AS30 Financial Instruments: Recognition and

Measurement
Recognition and Measurement issued by the ICAI, comes into
effect in respect of accounting periods commencing on after 1st
April 2009 will be recommendatory for in nature for an initial
period of two years. This accounting standard will become
mandatory in respect of accounting period commencing on or
after 1st April 2011 for all commercial, industrial and business
entities except to a small and medium sized entity.

Financial Instruments:

Features or Objectives:

 AS3o is a complex standard.

 Its main objective is to establish principles for recognizing

and measuring financial instruments like financial assets,
financial liabilities in an entities balance sheet and some
contracts to buy or sell non-financial items.

 The introduction of this standard is likely to affect almost all

items in a corporate or bank balance sheet.

 It deals with recognition or de-recognition and measurement

of financial instruments and also derivatives and Hedge
accounting.

 It uses mixed measurement model i.e. some assets and

liabilities are valued at fair value and other on cost basis.

 This standard stipulates measurement of assets and

liabilities at fair value unless otherwise stated.
Scope:

 This standard should be applied by all the entities to all

type of financial instruments except

a. Those interest in subsidiaries associated and joint

ventures that are accounted for under AS21.

b. Rights and Obligations under leased which is in AS19.

c. Employer’s right and obligation under employee benefit

plan to which AS15.

d. Financial instrument issued by the entity that meets the

definition of an equity instruments AS31.

e. Contract for contingent consideration in a business

combination.

f. Contract between acquirer and a vendor a business

combination to buy or sell an actuary at future date.

g. Loan commitments in AS29.

h. Financial instruments contracts and obligations.

 The following loan commitments are within the scope of

this standard.

a. Loan commitments that the entity designates as

financial liability at fair value through profit and loss.

b. Loan commitments that can be settled net in cash or by

delivering or issuing another financial instrument.

c. Loan commitments to provide at below market interest

rate.
  It should be applied to those contracts to buy or sell a
non-financial item that can be settled in net cash or
another instrument or by enhancing financial instruments.

Applicability:

1. Applicable for all commercial, industrial and business entity

except to small and medium sized entity.

2. Whose equity or debt securities are not listed in any stock

exchange whether in India or Outside.

3. Which is not a bank or financial institution.

4. Whose turnover excluding other income does not exceeds

Rs. 50 crore in the immediately preceding accounting year.

5. Which does not have borrowing (including Public Deposits) in

excess of 10 crore at any time during the immediately
preceding accounting year.

6. Which is not a holding or subsidiary entity of an entity which

is not small.

Definitions of Kinds of Financial Instruments

1. Financial asset or financial liability at a fair value

through profit and loss:

This financial instrument that needs either of the

following conditions.

It is classified as held for trading: a financial asset or

liability as held for trading if it is

• Acquired or incurred principally for the purpose

of selling or repurchasing or

• Part of portfolio of identified financial

instruments that are managed together.
 • A Derivative (financial instrument or other
contract within the scope)

2. Held to maturity investment are non-derivative financial

asset with fixed or determinable payment and fixed maturity
that an entity has the positive intention and ability to hold
maturity other than

• Those that the entity upon initial recognition

designates as a fair value through profit and
loss.

• Those that meets the definition of loans and

receivables.

• Those that the entity designates as available for

sale.

3. Loans and Receivables are non-derivative financial asset

with fixed and determinable payments that are not coated in
the active market other than

• Those that entity intends sell immediately.

• Those that entity upon initial recognition

designate as available for sale.

• Those for which an older may not recover

substantially all of its initial investments.

4. Available for sale of Financial assets are those non-

derivative financial asset that are designated as available for
sale are not classified as
 • Loans and receivable.

• Held to maturity investment.

• Financial asset at fair value through profit and

loss.

Definitions Relating to Recognition and Measurement

1. The amortised cost of a financial asset or financial liability is
the amount at
which the financial asset or financial liability is measured at initial
recognition minus principal repayments, plus or minus the
cumulative amortisation using the effective interest method of
any difference between that initial amount and the maturity
amount, and minus any reduction (directly or through the use of
an allowance account) for impairment or uncollectibility.

2. The effective interest method is a method of calculating the

amortised cost of a financial asset or a financial liability (or
group of financial assets or financial liabilities) and of
allocating the interest income or interest expense over the
relevant period.
3. The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts through the
expected life of the financial instrument or, when
appropriate, a shorter period to the net carrying amount of
the financial asset or financial liability (see Appendix A
paragraphs A23-A27).
4. Derecognition is the removal of a previously recognised
financial asset or financial liability from an entity’s balance
sheet.
 5. Fair value is the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction15.
6. A regular way purchase or sale is a purchase or sale of a
financial asset under a contract whose terms require
delivery of the asset within the time frame established
generally by regulation or convention in the marketplace
concerned.
7. Transaction costs are incremental costs that are directly
attributable to the acquisition, issue or disposal of a financial
asset or financial liability. An incremental cost is one that
would not have been incurred if the entity had not acquired,
issued or disposed of the financial instrument.

Subsequent measurement of financial assets depends upon

classification at initial recognition into any of the four
categories.

a. Financial assets at fair value through profit or loss.

b. Held to maturity investment.
c. Loan and receivable.
d. Available for sale fixed asset.

Measurement
Initial Measurement of Financial Assets and Financial
Liabilities
When a financial asset or financial liability is recognised initially,
an entity should measure it as follows:
(a) A financial asset or financial liability at fair value through
profit or loss should be measured at fair value on the date of
acquisition or issue.
 (b) Short-term receivables and payables with no stated
interest rate should be measured at original invoice amount
if the effect of discounting is immaterial.
(c) Other financial assets or financial liabilities should be
measured at fair value plus/ minus transaction costs that are
directly attributable to the acquisition or issue of the
financial asset or financial liability.

Subsequent Measurement of Financial Liabilities

Classified under fair value through profit or loss is at faire value
and the resulting gains or losses are recognized in the statement
of profit and loss account. All other financial liabilities are
measured at amortised cost using the effective interest method.

Challenges
1. This standard can substantially affect the operation of
entities by change in accounting procedures.
2. The implementation of AS30 as the potential to highest
earning volatility especially the Hedge accounting has been
defined very rigorously under the frame work and the
derivatives that do not qualify as hedges will have to be
marked to market and the resultant gains or losses will have
to be routed through the profit and loss account.
3. Resorting to fair value measurement would pose a serious
challenges in the valuation of financial instruments under
pinning the need to develop skills for valuation among the
 accountants, finance professionals and prepare greater level
of transparency through enhanced disclosure requirement
and documentation needs prescribed by the standards.
4. Appropriate board oversight and involvement of senior
management would be prerequisite for the smooth adoption.
Further there is need to revamp the MIS and technology
capabilities of the entities that have to comply with AS20 for
which significant investment.
5. Migration to fair value accounting has its own challenges but
at the same time it brings in innumerous amount of
opportunity for Indian corporate and financial institutions
especially in the context of greater integration of our
markets with international market.