue t(roug( profit or *oss remeasured to fair va*ue ,it( c(anges in profit or *oss 16010 10

59 December 5>$5 %ecei!a(le 16010 *inancial asset 1quity ;fair !alue ad5ust"ent< %etained earnings 10 ;through 'rofit or loss< 33 December 5>$5 %ecei!a(le 16010 *inancial asset 1quity ;fair !alue ad5ust"ent< %etained earnings 10 ;through 'rofit or loss< < Ganuar. 5>$3 1quity ;fair !alue ad5ust"ent< %etained earnings 10 ;through 'rofit or loss<

16010 10

16010 10

10

10

D8583 Sett*ement date accounting% e&c(ange of nonAcas( financia* assets

If an entit. recognises sa*es of financia* assets using sett*ement date accounting4 ,ou*d a c(ange in t(e fair va*ue of a financia* asset to be received in e&c(ange for t(e nonAcas( financia* asset t(at is so*d be recognised in accordance ,it( Ind AS 39896F It de'ends4 #ny change in the fair !alue of the financial asset to (e recei!ed &ould (e accounted for under Ind #) 39457 if the entity a''lies settle"ent date accounting for that category of financial assets4 -o&e!er6 if the entity classifies the financial asset to (e recei!ed in a category for &hich it a''lies trade date accounting6 the asset to (e recei!ed is recognised on the trade date as descri(ed in Ind #) 394#+554 In that case6 the entity recognises a lia(ility of an a"ount equal to the carrying a"ount of the financial asset to (e deli!ered on settle"ent date4 To illustrate: on 29 Dece"(er 20U2 ;trade date< 1ntity # enters into a contract to sell Hote %ecei!a(le #6 &hich is carried at a"ortised cost6 in e8change for /ond /6 &hich

146

&ill (e classified as held for trading and "easured at fair !alue4 /oth assets ha!e a fair !alue of %s416010 on 29 Dece"(er6 &hile the a"ortised cost of Hote %ecei!a(le # is %s4160004 1ntity # uses settle"ent date accounting for loans and recei!a(les and trade date accounting for assets held for trading4 @n 31 Dece"(er 20U2 ;financial year,end<6 the fair !alue of Hote %ecei!a(le # is %s416012 and the fair !alue of /ond / is %s4160094 @n 4 Ianuary 20U36 the fair !alue of Hote %ecei!a(le # is %s416013 and the fair !alue of /ond / is %s4160074 The follo&ing entries are "ade: 59 December 5>$5 Dr /ond / r Daya(le 33 December 5>$5 Dr Trading loss r /ond / < Ganuar. 5>$3 Dr Daya(le Dr Trading loss r Hote %ecei!a(le # r /ond / r %ealisation gain %s416010 %s416010 %s41 %s41 %s416010 %s42 %s416000 %s42 %s410

Section E

easurement

E83 Initia* measurement of financia* assets and financia* *iabi*ities

E8383 Initia* measurement% transaction costs
0ransaction costs s(ou*d be inc*uded in t(e initia* measurement of financia* assets and financia* *iabi*ities ot(er t(an t(ose at fair va*ue t(roug( profit or *oss8 !o, s(ou*d t(is re-uirement be app*ied in practiceF *or financial assets6 incre"ental costs that are directly attri(uta(le to the acquisition of the asset6 for e8a"'le fees and co""issions6 are added to the a"ount originally recognised4 *or financial lia(ilities6 directly related costs of issuing de(t are deducted fro" the a"ount of de(t originally recognised4 *or financial instru"ents that are "easured at fair !alue through 'rofit or loss6 transaction costs are not added to the fair !alue "easure"ent at initial recognition4 *or financial instru"ents that are carried at a"ortised cost6 such as held,to,"aturity in!est"ents6 loans and recei!a(les6 and financial lia(ilities that are not at fair !alue through 'rofit or loss6 transaction costs are included in the calculation of a"ortised cost using the effecti!e interest "ethod and6 in effect6 a"ortised through 'rofit or loss o!er the life of the instru"ent4 *or a!aila(le,for,sale financial assets6 transaction costs are recognised in other co"'rehensi!e inco"e as 'art of a change in fair !alue at the ne8t re"easure"ent4 If an a!aila(le,for,sale financial asset has fi8ed or deter"ina(le 'ay"ents and does not ha!e an indefinite life6 the transaction costs are a"ortised to 'rofit or loss using the effecti!e

147

interest "ethod4 If an a!aila(le,for,sale financial asset does not ha!e fi8ed or deter"ina(le 'ay"ents and has an indefinite life6 the transaction costs are recognised in 'rofit or loss &hen the asset is derecognised or (eco"es i"'aired4 Transaction costs e8'ected to (e incurred on transfer or dis'osal of a financial instru"ent are not included in the "easure"ent of the financial instru"ent4

E85 )air va*ue measurement considerations

E8583 )air va*ue measurement considerations for investment funds
Ind AS 398A265 states t(at t(e current bid price is usua**. t(e appropriate price to be used in measuring t(e fair va*ue of an asset (e*d8 0(e ru*es app*icab*e to some investment funds re-uire net asset va*ues to be reported to investors on t(e basis of midAmar@et prices8 In t(ese circumstances4 ,ou*d it be appropriate for an investment fund to measure its assets on t(e basis of midAmar@et pricesF Ho4 The e8istence of regulations that require a different "easure"ent for s'ecific 'ur'oses does not 5ustify a de'arture fro" the general require"ent in Ind #) 394#+72 to use the current (id 'rice in the a(sence of a "atching lia(ility 'osition4 In its financial state"ents6 an in!est"ent fund "easures its assets at current (id 'rices4 In re'orting its net asset !alue to in!estors6 an in!est"ent fund "ay &ish to 'ro!ide a reconciliation (et&een the fair !alues recognised in its (alance sheet and the 'rices used for the net asset !alue calculation4

E8585 )air va*ue measurement% *arge (o*ding

Entit. A (o*ds 39 per cent of t(e s(are capita* in Entit. '8 0(e s(ares are pub*ic*. traded in an active mar@et8 0(e current*. -uoted price is Rs83>>8 Dai*. trading vo*ume is >83 per cent of outstanding s(ares8 'ecause Entit. A be*ieves t(at t(e fair va*ue of t(e Entit. ' s(ares it o,ns4 if so*d as a b*oc@4 is greater t(an t(e -uoted mar@et price4 Entit. A obtains severa* independent estimates of t(e price it ,ou*d obtain if it se**s its (o*ding8 0(ese estimates indicate t(at Entit. A ,ou*d be ab*e to obtain a price of Rs83>94 ie a 9 per cent premium above t(e -uoted price8 C(ic( figure s(ou*d Entit. A use for measuring its (o*ding at fair va*ueF Fnder Ind #) 394#+716 a 'u(lished 'rice quotation in an acti!e "ar>et is the (est esti"ate of fair !alue4 Therefore6 1ntity # uses the 'u(lished 'rice quotation ;%s4100<4 1ntity # cannot de'art fro" the quoted "ar>et 'rice solely (ecause inde'endent esti"ates indicate that 1ntity # &ould o(tain a higher ;or lo&er< 'rice (y selling the holding as a (loc>4

E83 2ains and *osses

E8383 Avai*ab*eAforAsa*e financia* assets% e&c(ange of s(ares
Entit. A (o*ds a sma** number of s(ares in Entit. '8 0(e s(ares are c*assified as avai*ab*e for sa*e8 On 5> December 5>$>4 t(e fair va*ue of t(e s(ares is Rs835> and t(e cumu*ative gain recognised in ot(er compre(ensive income is Rs85>8 On t(e same da.4 Entit. ' is ac-uired b. Entit. C4 a *arge pub*ic entit.8 As a resu*t4 Entit. A receives s(ares in Entit. C in e&c(ange for t(ose it (ad in Entit. ' of e-ua* fair va*ue8 /nder Ind AS 39899(b)4 s(ou*d Entit. A rec*assif. t(e cumu*ative gain of

148

Rs85> recognised in ot(er compre(ensive income from e-uit. to profit or *oss as a rec*assification adjustmentF Kes4 The transaction qualifies for derecognition under Ind #) 394 Ind #) 39455;(< requires the cu"ulati!e gain or loss on an a!aila(le,for,sale financial asset that has (een recognised in other co"'rehensi!e inco"e to (e reclassified fro" equity to 'rofit or loss &hen the asset is derecognised4 In the e8change of shares6 1ntity # dis'oses of the shares it had in 1ntity / and recei!es shares in 1ntity 4

E8385 Ind AS 39 and Ind AS 53 Avai*ab*eAforAsa*e financia* assets% separation of currenc. component
)or an avai*ab*eAforAsa*e monetar. financia* asset4 t(e entit. recognises c(anges in t(e carr.ing amount re*ating to c(anges in foreign e&c(ange rates in profit or *oss in accordance ,it( Ind AS 53853(a) and Ind AS 53857 and ot(er c(anges in t(e carr.ing amount in ot(er compre(ensive income in accordance ,it( Ind AS 398 !o, is t(e cumu*ative gain or *oss t(at is recognised in ot(er compre(ensive income determinedF It is the difference (et&een the a"ortised cost ;ad5usted for i"'air"ent6 if any< and fair !alue of the a!aila(le,for,sale "onetary financial asset in the functional currency of the re'orting entity4 *or the 'ur'ose of a''lying Ind #) 21428 the asset is treated as an asset "easured at a"ortised cost in the foreign currency4 To illustrate: on 31 Dece"(er 20U1 1ntity # acquires a (ond deno"inated in a foreign currency ;* < for its fair !alue of * 160004 The (ond has fi!e years re"aining to "aturity and a 'rinci'al a"ount of * 162506 carries fi8ed interest of 447 'er cent that is 'aid annually ;* 16250 O 447 'er cent X * 59 'er year<6 and has an effecti!e interest rate of 10 'er cent4 1ntity # classifies the (ond as a!aila(le for sale6 and thus recognises gains and losses in other co"'rehensi!e inco"e4 The entity?s functional currency is its local currency ;2 <4 The e8change rate is * 1 to 2 145 and the carrying a"ount of the (ond is 2 16500 ;X * 16000 O 145<4 Dr /ond 2 16500 r ash 2 16500

@n 31 Dece"(er 20U26 the foreign currency has a''reciated and the e8change rate is * 1 to 2 24 The fair !alue of the (ond is * 160$0 and thus the carrying a"ount is 2 26120 ;X * 160$0 O 2<4 The a"ortised cost is * 16041 ;X 2 26082<4 In this case6 the cu"ulati!e gain or loss to (e recognised in other co"'rehensi!e inco"e and accu"ulated in equity is the difference (et&een the fair !alue and the a"ortised cost on 31 Dece"(er 20U26 ie 2 38 ;X 2 26120 2 26082<4 Interest recei!ed on the (ond on 31 Dece"(er 20U2 is * 59 ;X 2 118<4 Interest inco"e deter"ined in accordance &ith the effecti!e interest "ethod is * 100 ;X 16000 O 10 'er cent<4 The a!erage e8change rate during the year is * 1 to 2 14754 *or the 'ur'ose of this question6 it is assu"ed that the use of the a!erage e8change rate 'ro!ides a relia(le a''ro8i"ation of the s'ot rates a''lica(le to the accrual of interest inco"e during the year ;Ind #) 21422<4 Thus6 re'orted interest inco"e is 2 175 ;X * 100 O 1475< including accretion of the initial discount of 2 72 ;X 7* 100 * 599 O 1475<4 #ccordingly6 the e8change difference on the (ond that is recognised in 'rofit or

149

loss is 2 510 ;X 2 26082 2 16500 2 72<4 #lso6 there is an e8change gain on the interest recei!a(le for the year of 2 15 ;X * 59 O 72400 14759<4 Dr /ond Dr ash r Interest inco"e r 18change gain r *air !alue change in other co"'rehensi!e inco"e @n 31 Dece"(er 20U36 the foreign currency has a''reciated further and the e8change rate is * 1 to 2 24504 The fair !alue of the (ond is * 16070 and thus the carrying a"ount is 2 26$75 ;X * 16070 O 2450<4 The a"ortised cost is * 1608$ ;X 2 26715<4 The cu"ulati!e gain or loss to (e accu"ulated in equity is the difference (et&een the fair !alue and the a"ortised cost on 31 Dece"(er 20U36 ie negati!e 2 40 ;X 2 26$75 2 26715<4 Thus6 the a"ount recognised in other co"'rehensi!e inco"e equals the change in the difference during 20U3 of 2 78 ;X 2 40 N 2 38<4 Interest recei!ed on the (ond on 31 Dece"(er 20U3 is * 59 ;X 2 148<4 Interest inco"e deter"ined in accordance &ith the effecti!e interest "ethod is * 104 ;X * 16041 O 10 'er cent<4 The a!erage e8change rate during the year is * 1 to 2 24254 *or the 'ur'ose of this question6 it is assu"ed that the use of the a!erage e8change rate 'ro!ides a relia(le a''ro8i"ation of the s'ot rates a''lica(le to the accrual of interest inco"e during the year ;Ind #) 21422<4 Thus6 recognised interest inco"e is 2 234 ;X * 104 O 2425< including accretion of the initial discount of 2 101 ;X 7* 104 * 599 O 2425<4 #ccordingly6 the e8change difference on the (ond that is recognised in 'rofit or loss is 2 532 ;X 2 26715 2 26082 2 101<4 #lso6 there is an e8change gain on the interest recei!a(le for the year of 2 15 ;X * 59 O 72450 24259<4 Dr /ond Dr ash Dr *air !alue change in other co"'rehensi!e inco"e r Interest inco"e r 18change gain 2 555 2 148 2 78 2 234 2 547 2 $20 2 118 2 175 2 525 2 38

E8383 Ind AS 39 and Ind AS 53 E&c(ange differences arising on trans*ation of foreign entities% ot(er compre(ensive income or profit or *ossF
Ind AS 53835 andInd AS 538<7 states t(at a** e&c(ange differences resu*ting from trans*ating t(e financia* statements of a foreign operation s(ou*d be recognised in ot(er compre(ensive income unti* disposa* of t(e net investment8 0(is ,ou*d inc*ude e&c(ange differences arising from financia* instruments carried at fair va*ue4 ,(ic( ,ou*d inc*ude bot( financia* assets c*assified as at fair va*ue t(roug( profit or *oss and financia* assets t(at are avai*ab*e for sa*e8 Ind AS 39899 re-uires t(at c(anges in fair va*ue of financia* assets c*assified as at fair va*ue t(roug( profit or *oss s(ou*d be recognised in profit or *oss and c(anges in fair va*ue of avai*ab*eAforAsa*e investments s(ou*d be recognised in ot(er compre(ensive income8

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If t(e foreign operation is a subsidiar. ,(ose financia* statements are conso*idated ,it( t(ose of its parent4 in t(e conso*idated financia* statements (o, are Ind AS 39899 andInd AS 53839 app*iedF Ind #) 39 a''lies in the accounting for financial instru"ents in the financial state"ents of a foreign o'eration and Ind #) 21 a''lies in translating the financial state"ents of a foreign o'eration for incor'oration in the financial state"ents of the re'orting entity4 To illustrate: 1ntity # is do"iciled in ountry U and its functional currency and 'resentation currency are the local currency of ountry U ;2 U<4 # has a foreign su(sidiary ;1ntity /< in ountry K &hose functional currency is the local currency of ountry K ;2 K<4 / is the o&ner of a de(t instru"ent6 &hich is held for trading and therefore carried at fair !alue under Ind #) 394 In /?s financial state"ents for year 20U06 the fair !alue and carrying a"ount of the de(t instru"ent is 2 K100 in the local currency of ountry K4 In #?s consolidated financial state"ents6 the asset is translated into the local currency of ountry U at the s'ot e8change rate a''lica(le at the end of the re'orting 'eriod ;2400<4 Thus6 the carrying a"ount is 2 U200 ;X 2 K100 O 2400< in the consolidated financial state"ents4 #t the end of year 20U16 the fair !alue of the de(t instru"ent has increased to 2 K110 in the local currency of ountry K4 / recognises the trading asset at 2 K110 in its (alance sheet and recognises a fair !alue gain of 2 K10 in its 'rofit or loss4 During the year6 the s'ot e8change rate has increased fro" 2400 to 3400 resulting in an increase in the fair !alue of the instru"ent fro" 2 U200 to 2 U330 ;X 2 K110 O 3400< in the currency of ountry U4 Therefore6 1ntity # recognises the trading asset at 2 U330 in its consolidated financial state"ents4 1ntity # translates the state"ent of 'rofit and loss of / Eat the e8change rates at the dates of the transactions? ;Ind #) 21439;(<<4 )ince the fair !alue gain has accrued through the year6 # uses the a!erage rate as a 'ractical a''ro8i"ation ;73400 N 24009 G 2 X 24506 in accordance &ith Ind #) 21422<4 Therefore6 &hile the fair !alue of the trading asset has increased (y 2 U130 ;X 2 U330 2 U200<6 1ntity # recognises only 2 U25 ;X 2 K10 O 245< of this increase in consolidated 'rofit or loss to co"'ly &ith Ind #) 21439;(<4 The resulting e8change difference6 ie the re"aining increase in the fair !alue of the de(t instru"ent ;2 U130 2 U25 X 2 U105<6 is accu"ulated in equity until the dis'osal of the net in!est"ent in the foreign o'eration in accordance &ith Ind #) 214484

E838< Ind AS 39 and Ind AS 53 Interaction bet,een Ind AS 39 and Ind AS 53

Ind AS 39 inc*udes re-uirements about t(e measurement of financia* assets and financia* *iabi*ities and t(e recognition of gains and *osses on remeasurement in profit or *oss8 Ind AS 53 inc*udes ru*es about t(e reporting of foreign currenc. items and t(e recognition of e&c(ange differences in profit or *oss8 In ,(at order are Ind AS 53 and Ind AS 39 app*iedF )tatement of financial position +enerally6 the "easure"ent of a financial asset or financial lia(ility at fair !alue6 cost a"ortised cost is first deter"ined in the foreign currency in &hich the ite" deno"inated in accordance &ith Ind #) 394 Then6 the foreign currency a"ount translated into the functional currency using the closing rate or a historical rate or is is in

151

accordance &ith Ind #) 21 ;Ind #) 394#+83<4 *or e8a"'le6 if a "onetary financial asset ;such as a de(t instru"ent< is carried at a"ortised cost under Ind #) 396 a"ortised cost is calculated in the currency of deno"ination of that financial asset4 Then6 the foreign currency a"ount is recognised using the closing rate in the entity?s financial state"ents ;Ind #) 21423<4 That a''lies regardless of &hether a "onetary ite" is "easured at cost6 a"ortised cost or fair !alue in the foreign currency ;Ind #) 21424<4 # non,"onetary financial asset ;such as an in!est"ent in an equity instru"ent< is translated using the closing rate if it is carried at fair !alue in the foreign currency ;Ind #) 21423;c<< and at a historical rate if it is not carried at fair !alue under Ind #) 39 (ecause its fair !alue cannot (e relia(ly "easured ;Ind #) 21423;(< and Ind #) 3944$;c<<4 #s an e8ce'tion6 if the financial asset or financial lia(ility is designated as a hedged ite" in a fair !alue hedge of the e8'osure to changes in foreign currency rates underInd #) 396 the hedged ite" is re"easured for changes in foreign currency rates e!en if it &ould other&ise ha!e (een recognised using a historical rate under Ind #) 21 ;Ind #) 39489<6 ie the foreign currency a"ount is recognised using the closing rate4 This e8ce'tion a''lies to non,"onetary ite"s that are carried in ter"s of historical cost in the foreign currency and are hedged against e8'osure to foreign currency rates ;Ind #) 21423;(<<4 #rofit or loss The recognition of a change in the carrying a"ount of a financial asset or financial lia(ility in 'rofit or loss de'ends on a nu"(er of factors6 including &hether it is an e8change difference or other change in carrying a"ount6 &hether it arises on a "onetary ite" ;for e8a"'le6 "ost de(t instru"ents< or non,"onetary ite" ;such as "ost equity in!est"ents<6 &hether the associated asset or lia(ility is designated as a cash flo& hedge of an e8'osure to changes in foreign currency rates6 and &hether it results fro" translating the financial state"ents of a foreign o'eration4 The issue of recognising changes in the carrying a"ount of a financial asset or financial lia(ility held (y a foreign o'eration is addressed in a se'arate question ;see .uestion 14343<4 #ny e8change difference arising on recognising a monetary item at a rate different fro" that at &hich it &as initially recognised during the 'eriod6 or recognised in 're!ious financial state"ents6 is recognised in 'rofit or loss or in other co"'rehensi!e inco"e in accordance &ith Ind #) 21 ;Ind #) 394#+836Ind #) 21428 andInd #) 21432<6 unless the "onetary ite" is designated as a cash flo& hedge of a highly 'ro(a(le forecast transaction in foreign currency6 in &hich case the require"ents for recognition of gains and losses on cash flo& hedges in Ind #) 39 a''ly ;Ind #) 39495<4 Differences arising fro" recognising a "onetary ite" at a foreign currency a"ount different fro" that at &hich it &as 're!iously recognised are accounted for in a si"ilar "anner6 since all changes in the carrying a"ount relating to foreign currency "o!e"ents should (e treated consistently4 #ll other changes in the (alance sheet "easure"ent of a "onetary ite" are recognised in 'rofit or loss or in other co"'rehensi!e inco"e in accordance &ithInd #) 394 *or e8a"'le6 although an entity recognises gains and losses on a!aila(le,for,sale "onetary financial assets in other co"'rehensi!e inco"e ;Ind #) 39455;(<<6 the entity ne!ertheless recognises the changes in the carrying a"ount relating to changes in foreign e8change rates in 'rofit or loss ;Ind #) 21423;a<<4 #ny changes in the carrying a"ount of a non"monetary item are recognised in 'rofit or loss or in other co"'rehensi!e inco"e in accordance &ith Ind #) 39 ;Ind #) 394#+83<4 *or e8a"'le6 for a!aila(le,for,sale financial assets the entire change in the carrying a"ount6 including the effect of changes in foreign currency rates6 is recognised in other

152

co"'rehensi!e inco"e4 If the non,"onetary ite" is designated as a cash flo& hedge of an unrecognised fir" co""it"ent or a highly 'ro(a(le forecast transaction in foreign currency6 the require"ents for recognition of gains and losses on cash flo& hedges in Ind #) 39 a''ly ;Ind #) 39495<4 Bhen so"e 'ortion of the change in carrying a"ount is recognised in other co"'rehensi!e inco"e and so"e 'ortion is recognised in 'rofit or loss6 for e8a"'le6 if the a"ortised cost of a foreign currency (ond classified as a!aila(le for sale has increased in foreign currency ;resulting in a gain in 'rofit or loss< (ut its fair !alue has decreased in the functional currency ;resulting in a loss recognised in other co"'rehensi!e inco"e<6 an entity cannot offset those t&o co"'onents for the 'ur'oses of deter"ining gains or losses that should (e recognised in 'rofit or loss or in other co"'rehensi!e inco"e4

E8< Impairment and unco**ectibi*it. of financia* assets

E8<83 Objective evidence of impairment
Does Ind AS 39 re-uire t(at an entit. be ab*e to identif. a sing*e4 distinct past causative event to conc*ude t(at it is probab*e t(at an impairment *oss on a financia* asset (as been incurredF Ho4Ind #) 39459 states EIt "ay not (e 'ossi(le to identify a single6 discrete e!ent that caused the i"'air"ent4 %ather the co"(ined effect of se!eral e!ents "ay ha!e caused the i"'air"ent4? #lso6Ind #) 394$0 states that Ea do&ngrade of an entity?s credit rating is not6 of itself6 e!idence of i"'air"ent6 although it "ay (e e!idence of i"'air"ent &hen considered &ith other a!aila(le infor"ation?4 @ther factors that an entity considers in deter"ining &hether it has o(5ecti!e e!idence that an i"'air"ent loss has (een incurred include infor"ation a(out the de(tors? or issuers? liquidity6 sol!ency and (usiness and financial ris> e8'osures6 le!els of and trends in delinquencies for si"ilar financial assets6 national and local econo"ic trends and conditions6 and the fair !alue of collateral and guarantees4 These and other factors "ay6 either indi!idually or ta>en together6 'ro!ide sufficient o(5ecti!e e!idence that an i"'air"ent loss has (een incurred in a financial asset or grou' of financial assets4

E8<85 Impairment% future *osses

Does Ind AS 39 permit t(e recognition of an impairment *oss t(roug( t(e estab*is(ment of an a**o,ance for future *osses ,(en a *oan is givenF )or e&amp*e4 if Entit. A *ends Rs834>>> to Customer '4 can it recognise an immediate impairment *oss of Rs83> if Entit. A4 based on (istorica* e&perience4 e&pects t(at 3 per cent of t(e principa* amount of *oans given ,i** not be co**ectedF Ho4Ind #) 39443 requires a financial asset to (e initially "easured at fair !alue4 *or a loan asset6 the fair !alue is the a"ount of cash lent ad5usted for any fees and costs ;unless a 'ortion of the a"ount lent is co"'ensation for other stated or i"'lied rights or 'ri!ileges<4 In addition6Ind #) 39458 requires that an i"'air"ent loss is recognised only if there is o(5ecti!e e!idence of i"'air"ent as a result of a 'ast e!ent that occurred after initial recognition4 #ccordingly6 it is inconsistent &ith Ind #) 39443 and Ind #) 39458 to reduce the carrying a"ount of a loan asset on initial recognition through the recognition of an i""ediate i"'air"ent loss4

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E8<83 Assessment of impairment% principa* and interest

'ecause of Customer '?s financia* difficu*ties4 Entit. A is concerned t(at Customer ' ,i** not be ab*e to ma@e a** principa* and interest pa.ments due on a *oan in a time*. manner8 It negotiates a restructuring of t(e *oan8 Entit. A e&pects t(at Customer ' ,i** be ab*e to meet its ob*igations under t(e restructured terms8 Cou*d Entit. A recognise an impairment *oss if t(e restructured terms are as ref*ected in an. of t(e fo**o,ing casesF ;a< Customer ' ,i** pa. t(e fu** principa* amount of t(e origina* *oan five .ears after t(e origina* due date4 but none of t(e interest due under t(e origina* terms8 Customer ' ,i** pa. t(e fu** principa* amount of t(e origina* *oan on t(e origina* due date4 but none of t(e interest due under t(e origina* terms8 Customer ' ,i** pa. t(e fu** principa* amount of t(e origina* *oan on t(e origina* due date ,it( interest on*. at a *o,er interest rate t(an t(e interest rate in(erent in t(e origina* *oan8 Customer ' ,i** pa. t(e fu** principa* amount of t(e origina* *oan five .ears after t(e origina* due date and a** interest accrued during t(e origina* *oan term4 but no interest for t(e e&tended term8 Customer ' ,i** pa. t(e fu** principa* amount of t(e origina* *oan five .ears after t(e origina* due date and a** interest4 inc*uding interest for bot( t(e origina* term of t(e *oan and t(e e&tended term8

;(< ;c<

;d<

;e<

Ind #) 39458 indicates that an i"'air"ent loss has (een incurred if there is o(5ecti!e e!idence of i"'air"ent4 The a"ount of the i"'air"ent loss for a loan "easured at a"ortised cost is the difference (et&een the carrying a"ount of the loan and the 'resent !alue of future 'rinci'al and interest 'ay"ents discounted at the loan?s original effecti!e interest rate4 In cases ;a<;d< a(o!e6 the 'resent !alue of the future 'rinci'al and interest 'ay"ents discounted at the loan?s original effecti!e interest rate &ill (e lo&er than the carrying a"ount of the loan4 Therefore6 an i"'air"ent loss is recognised in those cases4 In case ;e<6 e!en though the ti"ing of 'ay"ents has changed6 the lender &ill recei!e interest on interest6 and the 'resent !alue of the future 'rinci'al and interest 'ay"ents discounted at the loan?s original effecti!e interest rate &ill equal the carrying a"ount of the loan4 Therefore6 there is no i"'air"ent loss4 -o&e!er6 this fact 'attern is unli>ely gi!en usto"er /?s financial difficulties4

E8<8< Assessment of impairment% fair va*ue (edge

A *oan ,it( fi&ed interest rate pa.ments is (edged against t(e e&posure to interest rate ris@ b. a receiveAvariab*e4 pa.Afi&ed interest rate s,ap8 0(e (edge re*ations(ip -ua*ifies for fair va*ue (edge accounting and is reported as a fair va*ue (edge8 0(us4 t(e carr.ing amount of t(e *oan inc*udes an adjustment for fair va*ue c(anges attributab*e to movements in interest rates8 S(ou*d an assessment of impairment in t(e *oan ta@e into account t(e fair va*ue adjustment for interest rate ris@F

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Kes4 The loan?s original effecti!e interest rate (efore the hedge (eco"es irrele!ant once the carrying a"ount of the loan is ad5usted for any changes in its fair !alue attri(uta(le to interest rate "o!e"ents4 Therefore6 the original effecti!e interest rate and a"ortised cost of the loan are ad5usted to ta>e into account recognised fair !alue changes4 The ad5usted effecti!e interest rate is calculated using the ad5usted carrying a"ount of the loan4 #n i"'air"ent loss on the hedged loan is calculated as the difference (et&een its carrying a"ount after ad5ust"ent for fair !alue changes attri(uta(le to the ris> (eing hedged and the esti"ated future cash flo&s of the loan discounted at the ad5usted effecti!e interest rate4 Bhen a loan is included in a 'ortfolio hedge of interest rate ris>6 the entity should allocate the change in the fair !alue of the hedged 'ortfolio to the loans ;or grou's of si"ilar loans< (eing assessed for i"'air"ent on a syste"atic and rational (asis4

E8<89 Impairment% provision matri&

A financia* institution ca*cu*ates impairment in t(e unsecured portion of *oans and receivab*es on t(e basis of a provision matri& t(at specifies fi&ed provision rates for t(e number of da.s a *oan (as been c*assified as nonAperforming (Lero per cent if *ess t(an 9> da.s4 5> per cent if 9>:37> da.s4 9> per cent if 373:3;9 da.s and 3>> per cent if more t(an 3;9 da.s)8 Can t(e resu*ts be considered to be appropriate for t(e purpose of ca*cu*ating t(e impairment *oss on *oans and receivab*es under Ind AS 398;3F Hot necessarily4Ind #) 394$3 requires i"'air"ent or (ad de(t losses to (e calculated as the difference (et&een the asset?s carrying a"ount and the 'resent !alue of esti"ated future cash flo&s discounted at the financial instru"ent?s original effecti!e interest rate4

E8<8; Impairment% e&cess *osses

Does Ind AS 39 permit an entit. to recognise impairment or bad debt *osses in e&cess of impairment *osses t(at are determined on t(e basis of objective evidence about impairment in identified individua* financia* assets or identified groups of simi*ar financia* assetsF Ho4 Ind #) 39 does not 'er"it an entity to recognise i"'air"ent or (ad de(t losses in addition to those that can (e attri(uted to indi!idually identified financial assets or identified grou's of financial assets &ith si"ilar credit ris> characteristics ;Ind #) 394$4< on the (asis of o(5ecti!e e!idence a(out the e8istence of i"'air"ent in those assets ;Ind #) 39458<4 #"ounts that an entity "ight &ant to set aside for additional 'ossi(le i"'air"ent in financial assets6 such as reser!es that cannot (e su''orted (y o(5ecti!e e!idence a(out i"'air"ent6 are not recognised as i"'air"ent or (ad de(t losses under Ind #) 394 -o&e!er6 if an entity deter"ines that no o(5ecti!e e!idence of i"'air"ent e8ists for an indi!idually assessed financial asset6 &hether significant or not6 it includes the asset in a grou' of financial assets &ith si"ilar credit ris> characteristics ;Ind #) 394$4<4

E8<86 Recognition of impairment on a portfo*io basis

Ind AS 398;3 re-uires t(at impairment be recognised for financia* assets carried at amortised cost8Ind AS 398;< states t(at impairment ma. be measured and recognised individua**. or on a portfo*io basis for a group of simi*ar financia*

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assets8 If one asset in t(e group is impaired but t(e fair va*ue of anot(er asset in t(e group is above its amortised cost4 does Ind AS 39 a**o, nonArecognition of t(e impairment of t(e first assetF Ho4 If an entity >no&s that an indi!idual financial asset carried at a"ortised cost is i"'aired6Ind #) 394$3 requires that the i"'air"ent of that asset should (e recognised4 It states: Ethe a"ount of the loss is "easured as the difference (et&een the asset=s carrying a"ount and the 'resent !alue of esti"ated future cash flo&s ;e8cluding future credit losses that ha!e not (een incurred< discounted at the financial asset?s original effecti!e interest rate? ;e"'hasis added<4 3easure"ent of i"'air"ent on a 'ortfolio (asis under Ind #) 394$4 "ay (e a''lied to grou's of s"all (alance ite"s and to financial assets that are indi!idually assessed and found not to (e i"'aired &hen there is indication of i"'air"ent in a grou' of si"ilar assets and i"'air"ent cannot (e identified &ith an indi!idual asset in that grou'4

E8<87 Impairment% recognition of co**atera*

If an impaired financia* asset is secured b. co**atera* t(at does not meet t(e recognition criteria for assets in ot(er Standards4 is t(e co**atera* recognised as an asset separate from t(e impaired financia* assetF Ho4 The "easure"ent of the i"'aired financial asset reflects the fair !alue of the collateral4 The collateral is not recognised as an asset se'arate fro" the i"'aired financial asset unless it "eets the recognition criteria for an asset in another )tandard4

E8<89 Impairment of nonAmonetar. avai*ab*eAforAsa*e financia* asset

If a nonAmonetar. financia* asset4 suc( as an e-uit. instrument4 measured at fair va*ue ,it( gains and *osses recognised in ot(er compre(ensive income becomes impaired4 s(ou*d t(e cumu*ative net *oss recognised in ot(er compre(ensive income4 inc*uding an. portion attributab*e to foreign currenc. c(anges4 be rec*assified from e-uit. to profit or *oss as a rec*assification adjustmentF Kes4 Ind #) 394$7 states that &hen a decline in the fair !alue of an a!aila(le,for,sale financial asset has (een recognised in other co"'rehensi!e inco"e and there is o(5ecti!e e!idence that the asset is i"'aired6 the cu"ulati!e net loss that had (een recognised in other co"'rehensi!e inco"e should (e reclassified fro" equity to 'rofit or loss e!en though the asset has not (een derecognised4 #ny 'ortion of the cu"ulati!e net loss that is attri(uta(le to foreign currency changes on that asset that had (een recognised in other co"'rehensi!e inco"e is also reclassified fro" equity to 'rofit or loss4 #ny su(sequent losses6 including any 'ortion attri(uta(le to foreign currency changes6 are also reclassified fro" equity to 'rofit or loss until the asset is derecognised4

E8<83> Impairment% ,(et(er t(e avai*ab*eAforAsa*e reserve in e-uit. can be negative

Ind AS 39 re-uires t(at gains and *osses arising from c(anges in fair va*ue on avai*ab*eAforAsa*e financia* assets are recognised in ot(er compre(ensive income8 If t(e aggregate fair va*ue of suc( assets is *ess t(an t(eir carr.ing amount4 s(ou*d t(e aggregate net *oss t(at (as been recognised in ot(er compre(ensive income be rec*assified from e-uit. to profit or *oss as a rec*assification adjustmentF

156

Hot necessarily4 The rele!ant criterion is not &hether the aggregate fair !alue is less than the carrying a"ount6 (ut &hether there is o(5ecti!e e!idence that a financial asset or grou' of assets is i"'aired4 #n entity assesses at the end of each re'orting 'eriod &hether there is any o(5ecti!e e!idence that a financial asset or grou' of assets "ay (e i"'aired6 in accordance &ith Ind #) 39459$14 Ind #) 394$0 states that a do&ngrade of an entity?s credit rating is not6 of itself6 e!idence of i"'air"ent6 although it "ay (e e!idence of i"'air"ent &hen considered &ith other a!aila(le infor"ation4 #dditionally6 a decline in the fair !alue of a financial asset (elo& its cost or a"ortised cost is not necessarily e!idence of i"'air"ent ;for e8a"'le6 a decline in the fair !alue of an in!est"ent in a de(t instru"ent that results fro" an increase in the (asic6 ris>,free interest rate<4

Section ) !edging
)83 !edging instruments
)8383 !edging t(e fair va*ue e&posure of a bond denominated in a foreign currenc. Entit. G4 ,(ose functiona* currenc. is t(e Gapanese .en4 (as issued 9 mi**ion fiveA .ear /S do**ar fi&ed rate debt8 A*so4 it o,ns a 9 mi**ion fiveA.ear fi&ed rate /S do**ar bond ,(ic( it (as c*assified as avai*ab*e for sa*e8 Can Entit. G designate its /S do**ar *iabi*it. as a (edging instrument in a fair va*ue (edge of t(e entire fair va*ue e&posure of its /S do**ar bondF Ho4Ind #) 39472 'er"its a non,deri!ati!e to (e used as a hedging instru"ent only for a hedge of a foreign currency ris>4 1ntity I?s (ond has a fair !alue e8'osure to foreign currency and interest rate changes and credit ris>4 A*ternative*.4 can t(e /S do**ar *iabi*it. be designated as a fair va*ue (edge or cas( f*o, (edge of t(e foreign currenc. component of t(e bondF Kes4 -o&e!er6 hedge accounting is unnecessary (ecause the a"ortised cost of the hedging instru"ent and the hedged ite" are (oth re"easured using closing rates4 %egardless of &hether 1ntity I designates the relationshi' as a cash flo& hedge or a fair !alue hedge6 the effect on 'rofit or loss is the sa"e4 #ny gain or loss on the non, deri!ati!e hedging instru"ent designated as a cash flo& hedge is i""ediately recognised in 'rofit or loss to corres'ond &ith the recognition of the change in s'ot rate on the hedged ite" in 'rofit or loss as required (y Ind #) 21

)8385 !edging ,it( a nonAderivative financia* asset or *iabi*it.

Entit. G?s functiona* currenc. is t(e Gapanese .en8 It (as issued a fi&ed rate debt instrument ,it( semiAannua* interest pa.ments t(at matures in t,o .ears ,it( principa* due at maturit. of 9 mi**ion /S do**ars8 It (as a*so entered into a fi&ed price sa*es commitment for 9 mi**ion /S do**ars t(at matures in t,o .ears and is not accounted for as a derivative because it meets t(e e&emption for norma* sa*es in paragrap( 98 Can Entit. G designate its /S do**ar *iabi*it. as a fair va*ue (edge of t(e entire fair va*ue e&posure of its fi&ed price sa*es commitment and -ua*if. for (edge accountingF

157

Ho4 Ind #) 39472 'er"its a non,deri!ati!e asset or lia(ility to (e used as a hedging instru"ent only for a hedge of a foreign currency ris>4 A*ternative*.4 can Entit. G designate its /S do**ar *iabi*it. as a cas( f*o, (edge of t(e foreign currenc. e&posure associated ,it( t(e future receipt of /S do**ars on t(e fi&ed price sa*es commitmentF Kes4 Ind #) 39 'er"its the designation of a non,deri!ati!e asset or lia(ility as a hedging instru"ent in either a cash flo& hedge or a fair !alue hedge of the e8'osure to changes in foreign e8change rates of a fir" co""it"ent ;Ind #) 39487<4 #ny gain or loss on the non,deri!ati!e hedging instru"ent that is recognised in other co"'rehensi!e inco"e during the 'eriod 'receding the future sale is reclassified fro" equity to 'rofit or loss as a reclassification ad5ust"ent &hen the sale ta>es 'lace ;Ind #) 39495<4 A*ternative*.4 can Entit. G designate t(e sa*es commitment as t(e (edging instrument instead of t(e (edged itemF Ho4 @nly a deri!ati!e instru"ent or a non,deri!ati!e financial asset or lia(ility can (e designated as a hedging instru"ent in a hedge of a foreign currency ris>4 # fir" co""it"ent cannot (e designated as a hedging instru"ent4 -o&e!er6 if the foreign currency co"'onent of the sales co""it"ent is required to (e se'arated as an e"(edded deri!ati!e underInd #) 39411 andInd #) 394#+33;d<6 it could (e designated as a hedging instru"ent in a hedge of the e8'osure to changes in the fair !alue of the "aturity a"ount of the de(t attri(uta(le to foreign currency ris>4

)8383 !edge accounting% use of ,ritten options in combined (edging instruments

Issue (a) : Does Ind AS 398A29< prec*ude t(e use of an interest rate co**ar or ot(er derivative instrument t(at combines a ,ritten option component and a purc(ased option component as a (edging instrumentF It de'ends4 #n interest rate collar or other deri!ati!e instru"ent that includes a &ritten o'tion cannot (e designated as a hedging instru"ent if it is a net &ritten o'tion6 (ecauseInd #) 394#+94 'recludes the use of a &ritten o'tion as a hedging instru"ent unless it is designated as an offset to a 'urchased o'tion4 #n interest rate collar or other deri!ati!e instru"ent that includes a &ritten o'tion "ay (e designated as a hedging instru"ent6 ho&e!er6 if the co"(ination is a net 'urchased o'tion or Jero cost collar4 Issue (b) : C(at factors indicate t(at an interest rate co**ar or ot(er derivative instrument t(at combines a ,ritten option component and a purc(ased option component is not a net ,ritten optionF The follo&ing factors ta>en together suggest that an interest rate collar or other deri!ati!e instru"ent that includes a &ritten o'tion is not a net &ritten o'tion4 ;a< Ho net 're"iu" is recei!ed either at ince'tion or o!er the life of the co"(ination of o'tions4 The distinguishing feature of a &ritten o'tion is the recei't of a 're"iu" to co"'ensate the &riter for the ris> incurred4 18ce't for the stri>e 'rices6 the critical ter"s and conditions of the &ritten o'tion co"'onent and the 'urchased o'tion co"'onent are the sa"e ;including underlying !aria(le or !aria(les6 currency deno"ination and "aturity date<4 #lso6

;(<

158

the notional a"ount of the &ritten o'tion co"'onent is not greater than the notional a"ount of the 'urchased o'tion co"'onent4

)838< Interna* (edges

Some entities use interna* derivative contracts (interna* (edges) to transfer ris@ e&posures bet,een different companies ,it(in a group or divisions ,it(in a sing*e *ega* entit.8 DoesInd AS 39863 pro(ibit (edge accounting in suc( casesF Kes6 if the deri!ati!e contracts are internal to the entity (eing re'orted on4 Ind #) 39 does not s'ecify ho& an entity should "anage its ris>4 -o&e!er6 it states that internal hedging transactions do not qualify for hedge accounting4 This a''lies (oth ;a< in consolidated financial state"ents for intragrou' hedging transactions6 and ;(< in the indi!idual or se'arate financial state"ents of a legal entity for hedging transactions (et&een di!isions in the entity4 The 'rinci'les of 're'aring consolidated financial state"ents in Ind #) 27424 require that Eintragrou' (alances6 transactions6 inco"e and e8'enses shall (e eli"inated in full?4 @n the other hand6 an intragrou' hedging transaction "ay (e designated as a hedge in the indi!idual or se'arate financial state"ents of a grou' entity6 if the intragrou' transaction is an e8ternal transaction fro" the 'ers'ecti!e of the grou' entity4 In addition6 if the internal contract is offset &ith an e8ternal 'arty the e8ternal contract "ay (e regarded as the hedging instru"ent and the hedging relationshi' "ay qualify for hedge accounting4 The follo&ing su""arises the a''lication of Ind #) 39 to internal hedging transactions4

Ind #) 39 does not 'reclude an entity fro" using internal deri!ati!e contracts for ris> "anage"ent 'ur'oses and it does not 'reclude internal deri!ati!es fro" (eing accu"ulated at the treasury le!el or so"e other central location so that ris> can (e "anaged on an entity,&ide (asis or at so"e higher le!el than the se'arate legal entity or di!ision4 Internal deri!ati!e contracts (et&een t&o se'arate entities &ithin a consolidated grou' can qualify for hedge accounting (y those entities in their indi!idual or se'arate financial state"ents6 e!en though the internal contracts are not offset (y deri!ati!e contracts &ith a 'arty e8ternal to the consolidated grou'4 Internal deri!ati!e contracts (et&een t&o se'arate di!isions &ithin the sa"e legal entity can qualify for hedge accounting in the indi!idual or se'arate financial state"ents of that legal entity only if those contracts are offset (y deri!ati!e contracts &ith a 'arty e8ternal to the legal entity4 Internal deri!ati!e contracts (et&een se'arate di!isions &ithin the sa"e legal entity and (et&een se'arate entities &ithin the consolidated grou' can qualify for hedge accounting in the consolidated financial state"ents only if the internal contracts are offset (y deri!ati!e contracts &ith a 'arty e8ternal to the consolidated grou'4 If the internal deri!ati!e contracts are not offset (y deri!ati!e contracts &ith e8ternal 'arties6 the use of hedge accounting (y grou' entities and di!isions using internal contracts "ust (e re!ersed on consolidation4

159

To illustrate: the (an>ing di!ision of 1ntity # enters into an internal interest rate s&a' &ith the trading di!ision of the sa"e entity4 The 'ur'ose is to hedge the interest rate ris> e8'osure of a loan ;or grou' of si"ilar loans< in the loan 'ortfolio4 Fnder the s&a'6 the (an>ing di!ision 'ays fi8ed interest 'ay"ents to the trading di!ision and recei!es !aria(le interest rate 'ay"ents in return4 If a hedging instru"ent is not acquired fro" an e8ternal 'arty6 Ind #) 39 does not allo& hedge accounting treat"ent for the hedging transaction underta>en (y the (an>ing and trading di!isions4Ind #) 39473 indicates that only deri!ati!es that in!ol!e a 'arty e8ternal to the entity can (e designated as hedging instru"ents and6 further6 that any gains or losses on intragrou' or intra,entity transactions should (e eli"inated on consolidation4 Therefore6 transactions (et&een different di!isions &ithin 1ntity # do not qualify for hedge accounting treat"ent in the financial state"ents of 1ntity #4 )i"ilarly6 transactions (et&een different entities &ithin a grou' do not qualify for hedge accounting treat"ent in consolidated financial state"ents4 -o&e!er6 if in addition to the internal s&a' in the a(o!e e8a"'le the trading di!ision enters into an interest rate s&a' or other contract &ith an e8ternal 'arty that offsets the e8'osure hedged in the internal s&a'6 hedge accounting is 'er"itted underInd #) 394 *or the 'ur'oses ofInd #) 396 the hedged ite" is the loan ;or grou' of si"ilar loans< in the (an>ing di!ision and the hedging instru"ent is the e8ternal interest rate s&a' or other contract4 The trading di!ision "ay aggregate se!eral internal s&a's or 'ortions of the" that are not offsetting each other and enter into a single third 'arty deri!ati!e contract that offsets the aggregate e8'osure4 Fnder Ind #) 396 such e8ternal hedging transactions "ay qualify for hedge accounting treat"ent 'ro!ided that the hedged ite"s in the (an>ing di!ision are identified and the other conditions for hedge accounting are "et4 It should (e noted6 ho&e!er6 that Ind #) 39479 does not 'er"it hedge accounting treat"ent for held,to,"aturity in!est"ents if the hedged ris> is the e8'osure to interest rate changes4

)8389 Offsetting interna* derivative contracts used to manage interest rate ris@
If a centra* treasur. function enters into interna* derivative contracts ,it( subsidiaries and various divisions ,it(in t(e conso*idated group to manage interest rate ris@ on a centra*ised basis4 can t(ose contracts -ua*if. for (edge accounting in t(e conso*idated financia* statements if4 before *a.ing off t(e ris@4 t(e interna* contracts are first netted against eac( ot(er and on*. t(e net e&posure is offset in t(e mar@etp*ace ,it( e&terna* derivative contractsF Ho4 #n internal contract designated at the su(sidiary le!el or (y a di!ision as a hedge results in the recognition of changes in the fair !alue of the ite" (eing hedged in 'rofit or loss ;a fair !alue hedge< or in the recognition of the changes in the fair !alue of the internal deri!ati!e in other co"'rehensi!e inco"e ;a cash flo& hedge<4 There is no (asis for changing the "easure"ent attri(ute of the ite" (eing hedged in a fair !alue hedge unless the e8'osure is offset &ith an e8ternal deri!ati!e4 There is also no (asis for recognising the gain or loss on the internal deri!ati!e in other co"'rehensi!e inco"e for one entity and recognising it in 'rofit or loss (y the other entity unless it is offset &ith an e8ternal deri!ati!e4 In cases &here t&o or "ore internal deri!ati!es are used to "anage interest rate ris> on assets or lia(ilities at the su(sidiary or di!ision le!el and those internal deri!ati!es are offset at the treasury le!el6 the effect of designating the internal

160

deri!ati!es as hedging instru"ents is that the hedged non,deri!ati!e e8'osures at the su(sidiary or di!ision le!els &ould (e used to offset each other on consolidation4 #ccordingly6 since Ind #) 39472 does not 'er"it designating non,deri!ati!es as hedging instru"ents6 e8ce't for foreign currency e8'osures6 the results of hedge accounting fro" the use of internal deri!ati!es at the su(sidiary or di!ision le!el that are not laid off &ith e8ternal 'arties "ust (e re!ersed on consolidation4 It should (e noted6 ho&e!er6 that there &ill (e no effect on 'rofit or loss and other co"'rehensi!e inco"e of re!ersing the effect of hedge accounting in consolidation for internal deri!ati!es that offset each other at the consolidation le!el if they are used in the sa"e ty'e of hedging relationshi' at the su(sidiary or di!ision le!el and6 in the case of cash flo& hedges6 &here the hedged ite"s affect 'rofit or loss in the sa"e 'eriod4 Iust as the internal deri!ati!es offset at the treasury le!el6 their use as fair !alue hedges (y t&o se'arate entities or di!isions &ithin the consolidated grou' &ill also result in the offset of the fair !alue a"ounts recognised in 'rofit or loss6 and their use as cash flo& hedges (y t&o se'arate entities or di!isions &ithin the consolidated grou' &ill also result in the fair !alue a"ounts (eing offset against each other in other co"'rehensi!e inco"e4 -o&e!er6 there "ay (e an effect on indi!idual line ite"s in (oth the consolidated state"ent of 'rofit and loss and the consolidated (alance sheet6 for e8a"'le &hen internal deri!ati!es that hedge assets ;or lia(ilities< in a fair !alue hedge are offset (y internal deri!ati!es that are used as a fair !alue hedge of other assets ;or lia(ilities< that are recognised in a different line ite" in the (alance sheet or state"ent of 'rofit and loss4 In addition6 to the e8tent that one of the internal contracts is used as a cash flo& hedge and the other is used in a fair !alue hedge6 gains and losses recognised &ould not offset since the gain ;or loss< on the internal deri!ati!e used as a fair !alue hedge &ould (e recognised in 'rofit or loss and the corres'onding loss ;or gain< on the internal deri!ati!e used as a cash flo& hedge &ould (e recognised in other co"'rehensi!e inco"e4 .uestion *4144 descri(es the a''lication of Ind #) 39 to internal hedging transactions4

)838; Offsetting interna* derivative contracts used to manage foreign currenc. ris@
If a centra* treasur. function enters into interna* derivative contracts ,it( subsidiaries and various divisions ,it(in t(e conso*idated group to manage foreign currenc. ris@ on a centra*ised basis4 can t(ose contracts be used as a basis for identif.ing e&terna* transactions t(at -ua*if. for (edge accounting in t(e conso*idated financia* statements if4 before *a.ing off t(e ris@4 t(e interna* contracts are first netted against eac( ot(er and on*. t(e net e&posure is offset b. entering into a derivative contract ,it( an e&terna* part.F It de'ends4 Ind #) 27 Consolidated and )eparate Financial )tatements requires all internal transactions to (e eli"inated in consolidated financial state"ents4 #s stated in Ind #) 394736 internal hedging transactions do not qualify for hedge accounting in the consolidated financial state"ents of the grou'4 Therefore6 if an entity &ishes to achie!e hedge accounting in the consolidated financial state"ents6 it "ust designate a hedging relationshi' (et&een a qualifying e8ternal hedging instru"ent and a qualifying hedged ite"4 #s discussed in .uestion *41456 the accounting effect of t&o or "ore internal deri!ati!es that are used to "anage interest rate ris> at the su(sidiary or di!ision le!el and are

161

offset at the treasury le!el is that the hedged non,deri!ati!e e8'osures at those le!els &ould (e used to offset each other on consolidation4 There is no effect on 'rofit of loss or other co"'rehensi!e inco"e if ;a< the internal deri!ati!es are used in the sa"e ty'e of hedge relationshi' ;ie fair !alue or cash flo& hedges< and ;(<6 in the case of cash flo& hedges6 any deri!ati!e gains and losses that are initially recognised in other co"'rehensi!e inco"e are reclassified fro" equity to 'rofit or loss in the sa"e 'eriod;s<4 Bhen these t&o conditions are "et6 the gains and losses on the internal deri!ati!es that are recognised in 'rofit or loss or in other co"'rehensi!e inco"e &ill offset on consolidation resulting in the sa"e 'rofit or loss and other co"'rehensi!e inco"e as if the deri!ati!es had (een eli"inated4 -o&e!er6 there "ay (e an effect on indi!idual line ite"s6 in (oth the consolidated state"ent of 'rofit and loss and the consolidated (alance sheet6 that &ould need to (e eli"inated4 In addition6 there is an effect on 'rofit or loss and other co"'rehensi!e inco"e if so"e of the offsetting internal deri!ati!es are used in cash flo& hedges6 &hile others are used in fair !alue hedges4 There is also an effect on 'rofit or loss and other co"'rehensi!e inco"e for offsetting internal deri!ati!es that are used in cash flo& hedges if the deri!ati!e gains and losses that are initially recognised in other co"'rehensi!e inco"e are reclassified fro" equity to 'rofit or loss in different 'eriods ;(ecause the hedged ite"s affect 'rofit or loss in different 'eriods<4 #s regards foreign currency ris>6 'ro!ided that the internal deri!ati!es re'resent the transfer of foreign currency ris> on underlying non,deri!ati!e financial assets or lia(ilities6 hedge accounting can (e a''lied (ecause Ind #) 39472 'er"its a non,deri!ati!e financial asset or lia(ility to (e designated as a hedging instru"ent for hedge accounting 'ur'oses for a hedge of a foreign currency ris>4 #ccordingly6 in this case the internal deri!ati!e contracts can (e used as a (asis for identifying e8ternal transactions that qualify for hedge accounting in the consolidated financial state"ents e!en if they are offset against each other4 -o&e!er6 for consolidated financial state"ents6 it is necessary to designate the hedging relationshi' so that it in!ol!es only e8ternal transactions4 *urther"ore6 the entity cannot a''ly hedge accounting to the e8tent that t&o or "ore offsetting internal deri!ati!es re'resent the transfer of foreign currency ris> on underlying forecast transactions or unrecognised fir" co""it"ents4 This is (ecause an unrecognised fir" co""it"ent or forecast transaction does not qualify as a hedging instru"ent under Ind #) 394 #ccordingly6 in this case the internal deri!ati!es cannot (e used as a (asis for identifying e8ternal transactions that qualify for hedge accounting in the consolidated financial state"ents4 #s a result6 any cu"ulati!e net gain or loss on an internal deri!ati!e that has (een included in the initial carrying a"ount of an asset or lia(ility ;(asis ad5ust"ent< or recognised in other co"'rehensi!e inco"e &ould ha!e to (e re!ersed on consolidation if it cannot (e de"onstrated that the offsetting internal deri!ati!e re'resented the transfer of a foreign currency ris> on a financial asset or lia(ility to an e8ternal hedging instru"ent4

)8386 Interna* derivatives% e&amp*es of app*.ing Euestion )838;

In each case, FC > foreign currency, &C > local currency .'hich is the entity=s functional currency/, and TC > treasury centre+ Case 0 ?ffset of fair value hedges

162

)u(sidiary # has trade recei!a(les of * 1006 due in $0 days6 &hich it hedges using a for&ard contract &ith T 4 )u(sidiary / has 'aya(les of * 506 also due in $0 days6 &hich it hedges using a for&ard contact &ith T 4 T nets the t&o internal deri!ati!es and enters into a net e8ternal for&ard contract to 'ay * 50 and recei!e 2 in $0 days4 #t the end of "onth 16 * &ea>ens against 2 4 # incurs a foreign e8change loss of 2 10 on its recei!a(les6 offset (y a gain of 2 10 on its for&ard contract &ith T 4 / "a>es a foreign e8change gain of 2 5 on its 'aya(les offset (y a loss of 2 5 on its for&ard contract &ith T 4 T "a>es a loss of 2 10 on its internal for&ard contract &ith #6 a gain of 2 5 on its internal for&ard contract &ith /6 and a gain of 2 5 on its e8ternal for&ard contract4 #t the end of "onth 16 the follo&ing entries are "ade in the indi!idual or se'arate financial state"ents of #6 / and T 4 1ntries reflecting intragrou' transactions or e!ents are sho&n in italics4

A,s entries Dr *oreign e8change loss r %ecei!a(les !r Internal contract TC Cr Internal gain TC (,s entries Dr Daya(les r *oreign e8change gain !r Internal loss TC Cr Internal TC -.,s entries !r Internal loss A Cr Internal A !r Internal contract @ Cr Internal gain @ Dr 18ternal contract r *oreign e8change gain for&ard contract contract

2 10 2 10 &C03 &C03 2 5 2 5 &C: &C:

&C03 &C03 &C: &C: 2 5 2 5

/oth # and / could a''ly hedge accounting in their indi!idual financial state"ents 'ro!ided all conditions in Ind #) 39 are "et4 -o&e!er6 in this case6 no hedge accounting is required (ecause gains and losses on the internal deri!ati!es and the offsetting losses and gains on the hedged recei!a(les and 'aya(les are recognised i""ediately in 'rofit or loss of # and / &ithout hedge accounting4

163

In the consolidated financial state"ents6 the internal deri!ati!e transactions are eli"inated4 In econo"ic ter"s6 the 'aya(le in / hedges * 50 of the recei!a(les in #4 The e8ternal for&ard contract in T hedges the re"aining * 50 of the recei!a(le in #4 -edge accounting is not necessary in the consolidated financial state"ents (ecause "onetary ite"s are "easured at s'ot foreign e8change rates under Ind #) 21 irres'ecti!e of &hether hedge accounting is a''lied4 The net (alances (efore and after eli"ination of the accounting entries relating to the internal deri!ati!es are the sa"e6 as set out (elo&4 #ccordingly6 there is no need to "a>e any further accounting entries to "eet the require"ents of Ind #) 394 !e$i Credi t t %ecei!a(les Daya(les 2 5 2 10

18ternal for&ard contract 2 5 +ains and losses Internal contracts

Case 2 ?ffset of cash flo' hedges To e8tend the e8a"'le6 # also has highly 'ro(a(le future re!enues of * 200 on &hich it e8'ects to recei!e cash in 90 days4 / has highly 'ro(a(le future e8'enses of * 500 ;ad!ertising cost<6 also to (e 'aid for in 90 days4 # and / enter into se'arate for&ard contracts &ith T to hedge these e8'osures and T enters into an e8ternal for&ard contract to recei!e * 300 in 90 days4 #s (efore6 * &ea>ens at the end of "onth 14 # incurs a Eloss? of 2 20 on its antici'ated re!enues (ecause the 2 !alue of these re!enues decreases4 This is offset (y a Egain? of 2 20 on its for&ard contract &ith T 4 / incurs a Egain? of 2 50 on its antici'ated ad!ertising cost (ecause the 2 !alue of the e8'ense decreases4 This is offset (y a Eloss? of 2 50 on its transaction &ith T 4 T incurs a Egain? of 2 50 on its internal transaction &ith /6 a Eloss? of 2 20 on its internal transaction &ith # and a loss of 2 30 on its e8ternal for&ard contract4 # and / co"'lete the necessary docu"entation6 the hedges are effecti!e6 and (oth # and / qualify for hedge accounting in their indi!idual financial state"ents4 # recognises the gain of 2 20 on its internal deri!ati!e transaction in other co"'rehensi!e inco"e and / recognises the loss of 2 50 in other co"'rehensi!e inco"e4 T does not clai" hedge accounting6 (ut "easures (oth its internal and e8ternal deri!ati!e 'ositions at fair !alue6 &hich net to Jero4 #t the end of "onth 16 the follo&ing entries are "ade in the indi!idual or se'arate financial state"ents of #6 / and T 4 1ntries reflecting intragrou' transactions or e!ents are sho&n in italics4 A?s entries !r Internal contract TC &C23

164

Cr ?ther comprehensive income '?s entries !r ?ther income comprehensive Cr Internal TC 0C?s entries !r Internal loss A Cr Internal contract A !r Internal contract @ Cr Internal gain @ Dr *oreign e8change loss r 18ternal for&ard contract 2 30 &C:3 &C23 contract &C:3

&C23

&C:3

&C23 &C:3 2 30

*or the consolidated financial state"ents6 T ?s e8ternal for&ard contract on * 300 is designated6 at the (eginning of "onth 16 as a hedging instru"ent of the first * 300 of /?s highly 'ro(a(le future e8'enses4 Ind #) 39 requires that in the consolidated financial state"ents at the end of "onth 16 the accounting effects of the internal deri!ati!e transactions "ust (e eli"inated4 -o&e!er6 the net (alances (efore and after eli"ination of the accounting entries relating to the internal deri!ati!es are the sa"e6 as set out (elo&4 #ccordingly6 there is no need to "a>e any further accounting entries in order for the require"ents of Ind #) 39 to (e "et4 !e$i t 18ternal for&ard contract Credi t 2 30

@ther co"'rehensi!e inco"e 2 30 +ains and losses Internal contracts

Case 7 ?ffset of fair value and cash flo' hedges #ssu"e that the e8'osures and the internal deri!ati!e transactions are the sa"e as in cases 1 and 24 -o&e!er6 instead of entering into t&o e8ternal deri!ati!es to hedge se'arately the fair !alue and cash flo& e8'osures6 T enters into a single net e8ternal deri!ati!e to recei!e * 250 in e8change for 2 in 90 days4 T has four internal deri!ati!es6 t&o "aturing in $0 days and t&o "aturing in 90 days4 These are offset (y a net e8ternal deri!ati!e "aturing in 90 days4 The interest rate differential (et&een * and 2 is "ini"al6 and therefore the ineffecti!eness resulting fro" the "is"atch in "aturities is e8'ected to ha!e a "ini"al effect on 'rofit or loss in T 4 #s in cases 1 and 26 # and / a''ly hedge accounting for their cash flo& hedges and T "easures its deri!ati!es at fair !alue4 # recognises a gain of 2 20 on its internal

165

deri!ati!e transaction in other co"'rehensi!e inco"e and / recognises a loss of 2 50 on its internal deri!ati!e transaction in other co"'rehensi!e inco"e4 #t the end of "onth 16 the follo&ing entries are "ade in the indi!idual or se'arate financial state"ents of #6 / and T 4 1ntries reflecting intragrou' transactions or e!ents are sho&n in italics4 A?s entries Dr *oreign e8change loss r %ecei!a(les !r Internal contract TC Cr Internal gain TC !r Internal contract TC Cr ?ther comprehensive income '?s entries Dr Daya(les r *oreign gain !r Internal loss TC Cr Internal TC !r ?ther income comprehensive Cr Internal TC 0C?s entries !r Internal loss A Cr Internal contract A !r Internal loss A Cr Internal contract A !r Internal contract @ Cr Internal gain @ !r Internal contract @ Cr Internal gain @ Dr *oreign e8change loss r 18ternal contract T?TA& .for derivatives/ Drofit or hedges< loss the internal A for&ard 2 25 2 25 &C:3 &C:3 &C: &C: &C23 &C23 &C03 &C03 contract &C:3 &C:3 contract e8change &C: &C: 2 5 2 5 &C23 &C23 &C03 &C03 2 10 2 10

@ &C ;5< ;50<

Total &C 5 ;30<

;fair

&C !alue 10

@ther co"'rehensi!e inco"e 20 ;cash flo& hedges<

166

Total

30

;55<

;25<

o"(ining these a"ounts &ith the e8ternal transactions ;ie those not "ar>ed in italics a(o!e< 'roduces the total net (alances (efore eli"ination of the internal deri!ati!es as follo&s: !e$i t %ecei!a(les Daya(les *or&ard contract 2 5 Credi t 2 10 2 25

@ther co"'rehensi!e inco"e 2 30 +ains and losses Internal contracts

*or the consolidated financial state"ents6 the follo&ing designations are "ade at the (eginning of "onth 1: the 'aya(le of * 50 in / is designated as a hedge of the first * 50 of the highly 'ro(a(le future re!enues in #4 Therefore6 at the end of "onth 16 the follo&ing entries are "ade in the consolidated financial state"ents: Dr Daya(le 2 5= r @ther co"'rehensi!e inco"e 2 5= the recei!a(le of * 100 in # is designated as a hedge of the first * 100 of the highly 'ro(a(le future e8'enses in /4 Therefore6 at the end of "onth 16 the follo&ing entries are "ade in the consolidated financial state"ents: Dr @ther co"'rehensi!e inco"e 2 10= r %ecei!a(le 2 10= and the e8ternal for&ard contract on * 250 in T is designated as a hedge of the ne8t * 250 of highly 'ro(a(le future e8'enses in /4 Therefore6 at the end of "onth 16 the follo&ing entries are "ade in the consolidated financial state"ents: Dr @ther co"'rehensi!e inco"e 2 25= r 18ternal for&ard contract 2 254 In the consolidated financial state"ents at the end of "onth 16 Ind #) 39 requires the accounting effects of the internal deri!ati!e transactions to (e eli"inated4 -o&e!er6 the total net (alances (efore and after eli"ination of the accounting entries relating to the internal deri!ati!es are the sa"e6 as set out (elo&4 #ccordingly6 there is no need to "a>e any further accounting entries to "eet the require"ents of Ind #) 394 !e$i t %ecei!a(les Daya(les *or&ard contract 2 5 Credi t 2 10 2 25

167

@ther co"'rehensi!e inco"e 2 30 +ains and losses Internal contracts

Case A ?ffset of fair value and cash flo' hedges 'ith ad5ustment to carrying amount of inventory #ssu"e si"ilar transactions as in case 36 e8ce't that the antici'ated cash outflo& of * 500 in / relates to the 'urchase of in!entory that is deli!ered after $0 days4 #ssu"e also that the entity has a 'olicy of (asis,ad5usting hedged forecast non,financial ite"s4 #t the end of "onth 26 there are no further changes in e8change rates or fair !alues4 #t that date6 the in!entory is deli!ered and the loss of 2 50 on /?s internal deri!ati!e6 recognised in other co"'rehensi!e inco"e in "onth 16 is ad5usted against the carrying a"ount of in!entory in /4 The gain of 2 20 on #?s internal deri!ati!e is recognised in other co"'rehensi!e inco"e as (efore4 In the consolidated financial state"ents6 there is no& a "is"atch co"'ared &ith the result that &ould ha!e (een achie!ed (y un&inding and redesignating the hedges4 The e8ternal deri!ati!e ;* 250< and a 'ro'ortion of the recei!a(le ;* 50< offset * 300 of the antici'ated in!entory 'urchase4 There is a natural hedge (et&een the re"aining * 200 of antici'ated cash outflo& in / and the antici'ated cash inflo& of * 200 in #4 This relationshi' does not qualify for hedge accounting under Ind #) 39 and this ti"e there is only a 'artial offset (et&een gains and losses on the internal deri!ati!es that hedge these a"ounts4 #t the end of "onths 1 and 26 the follo&ing entries are "ade in the indi!idual or se'arate financial state"ents of #6 / and T 4 1ntries reflecting intragrou' transactions or e!ents are sho&n in italics4 A?s entries (a** at t(e end of mont( 3) Dr *oreign e8change loss r %ecei!a(les !r Internal contract TC Cr Internal gain TC !r Internal contract TC Cr ?ther comprehensive income '?s entries #t the end of "onth 1: Dr Daya(les 2 5 r *oreign e8change gain !r Internal loss TC Cr Internal TC !r ?ther comprehensive income Cr Internal contract T &C:3 &C:3 contract &C: &C: 2 5 &C23 &C23 &C03 &C03 2 10 2 10

168

#t the end of "onth 2: Dr In!entory r @ther co"'rehensi!e inco"e 0C?s entries (a** at t(e end of mont( 3) !r Internal loss A Cr !r Internal loss A Cr !r Internal contract @ Cr !r Internal contract @ Cr Dr *oreign e8change loss r T?TA& .for the internal derivatives/ A &C Drofit or loss ;fair !alue hedges< 10 @ther co"'rehensi!e inco"e ;cash 20 flo& hedges< /asis ad5ust"ent ;in!entory< Total 30

2 50 2 50

&C03 Internal contract A &C23 Internal contract A &C: Internal gain @ &C:3 Internal gain @ 2 25 *or&ard @ &C ;5< ;50< ;55< 2 25 Total TC 5 20 ;50< ;25< &C:3 &C: &C23 &C03

o"(ining these a"ounts &ith the e8ternal transactions ;ie those not "ar>ed in italics a(o!e< 'roduces the total net (alances (efore eli"ination of the internal deri!ati!es as follo&s: !e$i t %ecei!a(les Daya(les *or&ard contract 2 5 Credi t 2 10 2 25 2 20

@ther co"'rehensi!e inco"e /asis ad5ust"ent ;in!entory< +ains and losses Internal contracts

2 50

*or the consolidated financial state"ents6 the follo&ing designations are "ade at the (eginning of "onth 1: the 'aya(le of * 50 in / is designated as a hedge of the first * 50 of the highly 'ro(a(le future re!enues in #4 Therefore6 at the end of "onth 16 the follo&ing

169

entry is "ade in the consolidated financial state"ents: Dr Daya(les 2 5= co"'rehensi!e inco"e 2 54

r @ther

the recei!a(le of * 100 in # is designated as a hedge of the first * 100 of the highly 'ro(a(le future e8'enses in /4 Therefore6 at the end of "onth 16 the follo&ing entries are "ade in the consolidated financial state"ents: Dr @ther co"'rehensi!e inco"e 2 10= r %ecei!a(le 2 10= and at the end of "onth 26 Dr In!entory 2 10= r @ther co"'rehensi!e inco"e 2 104 the e8ternal for&ard contract on * 250 in T is designated as a hedge of the ne8t * 250 of highly 'ro(a(le future e8'enses in /4 Therefore6 at the end of "onth 16 the follo&ing entry is "ade in the consolidated financial state"ents: Dr @ther co"'rehensi!e inco"e 2 25= r 18ternal for&ard contract 2 25= and at the end of "onth 26 Dr In!entory 2 25= r @ther co"'rehensi!e inco"e 2 254 The total net (alances after eli"ination of the accounting entries relating to the internal deri!ati!es are as follo&s: !e$i t %ecei!a(les Daya(les *or&ard contract 2 5 Credi t 2 10 2 25 2 5

@ther co"'rehensi!e inco"e /asis ad5ust"ent ;in!entory< +ains and losses Internal contracts

2 35

These total net (alances are different fro" those that &ould (e recognised if the internal deri!ati!es &ere not eli"inated6 and it is these net (alances that Ind #) 39 requires to (e included in the consolidated financial state"ents4 The accounting entries required to ad5ust the total net (alances (efore eli"ination of the internal deri!ati!es are as follo&s: ;a< to reclassify 2 15 of the loss on /?s internal deri!ati!e that is included in in!entory to reflect that * 150 of the forecast 'urchase of in!entory is not hedged (y an e8ternal instru"ent ;neither the e8ternal for&ard contract of * 250 in T nor the e8ternal 'aya(le of * 100 in #<= and to reclassify the gain of 2 15 on #?s internal deri!ati!e to reflect that the forecast re!enues of * 150 to &hich it relates is not hedged (y an e8ternal instru"ent4

;(<

The net effect of these t&o ad5ust"ents is as follo&s: Dr @ther co"'rehensi!e inco"e r In!entory 2 15 2 15

)8387 Combination of ,ritten and purc(ased options

170

In most cases4Ind AS 398A29< pro(ibits t(e use of ,ritten options as (edging instruments8 If a combination of a ,ritten option and purc(ased option (suc( as an interest rate co**ar) is transacted as a sing*e instrument ,it( one counterpart.4 can an entit. sp*it t(e derivative instrument into its ,ritten option component and purc(ased option component and designate t(e purc(ased option component as a (edging instrumentF Ho4Ind #) 39474 s'ecifies that a hedging relationshi' is designated (y an entity for a hedging instru"ent in its entirety4 The only e8ce'tions 'er"itted are s'litting the ti"e !alue and intrinsic !alue of an o'tion and s'litting the interest ele"ent and s'ot 'rice on a for&ard4 .uestion *4143 addresses the issue of &hether and &hen a co"(ination of o'tions is considered as a &ritten o'tion4

)8389 De*taAneutra* (edging strateg.

Does Ind AS 39 permit an entit. to app*. (edge accounting for a Bde*taAneutra*? (edging strateg. and ot(er d.namic (edging strategies under ,(ic( t(e -uantit. of t(e (edging instrument is constant*. adjusted in order to maintain a desired (edge ratio4 for e&amp*e4 to ac(ieve a de*taAneutra* position insensitive to c(anges in t(e fair va*ue of t(e (edged itemF Kes4 Ind #) 39474 states that Ea dyna"ic hedging strategy that assesses (oth the intrinsic !alue and ti"e !alue of an o'tion contract can qualify for hedge accounting?4 *or e8a"'le6 a 'ortfolio insurance strategy that see>s to ensure that the fair !alue of the hedged ite" does not dro' (elo& a certain le!el6 &hile allo&ing the fair !alue to increase6 "ay qualify for hedge accounting4 To qualify for hedge accounting6 the entity "ust docu"ent ho& it &ill "onitor and u'date the hedge and "easure hedge effecti!eness6 (e a(le to trac> 'ro'erly all ter"inations and redesignations of the hedging instru"ent6 and de"onstrate that all other criteria for hedge accounting in Ind #) 39488 are "et4 #lso6 it "ust (e a(le to de"onstrate an e8'ectation that the hedge &ill (e highly effecti!e for a s'ecified short 'eriod of ti"e during &hich the hedge is not e8'ected to (e ad5usted4

)8383> !edging instrument% out of t(e mone. put option

Entit. A (as an investment in one s(are of Entit. '4 ,(ic( it (as c*assified as avai*ab*e for sa*e8 0o give itse*f partia* protection against decreases in t(e s(are price of Entit. '4 Entit. A ac-uires a put option on one s(are of Entit. ' and designates t(e c(ange in t(e intrinsic va*ue of t(e put as a (edging instrument in a fair va*ue (edge of c(anges in t(e fair va*ue of its s(are in Entit. '8 0(e put gives Entit. A t(e rig(t to se** one s(are of Entit. ' at a stri@e price of Rs89>8 At t(e inception of t(e (edging re*ations(ip4 t(e s(are (as a -uoted price of Rs83>>8 Since t(e put option gives Entit. A t(e rig(t to dispose of t(e s(are at a price of Rs89>4 t(e put s(ou*d norma**. be fu**. effective in offsetting price dec*ines be*o, Rs89> on an intrinsic va*ue basis8 "rice c(anges above Rs89> are not (edged8 In t(is case4 are c(anges in t(e fair va*ue of t(e s(are of Entit. ' for prices above Rs89> regarded as (edge ineffectiveness under Ind AS 39877 and recognised in profit or *oss under Ind AS 39879F Ho4 Ind #) 39474 'er"its 1ntity # to designate changes in the intrinsic !alue of the o'tion as the hedging instru"ent4 The changes in the intrinsic !alue of the o'tion 'ro!ide 'rotection against the ris> of !aria(ility in the fair !alue of one share of 1ntity / (elo& or

171

equal to the stri>e 'rice of the 'ut of %s4904 *or 'rices a(o!e %s4906 the o'tion is out of the "oney and has no intrinsic !alue4 #ccordingly6 gains and losses on one share of 1ntity / for 'rices a(o!e %s490 are not attri(uta(le to the hedged ris> for the 'ur'oses of assessing hedge effecti!eness and recognising gains and losses on the hedged ite"4 Therefore6 1ntity # recognises changes in the fair !alue of the share in other co"'rehensi!e inco"e if it is associated &ith !ariation in its 'rice a(o!e %s490 ;Ind #) 39455 and Ind #) 39490<4 hanges in the fair !alue of the share associated &ith 'rice declines (elo& %s490 for" 'art of the designated fair !alue hedge and are recognised in 'rofit or loss under Ind #) 39489;(<4 #ssu"ing the hedge is effecti!e6 those changes are offset (y changes in the intrinsic !alue of the 'ut6 &hich are also recognised in 'rofit or loss ;Ind #) 39489;a<<4 hanges in the ti"e !alue of the 'ut are e8cluded fro" the designated hedging relationshi' and recognised in 'rofit or loss under Ind #) 39455;a<4

)83833 !edging instrument% proportion of t(e cas( f*o,s of a cas( instrument

In t(e case of foreign e&c(ange ris@4 a nonAderivative financia* asset or nonA derivative financia* *iabi*it. can potentia**. -ua*if. as a (edging instrument8 Can an entit. treat t(e cas( f*o,s for specified periods during ,(ic( a financia* asset or financia* *iabi*it. t(at is designated as a (edging instrument remains outstanding as a proportion of t(e (edging instrument under Ind AS 398694 and e&c*ude t(e ot(er cas( f*o,s from t(e designated (edging re*ations(ipF Ho4 Ind #) 39475 indicates that a hedging relationshi' "ay not (e designated for only a 'ortion of the ti"e 'eriod in &hich the hedging instru"ent is outstanding4 *or e8a"'le6 the cash flo&s during the first three years of a ten,year (orro&ing deno"inated in a foreign currency cannot qualify as a hedging instru"ent in a cash flo& hedge of the first three years of re!enue in the sa"e foreign currency4 @n the other hand6 a non,deri!ati!e financial asset or financial lia(ility deno"inated in a foreign currency "ay 'otentially qualify as a hedging instru"ent in a hedge of the foreign currency ris> associated &ith a hedged ite" that has a re"aining ti"e 'eriod until "aturity that is equal to or longer than the re"aining "aturity of the hedging instru"ent ;see .uestion *42417<4

)83835 !edges of more t(an one t.pe of ris@

Issue (a) : #orma**. a (edging re*ations(ip is designated bet,een an entire (edging instrument and a (edged item so t(at t(ere is a sing*e measure of fair va*ue for t(e (edging instrument8 Does t(is prec*ude designating a sing*e financia* instrument simu*taneous*. as a (edging instrument in bot( a cas( f*o, (edge and a fair va*ue (edgeF Ho4 *or e8a"'le6 entities co""only use a co"(ined interest rate and currency s&a' to con!ert a !aria(le rate 'osition in a foreign currency to a fi8ed rate 'osition in the functional currency4 Ind #) 3947$ allo&s the s&a' to (e designated se'arately as a fair !alue hedge of the currency ris> and a cash flo& hedge of the interest rate ris> 'ro!ided the conditions in Ind #) 3947$ are "et4 Issue (b) : If a sing*e financia* instrument is a (edging instrument in t,o different (edges4 is specia* disc*osure re-uiredF Ind #) 107422 requires disclosures se'arately for designated fair !alue hedges6 cash flo& hedges and hedges of a net in!est"ent in a foreign o'eration4 The instru"ent in

172

question &ould (e re'orted in the Ind #) 107422 disclosures se'arately for each ty'e of hedge4

)83833 !edging instrument% dua* foreign currenc. for,ard e&c(ange contract

Entit. A?s functiona* currenc. is t(e Gapanese .en8 Entit. A (as a fiveA.ear f*oating rate /S do**ar *iabi*it. and a tenA.ear fi&ed rate pound ster*ingA denominated note receivab*e8 0(e principa* amounts of t(e asset and *iabi*it. ,(en converted into t(e Gapanese .en are t(e same8 Entit. A enters into a sing*e foreign currenc. for,ard contract to (edge its foreign currenc. e&posure on bot( instruments under ,(ic( it receives /S do**ars and pa.s pounds ster*ing at t(e end of five .ears8 If Entit. A designates t(e for,ard e&c(ange contract as a (edging instrument in a cas( f*o, (edge against t(e foreign currenc. e&posure on t(e principa* repa.ments of bot( instruments4 can it -ua*if. for (edge accountingF Kes4Ind #) 3947$ 'er"its designating a single hedging instru"ent as a hedge of "ulti'le ty'es of ris> if three conditions are "et4 In this e8a"'le6 the deri!ati!e hedging instru"ent satisfies all of these conditions6 as follo&s4 ;a< The ris>s hedged can (e identified clearly4 The ris>s are the e8'osures to changes in the e8change rates (et&een F) dollars and yen6 and yen and 'ounds6 res'ecti!ely4 The effecti!eness of the hedge can (e de"onstrated4 *or the 'ound sterling loan6 the effecti!eness is "easured as the degree of offset (et&een the fair !alue of the 'rinci'al re'ay"ent in 'ounds sterling and the fair !alue of the 'ound sterling 'ay"ent on the for&ard e8change contract4 *or the F) dollar lia(ility6 the effecti!eness is "easured as the degree of offset (et&een the fair !alue of the 'rinci'al re'ay"ent in F) dollars and the F) dollar recei't on the for&ard e8change contract4 1!en though the recei!a(le has a ten,year life and the for&ard 'rotects it for only the first fi!e years6 hedge accounting is 'er"itted for only a 'ortion of the e8'osure as descri(ed in .uestion *424174 It is 'ossi(le to ensure that there is s'ecific designation of the hedging instru"ent and different ris> 'ositions4 The hedged e8'osures are identified as the 'rinci'al a"ounts of the lia(ility and the note recei!a(le in their res'ecti!e currency of deno"ination4

;(<

;c<

)8383< Concurrent offsetting s,aps and use of one as a (edging instrument

Entit. A enters into an interest rate s,ap and designates it as a (edge of t(e fair va*ue e&posure associated ,it( fi&ed rate debt8 0(e fair va*ue (edge meets t(e (edge accounting criteria of Ind AS 398 Entit. A simu*taneous*. enters into a second interest rate s,ap ,it( t(e same s,ap counterpart. t(at (as terms t(at fu**. offset t(e first interest rate s,ap8 Is Entit. A re-uired to vie, t(e t,o s,aps as one unit and t(erefore prec*uded from app*.ing fair va*ue (edge accounting to t(e first s,apF

173

It de'ends4 Ind #) 39 is transaction,(ased4 If the second s&a' &as not entered into in conte"'lation of the first s&a' or there is a su(stanti!e (usiness 'ur'ose for structuring the transactions se'arately6 then the s&a's are not !ie&ed as one unit4 *or e8a"'le6 so"e entities ha!e a 'olicy that requires a centralised dealer or treasury su(sidiary to enter into third,'arty deri!ati!e contracts on (ehalf of other su(sidiaries &ithin the organisation to hedge the su(sidiaries? interest rate ris> e8'osures4 The dealer or treasury su(sidiary also enters into internal deri!ati!e transactions &ith those su(sidiaries in order to trac> those hedges o'erationally &ithin the organisation4 /ecause the dealer or treasury su(sidiary also enters into deri!ati!e contracts as 'art of its trading o'erations6 or (ecause it "ay &ish to re(alance the ris> of its o!erall 'ortfolio6 it "ay enter into a deri!ati!e contract &ith the sa"e third 'arty during the sa"e (usiness day that has su(stantially the sa"e ter"s as a contract entered into as a hedging instru"ent on (ehalf of another su(sidiary4 In this case6 there is a !alid (usiness 'ur'ose for entering into each contract4 Iudge"ent is a''lied to deter"ine &hether there is a su(stanti!e (usiness 'ur'ose for structuring the transactions se'arately4 *or e8a"'le6 if the sole 'ur'ose is to o(tain fair !alue accounting treat"ent for the de(t6 there is no su(stanti!e (usiness 'ur'ose4

)85 !edged items

)8583 C(et(er a derivative can be designated as a (edged item
Does Ind AS 39 permit designating a derivative instrument (,(et(er a standAa*one or separate*. recognised embedded derivative) as a (edged item eit(er individua**. or as part of a (edged group in a fair va*ue or cas( f*o, (edge4 for e&amp*e4 b. designating a pa.Avariab*e4 receiveAfi&ed )or,ard Rate Agreement ()RA) as a cas( f*o, (edge of a pa.Afi&ed4 receiveAvariab*e )RAF Ho4 Deri!ati!e instru"ents are al&ays dee"ed held for trading and "easured at fair !alue &ith gains and losses recognised in 'rofit or loss unless they are designated and effecti!e hedging instru"ents ;Ind #) 3949<4 #s an e8ce'tion6Ind #) 394#+94 'er"its the designation of a 'urchased o'tion as the hedged ite" in a fair !alue hedge4

)8585 Cas( f*o, (edge% anticipated issue of fi&ed rate debt

Is (edge accounting a**o,ed for a (edge of an anticipated issue of fi&ed rate debtF Kes4 This &ould (e a cash flo& hedge of a highly 'ro(a(le forecast transaction that &ill affect 'rofit or loss ;Ind #) 3948$< 'ro!ided that the conditions in Ind #) 39488 are "et4 To illustrate: 1ntity % 'eriodically issues ne& (onds to refinance "aturing (onds6 'ro!ide &or>ing ca'ital and for !arious other 'ur'oses4 Bhen 1ntity % decides it &ill (e issuing (onds6 it "ay hedge the ris> of changes in the long,ter" interest rate fro" the date it decides to issue the (onds to the date the (onds are issued4 If long,ter" interest rates go u'6 the (ond &ill (e issued either at a higher rate or &ith a higher discount or s"aller 're"iu" than &as originally e8'ected4 The higher rate (eing 'aid or decrease in 'roceeds is nor"ally offset (y the gain on the hedge4 If long,ter" interest rates go do&n6 the (ond &ill (e issued either at a lo&er rate or &ith a higher 're"iu" or a s"aller

174

discount than &as originally e8'ected4 The lo&er rate (eing 'aid or increase in 'roceeds is nor"ally offset (y the loss on the hedge4 *or e8a"'le6 in #ugust 20U0 1ntity % decided it &ould issue %s4200 "illion se!en,year (onds in Ianuary 20U14 1ntity % 'erfor"ed historical correlation studies and deter"ined that a se!en,year treasury (ond adequately correlates to the (onds 1ntity % e8'ected to issue6 assu"ing a hedge ratio of 0493 futures contracts to one de(t unit4 Therefore6 1ntity % hedged the antici'ated issue of the (onds (y selling ;shorting< %s418$ "illion &orth of futures on se!en,year treasury (onds4 *ro" #ugust 20U0 to Ianuary 20U1 interest rates increased4 The short futures 'ositions &ere closed in Ianuary 20U16 the date the (onds &ere issued6 and resulted in a %s4142 "illion gain that &ill offset the increased interest 'ay"ents on the (onds and6 therefore6 &ill affect 'rofit or loss o!er the life of the (onds4 The hedge qualifies as a cash flo& hedge of the interest rate ris> on the forecast issue of de(t4

)8583 !edge accounting% core deposit intangib*es

Is (edge accounting treatment permitted for a (edge of t(e fair va*ue e&posure of core deposit intangib*esF It de'ends on &hether the core de'osit intangi(le is generated internally or acquired ;eg as 'art of a (usiness co"(ination<4 Internally generated core de'osit intangi(les are not recognised as intangi(le assets under Ind #) 384 /ecause they are not recognised6 they cannot (e designated as a hedged ite"4 If a core de'osit intangi(le is acquired together &ith a related 'ortfolio of de'osits6 the core de'osit intangi(le is required to (e recognised se'arately as an intangi(le asset ;or as 'art of the related acquired 'ortfolio of de'osits< if it "eets the recognition criteria in 'aragra'h 21 of Ind #) 38 Intangi$le Assets4 # recognised core de'osit intangi(le asset could (e designated as a hedged ite"6 (ut only if it "eets the conditions in 'aragra'h 886 including the require"ent in 'aragra'h 88;d< that the effecti!eness of the hedge can (e "easured relia(ly4 /ecause it is often difficult to "easure relia(ly the fair !alue of a core de'osit intangi(le asset other than on initial recognition6 it is unli>ely that the require"ent in 'aragra'h 88;d< &ill (e "et4

)858< !edge accounting% (edging of future foreign currenc. revenue streams

Is (edge accounting permitted for a currenc. borro,ing t(at (edges an e&pected but not contractua* revenue stream in foreign currenc.F Kes6 if the re!enues are highly 'ro(a(le4 Fnder Ind #) 3948$;(< a hedge of an antici'ated sale "ay qualify as a cash flo& hedge4 *or e8a"'le6 an airline entity "ay use so'histicated "odels (ased on e8'erience and econo"ic data to 'ro5ect its re!enues in !arious currencies4 If it can de"onstrate that forecast re!enues for a 'eriod of ti"e into the future in a 'articular currency are Ehighly 'ro(a(le?6 as required (y Ind #) 394886 it "ay designate a currency (orro&ing as a cash flo& hedge of the future re!enue strea"4 The 'ortion of the gain or loss on the (orro&ing that is deter"ined to (e an effecti!e hedge is recognised in other co"'rehensi!e inco"e until the re!enues occur4

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It is unli>ely that an entity can relia(ly 'redict 100 'er cent of re!enues for a future year4 @n the other hand6 it is 'ossi(le that a 'ortion of 'redicted re!enues6 nor"ally those e8'ected in the short ter"6 &ill "eet the Ehighly 'ro(a(le? criterion4

)8589 Cas( f*o, (edges% Ba** in one? (edge

If a derivative instrument is e&pected to be sett*ed gross b. de*iver. of t(e under*.ing asset in e&c(ange for t(e pa.ment of a fi&ed price4 can t(e derivative instrument be designated as t(e (edging instrument in a cas( f*o, (edge of t(at gross sett*ement assuming t(e ot(er cas( f*o, (edge accounting criteria are metF Kes4 # deri!ati!e instru"ent that &ill (e settled gross can (e designated as the hedging instru"ent in a cash flo& hedge of the !aria(ility of the consideration to (e 'aid or recei!ed in the future transaction that &ill occur on gross settle"ent of the deri!ati!e contract itself (ecause there &ould (e an e8'osure to !aria(ility in the 'urchase or sale 'rice &ithout the deri!ati!e4 This a''lies to all fi8ed 'rice contracts that are accounted for as deri!ati!es under Ind #) 394 *or e8a"'le6 if an entity enters into a fi8ed 'rice contract to sell a co""odity and that contract is accounted for as a deri!ati!e under Ind #) 39 ;for e8a"'le6 (ecause the entity has a 'ractice of settling such contracts net in cash or of ta>ing deli!ery of the underlying and selling it &ithin a short 'eriod after deli!ery for the 'ur'ose of generating a 'rofit fro" short,ter" fluctuations in 'rice or dealer?s "argin<6 the entity "ay designate the fi8ed 'rice contract as a cash flo& hedge of the !aria(ility of the consideration to (e recei!ed on the sale of the asset ;a future transaction< e!en though the fi8ed 'rice contract is the contract under &hich the asset &ill (e sold4 #lso6 if an entity enters into a for&ard contract to 'urchase a de(t instru"ent that &ill (e settled (y deli!ery6 (ut the for&ard contract is a deri!ati!e (ecause its ter" e8ceeds the regular &ay deli!ery 'eriod in the "ar>et'lace6 the entity "ay designate the for&ard as a cash flo& hedge of the !aria(ility of the consideration to (e 'aid to acquire the de(t instru"ent ;a future transaction<6 e!en though the deri!ati!e is the contract under &hich the de(t instru"ent &ill (e acquired4

)858; !edge re*ations(ips% entit.A,ide ris@

An entit. (as a fi&ed rate asset and a fi&ed rate *iabi*it.4 eac( (aving t(e same principa* amount8 /nder t(e terms of t(e instruments4 interest pa.ments on t(e asset and *iabi*it. occur in t(e same period and t(e net cas( f*o, is a*,a.s positive because t(e interest rate on t(e asset e&ceeds t(e interest rate on t(e *iabi*it.8 0(e entit. enters into an interest rate s,ap to receive a f*oating interest rate and pa. a fi&ed interest rate on a notiona* amount e-ua* to t(e principa* of t(e asset and designates t(e interest rate s,ap as a fair va*ue (edge of t(e fi&ed rate asset8 Does t(e (edging re*ations(ip -ua*if. for (edge accounting even t(oug( t(e effect of t(e interest rate s,ap on an entit.A,ide basis is to create an e&posure to interest rate c(anges t(at did not previous*. e&istF Kes4 Ind #) 39 does not require ris> reduction on an entity,&ide (asis as a condition for hedge accounting4 18'osure is assessed on a transaction (asis and6 in this instance6 the asset (eing hedged has a fair !alue e8'osure to interest rate increases that is offset (y the interest rate s&a'4

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)8586 Cas( f*o, (edge% forecast transaction re*ated to an entit.?s e-uit.

Can a forecast transaction in t(e entit.?s o,n e-uit. instruments or forecast dividend pa.ments to s(are(o*ders be designated as a (edged item in a cas( f*o, (edgeF Ho4 To qualify as a hedged ite"6 the forecast transaction "ust e8'ose the entity to a 'articular ris> that can affect 'rofit or loss ;Ind #) 3948$<4 The classification of financial instru"ents as lia(ilities or equity generally 'ro!ides the (asis for deter"ining &hether transactions or other 'ay"ents relating to such instru"ents are recognised in 'rofit or loss ;Ind #) 32<4 *or e8a"'le6 distri(utions to holders of an equity instru"ent are de(ited (y the issuer directly to equity ;Ind #) 32435<4 Therefore6 such distri(utions cannot (e designated as a hedged ite"4 -o&e!er6 a declared di!idend that has not yet (een 'aid and is recognised as a financial lia(ility "ay qualify as a hedged ite"6 for e8a"'le6 for foreign currency ris> if it is deno"inated in a foreign currency4

)8587 !edge accounting% ris@ of a transaction not occurring

Does Ind AS 39 permit an entit. to app*. (edge accounting to a (edge of t(e ris@ t(at a transaction ,i** not occur4 for e&amp*e4 if t(at ,ou*d resu*t in *ess revenue to t(e entit. t(an e&pectedF Ho4 The ris> that a transaction &ill not occur is an o!erall (usiness ris> that is not eligi(le as a hedged ite"4 -edge accounting is 'er"itted only for ris>s associated &ith recognised assets and lia(ilities6 fir" co""it"ents6 highly 'ro(a(le forecast transactions and net in!est"ents in foreign o'erations ;Ind #) 3948$<4

)8589 !e*dAtoAmaturit. investments% (edging variab*e interest rate pa.ments

Can an entit. designate a pa.Avariab*e4 receiveAfi&ed interest rate s,ap as a cas( f*o, (edge of a variab*e rate4 (e*dAtoAmaturit. investmentF Ho4 It is inconsistent &ith the designation of a de(t in!est"ent as (eing held to "aturity to designate a s&a' as a cash flo& hedge of the de(t in!est"ent?s !aria(le interest rate 'ay"ents4 Ind #) 39479 states that a held,to,"aturity in!est"ent cannot (e a hedged ite" &ith res'ect to interest rate ris> or 're'ay"ent ris> E(ecause designation of an in!est"ent as held to "aturity requires an intention to hold the in!est"ent until "aturity &ithout regard to changes in the fair !alue or cash flo&s of such an in!est"ent attri(uta(le to changes in interest rates?4

)8583> !edged items% purc(ase of (e*dAtoAmaturit. investment

An entit. forecasts t(e purc(ase of a financia* asset t(at it intends to c*assif. as (e*d to maturit. ,(en t(e forecast transaction occurs8 It enters into a derivative contract ,it( t(e intent to *oc@ in t(e current interest rate and designates t(e derivative as a (edge of t(e forecast purc(ase of t(e financia* asset8 Can t(e (edging re*ations(ip -ua*if. for cas( f*o, (edge accounting even t(oug( t(e asset ,i** be c*assified as a (e*dAtoAmaturit. investmentF Kes4 Bith res'ect to interest rate ris>6 Ind #) 39 'rohi(its hedge accounting for financial assets that are classified as held,to,"aturity ;Ind #) 39479<4 -o&e!er6 e!en though the

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entity intends to classify the asset as held to "aturity6 the instru"ent is not classified as such until the transaction occurs4

)85833 Cas( f*o, (edges% reinvestment of funds obtained from (e*dA toAmaturit. investments
An entit. o,ns a variab*e rate asset t(at it (as c*assified as (e*d to maturit.8 It enters into a derivative contract ,it( t(e intention to *oc@ in t(e current interest rate on t(e reinvestment of variab*e rate cas( f*o,s4 and designates t(e derivative as a cas( f*o, (edge of t(e forecast future interest receipts on debt instruments resu*ting from t(e reinvestment of interest receipts on t(e (e*dAtoAmaturit. asset8 Assuming t(at t(e ot(er (edge accounting criteria are met4 can t(e (edging re*ations(ip -ua*if. for cas( f*o, (edge accounting even t(oug( t(e interest pa.ments t(at are being reinvested come from an asset t(at is c*assified as (e*d to maturit.F Kes4 Ind #) 39479 states that a held,to,"aturity in!est"ent cannot (e a hedged ite" &ith res'ect to interest rate ris>4 .uestion *4249 s'ecifies that this a''lies not only to fair !alue hedges6 ie hedges of the e8'osure to fair !alue interest rate ris> associated &ith held,to,"aturity in!est"ents that 'ay fi8ed interest6 (ut also to cash flo& hedges6 ie hedges of the e8'osure to cash flo& interest rate ris> associated &ith held,to,"aturity in!est"ents that 'ay !aria(le interest at current "ar>et rates4 -o&e!er6 in this instance6 the deri!ati!e is designated as an offset of the e8'osure to cash flo& ris> associated &ith forecast future interest recei'ts on de(t instru"ents resulting fro" the forecast rein!est"ent of !aria(le rate cash flo&s on the held,to,"aturity in!est"ent4 The source of the funds forecast to (e rein!ested is not rele!ant in deter"ining &hether the rein!est"ent ris> can (e hedged4 #ccordingly6 designation of the deri!ati!e as a cash flo& hedge is 'er"itted4 This ans&er a''lies also to a hedge of the e8'osure to cash flo& ris> associated &ith the forecast future interest recei'ts on de(t instru"ents resulting fro" the rein!est"ent of interest recei'ts on a fi8ed rate asset classified as held to "aturity4

)85835 !edge accounting% prepa.ab*e financia* asset

If t(e issuer (as t(e rig(t to prepa. a financia* asset4 can t(e investor designate t(e cas( f*o,s after t(e prepa.ment date as part of t(e (edged itemF ash flo&s after the 're'ay"ent date "ay (e designated as the hedged ite" to the e8tent it can (e de"onstrated that they are Ehighly 'ro(a(le? ;Ind #) 39488<4 *or e8a"'le6 cash flo&s after the 're'ay"ent date "ay qualify as highly 'ro(a(le if they result fro" a grou' or 'ool of si"ilar assets ;for e8a"'le6 "ortgage loans< for &hich 're'ay"ents can (e esti"ated &ith a high degree of accuracy or if the 're'ay"ent o'tion is significantly out of the "oney4 In addition6 the cash flo&s after the 're'ay"ent date "ay (e designated as the hedged ite" if a co"'ara(le o'tion e8ists in the hedging instru"ent4

)85833 )air va*ue (edge% ris@ t(at cou*d affect profit or *oss
Is fair va*ue (edge accounting permitted for e&posure to interest rate ris@ in fi&ed rate *oans t(at are c*assified as *oans and receivab*esF

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Kes4 FnderInd #) 396 loans and recei!a(les are carried at a"ortised cost4 /an>ing institutions in "any countries hold the (ul> of their loans and recei!a(les until "aturity4 Thus6 changes in the fair !alue of such loans and recei!a(les that are due to changes in "ar>et interest rates &ill not affect 'rofit or loss4Ind #) 3948$ s'ecifies that a fair !alue hedge is a hedge of the e8'osure to changes in fair !alue that is attri(uta(le to a 'articular ris> and that can affect 'rofit or loss4 Therefore6Ind #) 3948$ "ay a''ear to 'reclude fair !alue hedge accounting for loans and recei!a(les4 -o&e!er6 it follo&s fro" Ind #) 39479 that loans and recei!a(les can (e hedged ite"s &ith res'ect to interest rate ris> since they are not designated as held,to,"aturity in!est"ents4 The entity could sell the" and the change in fair !alues &ould affect 'rofit or loss4 Thus6 fair !alue hedge accounting is 'er"itted for loans and recei!a(les4

)8583< Intragroup and intraAentit. (edging transactions

An Austra*ian entit.4 ,(ose functiona* currenc. is t(e Austra*ian do**ar4 (as forecast purc(ases in Gapanese .en t(at are (ig(*. probab*e8 0(e Austra*ian entit. is ,(o**. o,ned b. a S,iss entit.4 ,(ic( prepares conso*idated financia* statements (,(ic( inc*ude t(e Austra*ian subsidiar.) in S,iss francs8 0(e S,iss parent entit. enters into a for,ard contract to (edge t(e c(ange in .en re*ative to t(e Austra*ian do**ar8 Can t(at (edge -ua*if. for (edge accounting in t(e conso*idated financia* statements4 or must t(e Austra*ian subsidiar. t(at (as t(e foreign currenc. e&posure be a part. to t(e (edging transactionF The hedge can qualify for hedge accounting 'ro!ided the other hedge accounting criteria in Ind #) 39 are "et4 )ince the #ustralian entity did not hedge the foreign currency e8change ris> associated &ith the forecast 'urchases in yen6 the effects of e8change rate changes (et&een the #ustralian dollar and the yen &ill affect the #ustralian entity?s 'rofit or loss and6 therefore6 &ould also affect consolidated 'rofit or loss4 Ind #) 39 does not require that the o'erating unit that is e8'osed to the ris> (eing hedged (e a 'arty to the hedging instru"ent4

)85839 Interna* contracts% sing*e offsetting e&terna* derivative

An entit. uses ,(at it describes as interna* derivative contracts to document t(e transfer of responsibi*it. for interest rate ris@ e&posures from individua* divisions to a centra* treasur. function8 0(e centra* treasur. function aggregates t(e interna* derivative contracts and enters into a sing*e e&terna* derivative contract t(at offsets t(e interna* derivative contracts on a net basis8 )or e&amp*e4 if t(e centra* treasur. function (as entered into t(ree interna* receiveAfi&ed4 pa.Avariab*e interest rate s,aps t(at *a. off t(e e&posure to variab*e interest cas( f*o,s on variab*e rate *iabi*ities in ot(er divisions and one interna* receiveAvariab*e4 pa.A fi&ed interest rate s,ap t(at *a.s off t(e e&posure to variab*e interest cas( f*o,s on variab*e rate assets in anot(er division4 it ,ou*d enter into an interest rate s,ap ,it( an e&terna* counterpart. t(at e&act*. offsets t(e four interna* s,aps8 Assuming t(at t(e (edge accounting criteria are met4 in t(e entit.?s financia* statements ,ou*d t(e sing*e offsetting e&terna* derivative -ua*if. as a (edging instrument in a (edge of a part of t(e under*.ing items on a gross basisF Kes6 (ut only to the e8tent the e8ternal deri!ati!e is designated as an offset of cash inflo&s or cash outflo&s on a gross (asis4 Ind #) 39484 indicates that a hedge of an o!erall net 'osition does not qualify for hedge accounting4 -o&e!er6 it does 'er"it designating a 'art of the underlying ite"s as the hedged 'osition on a gross (asis4

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Therefore6 e!en though the 'ur'ose of entering into the e8ternal deri!ati!e &as to offset internal deri!ati!e contracts on a net (asis6 hedge accounting is 'er"itted if the hedging relationshi' is defined and docu"ented as a hedge of a 'art of the underlying cash inflo&s or cash outflo&s on a gross (asis4 #n entity follo&s the a''roach outlined in Ind #) 39484 and Ind #) 394#+101 to designate 'art of the underlying cash flo&s as the hedged 'osition4

)8583; Interna* contracts% e&terna* derivative contracts t(at are sett*ed net
Issue (a) : An entit. uses interna* derivative contracts to transfer interest rate ris@ e&posures from individua* divisions to a centra* treasur. function8 )or eac( interna* derivative contract4 t(e centra* treasur. function enters into a derivative contract ,it( a sing*e e&terna* counterpart. t(at offsets t(e interna* derivative contract8 )or e&amp*e4 if t(e centra* treasur. function (as entered into a receiveA 9 per centAfi&ed4 pa.A I'OR interest rate s,ap ,it( anot(er division t(at (as entered into t(e interna* contract ,it( centra* treasur. to (edge t(e e&posure to variabi*it. in interest cas( f*o,s on a pa.A I'OR borro,ing4 centra* treasur. ,ou*d enter into a pa.A9 per centAfi&ed4 receiveA I'OR interest rate s,ap on t(e same principa* terms ,it( t(e e&terna* counterpart.8 A*t(oug( eac( of t(e e&terna* derivative contracts is forma**. documented as a separate contract4 on*. t(e net of t(e pa.ments on a** of t(e e&terna* derivative contracts is sett*ed since t(ere is a netting agreement ,it( t(e e&terna* counterpart.8 Assuming t(at t(e ot(er (edge accounting criteria are met4 can t(e individua* e&terna* derivative contracts4 suc( as t(e pa.A9 per centAfi&ed4 receiveA I'OR interest rate s,ap above4 be designated as (edging instruments of under*.ing gross e&posures4 suc( as t(e e&posure to c(anges in variab*e interest pa.ments on t(e pa.A I'OR borro,ing above4 even t(oug( t(e e&terna* derivatives are sett*ed on a net basisF +enerally6 yes4 18ternal deri!ati!e contracts that are legally se'arate contracts and ser!e a !alid (usiness 'ur'ose6 such as laying off ris> e8'osures on a gross (asis6 qualify as hedging instru"ents e!en if those e8ternal contracts are settled on a net (asis &ith the sa"e e8ternal counter'arty6 'ro!ided the hedge accounting criteria in Ind #) 39 are "et4 )ee also .uestion *414144 Issue (b) : 0reasur. observes t(at b. entering into t(e e&terna* offsetting contracts and inc*uding t(em in t(e centra*ised portfo*io4 it is no *onger ab*e to eva*uate t(e e&posures on a net basis8 0reasur. ,is(es to manage t(e portfo*io of offsetting e&terna* derivatives separate*. from ot(er e&posures of t(e entit.8 0(erefore4 it enters into an additiona*4 sing*e derivative to offset t(e ris@ of t(e portfo*io8 Can t(e individua* e&terna* derivative contracts in t(e portfo*io sti** be designated as (edging instruments of under*.ing gross e&posures even t(oug( a sing*e e&terna* derivative is used to offset fu**. t(e mar@et e&posure created b. entering into t(e e&terna* contractsF +enerally6 yes4 The 'ur'ose of structuring the e8ternal deri!ati!e contracts in this "anner is consistent &ith the entity?s ris> "anage"ent o(5ecti!es and strategies4 #s indicated a(o!e6 e8ternal deri!ati!e contracts that are legally se'arate contracts and ser!e a !alid (usiness 'ur'ose qualify as hedging instru"ents4 3oreo!er6 the ans&er to .uestion *41414 s'ecifies that hedge accounting is not 'recluded si"'ly (ecause the entity has entered into a s&a' that "irrors e8actly the ter"s of another s&a' &ith the

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sa"e counter'arty if there is a su(stanti!e (usiness 'ur'ose for structuring the transactions se'arately4

)85836 "artia* term (edging

Ind AS 39869 indicates t(at a (edging re*ations(ip ma. not be designated for on*. a portion of t(e time period during ,(ic( a (edging instrument remains outstanding8 Is it permitted to designate a derivative as (edging on*. a portion of t(e time period to maturit. of a (edged itemF Kes4 # financial instru"ent "ay (e a hedged ite" for only a 'ortion of its cash flo&s or fair !alue6 if effecti!eness can (e "easured and the other hedge accounting criteria are "et4 To illustrate: 1ntity # acquires a 10 'er cent fi8ed rate go!ern"ent (ond &ith a re"aining ter" to "aturity of ten years4 1ntity # classifies the (ond as a!aila(le for sale4 To hedge itself against fair !alue e8'osure on the (ond associated &ith the 'resent !alue of the interest rate 'ay"ents until year 56 1ntity # acquires a fi!e,year 'ay,fi8ed6 recei!e,floating s&a'4 The s&a' "ay (e designated as hedging the fair !alue e8'osure of the interest rate 'ay"ents on the go!ern"ent (ond until year 5 and the change in !alue of the 'rinci'al 'ay"ent due at "aturity to the e8tent affected (y changes in the yield cur!e relating to the fi!e years of the s&a'4

)85837 !edging instrument% crossAcurrenc. interest rate s,ap

Entit. A?s functiona* currenc. is t(e Gapanese .en8 Entit. A (as a fiveA.ear f*oating rate /S do**ar *iabi*it. and a 3>A.ear fi&ed rate pound ster*ingA denominated note receivab*e8 Entit. A ,is(es to (edge t(e foreign currenc. e&posure on its asset and *iabi*it. and t(e fair va*ue interest rate e&posure on t(e receivab*e and enters into a matc(ing crossAcurrenc. interest rate s,ap to receive f*oating rate /S do**ars and pa. fi&ed rate pounds ster*ing and to e&c(ange t(e do**ars for t(e pounds at t(e end of five .ears8 Can Entit. A designate t(e s,ap as a (edging instrument in a fair va*ue (edge against bot( foreign currenc. ris@ and interest rate ris@4 a*t(oug( bot( t(e pound ster*ing and /S do**ar are foreign currencies to Entit. AF Kes4 Ind #) 39481 'er"its hedge accounting for co"'onents of ris>6 if effecti!eness can (e "easured4 #lso6 Ind #) 3947$ 'er"its designating a single hedging instru"ent as a hedge of "ore than one ty'e of ris> if the ris>s can (e identified clearly6 effecti!eness can (e de"onstrated6 and s'ecific designation of the hedging instru"ent and different ris> 'ositions can (e ensured4 Therefore6 the s&a' "ay (e designated as a hedging instru"ent in a fair !alue hedge of the 'ound sterling recei!a(le against e8'osure to changes in its fair !alue associated &ith changes in F0 interest rates for the initial 'artial ter" of fi!e years and the e8change rate (et&een 'ounds and F) dollars4 The s&a' is "easured at fair !alue &ith changes in fair !alue recognised in 'rofit or loss4 The carrying a"ount of the recei!a(le is ad5usted for changes in its fair !alue caused (y changes in F0 interest rates for the first fi!e,year 'ortion of the yield cur!e4 The recei!a(le and 'aya(le are re"easured using s'ot e8change rates under Ind #) 21 and the changes to their carrying a"ounts recognised in 'rofit or loss4

)85839 !edged items% (edge of foreign currenc. ris@ of pub*ic*. traded s(ares
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Entit. A ac-uires s(ares in Entit. ' on a foreign stoc@ e&c(ange for t(eir fair va*ue of 34>>> in foreign currenc. ()C)8 It c*assifies t(e s(ares as avai*ab*e for sa*e8 0o protect itse*f from t(e e&posure to c(anges in t(e foreign e&c(ange rate associated ,it( t(e s(ares4 it enters into a for,ard contract to se** )C69>8 Entit. A intends to ro** over t(e for,ard e&c(ange contract for as *ong as it retains t(e s(ares8 Assuming t(at t(e ot(er (edge accounting criteria are met4 cou*d t(e for,ard e&c(ange contract -ua*if. as a (edge of t(e foreign e&c(ange ris@ associated ,it( t(e s(aresF Kes6 (ut only if there is a clear and identifia(le e8'osure to changes in foreign e8change rates4 Therefore6 hedge accounting is 'er"itted if ;a< the equity instru"ent is not traded on an e8change ;or in another esta(lished "ar>et'lace< &here trades are deno"inated in the sa"e currency as the functional currency of 1ntity # and ;(< di!idends to 1ntity # are not deno"inated in that currency4 Thus6 if a share is traded in "ulti'le currencies and one of those currencies is the functional currency of the re'orting entity6 hedge accounting for the foreign currency co"'onent of the share 'rice is not 'er"itted4 If so4 cou*d t(e for,ard e&c(ange contract be designated as a (edging instrument in a (edge of t(e foreign e&c(ange ris@ associated ,it( t(e portion of t(e fair va*ue of t(e s(ares up to )C69> in foreign currenc.F Kes4 Ind #) 39 'er"its designating a 'ortion of the cash flo& or fair !alue of a financial asset as the hedged ite" if effecti!eness can (e "easured ;Ind #) 39481<4 Therefore6 1ntity # "ay designate the for&ard e8change contract as a hedge of the foreign e8change ris> associated &ith only a 'ortion of the fair !alue of the shares in foreign currency4 It could either (e designated as a fair !alue hedge of the foreign e8change e8'osure of * 750 associated &ith the shares or as a cash flo& hedge of a forecast sale of the shares6 'ro!ided the ti"ing of the sale is identified4 #ny !aria(ility in the fair !alue of the shares in foreign currency &ould not affect the assess"ent of hedge effecti!eness unless the fair !alue of the shares in foreign currency &as to fall (elo& * 7504

)8585> !edge accounting% stoc@ inde&

An entit. ma. ac-uire a portfo*io of s(ares to rep*icate a stoc@ inde& and a put option on t(e inde& to protect itse*f from fair va*ue *osses8 Does Ind AS 39 permit designating t(e put on t(e stoc@ inde& as a (edging instrument in a (edge of t(e portfo*io of s(aresF Ho4 If si"ilar financial instru"ents are aggregated and hedged as a grou'6 Ind #) 39483 states that the change in fair !alue attri(uta(le to the hedged ris> for each indi!idual ite" in the grou' is e8'ected to (e a''ro8i"ately 'ro'ortional to the o!erall change in fair !alue attri(uta(le to the hedged ris> of the grou'4 In the scenario a(o!e6 the change in the fair !alue attri(uta(le to the hedged ris> for each indi!idual ite" in the grou' ;indi!idual share 'rices< is not e8'ected to (e a''ro8i"ately 'ro'ortional to the o!erall change in fair !alue attri(uta(le to the hedged ris> of the grou'.

)85853 !edge accounting% netting of assets and *iabi*ities

a. an entit. group financia* assets toget(er ,it( financia* *iabi*ities for t(e purpose of determining t(e net cas( f*o, e&posure to be (edged for (edge accounting purposesF

182

#n entity?s hedging strategy and ris> "anage"ent 'ractices "ay assess cash flo& ris> on a net (asis (ut Ind #) 39484 does not 'er"it designating a net cash flo& e8'osure as a hedged ite" for hedge accounting 'ur'oses4 Ind #) 394#+101 'ro!ides an e8a"'le of ho& a (an> "ight assess its ris> on a net (asis ;&ith si"ilar assets and lia(ilities grou'ed together< and then qualify for hedge accounting (y hedging on a gross (asis4

)83 !edge accounting

)8383 Cas( f*o, (edge% fi&ed interest rate cas( f*o,s
An entit. issues a fi&ed rate debt instrument and enters into a receiveAfi&ed4 pa.A variab*e interest rate s,ap to offset t(e e&posure to interest rate ris@ associated ,it( t(e debt instrument8 Can t(e entit. designate t(e s,ap as a cas( f*o, (edge of t(e future interest cas( outf*o,s associated ,it( t(e debt instrumentF Ho4 Ind #) 3948$;(< states that a cash flo& hedge is Ea hedge of the e8'osure to !aria(ility in cash flo&s?4 In this case6 the issued de(t instru"ent does not gi!e rise to any e8'osure to !aria(ility in cash flo&s since the interest 'ay"ents are fi8ed4 The entity "ay designate the s&a' as a fair !alue hedge of the de(t instru"ent6 (ut it cannot designate the s&a' as a cash flo& hedge of the future cash outflo&s of the de(t instru"ent4

)8385 Cas( f*o, (edge% reinvestment of fi&ed interest rate cas( f*o,s
An entit. manages interest rate ris@ on a net basis8 On 3 Ganuar. 5>$34 it forecasts aggregate cas( inf*o,s of Rs83>> on fi&ed rate assets and aggregate cas( outf*o,s of Rs89> on fi&ed rate *iabi*ities in t(e first -uarter of 5>$58 )or ris@ management purposes it uses a receiveAvariab*e4 pa.Afi&ed )or,ard Rate Agreement ()RA) to (edge t(e forecast net cas( inf*o, of Rs83>8 0(e entit. designates as t(e (edged item t(e first Rs83> of cas( inf*o,s on fi&ed rate assets in t(e first -uarter of 5>$58 Can it designate t(e receiveAvariab*e4 pa.Afi&ed )RA as a cas( f*o, (edge of t(e e&posure to variabi*it. to cas( f*o,s in t(e first -uarter of 5>$5 associated ,it( t(e fi&ed rate assetsF Ho4 The *%# does not qualify as a cash flo& hedge of the cash flo& relating to the fi8ed rate assets (ecause they do not ha!e a cash flo& e8'osure4 The entity could6 ho&e!er6 designate the *%# as a hedge of the fair !alue e8'osure that e8ists (efore the cash flo&s are re"itted4 In so"e cases6 the entity could also hedge the interest rate e8'osure associated &ith the forecast rein!est"ent of the interest and 'rinci'al it recei!es on fi8ed rate assets ;see .uestion *4$42<4 -o&e!er6 in this e8a"'le6 the *%# does not qualify for cash flo& hedge accounting (ecause it increases rather than reduces the !aria(ility of interest cash flo&s resulting fro" the rein!est"ent of interest cash flo&s ;for e8a"'le6 if "ar>et rates increase6 there &ill (e a cash inflo& on the *%# and an increase in the e8'ected interest cash inflo&s resulting fro" the rein!est"ent of interest cash inflo&s on fi8ed rate assets<4 -o&e!er6 'otentially it could qualify as a cash flo& hedge of a 'ortion of the refinancing of cash outflo&s on a gross (asis4

)8383 )oreign currenc. (edge

183

Entit. A (as a foreign currenc. *iabi*it. pa.ab*e in si& mont(s? time and it ,is(es to (edge t(e amount pa.ab*e on sett*ement against foreign currenc. f*uctuations8 0o t(at end4 it ta@es out a for,ard contract to bu. t(e foreign currenc. in si& mont(s? time8 S(ou*d t(e (edge be treated as% ;a< a fair va*ue (edge of t(e foreign currenc. *iabi*it. ,it( gains and *osses on reva*uing t(e *iabi*it. and t(e for,ard contract at t(e .earAend bot( recognised in profit or *oss= or a cas( f*o, (edge of t(e amount to be sett*ed in t(e future ,it( gains and *osses on reva*uing t(e for,ard contract recognised in ot(er compre(ensive incomeF

;(<

Ind #) 39 does not 'reclude either of these t&o "ethods4 If the hedge is treated as a fair !alue hedge6 the gain or loss on the fair !alue re"easure"ent of the hedging instru"ent and the gain or loss on the fair !alue re"easure"ent of the hedged ite" for the hedged ris> are recognised i""ediately in 'rofit or loss4 If the hedge is treated as a cash flo& hedge &ith the gain or loss on re"easuring the for&ard contract recognised in other co"'rehensi!e inco"e6 that a"ount is recognised in 'rofit or loss in the sa"e 'eriod or 'eriods during &hich the hedged ite" ;the lia(ility< affects 'rofit or loss6 ie &hen the lia(ility is re"easured for changes in foreign e8change rates4 Therefore6 if the hedge is effecti!e6 the gain or loss on the deri!ati!e is released to 'rofit or loss in the sa"e 'eriods during &hich the lia(ility is re"easured6 not &hen the 'ay"ent occurs4 )ee .uestion *43444

)838< )oreign currenc. cas( f*o, (edge

An entit. e&ports a product at a price denominated in a foreign currenc.8 At t(e date of t(e sa*e4 t(e entit. obtains a receivab*e for t(e sa*e price pa.ab*e in 9> da.s and ta@es out a 9>Ada. for,ard e&c(ange contract in t(e same currenc. as t(e receivab*e to (edge its foreign currenc. e&posure8 /nder Ind AS 534 t(e sa*e is recorded at t(e spot rate at t(e date of sa*e4 and t(e receivab*e is restated during t(e 9>Ada. period for c(anges in e&c(ange rates ,it( t(e difference being ta@en to profit or *oss (Ind AS 53853 and Ind AS 53857)8 If t(e foreign e&c(ange contract is designated as a (edging instrument4 does t(e entit. (ave a c(oice ,(et(er to designate t(e foreign e&c(ange contract as a fair va*ue (edge of t(e foreign currenc. e&posure of t(e receivab*e or as a cas( f*o, (edge of t(e co**ection of t(e receivab*eF Kes4 If the entity designates the foreign e8change contract as a fair !alue hedge6 the gain or loss fro" re"easuring the for&ard e8change contract at fair !alue is recognised i""ediately in 'rofit or loss and the gain or loss on re"easuring the recei!a(le is also recognised in 'rofit or loss4 If the entity designates the foreign e8change contract as a cash flo& hedge of the foreign currency ris> associated &ith the collection of the recei!a(le6 the 'ortion of the gain or loss that is deter"ined to (e an effecti!e hedge is recognised in other co"'rehensi!e inco"e6 and the ineffecti!e 'ortion in 'rofit or loss ;Ind #) 39495<4 The a"ount recognised in other co"'rehensi!e inco"e is reclassified fro" equity to 'rofit or loss as a reclassification ad5ust"ent in the sa"e 'eriod or 'eriods during &hich changes in the "easure"ent of the recei!a(le affect 'rofit or loss ;Ind #) 394100<4

184

)8389 )air va*ue (edge% variab*e rate debt instrument

Does Ind AS 39 permit an entit. to designate a portion of t(e ris@ e&posure of a variab*e rate debt instrument as a (edged item in a fair va*ue (edgeF Kes4 # !aria(le rate de(t instru"ent "ay ha!e an e8'osure to changes in its fair !alue due to credit ris>4 It "ay also ha!e an e8'osure to changes in its fair !alue relating to "o!e"ents in the "ar>et interest rate in the 'eriods (et&een &hich the !aria(le interest rate on the de(t instru"ent is reset4 *or e8a"'le6 if the de(t instru"ent 'ro!ides for annual interest 'ay"ents reset to the "ar>et rate each year6 a 'ortion of the de(t instru"ent has an e8'osure to changes in fair !alue during the year4

)838; )air va*ue (edge% inventor.

Ind AS 3987;(a) states t(at a fair va*ue (edge is Ba (edge of t(e e&posure to c(anges in fair va*ue of a recognised asset or *iabi*it. 888 t(at is attributab*e to a particu*ar ris@ and cou*d affect profit or *oss?8 Can an entit. designate inventories4 suc( as copper inventor.4 as t(e (edged item in a fair va*ue (edge of t(e e&posure to c(anges in t(e price of t(e inventories4 suc( as t(e copper price4 a*t(oug( inventories are measured at t(e *o,er of cost and net rea*isab*e va*ue under Ind AS 5 In!entoriesF Kes4 The in!entories "ay (e hedged for changes in fair !alue due to changes in the co''er 'rice (ecause the change in fair !alue of in!entories &ill affect 'rofit or loss &hen the in!entories are sold or their carrying a"ount is &ritten do&n4 The ad5usted carrying a"ount (eco"es the cost (asis for the 'ur'ose of a''lying the lo&er of cost and net realisa(le !alue test under Ind #) 2 4 The hedging instru"ent used in a fair !alue hedge of in!entories "ay alternati!ely qualify as a cash flo& hedge of the future sale of the in!entory4

)8386 !edge accounting% forecast transaction

)or cas( f*o, (edges4 a forecast transaction t(at is subject to a (edge must be B(ig(*. probab*e?8 !o, s(ou*d t(e term B(ig(*. probab*e? be interpretedF The ter" Ehighly 'ro(a(le? indicates a "uch greater li>elihood of ha''ening than the ter" E"ore li>ely than not?4 #n assess"ent of the li>elihood that a forecast transaction &ill ta>e 'lace is not (ased solely on "anage"ent?s intentions (ecause intentions are not !erifia(le4 # transaction?s 'ro(a(ility should (e su''orted (y o(ser!a(le facts and the attendant circu"stances4 In assessing the li>elihood that a transaction &ill occur6 an entity should consider the follo&ing circu"stances: ;a< ;(< ;c< the frequency of si"ilar 'ast transactions= the financial and o'erational a(ility of the entity to carry out the transaction= su(stantial co""it"ents of resources to a 'articular acti!ity ;for e8a"'le6 a "anufacturing facility that can (e used in the short run only to 'rocess a 'articular ty'e of co""odity<=

185

;d< ;e<

the e8tent of loss or disru'tion of o'erations that could result if the transaction does not occur= the li>elihood that transactions &ith su(stantially different characteristics "ight (e used to achie!e the sa"e (usiness 'ur'ose ;for e8a"'le6 an entity that intends to raise cash "ay ha!e se!eral &ays of doing so6 ranging fro" a short,ter" (an> loan to an offering of ordinary shares<= and the entity?s (usiness 'lan4

;f<

The length of ti"e until a forecast transaction is 'ro5ected to occur is also a factor in deter"ining 'ro(a(ility4 @ther factors (eing equal6 the "ore distant a forecast transaction is6 the less li>ely it is that the transaction &ould (e regarded as highly 'ro(a(le and the stronger the e!idence that &ould (e needed to su''ort an assertion that it is highly 'ro(a(le4 *or e8a"'le6 a transaction forecast to occur in fi!e years "ay (e less li>ely to occur than a transaction forecast to occur in one year4 -o&e!er6 forecast interest 'ay"ents for the ne8t 20 years on !aria(le rate de(t &ould ty'ically (e highly 'ro(a(le if su''orted (y an e8isting contractual o(ligation4 In addition6 other factors (eing equal6 the greater the 'hysical quantity or future !alue of a forecast transaction in 'ro'ortion to the entity?s transactions of the sa"e nature6 the less li>ely it is that the transaction &ould (e regarded as highly 'ro(a(le and the stronger the e!idence that &ould (e required to su''ort an assertion that it is highly 'ro(a(le4 *or e8a"'le6 less e!idence generally &ould (e needed to su''ort forecast sales of 1006000 units in the ne8t "onth than 9506000 units in that "onth &hen recent sales ha!e a!eraged 9506000 units 'er "onth for the 'ast three "onths4 # history of ha!ing designated hedges of forecast transactions and then deter"ining that the forecast transactions are no longer e8'ected to occur &ould call into question (oth an entity?s a(ility to 'redict forecast transactions accurately and the 'ro'riety of using hedge accounting in the future for si"ilar forecast transactions4

)8387 Retrospective designation of (edges

Does Ind AS 39 permit an entit. to designate (edge re*ations(ips retrospective*.F Ho4 Designation of hedge relationshi's ta>es effect 'ros'ecti!ely fro" the date all hedge accounting criteria inInd #) 39488 are "et4 In 'articular6 hedge accounting can (e a''lied only fro" the date the entity has co"'leted the necessary docu"entation of the hedge relationshi'6 including identification of the hedging instru"ent6 the related hedged ite" or transaction6 the nature of the ris> (eing hedged6 and ho& the entity &ill assess hedge effecti!eness4

)8389 !edge accounting% designation at t(e inception of t(e (edge

Does Ind AS 39 permit an entit. to designate and forma**. document a derivative contract as a (edging instrument after entering into t(e derivative contractF Kes6 'ros'ecti!ely4 *or hedge accounting 'ur'oses6 Ind #) 39 requires a hedging instru"ent to (e designated and for"ally docu"ented as such fro" the ince'tion of the hedge relationshi' ;Ind #) 39488<= in other &ords6 a hedge relationshi' cannot (e designated retros'ecti!ely4 #lso6 it 'recludes designating a hedging relationshi' for only

186

a 'ortion of the ti"e 'eriod during &hich the hedging instru"ent re"ains outstanding ;Ind #) 39475<4 -o&e!er6 it does not require the hedging instru"ent to (e acquired at the ince'tion of the hedge relationshi'4

)8383> !edge transaction

accounting%

identification

of

(edged

forecast

Can a forecast transaction be identified as t(e purc(ase or sa*e of t(e *ast 394>>> units of a product in a specified period or as a percentage of purc(ases or sa*es during a specified periodF Ho4 The hedged forecast transaction "ust (e identified and docu"ented &ith sufficient s'ecificity so that &hen the transaction occurs6 it is clear &hether the transaction is or is not the hedged transaction4 Therefore6 a forecast transaction "ay (e identified as the sale of the first 156000 units of a s'ecific 'roduct during a s'ecified three,"onth 'eriod6 (ut it could not (e identified as the last 156000 units of that 'roduct sold during a three, "onth 'eriod (ecause the last 156000 units cannot (e identified &hen they are sold4 *or the sa"e reason6 a forecast transaction cannot (e s'ecified solely as a 'ercentage of sales or 'urchases during a 'eriod4

)83833 Cas( f*o, (edge% documentation of timing of forecast transaction

)or a (edge of a forecast transaction4 s(ou*d t(e documentation of t(e (edge re*ations(ip t(at is estab*is(ed at inception of t(e (edge identif. t(e date on4 or time period in ,(ic(4 t(e forecast transaction is e&pected to occurF Kes4 To qualify for hedge accounting6 the hedge "ust relate to a s'ecific identified and designated ris> ;Ind #) 394#+110< and it "ust (e 'ossi(le to "easure its effecti!eness relia(ly ;Ind #) 39488;d<<4 #lso6 the hedged forecast transaction "ust (e highly 'ro(a(le ;Ind #) 39488;c<<4 To "eet these criteria6 an entity is not required to 'redict and docu"ent the e8act date a forecast transaction is e8'ected to occur4 -o&e!er6 it is required to identify and docu"ent the ti"e 'eriod during &hich the forecast transaction is e8'ected to occur &ithin a reasona(ly s'ecific and generally narro& range of ti"e fro" a "ost 'ro(a(le date6 as a (asis for assessing hedge effecti!eness4 To deter"ine that the hedge &ill (e highly effecti!e in accordance &ithInd #) 39488;d<6 it is necessary to ensure that changes in the fair !alue of the e8'ected cash flo&s are offset (y changes in the fair !alue of the hedging instru"ent and this test "ay (e "et only if the ti"ing of the cash flo&s occur &ithin close 'ro8i"ity to each other4 If the forecast transaction is no longer e8'ected to occur6 hedge accounting is discontinued in accordance &ith Ind #) 394101;c<4

)8< !edge effectiveness

)8<83 !edging on an afterAta& basis
!edging is often done on an afterAta& basis8 Is (edge effectiveness assessed after ta&esF Ind #) 39 'er"its6 (ut does not require6 assess"ent of hedge effecti!eness on an after, ta8 (asis4 If the hedge is underta>en on an after,ta8 (asis6 it is so designated at ince'tion as 'art of the for"al docu"entation of the hedging relationshi' and strategy4

187

)8<85 !edge effectiveness% assessment on cumu*ative basis

Ind AS 39877(b) re-uires t(at t(e (edge is e&pected to be (ig(*. effective8 S(ou*d e&pected (edge effectiveness be assessed separate*. for eac( period or cumu*ative*. over t(e *ife of t(e (edging re*ations(ipF 18'ected hedge effecti!eness "ay (e assessed on a cu"ulati!e (asis if the hedge is so designated6 and that condition is incor'orated into the a''ro'riate hedging docu"entation4 Therefore6 e!en if a hedge is not e8'ected to (e highly effecti!e in a 'articular 'eriod6 hedge accounting is not 'recluded if effecti!eness is e8'ected to re"ain sufficiently high o!er the life of the hedging relationshi'4 -o&e!er6 any ineffecti!eness is required to (e recognised in 'rofit or loss as it occurs4 To illustrate: an entity designates a 3I/@%,(ased interest rate s&a' as a hedge of a (orro&ing &hose interest rate is a F0 (ase rate 'lus a "argin4 The F0 (ase rate changes6 'erha's6 once each quarter or less6 in incre"ents of 2550 (asis 'oints6 &hile 3I/@% changes daily4 @!er a 'eriod of 12 years6 the hedge is e8'ected to (e al"ost 'erfect4 -o&e!er6 there &ill (e quarters &hen the F0 (ase rate does not change at all6 &hile 3I/@% has changed significantly4 This &ould not necessarily 'reclude hedge accounting4

)8<83 !edge effectiveness% counterpart. credit ris@

ust an entit. consider t(e *i@e*i(ood of defau*t b. t(e counterpart. to t(e (edging instrument in assessing (edge effectivenessF Kes4 #n entity cannot ignore &hether it &ill (e a(le to collect all a"ounts due under the contractual 'ro!isions of the hedging instru"ent4 Bhen assessing hedge effecti!eness6 (oth at the ince'tion of the hedge and on an ongoing (asis6 the entity considers the ris> that the counter'arty to the hedging instru"ent &ill default (y failing to "a>e any contractual 'ay"ents to the entity4 *or a cash flo& hedge6 if it (eco"es 'ro(a(le that a counter'arty &ill default6 an entity &ould (e una(le to conclude that the hedging relationshi' is e8'ected to (e highly effecti!e in achie!ing offsetting cash flo&s4 #s a result6 hedge accounting &ould (e discontinued4 *or a fair !alue hedge6 if there is a change in the counter'arty?s credit&orthiness6 the fair !alue of the hedging instru"ent &ill change6 &hich affects the assess"ent of &hether the hedge relationshi' is effecti!e and &hether it qualifies for continued hedge accounting4

)8<8< !edge effectiveness% effectiveness tests

!o, s(ou*d (edge effectiveness be measured for t(e purposes of initia**. -ua*if.ing for (edge accounting and for continued -ua*ificationF Ind #) 39 does not 'ro!ide s'ecific guidance a(out ho& effecti!eness tests are 'erfor"ed4 Ind #) 394#+105 s'ecifies that a hedge is nor"ally regarded as highly effecti!e only if ;a< at ince'tion and in su(sequent 'eriods6 the hedge is e8'ected to (e highly effecti!e in achie!ing offsetting changes in fair !alue or cash flo&s attri(uta(le to the hedged ris> during the 'eriod for &hich the hedge is designated6 and ;(< the actual results are &ithin a range of 80125 'er cent4 Ind #) 394#+105 also states that the e8'ectation in ;a< can (e de"onstrated in !arious &ays4

188

The a''ro'riateness of a gi!en "ethod of assessing hedge effecti!eness &ill de'end on the nature of the ris> (eing hedged and the ty'e of hedging instru"ent used4 The "ethod of assessing effecti!eness "ust (e reasona(le and consistent &ith other si"ilar hedges unless different "ethods are e8'licitly 5ustified4 #n entity is required to docu"ent at the ince'tion of the hedge ho& effecti!eness &ill (e assessed and then to a''ly that effecti!eness test on a consistent (asis for the duration of the hedge4 )e!eral "athe"atical techniques can (e used to "easure hedge effecti!eness6 including ratio analysis6 ie a co"'arison of hedging gains and losses &ith the corres'onding gains and losses on the hedged ite" at a 'oint in ti"e6 and statistical "easure"ent techniques such as regression analysis4 If regression analysis is used6 the entity?s docu"ented 'olicies for assessing effecti!eness "ust s'ecify ho& the results of the regression &ill (e assessed4

)8<89 !edge effectiveness% *ess t(an 3>> per cent offset

If a cas( f*o, (edge is regarded as (ig(*. effective because t(e actua* ris@ offset is ,it(in t(e a**o,ed 7>:359 per cent range of deviation from fu** offset4 is t(e gain or *oss on t(e ineffective portion of t(e (edge recognised in ot(er compre(ensive incomeF Ho4 Ind #) 39495;a< indicates that only the effecti!e 'ortion is recognised in other co"'rehensi!e inco"e4 Ind #) 39495;(< requires the ineffecti!e 'ortion to (e recognised in 'rofit or loss4

)8<86 Assuming perfect (edge effectiveness

If t(e principa* terms of t(e (edging instrument and of t(e entire (edged asset or *iabi*it. or (edged forecast transaction are t(e same4 can an entit. assume perfect (edge effectiveness ,it(out furt(er effectiveness testingF Ho4 Ind #) 39488;e< requires an entity to assess hedges on an ongoing (asis for hedge effecti!eness4 It cannot assu"e hedge effecti!eness e!en if the 'rinci'al ter"s of the hedging instru"ent and the hedged ite" are the sa"e6 since hedge ineffecti!eness "ay arise (ecause of other attri(utes such as the liquidity of the instru"ents or their credit ris> ;Ind #) 394#+109<4 It "ay6 ho&e!er6 designate only certain ris>s in an o!erall e8'osure as (eing hedged and there(y i"'ro!e the effecti!eness of the hedging relationshi'4 *or e8a"'le6 for a fair !alue hedge of a de(t instru"ent6 if the deri!ati!e hedging instru"ent has a credit ris> that is equi!alent to the ##,rate6 it "ay designate only the ris> related to ##,rated interest rate "o!e"ents as (eing hedged6 in &hich case changes in credit s'reads generally &ill not affect the effecti!eness of the hedge4

)89 Cas( f*o, (edges

)8983 !edge accounting% nonAderivative monetar. asset or nonAderivative monetar. *iabi*it. used as a (edging instrument
If an entit. designates a nonAderivative monetar. asset as a foreign currenc. cas( f*o, (edge of t(e repa.ment of t(e principa* of a nonAderivative monetar. *iabi*it.4 ,ou*d t(e e&c(ange differences on t(e (edged item be recognised in profit or *oss (Ind AS 53857) and t(e e&c(ange differences on t(e (edging instrument be

189

recognised in ot(er compre(ensive income unti* t(e repa.ment of t(e *iabi*it. (Ind AS 39899)F Ho4 18change differences on the "onetary asset and the "onetary lia(ility are (oth recognised in 'rofit or loss in the 'eriod in &hich they arise ;Ind #) 21428<4Ind #) 394#+83 s'ecifies that if there is a hedge relationshi' (et&een a non,deri!ati!e "onetary asset and a non,deri!ati!e "onetary lia(ility6 changes in fair !alues of those financial instru"ents are recognised in 'rofit or loss4

)8985 Cas( f*o, (edges% performance of (edging instrument (3)

Entit. A (as a f*oating rate *iabi*it. of Rs834>>> ,it( five .ears remaining to maturit.8 It enters into a fiveA.ear pa.Afi&ed4 receiveAf*oating interest rate s,ap in t(e same currenc. and ,it( t(e same principa* terms as t(e *iabi*it. to (edge t(e e&posure to variab*e cas( f*o, pa.ments on t(e f*oating rate *iabi*it. attributab*e to interest rate ris@8 At inception4 t(e fair va*ue of t(e s,ap is Lero8 Subse-uent*.4 t(ere is an increase of Rs8<9 in t(e fair va*ue of t(e s,ap8 0(is increase consists of a c(ange of Rs89> resu*ting from an increase in mar@et interest rates and a c(ange of minus Rs83 resu*ting from an increase in t(e credit ris@ of t(e s,ap counterpart.8 0(ere is no c(ange in t(e fair va*ue of t(e f*oating rate *iabi*it.4 but t(e fair va*ue (present va*ue) of t(e future cas( f*o,s needed to offset t(e e&posure to variab*e interest cas( f*o,s on t(e *iabi*it. increases b. Rs89>8 Assuming t(at Entit. A determines t(at t(e (edge is sti** (ig(*. effective4 is t(ere ineffectiveness t(at s(ou*d be recognised in profit or *ossF Ho4 # hedge of interest rate ris> is not fully effecti!e if 'art of the change in the fair !alue of the deri!ati!e is attri(uta(le to the counter'arty?s credit ris> ;Ind #) 394#+109<4 -o&e!er6 (ecause 1ntity # deter"ines that the hedge relationshi' is still highly effecti!e6 it recognises the effecti!e 'ortion of the change in fair !alue of the s&a'6 ie the net change in fair !alue of %s4496 in other co"'rehensi!e inco"e4 There is no de(it to 'rofit or loss for the change in fair !alue of the s&a' attri(uta(le to the deterioration in the credit quality of the s&a' counter'arty6 (ecause the cu"ulati!e change in the 'resent !alue of the future cash flo&s needed to offset the e8'osure to !aria(le interest cash flo&s on the hedged ite"6 ie %s4506 e8ceeds the cu"ulati!e change in !alue of the hedging instru"ent6 ie %s4494 Dr )&a' r @ther co"'rehensi!e inco"e %s449 %s449

If 1ntity # concludes that the hedge is no longer highly effecti!e6 it discontinues hedge accounting 'ros'ecti!ely as fro" the date the hedge ceased to (e highly effecti!e in accordance &ith Ind #) 3941014 Cou*d t(e ans,er c(ange if t(e fair va*ue of t(e s,ap instead increases to Rs893 of ,(ic( Rs89> resu*ts from t(e increase in mar@et interest rates and Rs83 from a decrease in t(e credit ris@ of t(e s,ap counterpart.F Kes4 In this case6 there is a credit to 'rofit or loss of %s41 for the change in fair !alue of the s&a' attri(uta(le to the i"'ro!e"ent in the credit quality of the s&a' counter'arty4 This is (ecause the cu"ulati!e change in the !alue of the hedging instru"ent6 ie %s4516 e8ceeds the cu"ulati!e change in the 'resent !alue of the future cash flo&s needed to offset the e8'osure to !aria(le interest cash flo&s on the hedged ite"6 ie %s4504 The

190

difference of %s41 re'resents the e8cess ineffecti!eness attri(uta(le to the deri!ati!e hedging instru"ent6 the s&a'6 and is recognised in 'rofit or loss4 Dr )&a' r @ther co"'rehensi!e inco"e r Drofit or loss %s451 %s450 %s41

)8983 Cas( f*o, (edges% performance of (edging instrument (5)

On 3> September 5>$34 Entit. A (edges t(e anticipated sa*e of 5< tonnes of pu*p on 3 arc( 5>$5 b. entering into a s(ort for,ard contract on 5< tonnes of pu*p8 0(e contract re-uires net sett*ement in cas( determined as t(e difference bet,een t(e future spot price of pu*p on a specified commodit. e&c(ange and Rs834>>>8 Entit. A e&pects to se** t(e pu*p in a different4 *oca* mar@et8 Entit. A determines t(at t(e for,ard contract is an effective (edge of t(e anticipated sa*e and t(at t(e ot(er conditions for (edge accounting are met8 It assesses (edge effectiveness b. comparing t(e entire c(ange in t(e fair va*ue of t(e for,ard contract ,it( t(e c(ange in t(e fair va*ue of t(e e&pected cas( inf*o,s8 On 33 December4 t(e spot price of pu*p (as increased bot( in t(e *oca* mar@et and on t(e e&c(ange8 0(e increase in t(e *oca* mar@et e&ceeds t(e increase on t(e e&c(ange8 As a resu*t4 t(e present va*ue of t(e e&pected cas( inf*o, from t(e sa*e on t(e *oca* mar@et is Rs8343>>8 0(e fair va*ue of Entit. A?s for,ard contract is negative Rs87>8 Assuming t(at Entit. A determines t(at t(e (edge is sti** (ig(*. effective4 is t(ere ineffectiveness t(at s(ou*d be recognised in profit or *ossF Ho4 In a cash flo& hedge6 ineffecti!eness is not recognised in the financial state"ents &hen the cu"ulati!e change in the fair !alue of the hedged cash flo&s e8ceeds the cu"ulati!e change in the !alue of the hedging instru"ent4 In this case6 the cu"ulati!e change in the fair !alue of the for&ard contract is %s4806 &hile the fair !alue of the cu"ulati!e change in e8'ected future cash flo&s on the hedged ite" is %s41004 )ince the fair !alue of the cu"ulati!e change in e8'ected future cash flo&s on the hedged ite" fro" the ince'tion of the hedge e8ceeds the cu"ulati!e change in fair !alue of the hedging instru"ent ;in a(solute a"ounts<6 no 'ortion of the gain or loss on the hedging instru"ent is recognised in 'rofit or loss ;Ind #) 39495;(<<4 /ecause 1ntity # deter"ines that the hedge relationshi' is still highly effecti!e6 it recognises the entire change in fair !alue of the for&ard contract ;%s480< in other co"'rehensi!e inco"e4 Dr @ther co"'rehensi!e inco"e r *or&ard %s480 %s480

If 1ntity # concludes that the hedge is no longer highly effecti!e6 it discontinues hedge accounting 'ros'ecti!ely as fro" the date the hedge ceases to (e highly effecti!e in accordance &ith Ind #) 3941014

)898< Cas( f*o, (edges% forecast transaction occurs before t(e specified period
An entit. designates a derivative as a (edging instrument in a cas( f*o, (edge of a forecast transaction4 suc( as a forecast sa*e of a commodit.8 0(e (edging re*ations(ip meets a** t(e (edge accounting conditions4 inc*uding t(e re-uirement to identif. and document t(e period in ,(ic( t(e transaction is e&pected to occur

191

,it(in a reasonab*. specific and narro, range of time (see Euestion )85836)8 If4 in a subse-uent period4 t(e forecast transaction is e&pected to occur in an ear*ier period t(an origina**. anticipated4 can t(e entit. conc*ude t(at t(is transaction is t(e same as t(e one t(at ,as designated as being (edgedF Kes4 The change in ti"ing of the forecast transaction does not affect the !alidity of the designation4 -o&e!er6 it "ay affect the assess"ent of the effecti!eness of the hedging relationshi'4 #lso6 the hedging instru"ent &ould need to (e designated as a hedging instru"ent for the &hole re"aining 'eriod of its e8istence in order for it to continue to qualify as a hedging instru"ent ;see Ind #) 39475 and .uestion *42417<4

)8989 Cas( f*o, (edges% measuring effectiveness for a (edge of a forecast transaction in a debt instrument
A forecast investment in an interestAearning asset or forecast issue of an interestA bearing *iabi*it. creates a cas( f*o, e&posure to interest rate c(anges because t(e re*ated interest pa.ments ,i** be based on t(e mar@et rate t(at e&ists ,(en t(e forecast transaction occurs8 0(e objective of a cas( f*o, (edge of t(e e&posure to interest rate c(anges is to offset t(e effects of future c(anges in interest rates so as to obtain a sing*e fi&ed rate4 usua**. t(e rate t(at e&isted at t(e inception of t(e (edge t(at corresponds ,it( t(e term and timing of t(e forecast transaction8 During t(e period of t(e (edge4 it is not possib*e to determine ,(at t(e mar@et interest rate for t(e forecast transaction ,i** be at t(e time t(e (edge is terminated or ,(en t(e forecast transaction occurs8 In t(is case4 (o, is t(e effectiveness of t(e (edge assessed and measuredF During this 'eriod6 effecti!eness can (e "easured on the (asis of changes in interest rates (et&een the designation date and the interi" effecti!eness "easure"ent date4 The interest rates used to "a>e this "easure"ent are the interest rates that corres'ond &ith the ter" and occurrence of the forecast transaction that e8isted at the ince'tion of the hedge and that e8ist at the "easure"ent date as e!idenced (y the ter" structure of interest rates4 +enerally it &ill not (e sufficient si"'ly to co"'are cash flo&s of the hedged ite" &ith cash flo&s generated (y the deri!ati!e hedging instru"ent as they are 'aid or recei!ed6 since such an a''roach ignores the entity?s e8'ectations of &hether the cash flo&s &ill offset in su(sequent 'eriods and &hether there &ill (e any resulting ineffecti!eness4 The discussion that follo&s illustrates the "echanics of esta(lishing a cash flo& hedge and "easuring its effecti!eness4 *or the 'ur'ose of the illustrations6 assu"e that an entity e8'ects to issue a %s41006000 one,year de(t instru"ent in three "onths4 The instru"ent &ill 'ay interest quarterly &ith 'rinci'al due at "aturity4 The entity is e8'osed to interest rate increases and esta(lishes a hedge of the interest cash flo&s of the de(t (y entering into a for&ard starting interest rate s&a'4 The s&a' has a ter" of one year and &ill start in three "onths to corres'ond &ith the ter"s of the forecast de(t issue4 The entity &ill 'ay a fi8ed rate and recei!e a !aria(le rate6 and the entity designates the ris> (eing hedged as the 3I/@%,(ased interest co"'onent in the forecast issue of the de(t4

Iie*d curve

192

The yield cur!e 'ro!ides the foundation for co"'uting future cash flo&s and the fair !alue of such cash flo&s (oth at the ince'tion of6 and during6 the hedging relationshi'4 It is (ased on current "ar>et yields on a''lica(le reference (onds that are traded in the "ar>et'lace4 3ar>et yields are con!erted to s'ot interest rates ;Es'ot rates? or EJero cou'on rates?< (y eli"inating the effect of cou'on 'ay"ents on the "ar>et yield4 )'ot rates are used to discount future cash flo&s6 such as 'rinci'al and interest rate 'ay"ents6 to arri!e at their fair !alue4 )'ot rates also are used to co"'ute for&ard interest rates that are used to co"'ute !aria(le and esti"ated future cash flo&s4 The relationshi' (et&een s'ot rates and one,'eriod for&ard rates is sho&n (y the follo&ing for"ula: Spot,+or ard relationship FX ;1 N )% t < t ;1 N )% t1 < t1 1

&here * X for&ard rate ;P< )% X s'ot rate ;P< t X 'eriod in ti"e ;eg 16 26 36 46 5< #lso6 for the 'ur'ose of this illustration6 assu"e that the follo&ing quarterly,'eriod ter" structure of interest rates using quarterly co"'ounding e8ists at the ince'tion of the hedge4 For'ard periods )'ot rates *or&ard rates Iie*d curve at inception : (beginning of period 3) 0 2 3 4 3475P 4450P 5450P $400P 3475P 5425P 7451P 7450P 5 $425P 7425P

The one,'eriod for&ard rates are co"'uted on the (asis of s'ot rates for the a''lica(le "aturities4 *or e8a"'le6 the current for&ard rate for Deriod 2 calculated using the for"ula a(o!e is equal to 71404502G1403759 1 X 5425 'er cent4 The current one,'eriod for&ard rate for Deriod 2 is different fro" the current s'ot rate for Deriod 26 since the s'ot rate is an interest rate fro" the (eginning of Deriod 1 ;s'ot< to the end of Deriod 26 &hile the for&ard rate is an interest rate fro" the (eginning of Deriod 2 to the end of Deriod 24

!edged item
In this e8a"'le6 the entity e8'ects to issue a %s41006000 one,year de(t instru"ent in three "onths &ith quarterly interest 'ay"ents4 The entity is e8'osed to interest rate increases and &ould li>e to eli"inate the effect on cash flo&s of interest rate changes that "ay ha''en (efore the forecast transaction ta>es 'lace4 If that ris> is eli"inated6 the entity &ould o(tain an interest rate on its de(t issue that is equal to the one,year for&ard cou'on rate currently a!aila(le in the "ar>et'lace in three "onths4 That for&ard cou'on rate6 &hich is different fro" the for&ard ;s'ot< rate6 is $48$ 'er cent6 co"'uted fro" the ter" structure of interest rates sho&n a(o!e4 It is the "ar>et rate of interest that e8ists at the ince'tion of the hedge6 gi!en the ter"s of the forecast de(t instru"ent4 It results in the fair !alue of the de(t (eing equal to 'ar at its issue4

193

#t the ince'tion of the hedging relationshi'6 the e8'ected cash flo&s of the de(t instru"ent can (e calculated on the (asis of the e8isting ter" structure of interest rates4 *or this 'ur'ose6 it is assu"ed that interest rates do not change and that the de(t &ould (e issued at $48$ 'er cent at the (eginning of Deriod 24 In this case6 the cash flo&s and fair !alue of the de(t instru"ent &ould (e as follo&s at the (eginning of Deriod 24 Issue of fi&ed rate debt 'eginning of period 5 A #o rate c(anges (spot based on for,ard rates) Total ?riginal for'ard periods 0 2 7 A : *emaining periods 0 2 7 A )'ot rates 5425P $438P $475P $488P *or&ard rates 5425P 7451P 7450P 7425P *s+ *s+ *s+ *s+ *s+ Cash flo's: *i8ed interest Z$48$P 1671$ 1671$ 1671$ 1671$ Drinci'al 1006000 Fair value: Interest $6592 16$94 16$$3 16$32 16$03 Drinci'al 936408 93640828 Total 1006000 )ince it is assu"ed that interest rates do not change6 the fair !alue of the interest and 'rinci'al a"ounts equals the 'ar a"ount of the forecast transaction4 The fair !alue a"ounts are co"'uted on the (asis of the s'ot rates that e8ist at the ince'tion of the hedge for the a''lica(le 'eriods in &hich the cash flo&s &ould occur had the de(t (een issued at the date of the forecast transaction4 They reflect the effect of discounting those cash flo&s on the (asis of the 'eriods that &ill re"ain after the de(t instru"ent is issued4 *or e8a"'le6 the s'ot rate of $438 'er cent is used to discount the interest cash flo& that is e8'ected to (e 'aid in Deriod 36 (ut it is discounted for only t&o 'eriods (ecause it &ill occur t&o 'eriods after the forecast transaction4 The for&ard interest rates are the sa"e as sho&n 're!iously6 since it is assu"ed that interest rates do not change4 The s'ot rates are different (ut they ha!e not actually changed4 They re'resent the s'ot rates one 'eriod for&ard and are (ased on the a''lica(le for&ard rates4

!edging instrument
The o(5ecti!e of the hedge is to o(tain an o!erall interest rate on the forecast transaction and the hedging instru"ent that is equal to $48$ 'er cent6 &hich is the "ar>et rate at the ince'tion of the hedge for the 'eriod fro" Deriod 2 to Deriod 54 This o(5ecti!e is acco"'lished (y entering into a for&ard starting interest rate s&a' that has a fi8ed rate of $48$ 'er cent4 /ased on the ter" structure of interest rates that e8ist at the ince'tion of the hedge6 the interest rate s&a' &ill ha!e such a rate4 #t the ince'tion of the hedge6 the fair !alue of the fi8ed rate 'ay"ents on the interest rate s&a' &ill equal the fair !alue of the !aria(le rate 'ay"ents6 resulting in the interest rate s&a' ha!ing a fair !alue of Jero4 The e8'ected cash flo&s of the interest rate s&a' and the related fair !alue a"ounts are sho&n as follo&s4
28

%s41006000G;1 N 7040$88G49< 4

194

?riginal for'ard periods *emaining periods Cash flo's: *i8ed interest Z$48$P *orecast !aria(le interest Forecast $ased on for'ard

Interest rate s,ap Total 0 2 0 *s+ 1671$ 16313 :+2:B ;403< :+2:B 16$94 1629$ ;398<

7 2 *s+ 1671$ 16877 C+:0B 1$1 <+71B 16$$3 16819 15$

A 7 *s+ 1671$ 1687$ C+:3B 1$0 <+C:B 16$32 16784 152

: A *s+ 1671$ 16813 C+2:B 97 <+11B 16$03 16$93 90

rate Het interest Fair value: !iscount rate .spot/ *i8ed interest $6592 *orecast !aria(le interest $6592 *air !alue of interest rate 0 s&a'

#t the ince'tion of the hedge6 the fi8ed rate on the for&ard s&a' is equal to the fi8ed rate the entity &ould recei!e if it could issue the de(t in three "onths under ter"s that e8ist today4 easuring (edge effectiveness If interest rates change during the 'eriod the hedge is outstanding6 the effecti!eness of the hedge can (e "easured in !arious &ays4 #ssu"e that interest rates change as follo&s i""ediately (efore the de(t is issued at the (eginning of Deriod 24 For'ard periods *emaining periods )'ot rates *or&ard rates Iie*d curve A Rates increase 5>> basis points 0 2 7 A 0 2 7 5475P $450P 7450P 5475P 7425P 9451P : A 8400P 9450P

Fnder the ne& interest rate en!iron"ent6 the fair !alue of the 'ay,fi8ed at $48$ 'er cent6 recei!e,!aria(le interest rate s&a' that &as designated as the hedging instru"ent &ould (e as follo&s4 )air va*ue of interest rate s,ap Total 0 2 7 0 2 *s+ *s *s+ *s+ + Cash flo's: *i8ed interest Z$48$P *orecast !aria(le interest Forecast $ased on ne' for'ard 1671$ 16438 :+2:B 1671$ 16813 C+2:B 1671$ 26377 -+:0B 1671$ 2637$ -+:3B

?riginal for'ard periods *emaining periods

A 7 *s+

: A *s+

195

rate Het interest Fair value: Ne' discount rate .spot/ *i8ed interest *orecast !aria(le interest *air !alue of net interest

;279< $65$2 76$15 16053 :+C:B 16$92 16417 ;275<

97 <+:3B 16$$2 16755 93

$$1 C+:3B 16$23 26248 $25

$$0 1+33B 16585 26195 $10

In order to co"'ute the effecti!eness of the hedge6 it is necessary to "easure the change in the 'resent !alue of the cash flo&s or the !alue of the hedged forecast transaction4 There are at least t&o "ethods of acco"'lishing this "easure"ent4 et(od A Compute c(ange in fair va*ue of debt Total ?riginal for'ard periods 0 2 7 A *emaining periods 0 2 7 *s *s+ *s+ *s+ + Cash flo's: *i8ed interest Z$48$P Drinci'al Fair value: Ne' discount rate .spot/ Interest Drinci'al Total *air !alue at ince'tion *air !alue difference $65$2 926385 986947 1006000 ;16053< 1671$ 1671$ 1671 $ 1006000 :+C:B 16$92 <+:3B 16$$2 C+:3 B 16$2 3 92638529 1+33B 16585 1671$

: A *s+

Fnder 3ethod #6 a co"'utation is "ade of the fair !alue in the ne& interest rate en!iron"ent of de(t that carries interest that is equal to the cou'on interest rate that e8isted at the ince'tion of the hedging relationshi' ;$48$ 'er cent<4 This fair !alue is co"'ared &ith the e8'ected fair !alue as of the (eginning of Deriod 2 that &as calculated on the (asis of the ter" structure of interest rates that e8isted at the ince'tion of the hedging relationshi'6 as illustrated a(o!e6 to deter"ine the change in the fair !alue4 Hote that the difference (et&een the change in the fair !alue of the s&a' and the change in the e8'ected fair !alue of the de(t e8actly offset in this e8a"'le6 since the ter"s of the s&a' and the forecast transaction "atch each other4 et(od ' Compute c(ange in fair va*ue of cas( f*o,s Total 0 2 7 A 0 2 7

?riginal for'ard periods *emaining periods

29

: A

%s41006000G;1 N 70408G49< 4

196

3ar>et rate at ince'tion urrent for&ard rate %ate difference ash flo& difference ;'rinci'al O rate< !iscount rate .spot/ *air !alue of difference

$48$P 5475P 1411P %s4279 5475P %s4275

$48$P 7425P ;0439P< ;%s497< $450P ;%s493<

$48$P 9451P ;24$4P< ;%s4$$1< 7450P ;%s4$25<

$48$P 9450P ;24$4P< ;%s4$$0< 8400P ;%s4$10<

;%s416053<

Fnder 3ethod /6 the 'resent !alue of the change in cash flo&s is co"'uted on the (asis of the difference (et&een the for&ard interest rates for the a''lica(le 'eriods at the effecti!eness "easure"ent date and the interest rate that &ould ha!e (een o(tained if the de(t had (een issued at the "ar>et rate that e8isted at the ince'tion of the hedge4 The "ar>et rate that e8isted at the ince'tion of the hedge is the one,year for&ard cou'on rate in three "onths4 The 'resent !alue of the change in cash flo&s is co"'uted on the (asis of the current s'ot rates that e8ist at the effecti!eness "easure"ent date for the a''lica(le 'eriods in &hich the cash flo&s are e8'ected to occur4 This "ethod also could (e referred to as the Etheoretical s&a'? "ethod ;or Ehy'othetical deri!ati!e? "ethod< (ecause the co"'arison is (et&een the hedged fi8ed rate on the de(t and the current !aria(le rate6 &hich is the sa"e as co"'aring cash flo&s on the fi8ed and !aria(le rate legs of an interest rate s&a'4 #s (efore6 the difference (et&een the change in the fair !alue of the s&a' and the change in the 'resent !alue of the cash flo&s e8actly offset in this e8a"'le6 since the ter"s "atch4 ?ther considerations There is an additional co"'utation that should (e 'erfor"ed to co"'ute ineffecti!eness (efore the e8'ected date of the forecast transaction that has not (een considered for the 'ur'ose of this illustration4 The fair !alue difference has (een deter"ined in each of the illustrations as of the e8'ected date of the forecast transaction i""ediately (efore the forecast transaction6 ie at the (eginning of Deriod 24 If the assess"ent of hedge effecti!eness is done (efore the forecast transaction occurs6 the difference should (e discounted to the current date to arri!e at the actual a"ount of ineffecti!eness4 *or e8a"'le6 if the "easure"ent date &ere one "onth after the hedging relationshi' &as esta(lished and the forecast transaction is no& e8'ected to occur in t&o "onths6 the a"ount &ould ha!e to (e discounted for the re"aining t&o "onths (efore the forecast transaction is e8'ected to occur to arri!e at the actual fair !alue4 This ste' &ould not (e necessary in the e8a"'les 'ro!ided a(o!e (ecause there &as no ineffecti!eness4 Therefore6 additional discounting of the a"ounts6 &hich net to Jero6 &ould not ha!e changed the result4 Fnder 3ethod /6 ineffecti!eness is co"'uted on the (asis of the difference (et&een the for&ard cou'on interest rates for the a''lica(le 'eriods at the effecti!eness "easure"ent date and the interest rate that &ould ha!e (een o(tained if the de(t had (een issued at the "ar>et rate that e8isted at the ince'tion of the hedge4 o"'uting the change in cash flo&s (ased on the difference (et&een the for&ard interest rates that e8isted at the ince'tion of the hedge and the for&ard rates that e8ist at the effecti!eness "easure"ent date is ina''ro'riate if the o(5ecti!e of the hedge is to esta(lish a single fi8ed rate for a series of forecast interest 'ay"ents4 This o(5ecti!e is "et (y hedging the e8'osures &ith an interest rate s&a' as illustrated in the a(o!e e8a"'le4 The fi8ed interest rate on the s&a' is a (lended interest rate co"'osed of the for&ard rates o!er

197

the life of the s&a'4 Fnless the yield cur!e is flat6 the co"'arison (et&een the for&ard interest rate e8'osures o!er the life of the s&a' and the fi8ed rate on the s&a' &ill 'roduce different cash flo&s &hose fair !alues are equal only at the ince'tion of the hedging relationshi'4 This difference is sho&n in the ta(le (elo&4 ?riginal for'ard periods *emaining periods *or&ard rate at ince'tion urrent for&ard rate %ate difference ash flo& difference ;'rinci'al O rate< Discount rate ;s'ot< *air !alue of difference ;%s416055< *air !alue of interest rate %s416053 s&a' Ineffecti!eness ;%s42< Total 0 2 0 5425P 5475P ;0450P< ;%s4125< 7 2 7451P 7425P 042$P %s4$4 A 7 7450P 9451P ;2400P< ;%s4501< 7450P ;%s4474< : A 7425P 9450P ;2425P< ;%s45$3< 8400P ;%s4520<

5475P $450P ;%s4123< %s4$2

If the o(5ecti!e of the hedge is to o(tain the for&ard rates that e8isted at the ince'tion of the hedge6 the interest rate s&a' is ineffecti!e (ecause the s&a' has a single (lended fi8ed cou'on rate that does not offset a series of different for&ard interest rates4 -o&e!er6 if the o(5ecti!e of the hedge is to o(tain the for&ard cou'on rate that e8isted at the ince'tion of the hedge6 the s&a' is effecti!e6 and the co"'arison (ased on differences in for&ard interest rates suggests ineffecti!eness &hen none "ay e8ist4 o"'uting ineffecti!eness (ased on the difference (et&een the for&ard interest rates that e8isted at the ince'tion of the hedge and the for&ard rates that e8ist at the effecti!eness "easure"ent date &ould (e an a''ro'riate "easure"ent of ineffecti!eness if the hedging o(5ecti!e is to loc> in those for&ard interest rates4 In that case6 the a''ro'riate hedging instru"ent &ould (e a series of for&ard contracts each of &hich "atures on a re'ricing date that corres'onds &ith the date of the forecast transactions4 It also should (e noted that it &ould (e ina''ro'riate to co"'are only the !aria(le cash flo&s on the interest rate s&a' &ith the interest cash flo&s in the de(t that &ould (e generated (y the for&ard interest rates4 That "ethodology has the effect of "easuring ineffecti!eness only on a 'ortion of the deri!ati!e6 and Ind #) 39 does not 'er"it the (ifurcation of a deri!ati!e for the 'ur'oses of assessing effecti!eness in this situation ;Ind #) 39474<4 It is recognised6 ho&e!er6 that if the fi8ed interest rate on the interest rate s&a' is equal to the fi8ed rate that &ould ha!e (een o(tained on the de(t at ince'tion6 there &ill (e no ineffecti!eness assu"ing that there are no differences in ter"s and no change in credit ris> or it is not designated in the hedging relationshi'4

)898; Cas( f*o, (edges% firm commitment to purc(ase inventor. in a foreign currenc.
Entit. A (as t(e +oca* Currenc. (+C) as its functiona* currenc. and presentation currenc.8 On 3> Gune 5>$34 it enters into a for,ard e&c(ange contract to receive )oreign Currenc. ()C) 3>>4>>> and de*iver +C3>94;>> on 3> Gune 5>$5 at an initia* cost and fair va*ue of Lero8 It designates t(e for,ard e&c(ange contract as a

198

(edging instrument in a cas( f*o, (edge of a firm commitment to purc(ase a certain -uantit. of paper on 33 arc( 5>$5 and t(e resu*ting pa.ab*e of )C3>>4>>>4 ,(ic( is to be paid on 3> Gune 5>$58 A** (edge accounting conditions in Ind AS 39 are met8 #s indicated in the ta(le (elo&6 on 30 Iune 20U16 the s'ot e8change rate is 2 14072 to * 16 &hile the t&el!e,"onth for&ard e8change rate is 2 1409$ to * 14 @n 31 Dece"(er 20U16 the s'ot e8change rate is 2 14080 to * 16 &hile the si8,"onth for&ard e8change rate is 2 14092 to * 14 @n 31 3arch 20U26 the s'ot e8change rate is 2 14074 to * 16 &hile the three,"onth for&ard rate is 2 1407$ to * 14 @n 30 Iune 20U26 the s'ot e8change rate is 2 14072 to * 14 The a''lica(le yield cur!e in the local currency is flat at $ 'er cent 'er year throughout the 'eriod4 The fair !alue of the for&ard e8change contract is negati!e 2 388 on 31 Dece"(er 20U1 [;714092 O 10060009 1096$00<G140$;$G12<\6 negati!e 2 14971 on 31 3arch 20U2 [;71407$ O 10060009 1096$00<G140$;;3G12<<\6 and negati!e 2 26400 on 30 Iune 20U2 [14072 O 1006000 1096$00\4 Date 30 Iune 20U1 31 Dece"(er 20U1 31 3arch 20U2 30 Iune 20U2 Spot rate 14072 14080 14074 14072 )or,ard rate to 3> Gune 5>$5 1409$ 14092 1407$ )air va*ue of for,ard contract ;388< ;16971< ;26400<

Issue (a) : C(at is t(e accounting for t(ese transactions if t(e (edging re*ations(ip is designated as being for c(anges in t(e fair va*ue of t(e for,ard e&c(ange contract and t(e entit.?s accounting po*ic. is to app*. basis adjustment to nonAfinancia* assets t(at resu*t from (edged forecast transactionsF The accounting entries are as follo&s4 3> Gune 5>$3 Dr *or&ard r ash 2 0 2 0

To record the for&ard e8change contract at its initial a"ount of Jero ;Ind #) 39443<4 The hedge is e8'ected to (e fully effecti!e (ecause the critical ter"s of the for&ard e8change contract and the 'urchase contract and the assess"ent of hedge effecti!eness are (ased on the for&ard 'rice ;Ind #) 394#+108<4 33 December 5>$3 Dr @ther co"'rehensi!e inco"e r *or&ard lia(ility 2 388 2 388

To record the change in the fair !alue of the for&ard e8change contract (et&een 30 Iune 20U1 and 31 Dece"(er 20U16 ie 2 388 0 X 2 3886 in other co"'rehensi!e inco"e ;Ind #) 39495<4 The hedge is fully effecti!e (ecause the loss on the for&ard

199

e8change contract ;2 388< e8actly offsets the change in cash flo&s associated &ith the 'urchase contract (ased on the for&ard 'rice 7;2 388< X [;714092 O 10060009 1096$00<G140$;$G12<\ [;71409$ O 10060009 1096$00<G140$\94 33 arc( 5>$5 Dr @ther co"'rehensi!e inco"e r *or&ard lia(ility 2 16583 2 16583

To record the change in the fair !alue of the for&ard e8change contract (et&een 1 Ianuary 20U2 and 31 3arch 20U2 ;ie 2 16971 2 388 X 2 16583< in other co"'rehensi!e inco"e ;Ind #) 39495<4 The hedge is fully effecti!e (ecause the loss on the for&ard e8change contract ;2 16583< e8actly offsets the change in cash flo&s associated &ith the 'urchase contract (ased on the for&ard 'rice 7;2 16583< X [;71407$ O 10060009 1096$00<G140$;3G12<\ [;714092 O 10060009 1096$00<G140$;$G12<\94 Dr Da'er ;'urchase 'rice< Dr Da'er ;hedging loss< r @ther co"'rehensi!e inco"e r Daya(le 2 1076400 2 16971 2 16971

2 1076400

To recognise the 'urchase of the 'a'er at the s'ot rate ;14074 O * 1006000< and re"o!e the cu"ulati!e loss on the for&ard e8change contract that has (een recognised in other co"'rehensi!e inco"e ;2 16971< and include it in the initial "easure"ent of the 'urchased 'a'er4 #ccordingly6 the initial "easure"ent of the 'urchased 'a'er is 2 1096371 consisting of a 'urchase consideration of 2 1076400 and a hedging loss of 2 169714 3> Gune 5>$5 Dr Daya(le r ash 2 1076400 2 1076200 2 200

r Drofit or loss

To record the settle"ent of the 'aya(le at the s'ot rate ;* 1006000 O 14072 X 1076200< and the associated e8change gain of 2 200 ;2 1076400 2 1076200<4 Dr Drofit or loss r *or&ard lia(ility 2 429 2 429

To record the loss on the for&ard e8change contract (et&een 1 #'ril 20U2 and 30 Iune 20U2 ;ie 2 26400 2 16971 X 2 429< in 'rofit or loss4 The hedge is regarded as fully effecti!e (ecause the loss on the for&ard e8change contract ;2 429< e8actly offsets the change in the fair !alue of the 'aya(le (ased on the for&ard 'rice ;2 429 X ;714072 O 10060009 1096$00 [;71407$ O 10060009 1096$00<G140$;3G12<\<4 Dr *or&ard lia(ility 2 26400

200

ash

2 26400

To record the net settle"ent of the for&ard e8change contract4 Issue (b) : C(at is t(e accounting for t(ese transactions if t(e (edging re*ations(ip instead is designated as being for c(anges in t(e spot e*ement of t(e for,ard e&c(ange contract and t(e interest e*ement is e&c*uded from t(e designated (edging re*ations(ip (Ind AS 3986<)F The accounting entries are as follo&s4 3> Gune 5>$3 Dr *or&ard r ash 2 0 2 0

To record the for&ard e8change contract at its initial a"ount of Jero ;Ind #) 39443<4 The hedge is e8'ected to (e fully effecti!e (ecause the critical ter"s of the for&ard e8change contract and the 'urchase contract are the sa"e and the change in the 're"iu" or discount on the for&ard contract is e8cluded fro" the assess"ent of effecti!eness ;Ind #) 394#+108<4 33 December 5>$3 Dr Drofit or loss ;interest ele"ent< r @ther co"'rehensi!e inco"e ;s'ot ele"ent< r *or&ard lia(ility 2 161$5 2 777 2 388

To record the change in the fair !alue of the for&ard e8change contract (et&een 30 Iune 20U1 and 31 Dece"(er 20U16 ie 2 388 0 X 2 3884 The change in the 'resent !alue of s'ot settle"ent of the for&ard e8change contract is a gain of 2 777 ;[;714080 O 10060009 1076200<G140$;$G12<\ [;714072 O 10060009 1076200<G140$\<6 &hich is recognised in other co"'rehensi!e inco"e ;Ind #) 39495;a<<4 The change in the interest ele"ent of the for&ard e8change contract ;the residual change in fair !alue< is a loss of 2 161$5 ;388 N 777<6 &hich is recognised in 'rofit or loss ;Ind #) 39474 and Ind #) 39455;a<<4 The hedge is fully effecti!e (ecause the gain in the s'ot ele"ent of the for&ard contract ;2 777< e8actly offsets the change in the 'urchase 'rice at s'ot rates ;2 777 X [;714080 O 10060009 1076200<G140$;$G12<\ [;714072 O 10060009 1076200<G140$\<4 33 arc( 5>$5 Dr @ther co"'rehensi!e inco"e ;s'ot ele"ent< Dr Drofit or loss ;interest ele"ent< r *or&ard lia(ility 2 580 2 16003 2 16583

To record the change in the fair !alue of the for&ard e8change contract (et&een 1 Ianuary 20U2 and 31 3arch 20U26 ie 2 16971 2 388 X 2 165834 The change in the 'resent !alue of the s'ot settle"ent of the for&ard e8change contract is a loss of 2 580 ;[;714074 O 10060009 1076200<G140$;3G12<\ [;714080 O 10060009 1076200<G140$;$G12<\<6

201

&hich is recognised in other co"'rehensi!e inco"e ;Ind #) 39495;a<<4 The change in the interest ele"ent of the for&ard e8change contract ;the residual change in fair !alue< is a loss of 2 16003 ;2 16583 2 580<6 &hich is recognised in 'rofit or loss ;Ind #) 39474 andInd #) 39455;a<<4 The hedge is fully effecti!e (ecause the loss in the s'ot ele"ent of the for&ard contract ;2 580< e8actly offsets the change in the 'urchase 'rice at s'ot rates 7;580< X [;714074 O 10060009 1076200<G140$;3G12<\ [;714080 O 10060009 1076200< G140$;$G12<\94 Dr Da'er ;'urchase 'rice< Dr @ther co"'rehensi!e inco"e r Da'er ;hedging gain< r Daya(le 2 1076400 2 197 2 197 2 1076400

To recognise the 'urchase of the 'a'er at the s'ot rate ;X 14074 O * 1006000< and re"o!e the cu"ulati!e gain on the s'ot ele"ent of the for&ard e8change contract that has (een recognised in other co"'rehensi!e inco"e ;2 777 2 580 X 2 197< and include it in the initial "easure"ent of the 'urchased 'a'er4 #ccordingly6 the initial "easure"ent of the 'urchased 'a'er is 2 10762036 consisting of a 'urchase consideration of 2 1076400 and a hedging gain of 2 1974 3> Gune 5>$5 Dr Daya(le r ash r Drofit or loss 2 1076400 2 1076200 2 200

To record the settle"ent of the 'aya(le at the s'ot rate ;* 1006000 O 14072 X 2 1076200< and the associated e8change gain of 2 200 ; 714072 140749 O * 1006000<4 Dr Drofit or loss ;s'ot ele"ent< Dr Drofit or loss ;interest ele"ent< r *or&ard lia(ility 2 197 2 232 2 429

To record the change in the fair !alue of the for&ard e8change contract (et&een 1 #'ril 20U2 and 30 Iune 20U2 ;ie 2 26400 2 16971 X 2 429<4 The change in the 'resent !alue of the s'ot settle"ent of the for&ard e8change contract is a loss of 2 197 ;714072 O 10060009 1076200 [;714074 O 10060009 1076200<G140$;3G12<\<6 &hich is recognised in 'rofit or loss4 The change in the interest ele"ent of the for&ard e8change contract ;the residual change in fair !alue< is a loss of 2 232 ;2 429 2 197<6 &hich is recognised in 'rofit or loss4 The hedge is fully effecti!e (ecause the loss in the s'ot ele"ent of the for&ard contract ;2 197< e8actly offsets the change in the 'resent !alue of the s'ot settle"ent of the 'aya(le 7;2 197< X [714072 O 10060009 1076200 [;714074 O 10060009 1076200<G140$;3G12<\94 Dr *or&ard lia(ility r ash 2 26400 2 26400

To record the net settle"ent of the for&ard e8change contract4

202

The follo&ing ta(le 'ro!ides an o!er!ie& of the co"'onents of the change in fair !alue of the hedging instru"ent o!er the ter" of the hedging relationshi'4 It illustrates that the &ay in &hich a hedging relationshi' is designated affects the su(sequent accounting for that hedging relationshi'6 including the assess"ent of hedge effecti!eness and the recognition of gains and losses4 #eriod ending Change in spot settlement &C 800 ;$00< ;200< Fair value of change in spot settlement &C 777 ;580< ;197< Change in for'ard settlement &C ;400< ;16$00< ;400< ;26400< Fair value of change in for'ard settlement &C ;388< ;16583< ;429< ;26400< Fair value of change in interest element &C Y;161$5< ;16003< ;232< ;26400<

Iune 20U1 Dece"(er 20U1 3arch 20U2 Iune 20U2 Total

)8; !edges% ot(er issues

)8;83 !edge accounting% management of interest rate ris@ in financia* institutions
'an@s and ot(er financia* institutions often manage t(eir e&posure to interest rate ris@ on a net basis for a** or parts of t(eir activities8 0(e. (ave s.stems to accumu*ate critica* information t(roug(out t(e entit. about t(eir financia* assets4 financia* *iabi*ities and for,ard commitments4 inc*uding *oan commitments8 0(is information is used to estimate and aggregate cas( f*o,s and to sc(edu*e suc( estimated cas( f*o,s into t(e app*icab*e future periods in ,(ic( t(e. are e&pected to be paid or received8 0(e s.stems generate estimates of cas( f*o,s based on t(e contractua* terms of t(e instruments and ot(er factors4 inc*uding estimates of prepa.ments and defau*ts8 )or ris@ management purposes4 man. financia* institutions use derivative contracts to offset some or a** e&posure to interest rate ris@ on a net basis8 If a financia* institution manages interest rate ris@ on a net basis4 can its activities potentia**. -ua*if. for (edge accounting under Ind AS 39F Kes4 -o&e!er6 to qualify for hedge accounting the deri!ati!e hedging instru"ent that hedges the net 'osition for ris> "anage"ent 'ur'oses "ust (e designated for accounting 'ur'oses as a hedge of a gross 'osition related to assets6 lia(ilities6 forecast cash inflo&s or forecast cash outflo&s gi!ing rise to the net e8'osure ;Ind #) 394846Ind #) 394#+101 andInd #) 394#+111<4 It is not 'ossi(le to designate a net 'osition as a hedged ite" under Ind #) 39 (ecause of the ina(ility to associate hedging gains and losses &ith a s'ecific ite" (eing hedged and6 corres'ondingly6 to deter"ine o(5ecti!ely the 'eriod in &hich such gains and losses should (e recognised in 'rofit or loss4 -edging a net e8'osure to interest rate ris> can often (e defined and docu"ented to "eet the qualifying criteria for hedge accounting inInd #) 39488 if the o(5ecti!e of the acti!ity is to offset a s'ecific6 identified and designated ris> e8'osure that ulti"ately

203

affects the entity?s 'rofit or loss ;Ind #) 394#+110< and the entity designates and docu"ents its interest rate ris> e8'osure on a gross (asis4 #lso6 to qualify for hedge accounting the infor"ation syste"s "ust ca'ture sufficient infor"ation a(out the a"ount and ti"ing of cash flo&s and the effecti!eness of the ris> "anage"ent acti!ities in acco"'lishing their o(5ecti!e4 The factors an entity "ust consider for hedge accounting 'ur'oses if it "anages interest rate ris> on a net (asis are discussed in .uestion *4$424

)8;85 !edge accounting considerations ,(en interest rate ris@ is managed on a net basis
If an entit. manages its e&posure to interest rate ris@ on a net basis4 ,(at are t(e issues t(e entit. s(ou*d consider in defining and documenting its interest rate ris@ management activities to -ua*if. for (edge accounting and in estab*is(ing and accounting for t(e (edge re*ations(ipF Issues ;a<;l< (elo& deal &ith the "ain issues4 *irst6 Issues ;a< and ;(< discuss the designation of deri!ati!es used in interest rate ris> "anage"ent acti!ities as fair !alue hedges or cash flo& hedges4 #s noted there6 hedge accounting criteria and accounting consequences differ (et&een fair !alue hedges and cash flo& hedges4 )ince it "ay (e easier to achie!e hedge accounting treat"ent if deri!ati!es used in interest rate ris> "anage"ent acti!ities are designated as cash flo& hedging instru"ents6 Issues ;c<;l< e8'and on !arious as'ects of the accounting for cash flo& hedges4 Issues ;c<;f< consider the a''lication of the hedge accounting criteria for cash flo& hedges in Ind #) 396 and Issues ;g< and ;h< discuss the required accounting treat"ent4 *inally6 Issues ;i< ;l< ela(orate on other s'ecific issues relating to the accounting for cash flo& hedges4 Issue (a) : Can a derivative t(at is used to manage interest rate ris@ on a net basis be designated under Ind AS 39 as a (edging instrument in a fair va*ue (edge or a cas( f*o, (edge of a gross e&posureF /oth ty'es of designation are 'ossi(le under Ind #) 394 #n entity "ay designate the deri!ati!e used in interest rate ris> "anage"ent acti!ities either as a fair !alue hedge of assets6 lia(ilities and fir" co""it"ents or as a cash flo& hedge of forecast transactions6 such as the antici'ated rein!est"ent of cash inflo&s6 the antici'ated refinancing or rollo!er of a financial lia(ility6 and the cash flo& consequences of the resetting of interest rates for an asset or a lia(ility4 In econo"ic ter"s6 it does not "atter &hether the deri!ati!e instru"ent is regarded as a fair !alue hedge or as a cash flo& hedge4 Fnder either 'ers'ecti!e of the e8'osure6 the deri!ati!e has the sa"e econo"ic effect of reducing the net e8'osure4 *or e8a"'le6 a recei!e,fi8ed6 'ay,!aria(le interest rate s&a' can (e considered to (e a cash flo& hedge of a !aria(le rate asset or a fair !alue hedge of a fi8ed rate lia(ility4 Fnder either 'ers'ecti!e6 the fair !alue or cash flo&s of the interest rate s&a' offset the e8'osure to interest rate changes4 -o&e!er6 accounting consequences differ de'ending on &hether the deri!ati!e is designated as a fair !alue hedge or a cash flo& hedge6 as discussed in Issue ;(<4 To illustrate: a (an> has the follo&ing assets and lia(ilities &ith a "aturity of t&o years4

204

1ariab*e interest Rs8 #ssets 2ia(ilities Het $0 ;100< ;40<

)i&ed interest Rs8 100 ;$0< 40

The (an> ta>es out a t&o,year s&a' &ith a notional 'rinci'al of %s440 to recei!e a !aria(le interest rate and 'ay a fi8ed interest rate to hedge the net e8'osure4 #s discussed a(o!e6 this "ay (e regarded and designated either as a fair !alue hedge of %s440 of the fi8ed rate assets or as a cash flo& hedge of %s440 of the !aria(le rate lia(ilities4 Issue (b) : C(at are t(e critica* considerations in deciding ,(et(er a derivative t(at is used to manage interest rate ris@ on a net basis s(ou*d be designated as a (edging instrument in a fair va*ue (edge or a cas( f*o, (edge of a gross e&posureF ritical considerations include the assess"ent of hedge effecti!eness in the 'resence of 're'ay"ent ris> and the a(ility of the infor"ation syste"s to attri(ute fair !alue or cash flo& changes of hedging instru"ents to fair !alue or cash flo& changes6 res'ecti!ely6 of hedged ite"s6 as discussed (elo&4 *or accounting 'ur'oses6 the designation of a deri!ati!e as hedging a fair !alue e8'osure or a cash flo& e8'osure is i"'ortant (ecause (oth the qualification require"ents for hedge accounting and the recognition of hedging gains and losses for these categories are different4 It is often easier to de"onstrate high effecti!eness for a cash flo& hedge than for a fair !alue hedge4 Effects of prepayments Dre'ay"ent ris> inherent in "any financial instru"ents affects the fair !alue of an instru"ent and the ti"ing of its cash flo&s and i"'acts on the effecti!eness test for fair !alue hedges and the highly 'ro(a(le test for cash flo& hedges6 res'ecti!ely4 1ffecti!eness is often "ore difficult to achie!e for fair !alue hedges than for cash flo& hedges &hen the instru"ent (eing hedged is su(5ect to 're'ay"ent ris>4 *or a fair !alue hedge to qualify for hedge accounting6 the changes in the fair !alue of the deri!ati!e hedging instru"ent "ust (e e8'ected to (e highly effecti!e in offsetting the changes in the fair !alue of the hedged ite" ;Ind #) 39488;(<<4 This test "ay (e difficult to "eet if6 for e8a"'le6 the deri!ati!e hedging instru"ent is a for&ard contract ha!ing a fi8ed ter" and the financial assets (eing hedged are su(5ect to 're'ay"ent (y the (orro&er4 #lso6 it "ay (e difficult to conclude that6 for a 'ortfolio of fi8ed rate assets that are su(5ect to 're'ay"ent6 the changes in the fair !alue for each indi!idual ite" in the grou' &ill (e e8'ected to (e a''ro8i"ately 'ro'ortional to the o!erall changes in fair !alue attri(uta(le to the hedged ris> of the grou'4 1!en if the ris> (eing hedged is a (ench"ar> interest rate6 to (e a(le to conclude that fair !alue changes &ill (e 'ro'ortional for each ite" in the 'ortfolio6 it "ay (e necessary to disaggregate the asset 'ortfolio into categories (ased on ter"6 cou'on6 credit6 ty'e of loan and other characteristics4

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In econo"ic ter"s6 a for&ard deri!ati!e instru"ent could (e used to hedge assets that are su(5ect to 're'ay"ent (ut it &ould (e effecti!e only for s"all "o!e"ents in interest rates4 # reasona(le esti"ate of 're'ay"ents can (e "ade for a gi!en interest rate en!iron"ent and the deri!ati!e 'osition can (e ad5usted as the interest rate en!iron"ent changes4 If an entity?s ris> "anage"ent strategy is to ad5ust the a"ount of the hedging instru"ent 'eriodically to reflect changes in the hedged 'osition6 the entity needs to de"onstrate that the hedge is e8'ected to (e highly effecti!e only for the 'eriod until the a"ount of the hedging instru"ent is ne8t ad5usted4 -o&e!er6 for that 'eriod6 the e8'ectation of effecti!eness has to (e (ased on e8isting fair !alue e8'osures and the 'otential for interest rate "o!e"ents &ithout consideration of future ad5ust"ents to those 'ositions4 *urther"ore6 the fair !alue e8'osure attri(uta(le to 're'ay"ent ris> can generally (e hedged &ith o'tions4 *or a cash flo& hedge to qualify for hedge accounting6 the forecast cash flo&s6 including the rein!est"ent of cash inflo&s or the refinancing of cash outflo&s6 "ust (e highly 'ro(a(le ;Ind #) 39488;c<< and the hedge e8'ected to (e highly effecti!e in achie!ing offsetting changes in the cash flo&s of the hedged ite" and hedging instru"ent ;Ind #) 39488;(<<4 Dre'ay"ents affect the ti"ing of cash flo&s and6 therefore6 the 'ro(a(ility of occurrence of the forecast transaction4 If the hedge is esta(lished for ris> "anage"ent 'ur'oses on a net (asis6 an entity "ay ha!e sufficient le!els of highly 'ro(a(le cash flo&s on a gross (asis to su''ort the designation for accounting 'ur'oses of forecast transactions associated &ith a 'ortion of the gross cash flo&s as the hedged ite"4 In this case6 the 'ortion of the gross cash flo&s designated as (eing hedged "ay (e chosen to (e equal to the a"ount of net cash flo&s (eing hedged for ris> "anage"ent 'ur'oses4 )ystems considerations The accounting for fair !alue hedges differs fro" that for cash flo& hedges4 It is usually easier to use e8isting infor"ation syste"s to "anage and trac> cash flo& hedges than it is for fair !alue hedges4 Fnder fair !alue hedge accounting6 the assets or lia(ilities that are designated as (eing hedged are re"easured for those changes in fair !alues during the hedge 'eriod that are attri(uta(le to the ris> (eing hedged4 )uch changes ad5ust the carrying a"ount of the hedged ite"s and6 for interest sensiti!e assets and lia(ilities6 "ay result in an ad5ust"ent of the effecti!e interest rate of the hedged ite" ;Ind #) 39489<4 #s a consequence of fair !alue hedging acti!ities6 the changes in fair !alue ha!e to (e allocated to the assets or lia(ilities (eing hedged in order for the entity to (e a(le to reco"'ute their effecti!e interest rate6 deter"ine the su(sequent a"ortisation of the fair !alue ad5ust"ent to 'rofit or loss6 and deter"ine the a"ount that should (e reclassified fro" equity to 'rofit or loss &hen assets are sold or lia(ilities e8tinguished ;Ind #) 39489 andInd #) 39492<4 To co"'ly &ith the require"ents for fair !alue hedge accounting6 it &ill generally (e necessary to esta(lish a syste" to trac> the changes in the fair !alue attri(uta(le to the hedged ris>6 associate those changes &ith indi!idual hedged ite"s6 reco"'ute the effecti!e interest rate of the hedged ite"s6 and a"ortise the changes to 'rofit or loss o!er the life of the res'ecti!e hedged ite"4 Fnder cash flo& hedge accounting6 the cash flo&s relating to the forecast transactions that are designated as (eing hedged reflect changes in interest rates4 The ad5ust"ent for changes in the fair !alue of a hedging deri!ati!e instru"ent is initially recognised in other co"'rehensi!e inco"e ;Ind #) 39495<4 To co"'ly &ith the require"ents for cash flo& hedge accounting6 it is necessary to deter"ine &hen the cu"ulati!e gains and

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losses recognised in other co"'rehensi!e inco"e fro" changes in the fair !alue of a hedging instru"ent should (e reclassified to 'rofit or loss;Ind #) 394100 and Ind #) 394101<4 *or cash flo& hedges6 it is not necessary to create a se'arate syste" to "a>e this deter"ination4 The syste" used to deter"ine the e8tent of the net e8'osure 'ro!ides the (asis for scheduling the changes in the cash flo&s of the deri!ati!e and the recognition of such changes in 'rofit or loss4 The ti"ing of the recognition in 'rofit or loss can (e 'redeter"ined &hen the hedge is associated &ith the e8'osure to changes in cash flo&s4 The forecast transactions that are (eing hedged can (e associated &ith a s'ecific 'rinci'al a"ount in s'ecific future 'eriods co"'osed of !aria(le rate assets and cash inflo&s (eing rein!ested or !aria(le rate lia(ilities and cash outflo&s (eing refinanced6 each of &hich creates a cash flo& e8'osure to changes in interest rates4 The s'ecific 'rinci'al a"ounts in s'ecific future 'eriods are equal to the notional a"ount of the deri!ati!e hedging instru"ents and are hedged only for the 'eriod that corres'onds to the re'ricing or "aturity of the deri!ati!e hedging instru"ents so that the cash flo& changes resulting fro" changes in interest rates are "atched &ith the deri!ati!e hedging instru"ent4Ind #) 394100 s'ecifies that the a"ounts recognised in other co"'rehensi!e inco"e should (e reclassified fro" equity to 'rofit or loss in the sa"e 'eriod or 'eriods during &hich the hedged ite" affects 'rofit or loss4 Issue (c) : If a (edging re*ations(ip is designated as a cas( f*o, (edge re*ating to c(anges in cas( f*o,s resu*ting from interest rate c(anges4 ,(at ,ou*d be inc*uded in t(e documentation re-uired b. Ind AS 39877(a)F The follo&ing &ould (e included in the docu"entation4 The hedging relationship ; The "aturity schedule of cash flo&s used for ris> "anage"ent 'ur'oses to deter"ine e8'osures to cash flo& "is"atches on a net (asis &ould 'ro!ide 'art of the docu"entation of the hedging relationshi'4 < The entity=s risk management o$5ective and strategy for undertaking the hedge ; The entity?s o!erall ris> "anage"ent o(5ecti!e and strategy for hedging e8'osures to interest rate ris> &ould 'ro!ide 'art of the docu"entation of the hedging o(5ecti!e and strategy4 < The type of hedge ; The hedge is docu"ented as a cash flo& hedge4 < The hedged item ; The hedged ite" is docu"ented as a grou' of forecast transactions ;interest cash flo&s< that are e8'ected to occur &ith a high degree of 'ro(a(ility in s'ecified future 'eriods6 for e8a"'le6 scheduled on a "onthly (asis4 The hedged ite" "ay include interest cash flo&s resulting fro" the rein!est"ent of cash inflo&s6 including the resetting of interest rates on assets6 or fro" the refinancing of cash outflo&s6 including the resetting of interest rates on lia(ilities and rollo!ers of financial lia(ilities4 #s discussed in Issue ;e<6 the forecast transactions "eet the 'ro(a(ility test if there are sufficient le!els of highly 'ro(a(le cash flo&s in the s'ecified future 'eriods to enco"'ass the a"ounts designated as (eing hedged on a gross (asis4 < The hedged risk ; The ris> designated as (eing hedged is docu"ented as a 'ortion of the o!erall e8'osure to changes in a s'ecified "ar>et interest rate6 often the ris>,free interest rate or an inter(an> offered rate6 co""on to all ite"s in the grou'4 To hel' ensure that the hedge effecti!eness test is "et at ince'tion of the hedge and su(sequently6 the designated hedged 'ortion of the interest rate ris> could (e

207

docu"ented as (eing (ased on the sa"e yield cur!e as the deri!ati!e hedging instru"ent4 < The hedging instrument ; 1ach deri!ati!e hedging instru"ent is docu"ented as a hedge of s'ecified a"ounts in s'ecified future ti"e 'eriods corres'onding &ith the forecast transactions occurring in the s'ecified future ti"e 'eriods designated as (eing hedged4 < The method of assessing effectiveness ; The effecti!eness test is docu"ented as (eing "easured (y co"'aring the changes in the cash flo&s of the deri!ati!es allocated to the a''lica(le 'eriods in &hich they are designated as a hedge to the changes in the cash flo&s of the forecast transactions (eing hedged4 3easure"ent of the cash flo& changes is (ased on the a''lica(le yield cur!es of the deri!ati!es and hedged ite"s4 < Issue (d) : If t(e (edging re*ations(ip is designated as a cas( f*o, (edge4 (o, does an entit. satisf. t(e re-uirement for an e&pectation of (ig( effectiveness in ac(ieving offsetting c(anges in Ind AS 39877(b)F #n entity "ay de"onstrate an e8'ectation of high effecti!eness (y 're'aring an analysis de"onstrating high historical and e8'ected future correlation (et&een the interest rate ris> designated as (eing hedged and the interest rate ris> of the hedging instru"ent4 18isting docu"entation of the hedge ratio used in esta(lishing the deri!ati!e contracts "ay also ser!e to de"onstrate an e8'ectation of effecti!eness4 Issue (e) : If t(e (edging re*ations(ip is designated as a cas( f*o, (edge4 (o, does an entit. demonstrate a (ig( probabi*it. of t(e forecast transactions occurring as re-uired b. Ind AS 39877(c)F #n entity "ay do this (y 're'aring a cash flo& "aturity schedule sho&ing that there e8ist sufficient aggregate gross le!els of e8'ected cash flo&s6 including the effects of the resetting of interest rates for assets or lia(ilities6 to esta(lish that the forecast transactions that are designated as (eing hedged are highly 'ro(a(le to occur4 )uch a schedule should (e su''orted (y "anage"ent?s stated intentions and 'ast 'ractice of rein!esting cash inflo&s and refinancing cash outflo&s4 *or e8a"'le6 an entity "ay forecast aggregate gross cash inflo&s of %s4100 and aggregate gross cash outflo&s of %s490 in a 'articular ti"e 'eriod in the near future4 In this case6 it "ay &ish to designate the forecast rein!est"ent of gross cash inflo&s of %s410 as the hedged ite" in the future ti"e 'eriod4 If "ore than %s410 of the forecast cash inflo&s are contractually s'ecified and ha!e lo& credit ris>6 the entity has strong e!idence to su''ort an assertion that gross cash inflo&s of %s410 are highly 'ro(a(le to occur and to su''ort the designation of the forecast rein!est"ent of those cash flo&s as (eing hedged for a 'articular 'ortion of the rein!est"ent 'eriod4 # high 'ro(a(ility of the forecast transactions occurring "ay also (e de"onstrated under other circu"stances4 Issue (f) : If t(e (edging re*ations(ip is designated as a cas( f*o, (edge4 (o, does an entit. assess and measure effectiveness under Ind AS 39877(d) and Ind AS 39877(e)F 1ffecti!eness is required to (e "easured at a "ini"u" at the ti"e an entity 're'ares its annual or interi" financial re'orts4 -o&e!er6 an entity "ay &ish to "easure it "ore frequently on a s'ecified 'eriodic (asis6 at the end of each "onth or other a''lica(le re'orting 'eriod4 It is also "easured &hene!er deri!ati!e 'ositions designated as hedging instru"ents are changed or hedges are ter"inated to ensure that the

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recognition in 'rofit or loss of the changes in the fair !alue a"ounts on assets and lia(ilities and the recognition of changes in the fair !alue of deri!ati!e instru"ents designated as cash flo& hedges are a''ro'riate4 hanges in the cash flo&s of the deri!ati!e are co"'uted and allocated to the a''lica(le 'eriods in &hich the deri!ati!e is designated as a hedge and are co"'ared &ith co"'utations of changes in the cash flo&s of the forecast transactions4 o"'utations are (ased on yield cur!es a''lica(le to the hedged ite"s and the deri!ati!e hedging instru"ents and a''lica(le interest rates for the s'ecified 'eriods (eing hedged4 The schedule used to deter"ine effecti!eness could (e "aintained and used as the (asis for deter"ining the 'eriod in &hich the hedging gains and losses recognised initially in other co"'rehensi!e inco"e are reclassified fro" equity to 'rofit or loss4 Issue (g) : If t(e (edging re*ations(ip is designated as a cas( f*o, (edge4 (o, does an entit. account for t(e (edgeF The hedge is accounted for as a cash flo& hedge in accordance &ith the 'ro!isions inInd #) 39495Ind #) 3941006 as follo&s: ;i< the 'ortion of gains and losses on hedging deri!ati!es deter"ined to result fro" effecti!e hedges is recognised in other co"'rehensi!e inco"e &hene!er effecti!eness is "easured= and ;ii< the ineffecti!e 'ortion of gains and losses resulting fro" hedging deri!ati!es is recognised in 'rofit or loss4

Ind #) 394100 s'ecifies that the a"ounts recognised in other co"'rehensi!e inco"e should (e reclassified fro" equity to 'rofit or loss in the sa"e 'eriod or 'eriods during &hich the hedged ite" affects 'rofit or loss4 #ccordingly6 &hen the forecast transactions occur6 the a"ounts 're!iously recognised in other co"'rehensi!e inco"e are reclassified fro" equity to 'rofit or loss4 *or e8a"'le6 if an interest rate s&a' is designated as a hedging instru"ent of a series of forecast cash flo&s6 the changes in the cash flo&s of the s&a' are reclassified fro" equity to 'rofit or loss in the 'eriods &hen the forecast cash flo&s and the cash flo&s of the s&a' offset each other4 Issue (() : If t(e (edging re*ations(ip is designated as a cas( f*o, (edge4 ,(at is t(e treatment of an. net cumu*ative gains and *osses recognised in ot(er compre(ensive income if t(e (edging instrument is terminated premature*.4 t(e (edge accounting criteria are no *onger met4 or t(e (edged forecast transactions are no *onger e&pected to ta@e p*aceF If the hedging instru"ent is ter"inated 're"aturely or the hedge no longer "eets the criteria for qualification for hedge accounting6 for e8a"'le6 the forecast transactions are no longer highly 'ro(a(le6 the net cu"ulati!e gain or loss recognised in other co"'rehensi!e inco"e re"ains in equity until the forecast transaction occurs ;Ind #) 394101;a< andInd #) 394101;(<<4 If the hedged forecast transactions are no longer e8'ected to occur6 the net cu"ulati!e gain or loss is reclassified fro" equity to 'rofit or loss ;Ind #) 394101;c<<4 Issue (i) :Ind AS 39869 states t(at a (edging re*ations(ip ma. not be designated for on*. a portion of t(e time period in ,(ic( a (edging instrument is outstanding8 If t(e (edging re*ations(ip is designated as a cas( f*o, (edge4 and t(e (edge

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subse-uent*. fai*s t(e test for being (ig(*. effective4 doesInd AS 39869 prec*ude redesignating t(e (edging instrumentF Ho4Ind #) 39475 indicates that a deri!ati!e instru"ent "ay not (e designated as a hedging instru"ent for only a 'ortion of its re"aining 'eriod to "aturity4Ind #) 39475 does not refer to the deri!ati!e instru"ent?s original 'eriod to "aturity4 If there is a hedge effecti!eness failure6 the ineffecti!e 'ortion of the gain or loss on the deri!ati!e instru"ent is recognised i""ediately in 'rofit or loss ;Ind #) 39495;(<< and hedge accounting (ased on the 're!ious designation of the hedge relationshi' cannot (e continued ;Ind #) 394101<4 In this case6 the deri!ati!e instru"ent "ay (e redesignated 'ros'ecti!ely as a hedging instru"ent in a ne& hedging relationshi' 'ro!ided this hedging relationshi' satisfies the necessary conditions4 The deri!ati!e instru"ent "ust (e redesignated as a hedge for the entire ti"e 'eriod it re"ains outstanding4 Issue (j) : )or cas( f*o, (edges4 if a derivative is used to manage a net e&posure to interest rate ris@ and t(e derivative is designated as a cas( f*o, (edge of forecast interest cas( f*o,s or portions of t(em on a gross basis4 does t(e occurrence of t(e (edged forecast transaction give rise to an asset or *iabi*it. t(at ,i** resu*t in a portion of t(e (edging gains and *osses t(at ,ere recognised in ot(er compre(ensive income remaining in e-uit.F Ho4 In the hedging relationshi' descri(ed in Issue ;c< a(o!e6 the hedged ite" is a grou' of forecast transactions consisting of interest cash flo&s in s'ecified future 'eriods4 The hedged forecast transactions do not result in the recognition of assets or lia(ilities and the effect of interest rate changes that are designated as (eing hedged is recognised in 'rofit or loss in the 'eriod in &hich the forecast transactions occur4 #lthough this is not rele!ant for the ty'es of hedges descri(ed here6 if instead the deri!ati!e is designated as a hedge of a forecast 'urchase of a financial asset or issue of a financial lia(ility6 the associated gains or losses that &ere recognised in other co"'rehensi!e inco"e are reclassified fro" equity to 'rofit or loss in the sa"e 'eriod or 'eriods during &hich the hedged forecast cash flo&s affect 'rofit or loss ;such as in the 'eriods that interest e8'enses are recognised<4 -o&e!er6 if an entity e8'ects at any ti"e that all or a 'ortion of a net loss recognised in other co"'rehensi!e inco"e &ill not (e reco!ered in one or "ore future 'eriods6 it shall reclassify i""ediately fro" equity to 'rofit or loss the a"ount that is not e8'ected to (e reco!ered4 Issue (@) : In t(e ans,er to Issue (c) above it ,as indicated t(at t(e designated (edged item is a portion of a cas( f*o, e&posure8 Does Ind AS 39 permit a portion of a cas( f*o, e&posure to be designated as a (edged itemF Kes4 Ind #) 39 does not s'ecifically address a hedge of a 'ortion of a cash flo& e8'osure for a forecast transaction4 -o&e!er6Ind #) 39481 s'ecifies that a financial asset or lia(ility "ay (e a hedged ite" &ith res'ect to the ris>s associated &ith only a 'ortion of its cash flo&s or fair !alue6 if effecti!eness can (e "easured4 The a(ility to hedge a 'ortion of a cash flo& e8'osure resulting fro" the resetting of interest rates for assets and lia(ilities suggests that a 'ortion of a cash flo& e8'osure resulting fro" the forecast rein!est"ent of cash inflo&s or the refinancing or rollo!er of financial lia(ilities can also (e hedged4 The (asis for qualification as a hedged ite" of a 'ortion of an e8'osure is the a(ility to "easure effecti!eness4 This is further su''orted (y Ind #) 394826 &hich s'ecifies that a non,financial asset or lia(ility can (e hedged only in its entirety or for foreign currency ris> (ut not for a 'ortion of other ris>s (ecause of the difficulty of isolating and "easuring the a''ro'riate 'ortion of the cash flo&s or fair !alue

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changes attri(uta(le to a s'ecific ris>4 #ccordingly6 assu"ing effecti!eness can (e "easured6 a 'ortion of a cash flo& e8'osure of forecast transactions associated &ith6 for e8a"'le6 the resetting of interest rates for a !aria(le rate asset or lia(ility can (e designated as a hedged ite"4 Issue (*) : In t(e ans,er to Issue (c) above it ,as indicated t(at t(e (edged item is documented as a group of forecast transactions8 Since t(ese transactions ,i** (ave different terms ,(en t(e. occur4 inc*uding credit e&posures4 maturities and option features4 (o, can an entit. satisf. t(e tests in Ind AS 39867 and Ind AS 39873 re-uiring t(e (edged group to (ave simi*ar ris@ c(aracteristicsF Ind #) 39478 'ro!ides for hedging a grou' of assets6 lia(ilities6 fir" co""it"ents or forecast transactions &ith si"ilar ris> characteristics4Ind #) 39483 'ro!ides additional guidance and s'ecifies that 'ortfolio hedging is 'er"itted if t&o conditions are "et6 na"ely: the indi!idual ite"s in the 'ortfolio share the sa"e ris> for &hich they are designated6 and the change in the fair !alue attri(uta(le to the hedged ris> for each indi!idual ite" in the grou' &ill (e e8'ected to (e a''ro8i"ately 'ro'ortional to the o!erall change in fair !alue4 Bhen an entity associates a deri!ati!e hedging instru"ent &ith a gross e8'osure6 the hedged ite" ty'ically is a grou' of forecast transactions4 *or hedges of cash flo& e8'osures relating to a grou' of forecast transactions6 the o!erall e8'osure of the forecast transactions and the assets or lia(ilities that are re'riced "ay ha!e !ery different ris>s4 The e8'osure fro" forecast transactions "ay differ de'ending on the ter"s that are e8'ected as they relate to credit e8'osures6 "aturities6 o'tions and other features4 #lthough the o!erall ris> e8'osures "ay (e different for the indi!idual ite"s in the grou'6 a s'ecific ris> inherent in each of the ite"s in the grou' can (e designated as (eing hedged4 The ite"s in the 'ortfolio do not necessarily ha!e to ha!e the sa"e o!erall e8'osure to ris>6 'ro!ided they share the sa"e ris> for &hich they are designated as (eing hedged4 # co""on ris> ty'ically shared (y a 'ortfolio of financial instru"ents is e8'osure to changes in the ris>,free or (ench"ar> interest rate or to changes in a s'ecified rate that has a credit e8'osure equal to the highest credit,rated instru"ent in the 'ortfolio ;ie the instru"ent &ith the lo&est credit ris><4 If the instru"ents that are grou'ed into a 'ortfolio ha!e different credit e8'osures6 they "ay (e hedged as a grou' for a 'ortion of the e8'osure4 The ris> they ha!e in co""on that is designated as (eing hedged is the e8'osure to interest rate changes fro" the highest credit rated instru"ent in the 'ortfolio4 This ensures that the change in fair !alue attri(uta(le to the hedged ris> for each indi!idual ite" in the grou' is e8'ected to (e a''ro8i"ately 'ro'ortional to the o!erall change in fair !alue attri(uta(le to the hedged ris> of the grou'4 It is li>ely there &ill (e so"e ineffecti!eness if the hedging instru"ent has a credit quality that is inferior to the credit quality of the highest credit,rated instru"ent (eing hedged6 since a hedging relationshi' is designated for a hedging instru"ent in its entirety ;Ind #) 39474<4 *or e8a"'le6 if a 'ortfolio of assets consists of assets rated #6 // and /6 and the current "ar>et interest rates for these assets are 3I/@%N20 (asis 'oints6 3I/@%N40 (asis 'oints and 3I/@%N$0 (asis 'oints6 res'ecti!ely6 an entity "ay use a s&a' that 'ays fi8ed interest rate and for &hich !aria(le interest 'ay"ents (ased on 3I/@% are "ade to hedge the e8'osure to !aria(le interest rates4 If 3I/@% is designated as the ris> (eing hedged6 credit s'reads a(o!e 3I/@% on the hedged ite"s are e8cluded fro" the designated hedge relationshi' and the assess"ent of hedge effecti!eness4

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)8;83 I**ustrative e&amp*e of app*.ing t(e approac( in Euestion )8;85

0(e purpose of t(is e&amp*e is to i**ustrate t(e process of estab*is(ing4 monitoring and adjusting (edge positions and of -ua*if.ing for cas( f*o, (edge accounting in app*.ing t(e approac( to (edge accounting described in Euestion )8;85 ,(en a financia* institution manages its interest rate ris@ on an entit.A,ide basis8 0o t(is end4 t(is e&amp*e identifies a met(odo*og. t(at a**o,s for t(e use of (edge accounting and ta@es advantage of e&isting ris@ management s.stems so as to avoid unnecessar. c(anges to it and to avoid unnecessar. boo@@eeping and trac@ing8 The a''roach illustrated here reflects only one of a nu"(er of ris> "anage"ent 'rocesses that could (e e"'loyed and could qualify for hedge accounting4 Its use is not intended to suggest that other alternati!es could not or should not (e used4 The a''roach (eing illustrated could also (e a''lied in other circu"stances ;such as for cash flo& hedges of co""ercial entities<6 for e8a"'le6 hedging the rollo!er of co""ercial 'a'er financing4

Identif.ing4 assessing and reducing cas( f*o, e&posures

The discussion and illustrations that follo& focus on the ris> "anage"ent acti!ities of a financial institution that "anages its interest rate ris> (y analysing e8'ected cash flo&s in a 'articular currency on an entity,&ide (asis4 The cash flo& analysis for"s the (asis for identifying the interest rate ris> of the entity6 entering into hedging transactions to "anage the ris>6 assessing the effecti!eness of ris> "anage"ent acti!ities6 and qualifying for and a''lying cash flo& hedge accounting4 The illustrations that follo& assu"e that an entity6 a financial institution6 had the follo&ing e8'ected future net cash flo&s and hedging 'ositions outstanding in a s'ecific currency6 consisting of interest rate s&a's6 at the (eginning of Deriod U04 The cash flo&s sho&n are e8'ected to occur at the end of the 'eriod and6 therefore6 create a cash flo& interest e8'osure in the follo&ing 'eriod as a result of the rein!est"ent or re'ricing of the cash inflo&s or the refinancing or re'ricing of the cash outflo&s4 The illustrations assu"e that the entity has an ongoing interest rate ris> "anage"ent 'rogra""e4 )chedule I sho&s the e8'ected cash flo&s and hedging 'ositions that e8isted at the (eginning of Deriod U04 It is included here to 'ro!ide a starting 'oint in the analysis4 It 'ro!ides a (asis for considering e8isting hedges in connection &ith the e!aluation that occurs at the (eginning of Deriod U14 Sc(edu*e I End of period% e&pected cas( f*o,s and (edging positions uarterly period D3 D0 D2 D7 DA D: En .units/ *s+ *s+ *s+ *s+ *s+ *s+ *s+ 18'ected net cash flo&s 16100 16500 16200 16400 16500 86888 ?utstanding interest rate s'aps: %ecei!e,fi8ed6 'ay, 26000 26000 26000 16200 16200 16200 86888 !aria(le ;notional a"ounts< Day,fi8ed6 recei!e,!aria(le ;notional a"ounts< Het e8'osure after ;16000< ;16000< ;16000< 100 500 ;500< 500 ;500< 700 ;500< 800 86888 84888

212

outstanding s&a's The schedule de'icts fi!e quarterly 'eriods4 The actual analysis &ould e8tend o!er a 'eriod of "any years6 re'resented (y the notation E]n?4 # financial institution that "anages its interest rate ris> on an entity,&ide (asis re,e!aluates its cash flo& e8'osures 'eriodically4 The frequency of the e!aluation de'ends on the entity?s ris> "anage"ent 'olicy4 *or the 'ur'oses of this illustration6 the entity is re,e!aluating its cash flo& e8'osures at the end of Deriod U04 The first ste' in the 'rocess is the generation of forecast net cash flo& e8'osures fro" e8isting interest,earning assets and interest,(earing lia(ilities6 including the rollo!er of short,ter" assets and short,ter" lia(ilities4 )chedule II (elo& illustrates the forecast of net cash flo& e8'osures4 # co""on technique for assessing e8'osure to interest rates for ris> "anage"ent 'ur'oses is an interest rate sensiti!ity ga' analysis sho&ing the ga' (et&een interest rate,sensiti!e assets and interest rate, sensiti!e lia(ilities o!er different ti"e inter!als4 )uch an analysis could (e used as a starting 'oint for identifying cash flo& e8'osures to interest rate ris> for hedge accounting 'ur'oses4 Sc(edu*e II )orecast net cas( f*o, and repricing e&posures uarterly period Notes D0 D2 D7 DA D: .units/ *s+ *s+ *s+ *s+ *s+ #)- IH*2@B #HD %1D%I IH+ 1UD@)F%1) , fro" assets #rincipal and interest payments: 2ong,ter" fi8ed rate ;1< 26400 36000 36000 16000 16200 )hort,ter" ;roll o!er< ;1<;2< 16575 16579 16582 1658$ 16591 Caria(le rate 'rinci'al ;1< 26000 16000 500 500 'ay"ents Caria(le rate esti"ated interest Total expected cash inflo's Caria(le rate asset (alances %ash in+lo s and repricings ;3< ;4< ;2< 125 <,033 86000 45,466 110 :,<176000 Y47,899 105 A,<1C 76000 44,89: 114 7,233 $6500 9,:66 118 7,A3$6000 9,569 En *s+ 86888 86888 86888 86888 x,xxx 86888 ;,;;;

#)- @FT*2@B #HD %1D%I IH+ 1UD@)F%1) , fro" lia(ilities #rincipal and interest payments: 2ong,ter" fi8ed rate ;1< 26100 400 500 500 )hort,ter" ;roll o!er< ;1<;2< 735 737 738 740 Caria(le rate 'rinci'al ;1< 26000 'ay"ents Caria(le rate esti"ated interest Total expected cash outflo's Caria(le rate lia(ility (alances ;3< ;2< 100 2,-7: 86000 110 0,2AC 86000 120 7,7:1 $6000 98 0,771 $6000

301 742 16000 109 2,0:2 56000

86888 86888 86888 86888 x,xxx 86888

213

%ash out+lo s and repricings NET ED#?)F*E) ;1<

;4< ;5<

46,93< 7,0<:

9,75: 7,AA2

9,3<9 2,72-

:,339 2,7<2

:,4<7 2,2:C

;,;;; x,xxx

The cash flo&s are esti"ated using contractual ter"s and assu"'tions (ased on "anage"ent?s intentions and "ar>et factors4 It is assu"ed that short,ter" assets and lia(ilities &ill continue to (e rolled o!er in succeeding 'eriods4 #ssu"'tions a(out 're'ay"ents and defaults and the &ithdra&al of de'osits are (ased on "ar>et and historical data4 It is assu"ed that 'rinci'al and interest inflo&s and outflo&s &ill (e rein!ested and refinanced6 res'ecti!ely6 at the end of each 'eriod at the then current "ar>et interest rates and share the (ench"ar> interest rate ris> to &hich they are e8'osed4 *or&ard interest rates o(tained fro" )chedule CI are used to forecast interest 'ay"ents on !aria(le rate financial instru"ents and e8'ected rollo!ers of short, ter" assets and lia(ilities4 #ll forecast cash flo&s are associated &ith the s'ecific ti"e 'eriods ;3 "onths6 $ "onths6 9 "onths and 12 "onths< in &hich they are e8'ected to occur4 *or co"'leteness6 the interest cash flo&s resulting fro" rein!est"ents6 refinancings and re'ricings are included in the schedule and sho&n gross e!en though only the net "argin "ay actually (e rein!ested4 )o"e entities "ay choose to disregard the forecast interest cash flo&s for ris> "anage"ent 'ur'oses (ecause they "ay (e used to a(sor( o'erating costs and any re"aining a"ounts &ould not (e significant enough to affect ris> "anage"ent decisions4 The cash flo& forecast is ad5usted to include the !aria(le rate asset and lia(ility (alances in each 'eriod in &hich such !aria(le rate asset and lia(ility (alances are re'riced4 The 'rinci'al a"ounts of these assets and lia(ilities are not actually (eing 'aid and6 therefore6 do not generate a cash flo&4 -o&e!er6 since interest is co"'uted on the 'rinci'al a"ounts for each 'eriod (ased on the then current "ar>et interest rate6 such 'rinci'al a"ounts e8'ose the entity to the sa"e interest rate ris> as if they &ere cash flo&s (eing rein!ested or refinanced4 The forecast cash flo& and re'ricing e8'osures that are identified in each 'eriod re'resent the 'rinci'al a"ounts of cash inflo&s that &ill (e rein!ested or re'riced and cash outflo&s that &ill (e refinanced or re'riced at the "ar>et interest rates that are in effect &hen those forecast transactions occur4 The net cash flo& and re'ricing e8'osure is the difference (et&een the cash inflo& and re'ricing e8'osures fro" assets and the cash outflo& and re'ricing e8'osures fro" lia(ilities4 In the illustration6 the entity is e8'osed to interest rate declines (ecause the e8'osure fro" assets e8ceeds the e8'osure fro" lia(ilities and the e8cess ;ie the net a"ount< &ill (e rein!ested or re'riced at the current "ar>et rate and there is no offsetting refinancing or re'ricing of outflo&s4

;2<

;3<

;4<

;5<

Hote that so"e (an>s regard so"e 'ortion of their non,interest (earing de"and de'osits as econo"ically equi!alent to long,ter" de(t4 -o&e!er6 these de'osits do not create a cash flo& e8'osure to interest rates and &ould therefore (e e8cluded fro" this analysis for accounting 'ur'oses4

214

)chedule II Forecast net cash flo' and repricing exposures 'ro!ides no "ore than a starting 'oint for assessing cash flo& e8'osure to interest rates and for ad5usting hedging 'ositions4 The co"'lete analysis includes outstanding hedging 'ositions and is sho&n in )chedule III Analysis of expected net exposures and hedging positions4 It co"'ares the forecast net cash flo& e8'osures for each 'eriod ;de!elo'ed in )chedule II< &ith e8isting hedging 'ositions ;o(tained fro" )chedule I<6 and 'ro!ides a (asis for considering &hether ad5ust"ent of the hedging relationshi' should (e "ade4 Sc(edu*e III Ana*.sis of e&pected net e&posures and (edging positions uarterly period D0 D2 D7 DA D: En .units/ *s+ *s+ *s+ *s+ *s+ *s+ Het cash flo& and re'ricing 361$5 36442 26329 263$2 26257 86888 e8'osures ;)chedule II< "reAe&isting s,aps outstanding% %ecei!e,fi8ed6 'ay,!aria(le 26000 ;notional a"ounts< Day,fi8ed6 recei!e,!aria(le ;notional a"ounts< Net exposure after pre"existing s'aps ;16000< 2,0<: 26000 ;16000< 2,AA2 16200 ;500< 0,<216200 ;500< 0,<<2 16200 ;500< 0,::C 86888 86888 x,xxx

0ransactions to adjust outstanding (edging positions% %ecei!e,fi8ed6 'ay !aria(le 26000 26000 26000 s&a' 1 ;notional a"ount6 10, years< Day,fi8ed6 recei!e,!aria(le s&a' 2 ;notional a"ount6 3, years< )&a's ]U Fnhedged cash flo' and repricing exposure 0<: AA2

26000

26000

86888

;16000< ;16000< ;16000< 86888

<2-

<<2

::C

86888 x,xxx

The notional a"ounts of the interest rate s&a's that are outstanding at the analysis date are included in each of the 'eriods in &hich the interest rate s&a's are outstanding to illustrate the i"'act of the outstanding interest rate s&a's on the identified cash flo& e8'osures4 The notional a"ounts of the outstanding interest rate s&a's are included in each 'eriod (ecause interest is co"'uted on the notional a"ounts each 'eriod6 and the !aria(le rate co"'onents of the outstanding s&a's are re'riced to the current "ar>et rate quarterly4 The notional a"ounts create an e8'osure to interest rates that in 'art is si"ilar to the 'rinci'al (alances of !aria(le rate assets and !aria(le rate lia(ilities4 The e8'osure that re"ains after considering the e8isting 'ositions is then e!aluated to deter"ine the e8tent to &hich ad5ust"ents of e8isting hedging 'ositions are necessary4 The (otto" 'ortion of )chedule III sho&s the (eginning of Deriod U1 using interest rate s&a' transactions to reduce the net e8'osures further to &ithin the tolerance le!els esta(lished under the entity?s ris> "anage"ent 'olicy4

215

Hote that in the illustration6 the cash flo& e8'osure is not entirely eli"inated4 3any financial institutions do not fully eli"inate ris> (ut rather reduce it to &ithin so"e tolera(le li"it4 Carious ty'es of deri!ati!e instru"ents could (e used to "anage the cash flo& e8'osure to interest rate ris> identified in the schedule of forecast net cash flo&s ;)chedule II<4 -o&e!er6 for the 'ur'ose of the illustration6 it is assu"ed that interest rate s&a's are used for all hedging acti!ities4 It is also assu"ed that in 'eriods in &hich interest rate s&a's should (e reduced6 rather than ter"inating so"e of the outstanding interest rate s&a' 'ositions6 a ne& s&a' &ith the o''osite return characteristics is added to the 'ortfolio4 In the illustration in )chedule III a(o!e6 s&a' 16 a recei!e,fi8ed6 'ay,!aria(le s&a'6 is used to reduce the net e8'osure in Deriods U1 and U24 )ince it is a 10,year s&a'6 it also reduces e8'osures identified in other future 'eriods not sho&n4 -o&e!er6 it has the effect of creating an o!er,hedged 'osition in Deriods U3U54 )&a' 26 a for&ard starting 'ay,fi8ed6 recei!e,!aria(le interest rate s&a'6 is used to reduce the notional a"ount of the outstanding recei!e,fi8ed6 'ay,!aria(le interest rate s&a's in Deriods U3U5 and there(y reduce the o!er,hedged 'ositions4 It also is noted that in "any situations6 no ad5ust"ent or only a single ad5ust"ent of the outstanding hedging 'osition is necessary to (ring the e8'osure to &ithin an acce'ta(le li"it4 -o&e!er6 &hen the entity?s ris> "anage"ent 'olicy s'ecifies a !ery lo& tolerance of ris> a greater nu"(er of ad5ust"ents to the hedging 'ositions o!er the forecast 'eriod &ould (e needed to further reduce any re"aining ris>4 To the e8tent that so"e of the interest rate s&a's fully offset other interest rate s&a's that ha!e (een entered into for hedging 'ur'oses6 it is not necessary to include the" in a designated hedging relationshi' for hedge accounting 'ur'oses4 These offsetting 'ositions can (e co"(ined6 de,designated as hedging instru"ents6 if necessary6 and reclassified for accounting 'ur'oses fro" the hedging 'ortfolio to the trading 'ortfolio4 This 'rocedure li"its the e8tent to &hich the gross s&a's "ust continue to (e designated and trac>ed in a hedging relationshi' for accounting 'ur'oses4 *or the 'ur'oses of this illustration it is assu"ed that %s4500 of the 'ay,fi8ed6 recei!e,!aria(le interest rate s&a's fully offset %s4500 of the recei!e,fi8ed6 'ay,!aria(le interest rate s&a's at the (eginning of Deriod U1 and for Deriods U1U56 and are de,designated as hedging instru"ents and reclassified to the trading account4 #fter reflecting these offsetting 'ositions6 the re"aining gross interest rate s&a' 'ositions fro" )chedule III are sho&n in )chedule IC as follo&s4 Sc(edu*e I1 Interest rate s,aps designated as (edges uarterly period D0 D2 D7 DA D: .units/ *s+ *s+ *s+ *s+ *s+ %ecei!e,fi8ed6 'ay,!aria(le 36500 36500 26700 26700 26700 ;notional a"ounts< Day,fi8ed6 recei!e,!aria(le ;notional a"ounts< Net outstanding s'aps positions ;500< 7,333 ;500< 7,333 En *s+ 86888

;16000< ;16000< ;16000< 86888 0,C33 0,C33 0,C33 86888

216

*or the 'ur'oses of the illustrations6 it is assu"ed that s&a' 26 entered into at the (eginning of Deriod U16 only 'artially offsets another s&a' (eing accounted for as a hedge and therefore continues to (e designated as a hedging instru"ent4 !edge accounting considerations Illustrating the designation of the hedging relationship The discussion and illustrations thus far ha!e focused 'ri"arily on econo"ic and ris> "anage"ent considerations relating to the identification of ris> in future 'eriods and the ad5ust"ent of that ris> using interest rate s&a's4 These acti!ities for" the (asis for designating a hedging relationshi' for accounting 'ur'oses4 The e8a"'les in Ind #) 39 focus 'ri"arily on hedging relationshi's in!ol!ing a single hedged ite" and a single hedging instru"ent6 (ut there is little discussion and guidance on 'ortfolio hedging relationshi's for cash flo& hedges &hen ris> is (eing "anaged centrally4 In this illustration6 the general 'rinci'les are a''lied to hedging relationshi's in!ol!ing a co"'onent of ris> in a 'ortfolio ha!ing "ulti'le ris>s fro" "ulti'le transactions or 'ositions4 #lthough designation is necessary to achie!e hedge accounting6 the &ay in &hich the designation is descri(ed also affects the e8tent to &hich the hedging relationshi' is 5udged to (e effecti!e for accounting 'ur'oses and the e8tent to &hich the entity?s e8isting syste" for "anaging ris> &ill (e required to (e "odified to trac> hedging acti!ities for accounting 'ur'oses4 #ccordingly6 an entity "ay &ish to designate the hedging relationshi' in a "anner that a!oids unnecessary syste"s changes (y ta>ing ad!antage of the infor"ation already generated (y the ris> "anage"ent syste" and a!oids unnecessary (oo>>ee'ing and trac>ing4 In designating hedging relationshi's6 the entity "ay also consider the e8tent to &hich ineffecti!eness is e8'ected to (e recognised for accounting 'ur'oses under alternati!e designations4 The designation of the hedging relationshi' needs to s'ecify !arious "atters4 These are illustrated and discussed here fro" the 'ers'ecti!e of the hedge of the interest rate ris> associated &ith the cash inflo&s6 (ut the guidance can also (e a''lied to the hedge of the ris> associated &ith the cash outflo&s4 It is fairly o(!ious that only a 'ortion of the gross e8'osures relating to the cash inflo&s is (eing hedged (y the interest rate s&a's4 )chedule C The general hedging relationship illustrates the designation of the 'ortion of the gross rein!est"ent ris> e8'osures identified in )chedule II as (eing hedged (y the interest rate s&a's4 Sc(edu*e 1 0(e genera* (edging re*ations(ip uarterly period D0 D2 D7 DA .units/ *s+ *s+ *s+ *s+ ash inflo& re'ricing e8'osure 146100 126$89 116$87 96700 ;)chedule II< %ecei!e,fi8ed6 'ay,!aria(le s&a's ;)chedule IC< %edged exposure percentage 36500 2A+1B 36500 2C+<B 26700 27+0B 26700 2C+1B D: *s+ 96409 26700 21+CB En *s+ 86888 86888 xx+xB

The hedged e8'osure 'ercentage is co"'uted as the ratio of the notional a"ount of the recei!e,fi8ed6 'ay,!aria(le s&a's that are outstanding di!ided (y the gross e8'osure4 Hote that in )chedule C there are sufficient le!els of forecast rein!est"ents in each

217

'eriod to offset "ore than the notional a"ount of the recei!e,fi8ed6 'ay,!aria(le s&a's and satisfy the accounting require"ent that the forecast transaction is highly 'ro(a(le4 It is not as o(!ious6 ho&e!er6 ho& the interest rate s&a's are s'ecifically related to the cash flo& interest ris>s designated as (eing hedged and ho& the interest rate s&a's are effecti!e in reducing that ris>4 The "ore s'ecific designation is illustrated in )chedule CI The specific hedging relationship (elo&4 It 'ro!ides a "eaningful &ay of de'icting the "ore co"'licated narrati!e designation of the hedge (y focusing on the hedging o(5ecti!e to eli"inate the cash flo& !aria(ility associated &ith future changes in interest rates and to o(tain an interest rate equal to the fi8ed rate inherent in the ter" structure of interest rates that e8ists at the co""ence"ent of the hedge4 The e8'ected interest fro" the rein!est"ent of the cash inflo&s and re'ricings of the assets is co"'uted (y "ulti'lying the gross a"ounts e8'osed (y the for&ard rate for the 'eriod4 *or e8a"'le6 the gross e8'osure for Deriod U2 of %s4146100 is "ulti'lied (y the for&ard rate for Deriods U2U5 of 5450 'er cent6 $400 'er cent6 $450 'er cent and 7425 'er cent6 res'ecti!ely6 to co"'ute the e8'ected interest for those quarterly 'eriods (ased on the current ter" structure of interest rates4 The hedged e8'ected interest is co"'uted (y "ulti'lying the e8'ected interest for the a''lica(le three,"onth 'eriod (y the hedged e8'osure 'ercentage4 Sc(edu*e 1I 0(e specific (edging re*ations(ip uarterly period D0 D2 D7 DA D: En )'ot rates 5400P 5425P 5450P 5475P $405P 8488P *or&ard rates30 5400P 5450P $400P $450P 7425P 8488P Cash flo' exposures and expected interest amounts %e'ricing 'eriod Ti"e to +ross 18'ected interest forecast transaction 2 3 4 5 $ -edged 'ercentage ;)chedule C< in the 're!ious 'eriod -edged e8'ected interest It does not "atter &hether the gross a"ount e8'osed is rein!ested in long,ter" fi8ed rate de(t or !aria(le rate de(t6 or in short,ter" de(t that is rolled o!er in each
30

a"ounts e8'osed 146100 126$89 116$87 96700 96409 2448P %s4 39< %s4 212 39> %s4 229 20$ 39> 2341P %s4 25$ 230 212 36; 2748P %s4 U88 U88 U88 $&& 8848 P 48 52 44 49 88

3 "onths $ "onths 9 "onths 12 "onths 15 "onths

274$P

The for&ard interest rates are co"'uted fro" the s'ot interest rates and rounded for the 'ur'oses of the 'resentation4 o"'utations that are (ased on the for&ard interest rates are "ade (ased on the actual co"'uted for&ard rate and then rounded for the 'ur'oses of the 'resentation4

218

su(sequent 'eriod4 The e8'osure to changes in the for&ard interest rate is the sa"e4 *or e8a"'le6 if the %s4146100 is rein!ested at a fi8ed rate at the (eginning of Deriod U2 for si8 "onths6 it &ill (e rein!ested at 5475 'er cent4 The e8'ected interest is (ased on the for&ard interest rates for Deriod U2 of 5450 'er cent and for Deriod U3 of $400 'er cent6 equal to a (lended rate of 5475 'er cent ;14055 O 140$0<0456 &hich is the Deriod U2 s'ot rate for the ne8t si8 "onths4 -o&e!er6 only the e8'ected interest fro" the rein!est"ent of the cash inflo&s or re'ricing of the gross a"ount for the first three,"onth 'eriod after the forecast transaction occurs is designated as (eing hedged4 The e8'ected interest (eing hedged is re'resented (y the shaded cells4 The e8'osure for the su(sequent 'eriods is not hedged4 In the e8a"'le6 the 'ortion of the interest rate e8'osure (eing hedged is the for&ard rate of 5450 'er cent for Deriod U24 In order to assess hedge effecti!eness and co"'ute actual hedge ineffecti!eness on an ongoing (asis6 the entity "ay use the infor"ation on hedged interest cash inflo&s in )chedule CI and co"'are it &ith u'dated esti"ates of e8'ected interest cash inflo&s ;for e8a"'le6 in a ta(le that loo>s li>e )chedule II<4 #s long as e8'ected interest cash inflo&s e8ceed hedged interest cash inflo&s6 the entity "ay co"'are the cu"ulati!e change in the fair !alue of the hedged cash inflo&s &ith the cu"ulati!e change in the fair !alue of the hedging instru"ent to co"'ute actual hedge effecti!eness4 If there are insufficient e8'ected interest cash inflo&s6 there &ill (e ineffecti!eness4 It is "easured (y co"'aring the cu"ulati!e change in the fair !alue of the e8'ected interest cash flo&s to the e8tent they are less than the hedged cash flo&s &ith the cu"ulati!e change in the fair !alue of the hedging instru"ent4

Describing t(e designation of t(e (edging re*ations(ip

#s "entioned 're!iously6 there are !arious "atters that should (e s'ecified in the designation of the hedging relationshi' that co"'licate the descri'tion of the designation (ut are necessary to li"it ineffecti!eness to (e recognised for accounting 'ur'oses and to a!oid unnecessary syste"s changes and (oo>>ee'ing4 The e8a"'le that follo&s descri(es the designation "ore fully and identifies additional as'ects of the designation not a''arent fro" the 're!ious illustrations4 E&amp*e designation %edging o$5ective The hedging o(5ecti!e is to eli"inate the ris> of interest rate fluctuations o!er the hedging 'eriod6 &hich is the life of the interest rate s&a'6 and in effect o(tain a fi8ed interest rate during this 'eriod that is equal to the fi8ed interest rate on the interest rate s&a'4 Type of hedge ash flo& hedge4 %edging instrument The recei!e,fi8ed6 'ay,!aria(le s&a's are designated as the hedging instru"ent4 They hedge the cash flo& e8'osure to interest rate ris>4

219

1ach re'ricing of the s&a' hedges a three,"onth 'ortion of the interest cash inflo&s that results fro": the forecast rein!est"ent or re'ricing of the 'rinci'al a"ounts sho&n in )chedule C4 unrelated in!est"ents or re'ricings that occur after the re'ricing dates on the s&a' o!er its life and in!ol!e different (orro&ers or lenders4

The hedged item(General The hedged ite" is a 'ortion of the gross interest cash inflo&s that &ill result fro" the rein!est"ent or re'ricing of the cash flo&s identified in )chedule C and are e8'ected to occur &ithin the 'eriods sho&n on such schedule4 The 'ortion of the interest cash inflo& that is (eing hedged has three co"'onents: the 'rinci'al co"'onent gi!ing rise to the interest cash inflo& and the 'eriod in &hich it occurs6 the interest rate co"'onent6 and the ti"e co"'onent or 'eriod co!ered (y the hedge4 The hedged item(The principal component The 'ortion of the interest cash inflo&s (eing hedged is the a"ount that results fro" the first 'ortion of the 'rinci'al a"ounts (eing in!ested or re'riced in each 'eriod: that is equal to the su" of the notional a"ounts of the recei!ed,fi8ed6 'ay, !aria(le interest rate s&a's that are designated as hedging instru"ents and outstanding in the 'eriod of the rein!est"ent or re'ricing6 and that corres'onds to the first 'rinci'al a"ounts of cash flo& e8'osures that are in!ested or re'riced at or after the re'ricing dates of the interest rate s&a's4 The hedged item(The interest rate component The 'ortion of the interest rate change that is (eing hedged is the change in (oth of the follo&ing: the credit co"'onent of the interest rate (eing 'aid on the 'rinci'al a"ount in!ested or re'riced that is equal to the credit ris> inherent in the interest rate s&a'4 It is that 'ortion of the interest rate on the in!est"ent that is equal to the interest inde8 of the interest rate s&a'6 such as 3I/@%6 and the yield cur!e co"'onent of the interest rate that is equal to the re'ricing 'eriod on the interest rate s&a' designated as the hedging instru"ent4 The hedged item(The hedged period The 'eriod of the e8'osure to interest rate changes on the 'ortion of the cash flo& e8'osures (eing hedged is: the 'eriod fro" the designation date to the re'ricing date of the interest rate s&a' that occurs &ithin the quarterly 'eriod in &hich6 (ut not (efore6 the forecast transactions occur6 and

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its effects for the 'eriod after the forecast transactions occur equal to the re'ricing inter!al of the interest rate s&a'4 It is i"'ortant to recognise that the s&a's are not hedging the cash flo& ris> for a single in!est"ent o!er its entire life4 The s&a's are designated as hedging the cash flo& ris> fro" different 'rinci'al in!est"ents and re'ricings that are "ade in each re'ricing 'eriod of the s&a's o!er their entire ter"4 The s&a's hedge only the interest accruals that occur in the first 'eriod follo&ing the rein!est"ent4 They are hedging the cash flo& i"'act resulting fro" a change in interest rates that occurs u' to the re'ricing of the s&a'4 The e8'osure to changes in rates for the 'eriod fro" the re'ricing of the s&a' to the date of the hedged rein!est"ent of cash inflo&s or re'ricing of !aria(le rate assets is not hedged4 Bhen the s&a' is re'riced6 the interest rate on the s&a' is fi8ed until the ne8t re'ricing date and the accrual of the net s&a' settle"ents is deter"ined4 #ny changes in interest rates after that date that affect the a"ount of the interest cash inflo& are no longer hedged for accounting 'ur'oses4

Designation objectives
)ystems considerations 3any of the trac>ing and (oo>>ee'ing require"ents are eli"inated (y designating each re'ricing of an interest rate s&a' as hedging the cash flo& ris> fro" forecast rein!est"ents of cash inflo&s and re'ricings of !aria(le rate assets for only a 'ortion of the li!es of the related assets4 3uch trac>ing and (oo>>ee'ing &ould (e necessary if the s&a's &ere instead designated as hedging the cash flo& ris> fro" forecast 'rinci'al in!est"ents and re'ricings of !aria(le rate assets o!er the entire li!es of these assets4 This ty'e of designation a!oids >ee'ing trac> of gains and losses recognised in other co"'rehensi!e inco"e after the forecast transactions occur ;Ind #) 39497 and Ind #) 39498< (ecause the 'ortion of the cash flo& ris> (eing hedged is that 'ortion that &ill (e reclassified fro" equity to 'rofit or loss in the 'eriod i""ediately follo&ing the forecast transactions that corres'onds &ith the 'eriodic net cash settle"ents on the s&a'4 If the hedge &ere to co!er the entire life of the assets (eing acquired6 it &ould (e necessary to associate a s'ecific interest rate s&a' &ith the asset (eing acquired4 If a forecast transaction is the acquisition of a fi8ed rate instru"ent6 the fair !alue of the s&a' that hedged that transaction &ould (e reclassified fro" equity to 'rofit or loss to ad5ust the interest inco"e on the asset &hen the interest inco"e is recognised4 The s&a' &ould then ha!e to (e ter"inated or redesignated in another hedging relationshi'4 If a forecast transaction is the acquisition of a !aria(le rate asset6 the s&a' &ould continue in the hedging relationshi' (ut it &ould ha!e to (e trac>ed (ac> to the asset acquired so that any fair !alue a"ounts on the s&a' recognised in other co"'rehensi!e inco"e could (e reclassified fro" equity to 'rofit or loss u'on the su(sequent sale of the asset4 It also a!oids the necessity of associating &ith !aria(le rate assets any 'ortion of the fair !alue of the s&a's that is recognised in other co"'rehensi!e inco"e4 #ccordingly6 there is no 'ortion of the fair !alue of the s&a' that is recognised in other co"'rehensi!e inco"e that should (e reclassified fro" equity to 'rofit or loss &hen a forecast transaction occurs or u'on the sale of a !aria(le rate asset4 This ty'e of designation also 'er"its fle8i(ility in deciding ho& to rein!est cash flo&s &hen they occur4 )ince the hedged ris> relates only to a single 'eriod that corres'onds

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&ith the re'ricing 'eriod of the interest rate s&a' designated as the hedging instru"ent6 it is not necessary to deter"ine at the designation date &hether the cash flo&s &ill (e rein!ested in fi8ed rate or !aria(le rate assets or to s'ecify at the date of designation the life of the asset to (e acquired4 Effectiveness considerations Ineffecti!eness is greatly reduced (y designating a s'ecific 'ortion of the cash flo& e8'osure as (eing hedged4 Ineffecti!eness due to credit differences (et&een the interest rate s&a' and hedged forecast cash flo& is eli"inated (y designating the cash flo& ris> (eing hedged as the ris> attri(uta(le to changes in the interest rates that corres'ond &ith the rates inherent in the s&a'6 such as the ## rate cur!e4 This ty'e of designation 're!ents changes resulting fro" changes in credit s'reads fro" (eing considered as ineffecti!eness4 Ineffecti!eness due to duration differences (et&een the interest rate s&a' and hedged forecast cash flo& is eli"inated (y designating the interest rate ris> (eing hedged as the ris> relating to changes in the 'ortion of the yield cur!e that corres'onds &ith the 'eriod in &hich the !aria(le rate leg of the interest rate s&a' is re'riced4 Ineffecti!eness due to interest rate changes that occur (et&een the re'ricing date of the interest rate s&a' and the date of the forecast transactions is eli"inated (y si"'ly not hedging that 'eriod of ti"e4 The 'eriod fro" the re'ricing of the s&a' and the occurrence of the forecast transactions in the 'eriod i""ediately follo&ing the re'ricing of the s&a' is left unhedged4 Therefore6 the difference in dates does not result in ineffecti!eness4 Accounting considerations The a(ility to qualify for hedge accounting using the "ethodology descri(ed here is founded on 'ro!isions in Ind #) 39 and on inter'retations of its require"ents4 )o"e of those are descri(ed in the ans&er to .uestion *4$42 %edge accounting considerations 'hen interest rate risk is managed on a net $asis4 )o"e additional and su''orting 'ro!isions and inter'retations are identified (elo&4 %edging a portion of the risk exposure The a(ility to identify and hedge only a 'ortion of the cash flo& ris> e8'osure resulting fro" the rein!est"ent of cash flo&s or re'ricing of !aria(le rate instru"ents is found in Ind #) 39481 as inter'reted in the ans&ers to .uestions *4$42 Issue ;>< and *42417 #artial term hedging4 %edging multiple risks 'ith a single instrument The a(ility to designate a single interest rate s&a' as a hedge of the cash flo& e8'osure to interest rates resulting fro" !arious rein!est"ents of cash inflo&s or re'ricings of !aria(le rate assets that occur o!er the life of the s&a' is founded on Ind #) 3947$ as inter'reted in the ans&er to .uestion *41412 %edges of more than one type of risk4 %edging similar risks in a portfolio

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The a(ility to s'ecify the forecast transaction (eing hedged as a 'ortion of the cash flo& e8'osure to interest rates for a 'ortion of the duration of the in!est"ent that gi!es rise to the interest 'ay"ent &ithout s'ecifying at the designation date the e8'ected life of the instru"ent and &hether it 'ays a fi8ed or !aria(le rate is founded on the ans&er to .uestion *4$42 Issue ;l<6 &hich s'ecifies that the ite"s in the 'ortfolio do not necessarily ha!e to ha!e the sa"e o!erall e8'osure to ris>6 'ro!iding they share the sa"e ris> for &hich they are designated as (eing hedged4 %edge terminations The a(ility to de,designate the forecast transaction ;the cash flo& e8'osure on an in!est"ent or re'ricing that &ill occur after the re'ricing date of the s&a'< as (eing hedged is 'ro!ided for in Ind #) 394101 dealing &ith hedge ter"inations4 Bhile a 'ortion of the forecast transaction is no longer (eing hedged6 the interest rate s&a' is not de,designated6 and it continues to (e a hedging instru"ent for the re"aining transactions in the series that ha!e not occurred4 *or e8a"'le6 assu"e that an interest rate s&a' ha!ing a re"aining life of one year has (een designated as hedging a series of three quarterly rein!est"ents of cash flo&s4 The ne8t forecast cash flo& rein!est"ent occurs in three "onths4 Bhen the interest rate s&a' is re'riced in three "onths at the then current !aria(le rate6 the fi8ed rate and the !aria(le rate on the interest rate s&a' (eco"e >no&n and no longer 'ro!ide hedge 'rotection for the ne8t three "onths4 If the ne8t forecast transaction does not occur until three "onths and ten days6 the ten,day 'eriod that re"ains after the re'ricing of the interest rate s&a' is not hedged4

)8;8< !edge accounting% premium or discount on for,ard e&c(ange contract

A for,ard e&c(ange contract is designated as a (edging instrument4 for e&amp*e4 in a (edge of a net investment in a foreign operation8 Is it permitted to amortise t(e discount or premium on t(e for,ard e&c(ange contract to profit or *oss over t(e term of t(e contractF Ho4 The 're"iu" or discount on a for&ard e8change contract "ay not (e a"ortised to 'rofit or loss under Ind #) 394 Deri!ati!es are al&ays "easured at fair !alue in the (alance sheet4 The gain or loss resulting fro" a change in the fair !alue of the for&ard e8change contract is al&ays recognised in 'rofit or loss unless the for&ard e8change contract is designated and effecti!e as a hedging instru"ent in a cash flo& hedge or in a hedge of a net in!est"ent in a foreign o'eration6 in &hich case the effecti!e 'ortion of the gain or loss is recognised in other co"'rehensi!e inco"e4 In that case6 the a"ounts recognised in other co"'rehensi!e inco"e are reclassified fro" equity to 'rofit or loss &hen the hedged future cash flo&s occur or on the dis'osal of the net in!est"ent6 as a''ro'riate4 Fnder Ind #) 39474;(<6 the interest ele"ent ;ti"e !alue< of the fair !alue of a for&ard "ay (e e8cluded fro" the designated hedge relationshi'4 In that case6 changes in the interest ele"ent 'ortion of the fair !alue of the for&ard e8change contract are recognised in 'rofit or loss4

)8;89 Ind AS 39 and Ind AS 53 )air va*ue (edge of asset measured at cost
If t(e future sa*e of a s(ip carried at (istorica* cost is (edged against t(e e&posure to currenc. ris@ b. foreign currenc. borro,ing4 does Ind AS 39 re-uire

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t(e s(ip to be remeasured for c(anges in t(e e&c(ange rate even t(oug( t(e basis of measurement for t(e asset is (istorica* costF Ho4 In a fair !alue hedge6 the hedged ite" is re"easured4 -o&e!er6 a foreign currency (orro&ing cannot (e classified as a fair !alue hedge of a shi' since a shi' does not contain any se'arately "easura(le foreign currency ris>4 If the hedge accounting conditions inInd #) 39488 are "et6 the foreign currency (orro&ing "ay (e classified as a cash flo& hedge of an antici'ated sale in that foreign currency4 In a cash flo& hedge6 the hedged ite" is not re"easured4 To illustrate: a shi''ing entity in Den"ar> has a F) su(sidiary that has the sa"e functional currency ;the Danish >rone<4 The shi''ing entity "easures its shi's at historical cost less de'reciation in the consolidated financial state"ents4 In accordance &ithInd #) 21423;(<6 the shi's are recognised in Danish >rone using the historical e8change rate4 To hedge6 fully or 'artly6 the 'otential currency ris> on the shi's at dis'osal in F) dollars6 the shi''ing entity nor"ally finances its 'urchases of shi's &ith loans deno"inated in F) dollars4 In this case6 a F) dollar (orro&ing ;or a 'ortion of it< "ay (e designated as a cash flo& hedge of the antici'ated sale of the shi' financed (y the (orro&ing 'ro!ided the sale is highly 'ro(a(le6 for e8a"'le6 (ecause it is e8'ected to occur in the i""ediate future6 and the a"ount of the sales 'roceeds designated as (eing hedged is equal to the a"ount of the foreign currency (orro&ing designated as the hedging instru"ent4 The gains and losses on the currency (orro&ing that are deter"ined to constitute an effecti!e hedge of the antici'ated sale are recognised in other co"'rehensi!e inco"e in accordance &ith Ind #) 39495;a<4

Section 2 Ot(er
283 Disc*osure of c(anges in fair va*ue
Ind AS 39 re-uires financia* assets c*assified as avai*ab*e for sa*e (A)S) and financia* assets and financia* *iabi*ities at fair va*ue t(roug( profit or *oss to be remeasured to fair va*ue8 /n*ess a financia* asset or a financia* *iabi*it. is designated as a cas( f*o, (edging instrument4 fair va*ue c(anges for financia* assets and financia* *iabi*ities at fair va*ue t(roug( profit or *oss are recognised in profit or *oss4 and fair va*ue c(anges for A)S assets are recognised in ot(er compre(ensive income8 C(at disc*osures are re-uired regarding t(e amounts of t(e fair va*ue c(anges during a reporting periodF Ind #) 107420 requires ite"s of inco"e6 e8'ense and gains and losses to (e disclosed4 This disclosure require"ent enco"'asses ite"s of inco"e6 e8'ense and gains and losses that arise on re"easure"ent to fair !alue4 Therefore6 an entity 'ro!ides disclosures of fair !alue changes6 distinguishing (et&een changes that are recognised in 'rofit or loss and changes that are recognised in other co"'rehensi!e inco"e4 *urther (rea>do&n is 'ro!ided of changes that relate to: ;a< #*) assets6 sho&ing se'arately the a"ount of gain or loss recognised in other co"'rehensi!e inco"e during the 'eriod and the a"ount that &as reclassified fro" equity to 'rofit or loss for the 'eriod as a reclassification ad5ust"ent=

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;(<

financial assets or financial lia(ilities at fair !alue through 'rofit or loss6 sho&ing se'arately those fair !alue changes on financial assets or financial lia(ilities ;i< designated as such u'on initial recognition and ;ii< classified as held for trading in accordance &ithInd #) 39= and hedging instru"ents4

;c<

Ind #) 107 neither requires nor 'rohi(its disclosure of co"'onents of the change in fair !alue (y the &ay ite"s are classified for internal 'ur'oses4 *or e8a"'le6 an entity "ay choose to disclose se'arately the change in fair !alue of those deri!ati!es that in accordance &ith Ind #) 39 it categorises as held for trading6 (ut the entity classifies as 'art of ris> "anage"ent acti!ities outside the trading 'ortfolio4 In addition6Ind #) 10748 requires disclosure of the carrying a"ounts of financial assets or financial lia(ilities at fair !alue through 'rofit or loss6 sho&ing se'arately: ;i< those designated as such u'on initial recognition and ;ii< those held for trading in accordance &ithInd #) 394

285 Ind AS 39 and Ind AS 6 !edge accounting% statements of cas( f*o,s

!o, s(ou*d cas( f*o,s arising from (edging instruments be c*assified in statements of cas( f*o,sF ash flo&s arising fro" hedging instru"ents are classified as o'erating6 in!esting or financing acti!ities6 on the (asis of the classification of the cash flo&s arising fro" the hedged ite"4 Bhile the ter"inology in Ind #) 7 has not (een u'dated to reflectInd #) 396 the classification of cash flo&s arising fro" hedging instru"ents in the state"ent of cash flo&s should (e consistent &ith the classification of these instru"ents as hedging instru"ents underInd #) 394

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Appendi& 3
Comparison ,it( IAS 394 Financial Instruments: Measurement and Recognition
Note: This appendix is not a part of the Indian Accounting )tandard+ The purpose of this Appendix is only to $ring out the differences $et'een Indian Accounting )tandard .Ind A)/ 7- and the corresponding International Accounting )tandard .IA)/ 7-, Financial InstrumentsH *ecognition and 8easurement issued $y the International Accounting )tandards @oard+

# 'ro!isio has (een added to 'aragra'h 48 of Ind #) 39 that in deter"ining the fair !alue of the financial lia(ilities &hich u'on initial recognition are designated at fair !alue through 'rofit or loss6 any change in fair !alue consequent to changes in the entity?s o&n credit ris> shall (e ignored4 I#) 39 requires all changes in fair !alues in such lia(ilities to (e recognised in 'rofit or loss4

I#) 39 does not change the require"ents relating to e"'loyee(enefit 'lans that co"'ly &ith I#) 2$6 #ccounting and %e'orting (y %etire"ent /enefit Dlans4 Ind #) 39 does not "ention so as I#) 2$ is not rele!ant for co"'anies 0(e transitiona* provisions given in IAS 39 and I)RIC ;4 I)RIC 3; and I)RIC 39 (ave not been given in Ind AS 394 since Accounting Standard corresponding to I)RS 34 First,time Adoption o+ International Financial Reporting Standards, &ill deal &ith the sa"e# The transitional 'ro!isions gi!en in I#) 39 and I*%I $6 I*%I 1$ and I*%I 19 ha!e not (een gi!en in Ind #) 396 since all transitional 'ro!isions related to Ind #)s6 &here!er considered a''ro'riate ha!e (een included in Ind #) 1016 First"time Adoption of Indian Accounting )tandards corres'onding to I*%) 16 First"time Adoption of International Financial *eporting )tandards Different ter"inology is used6 as used in e8isting la&s e4g46 the ter" B(alance sheet? is used instead of E)tate"ent of financial 'osition? and E)tate"ent of 'rofit and losses? is used instead of E)tate"ent of co"'rehensi!e inco"e?4 The follo&ing 'aragra'h nu"(ers a''ear as EDeleted Ein I#) 394 In order to "aintain consistency &ith 'aragra'h nu"(ers of I#) 396 the 'aragra'h nu"(ers are retained in Ind #) 39 : ;i< 'aragra'h 2;f< ;ii< 'aragra'h 3

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