Impact of AS 30, 31, 32 on Banks

Analysing Impact of AS
30, 31, 32 on Banks
Financial Services Industry – Emerging

Trends, Challenges & Way Forward
Presented by :‐ WIRC of ICAI
Ashutosh Pednekar November 20, 2009
Partner, M P Chitale & Co.
Disclaimers
These are my personal views and can not be construed to
be the views of M/s.M. P. Chitale & Co., Chartered
Accountants
ICAI has no responsibility for its contents
These views do not and shall not be considered as a

professional advice.
This presentation should not be reproduced in part or in

whole, in any manner or form, without my written
permission.
Ashutosh Pednekar, Partner, M. P. Chitale & Co. 2

Why an AS for Financial Instruments ?
Globalisation of Indian Economy;
Increasing sophistication of financial products and

markets;
Increased use of derivatives for risk mitigation and

trading;
No comprehensive standard until now (AS -13, AS - 11

and AS - 16 partly deal with the same);
Diverse practices made comparability of performance

difficult.
AS for financial instruments
AS 30 AS 31 AS 32
Recognition
and Measurement Derivatives
derecognition of and
Presentation Disclosure
of financial hedge
financial instruments accounting
instruments

Key concepts
The standard focuses on substance over form in accounting
for financial instruments. The key concepts that come to
fore are:
Fair valuation;
Symmetry; and
Hedge accounting
The standard is likely to have far reaching implications on

accounting of most assets and liabilities with consequent PL
implications due to fair valuation, changes in various laws
and challenging certain normally accepted principles
AS 31 – Objective and scope

Establish principles for
Presenting financial instruments as liability or equity (and related
classification of interest, dividends, losses and gains) by the
issuer
Offsetting a financial asset and a financial liability
Presentation of transactions in own equity
Accounting for treasury stock

Financial instruments – definition
Contract that gives rise to A financial liability and /or an

both a financial asset of one & equity
entity instrument of another entity
Financial Financial Equity

asset liability instrument
Financial instruments – examples

Financial assets and liabilities
Trade receivables and payables
Loans receivable and payable
Deposits and advances
Perpetual debt instruments
Contractual rights arising on contingent assets – eg. Guarantees
Finance leases
Following are not financial assets and instruments

Physical assets such as property, plant and equipment
Prepaid expenses (associated with the delivery of goods and services
and not contractual obligation to pay cash or another financial asset).
Liabilities that are not of a contractual nature (such as income taxes)
Financial instruments – examples…
IMPACT ANALYSIS
Equity instruments
New concept for Indian GAAP
Equity shares
Irredeemable preference shares
Portion of preference shares having discretionary dividends after
reducing liability component
Warrants / written call options that are settled by a fixed number of
own instruments for a fixed amount of cash or another financial
asset (equity option component of a convertible bond/debenture)
Derivative financial instruments

Options, futures, forwards, interest rate swaps, currency swaps
etc.
Liability or Equity?
Financial instrument is an equity instrument only if both criteria are
met:
There is no obligation to deliver cash or another financial asset or to
exchange financial assets or financial liability; and
The issuer will exchange fixed amount of cash or another financial asset
for a fixed number of its own equity instruments.
Does the entity have an unavoidable contractual obligation to deliver or exchange?
Yes No
Liability Equity
When there is a statutory requirement for classification as equity or liability,

compliance with law = compliance with AS

Compound instrument = part equity and part debt e.g. convertible debt
Split accounting required
The liability portion is valued first and the equity portion is the residual amount
Classification of liability and equity components of a convertible instrument is
not revised as a result of a change in the likelihood that a conversion option
will be exercised.
Standard does not prescribe the specific line item in equity where a equity
component of a compound instrument should be reflected in.
No gain or loss arises from initially recognising the components of a
compound instrument separately.
Once allocation of equity and liability components are made, subsequent gain
or loss is made in accordance with the accounting principles applicable to the
related component.
Subsequent changes in the terms of an instrument are recognised (by
comparing with the fair value of the new instrument) in the profit and loss
account.
A contract is not an equity instrument solely because it will result in the delivery of
the entity’s own equity instruments
Does the issuer potentially have

an obligation to settle gross in
cash or in a variable number
Yes Liability
of own shares?
No
Will settlement be the exchange

of fixed number of shares
for fixed amount?
Yes Equity
No
Derivative
Contingent settlement provisions
An instrument with a contingent settlement provision would

be a financial liability for the issuer unless:
The contingent settlement provision that could require settlement in

cash or another financial asset is not genuine; or
The issuer can be required to settle the obligation in cash or another

financial asset only in the event of liquidation of the issuer.
IMPACT ANALYSIS
Recognition on BS the financial liability arising out of such

provisions
Buyback of shares
If an entity re-acquires (buys-back) its own shares, nominal

value of those shares should be deducted from share capital
No gain or loss should be recognized in the profit and loss account;
Difference between the consideration paid and the nominal value of

shares should be recognized in an appropriate equity account.
IMPACT ANALYSIS
In an era of capital raising by banks this has not been

experienced yet

Interest, dividends, losses and gains
Income statement classification of interest, dividends, losses and gains

follows directly from the balance sheet classification as liability or equity.
Any income statement effect on a financial liability will be recognized as an

expense irrespective of the nomenclature of the item eg. dividends,
distributions etc.
Distributions to holders of an equity instrument should be recognized in an
appropriate equity account
Transaction costs, net of any income tax benefit, of an equity transaction
should be recognized in an appropriate equity account
Discount accretion / redemption premiums form part of the recognized
interest expense for a period on an effective interest rate basis.
Dividends classified as an expense are presented in the statement of profit
and loss as a separate item.
Offsetting a financial asset and a

financial liability
currently has a legally enforceable right to set off
and an intention to settle net
or to realise the asset and settle the liability simultaneously
but
Practical situations will cause implementation challenges

Master netting agreements
Several instruments used to emulate a single instrument (synthetic instrument)
Items with the same risk, but different counterparties
Financial assets pledged as collateral for non-recourse liabilities
Financial assets that did not qualify for de-recognition under AS 30
In practice, netting will be difficult to achieve other than in very limited

situations….because neither pure intention nor pure legal right is sufficient
IMPACT ANALYSIS
New concept for Indian GAAP

AS 30 Coverage
Ô Definition
Ô Recognition & Measurement
Ô Reclassification
Ô Impairment & Derecognition
Ô Derivatives & Embedded Derivatives
Ô Hedging
Ô Transitional Provisions
Scope of AS 30 – applies to all Financial

instruments except:
Interest in Subsidiaries, Associates and Joint Ventures covered by AS 21,
23 & 27 except as mentioned in those standard;
Lease transaction covered by AS 19. However lease receivables, payables
& derivatives embedded in lease will be covered by this standard;
Insurance Contracts. However financial guarantee contracts and derivatives
embedded in insurance contract covered by this standard ;
Contingent consideration for the acquirer or business combinations to buy
or sell at a future date;
Loan commitments, other than specific inclusions;
Share based payments (incl ESOPs) and Employers rights and obligations
under AS 15;
Own use commodity contracts other than those which are generally settled
net in cash;
Items are scoped out of the standard if another standard is more prescriptive
in dealing with such items.
Present Classification of financial
instruments by Banks
Category Particulars
Loans Bills Purchased & Discounted
CC, ODs and Loans Repayable on Demand
Term Loans
Further detailed presentation – popularly called 9 –way

classification
Investments 6 line items to be presented
3 way categorisation Æ HTM, AFS & HFT
Derivatives Presented by way of a note and as Contingent Liabilities
Liabilities No specific categorization other than the line items

specified in the BR Act format
AS’ classification of financial

instruments
Category Definition
Financial assets Classified as held for trading (intended to be actively
and financial traded)
liabilities at fair
value through profit All derivatives are classified as held for trading (except
and loss those used as hedging instruments on financial guarantee)
Financial asset or financial liability designated as such at

inception (subject to certain conditions)
Held-to-maturity Financial assets with fixed or determinable payments and

investments fixed maturity that an entity has the positive intention and
ability to hold to maturity
Loans and Non-derivatives financial assets with fixed or determinable
receivables payments, whether originated or acquired, quoted in an
active market. (Does not need to have a fixed maturity)

AS’ classification of financial
instruments…
Category Definition
Available-for- Non-derivative financial assets designated as AFS
sale financial or that are not:
assets
Loans or receivables
(AFS)
Held-to-maturity investments
Financial assets at fair value through profit

and loss
Other financial Financial liabilities that are not classified as “fair
liabilities value through PL”, e.g. Warrants, obligations to
deliver cash/cash equivalents/financial assets
Held-to-Maturity Investments
Positive intent and ability to hold to maturity ?
Yes
Was any held-to-maturity instrument sold or

reclassified in the current or two preceding years?
Yes No
Near maturity Yes

Classify as held-to-maturity and
Isolated event beyond an entity’s control measure at amortised cost
Collected substantially all principal OR
Insignificant amount in relation to the held-to-
maturity portfolio IMPACT ANALYSIS
No
RBI permits sale of
Reclassify all HTM instruments as HTM portfolio – will
available-for-sale
this fail the test of
intention to hold?
Available-for-sale financial assets
All available for sale assets are marked to market through a separate
component of equity (Investment revaluation reserve account)
Gains and losses on AFS assets are recognised in the profit and loss
account on disposal or impairment of the asset. However, there are a
number of other complications with available for sale gains and losses
Gain or loss on available-for-sale asset
Change in value Change in value

Effective interest Other changes in
due to embedded due to spot FX
rate fair value
derivative change
Profit and Loss Account Equity
Recycled to the profit and

loss account on disposal or
impairment of the asset
Classification determines subsequent

measurement of financial assets
IMPACT ANALYSIS
All valuation has to be

Classified as held for
trading or designated on gross basis unless
At fair value Yes
as at fair value off setting applies
through P&L
through P&L at
inception
No
(Amortised) cost
Non-derivative
Fair value
financial assets, Yes Loans and

fixed/determinable
receivables
payments, not quoted
in active market
No
Intent and ability to

No hold to maturity Yes
Available-for-sale Held-to-maturity
and meets other
criteria
… similarly applies to financial liabilities

Initial Recognition
Initial Recognition of a FA or FL to be done by an entity
when, and only when it becomes a party to the
contractual provisions of the instrument
All contractual rights & obligations under derivatives are to

be recognized on balance sheet as asset or liability except:-
If a transfer does not qualify for dercognition then
Transferor does not recognize derivatives of the FA / FL separately
Transferee does not recognize transferred FA / FL as its FA / FL
Initial Recognition…
Recognize assets to be acquired or liabilities to be incurred as
a result of firm commitment to purchase or sell goods or
services only when
At least one of the parties has performed under the agreement or
It is a firm commitment applicable under the Standard
But in case of an unrecognized firm commitment that is designated as
“hedged item” in a fair value hedge, any change in net fair value attributable
to hedged risk is recognized as asset or liability after inception of hedge
Don’t recognize FA/FL arising out of planned future transactions no

matter how likely, as entity is not party to the contract

Initial Measurement
FA / FL @ FVTPL Short-term receivables / Other FA / FL
payables with no stated interest
rate
At fair value on Original invoice amount At fair value + / - directly

attributable transaction cost
date of if effect of discounting is
acquisition or immaterial
issue
If settlement date accounting is used for an asset that is subsequently
measured at cost or amortized cost, then it is initially recognized at FV on
the trade date
Fair Value = the amount for which an asset could be exchanged, or a

liability settled, between knowledgeable, willing parties in an arm’s
length transaction
Fair value (FV)

Presumption of FV
Entity is a going concern, without
the intention or need to liquidate or
curtail materially the scale of operations or
to undertake a transaction on adverse terms
FV is not the amount that would be received or paid in
a forced transaction,
involuntary liquidation or
distress sale
FV reflects credit quality of financial instrument
E.g. Amount lent at below market rate and up-front received as
compensation; discount accreted to the PL A/c using effective
interest rate method
Transaction Costs (TC)
TC = Incremental cost directly attributable to acquisition, issue or disposal
of FA or FL
Increment cost = cost that would not have been incurred if the entity had not acquired,
issued or disposed off the financial instrument
For FA Æ TC are added to amount originally recognized
For FL Æ TC are deducted from amount of debt originally recognized
Present RBI requirement is to charge off TC
TC expected to be incurred on transfer or disposal of a FI are not included in its

measurement
TC not considered in fair value measurement at initial recognition
FI @ FV through PL
Short term receivables & payables
TC included in calculation of amortized cost using effective interest rate method and
thus amortized through P & L over life of instrument
Subsequent Measurement of FA
FA @ FVTPL HTM Investments Loans & Available for Sale
Receivables
FV without Amortized Cost Amortized Cost using FV without
deducting using effective effective interest deducting
transactions costs interest method method except for transactions costs
short-term that maybe incurred
that may be
receivables that are on sale or disposal
incurred on sale or carried at original
disposal invoice amount
No test for Test for Test for impairment Test for

impairment to be impairment to be to be performed impairment to be
performed performed performed
Equity instruments without quoted value & whose fair value cannot be reliably measured and
derivatives linked to such equity instruments Æ measured at cost
For FA measured at FV and the FV is negative, then it is a FL
Hedged FA items Æ to follow hedge accounting requirements

Subsequent Measurement of FL
At amortized cost using effective interest method except
FL at FVTPL unless
Derivative liability linked to an unquoted equity instrument whose
FV cannot be determined Æ measured at cost
FL arising out of transfer of FA not qualifying for derecognition
Recognize obligations retained by the entity
Short-term payables at original invoice amount
Financial Guarantee Contract & Commitments to provide Loans
below Market Interest Rate, higher of
Amount determined as per AS 29 and
Amount initially recognized
Hedged FL items Æ to follow hedge accounting requirements
Trade date/Settlement Date
Regular Way Purchase or Sale of a Financial Asset

Trade Date Accounting : The trade date is the date that an entity
commits itself to purchase or sell an asset.
Settlement Date Accounting : The settlement date is the date on
which an asset is delivered to or by an entity.
There is no bar in applying Trade Date Accounting for

certain category of Financial Asset and Settlement Date
Accounting for another category

Reclassifications
At fair value through profit or loss category
No reclassification of a financial instrument either into or out of this
category is permissible IMPACT ANALYSIS
HTM Investments to AFS category RBI permits reclassification

– will this be construed as
Reclassify the investment as ‘available for sale’ against AS 30?
Remeasure it at fair value
Recognise the difference between its carrying amount and the fair value in the
appropriate equity account (Investment Revaluation Reserve Account).
From AFS to HTM category
the fair value carrying amount on that date becomes its new cost.
Any previous gain or loss recognised directly in the appropriate equity
account:
Is amortised over the remaining life of the investment using the effective
interest rate method.
Gains & Losses on changes in FV

IMPACT ANALYSIS
FA / FL @ FVTPL
Recognized in P & L AFS Æ presently net negative in PL
and net positive is ignored
AFS – FA
Appropriate Equity Account (Investment Revaluation Reserve) except
Impairment losses & Foreign Exchange Gains & Losses to P & L
When FA is derecognized, balance in this equity account is transferred
to P & L
FA / FL @ Amortized Cost
Recognized in P & L
Hedged items to follow Hedge Accounting requirements
In case of settlement date accounting
Change in FV between trade date & settlement date is not recognized if
the FA / FL is carried at cost
Otherwise it is taken to P & L or the Appropriate Equity Account

Objective evidence of impairment
At each balance sheet date, the entity should assess
whether there is objective evidence of impairment for an
asset or group of financial assets
Evidence of impairment
Significant financial difficulty of the issuer
Default or breach of contract
Granting of a concession by the lender due to the borrower’s financial position
Bankruptcy or financial reorganisation of the borrower
Disappearance of an active market for the assets concerned because of financial
difficulties
Significant or prolonged decline in market price in the case of an equity security
Observable data that there is a measurable decrease in the estimated future cash flows
for a group of financial assets
Adverse changes in the payment status of borrowers in the group
National or local economic conditions that correlate with defaults on assets in the group
Assessment of objective evidence for Impairment

of financial assets measured at amortised cost
Individually significant
financial assets
yes no
Asses separately Collectively
results
Individually continue
significant impaired
yes no
Not included in IMPACT ANALYSIS Included in
collective Will all this change the IRAC collective
assessment norms? assessment
Focus is on cash flows not on
security value as at present
Derecognition
Removal of a previously recognised Financial Asset (FA)
or Financial Liability (FL) from an entity’s balance sheet
Derecognition of an FA is on transfer of associated risks and rewards
while that of a FL is on extinguishment of obligation
A transaction is treated as a transfer of FA if all three criteria
are met:
An entity has no obligation to pay amounts to the eventual recipients
unless it collects equivalent amounts from the original asset;
An entity is prohibited from selling or pledging the original asset; and
An entity has an obligation to remit any cash flows it collects on
behalf of the eventual recipients without material delay.
Derecognition can be applied to a part of FA / FL or a

part of a group of similar FA / FL
Derecognition of FA…
Derecognition is applied to a part of a FA or group of

similar FA if, and only if, it meets one of the following
three conditions
Part Comprises Example Derecognition
applied to
Specially identified cash Transaction of an interest Interest cash
flow rate strip flow
Fully proportionate (pro Rights to 90% share of all 90% of those
rata) share of the cash cash flows cash flows
flows
Pro rata share of specially Transaction where the 90% of those
identified cash flows counter party obtains the interest cash
rights to a 90% share of flows
interest cash flows

Main concepts of derecognition principles
Have the rights to the cash flows from
Yes the asset expired?
No Continued
recognition
Has the entity transferred its rights to
receive the cash flows from the asset? Assets remain on
the balance sheet of
Derecognise No the transferor
Has the entity assumed an obligation to
Assets qualify Yes pay the cash flows from the asset that
meets the conditions in paragraph 18? No
for Yes
de-recognition Analysis of
Has the entity transferred substantially
and removal all risks and rewards?
risks and
Yes Yes rewards
from the No of ownership of
balance sheet financial assets
Has the entity retained substantially all
risks & rewards?
No
Has the entity retained control of the Analysis of
No assets? control of
financial assets
Yes
Continue to recognise the asset to the extent of the entity’s continuing involvement
IMPACT
If the entity retains the right to service the FA for a fee it should recognise a service ANALYSIS
asset or liability for that service contract
Securitisation guidelines will
E.g. Repo, securitization, PTC Etc.
Ashutosh Pednekar, Partner, M. P. Chitale & Co. need to be reviewed 39
Freestanding derivatives – definition
Three characteristics
Fair value changes in

response to the change in
underlying
z Interest rate No initial
z Financial instrument price net investment or an initial net
investment that is smaller than
z Commodity price
would be required for other Settled
z Foreign exchange rate types of contracts that would at a future date
z Credit rating/index be expected to have a similar
response to changes in
z Index of prices or rates
market factors
z Other variables (in the case
of a non-financial variable -
it is not specific to a party
to the contract)

Derivatives excluded from AS 30
derivative accounting rules
All derivatives are always marked-to-market (MTM) with
changes in fair value recognised in the P&L (unless used
as hedging instruments in cash flow hedge when fair value
changes are in reserves) except for:
Contracts for ‘normal’ purchases Regular way purchase or sale of a

and sales of non-financial items financial asset
Intended to meet purchase, sale or Delivery within a time frame
usage requirements established by regulation or
convention in the market
Designated for that purpose
Apply trade date or settlement date
Will be settled by delivery
accounting
Embedded derivatives
An embedded derivative is a component of a hybrid (combined)
instrument that also includes a non-derivative host contract,
where some of the cash flows of the combined instrument vary in
a way similar to a stand-alone derivative.
When to separate? How to identify?
The embedded derivative is not An implicit or explicit term in a contract

that makes it behave like a derivative
closely related to economic
characteristics and risks of the host Instruments with conversion features
(e.g. leverage, optionality feature); Instruments with option to extend the term
of debt
Embedded derivative would be a
derivative if it was freestanding; and Index linked payments
Purchase or sale of contracts in foreign /
The host contract is not carried at fair third currency (other than currency of
value through profit or loss major party, or currency in which the
contract is normally denominated)

Embedded derivatives – decision tree
Host held for trading with changes to fair value Yes

No separation
recorded in the income statement?
No
Does embedded derivative meet the definition No

No separation
of a derivative under AS 30?
Yes
Characteristics or risks which are closely related Yes

No separation
to the host contract?
No
No Entire contract is treated
Can fair value of the derivative component
as held for trading and
separately be reliably measured?
measured at fair value
Yes
Separately account for: IMPACT ANALYSIS

z derivative under AS 30
z host contract under AS 30 or other relevant AS
No guidelines at
present for embedded
derivatives
Hedging Relationships
Cash flow
Exposure
Net investment
Fair in a foreign
Value Hedged items Hedging entity
instruments

Criteria for hedge accounting
1. Hedge relationship must be documented at inception
Risk management objective and strategy for the hedge

Identification of the hedging instrument
The related hedged item or transaction
The nature of the risk being hedged
How hedging instrument’s effectiveness will be assessed
2(a) Hedge relationship must be expected to be highly effective at inception and

subsequent periods
2(b) Hedge effectiveness can be reliably measured
2(c) Actual hedge effectiveness must be measured
3. In the case of hedging future cash flows, there must be a high probability
of that cash flow occurring
Hedged Items
Qualifying Items Recognized FA / FL
Unrecognized Firm Commitment
Highly Probable Forecast
transaction
Single or grouped
Designated FI For its entire fair value or for one

or more risk exposure
For a portion or a group of similar
assets / liabilities

Hedged Items…
Designated Non Foreign Currency Risk
Financial Items
In entirety for all risks
HTM Can be hedged only for currency
risk and credit risk
Unrecognized Firm Changes in the fair value through

Commitment Statement of Profit & Loss
Hedging Instruments
Derivatives can be used as hedging instruments
Proportion of the instrument can be designated
Time value can be excluded
Interest element & spot price of a forward contract can be
separated
Non-derivative FA / FL can be hedging instrument only

for foreign currency risk
Hedge accounting permitted only when instruments
involve an external party
Between group entities, transactions are eliminated and hence
do not qualify for hedge accounting in CFS
But in SFS hedge accounting is permitted

Hedging Instruments…
Single instrument can hedge more than one risk
Two or more derivatives or proportions of them can hedge

one risk
Not permitted for net written options

But purchased options are permitted
In India a corporate can write options only for zero cost

structures Æ which can be designated as Hedging
Instrument
Purchased options are permitted
Recent draft guidelines on writing options by corporates

Qualifying hedging instruments –

General rules
Natural hedges of FX risk permitted in limited circumstances
All of the derivative must be used in the hedge relationship
Derivative cannot hedge another derivative
More than one derivative can be used in a hedging relationship
Permitted strategies include:
partial term
5 year swap used to hedge part of 10 year debt as part of cash flow hedge
proportional hedging
Profit related hedges not permitted

Hedge effectiveness
The effectiveness test itself must be stated upfront in the hedge
documentation. This means that it must be designed and tested to
ensure that it provides a suitable solution before the hedge commences
There are two components to an effectiveness test:
the prospective test
the retrospective test
Following criteria to be fulfilled at inception & during the life of the hedge
Hedge is expected to achieve offsetting changes in fair value / cash flows

attributable to the hedged risk
Comparing past changes in fair value / cash flows
High statistical correlation between hedged item and hedging instrument
Actual results of hedge are within a range of 80%-125%
Hedge effectiveness…
Hedging instrument - 120
Hedged item + 100

computed effectiveness is within a range of 80% -125% (83% /
120% in this case)
the hedge relationship is highly effective
nevertheless a loss of 20 has to be recorded in profit and loss

due to ineffectiveness
the fact that the hedge relationship is highly effective does not
lead to ignore the loss incurred due to ineffectiveness

Transitional Provisions
Designation and Measurement of existing Financial Asset
and Financial Liability.
Change the designation and measurement as per the standard.
Adjust resultant gain or loss

To the extent of P&L impact, from the opening Revenue Reserve.
To the extent of ‘equity’ impact to recognize in equity account.
Derecognition of Financial Assets and Financial Liabilities

Requirements of the Standard to be applied prospectively.
Can be applied retrospectively provided the information needed was
obtained at the time of initially accounting for these transactions.
If chosen to apply retrospectively, it should be done for all FA & FL.
Transitional Provisions…
Hedge Accounting :
Measure all derivatives at fair value.
Eliminate all deferred losses and gains if any, arising on

derivatives which under the previous accounting policy of the
entity were reported as assets or liabilities.
Adjust any resulting gains or losses (as adjusted by any related
tax expense / benefit) against opening balance of revenue
reserves and surpluses.
Embedded Derivatives
an entity to assess whether an embedded derivative is to be
separated from the host contract and accounted for as derivative.

AS 32’s Genesis of Disclosure
Requires disclosures in the financial statements that enable

users to evaluate
the significance of financial instruments for the entity’s
financial position and performance; and
the nature and extent of risks arising from financial
instruments to which the entity is exposed during the
period and at the reporting date, and how the entity
manages those risks.
Some Disclosures: Balance Sheet
Loans or Receivables designated at FV through P & L

Maximum exposure to credit risks
Any products which mitigates the aforesaid credit risks
Changes in FV due to credit risk & methods used to evaluate it
Changes in the fair value of the products mitigating the credit risks
Financial liability at FV through P & L

Changes in fair value due to credit risk and the methods used to evaluate credit risk.
Differences between the carrying amount and the amount that would be contractually
required to pay.
Detailed reasons if changes in fair value due to credit risk and methods used to evaluate it
are not disclosed for
Loans or receivables.
Financial liabilities at FV through P & L.
Some Disclosures: Balance Sheet
Reclassification of a financial asset from cost or amortized

cost to fair value and vice versa
Derecognition of assets transferred
Nature of the assets
Nature of retained risk and benefits (rewards) of such
assets
Details of collateral – as borrower and as lender
Reconciliation of changes in allowances for credit losses
created.
Features of compound financial instruments containing
multiple embedded derivatives
Defaults and breaches for loans payable
Some Disclosures: P & L
Net gains or losses

Financial assets or liabilities presented on fair value basis.
Available for sale financial assets
Held to maturity investments
Loans & receivables
Financial liabilities at amortized cost
Interest income and expense excluding assets and liabilities
designated at fair value through P and L
Fee income and expense excluding assets and liabilities designated at
fair value through P and L
Interest Income on impaired financial assets
Impairment losses for each class of financial assets
Some Disclosure: Hedges
Disclosure of types and details of hedges
Fair value hedge
Cash flow hedge
Hedge of net investments in foreign operations
Description of each type of hedge
Description of the financial instruments used for hedging and their Fair value
Nature of risk being hedged

Ineffectiveness recognized in profit and loss account from cash flow hedges and net
investment in foreign operations hedges
Some Disclosures: Valuation
Methods and valuation techniques

Assumptions applied
Basis of determining fair value
Market price
Initial transaction price
Price quotations
Valuation techniques based on market data
Valuation techniques based on assumptions
Fair value of class of assets and liabilities should be disclosed in a way that
facilitates comparison with its carrying amount
Changes in fair value estimates
Some Disclosures: Risk
Qualitative disclosures for risk of each class of financial

instruments
The exposures to risks and how they arise
Risk management procedures and methods
Changes in the above from the previous years.
Quantitative disclosures for risk of each class of financial
instruments
Summary quantitative data provided internally to the key
management
Concentration of risks
Some Disclosures: Risk…
Credit Risk
Failure of a party to discharge its obligation in an contract

Liquidity Risk
Failure of a party in meeting obligations associated with financial

liabilities
Market Risk
The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices.
Types of market risk: currency risk, interest rate risk and other
price risk

Impact Analysis
Volatility in earnings
Impact on financial statements
MIS comparability over pre AS 30 and post AS 30 era
Performance indicators and ratios
IT systems
Contractual obligations (debt covenant, compensation)
Taxes & Distributable Profits
Managing market, investors and analysts
Greater level of documentation spelling out intentions
Management awareness
Use of experts critical
All this applies for bankers reading their clients’ financial statements
What now?
RBI has set a group to assess impact and draw up a road map for AS
30 implementation in banks
Preparedness to be tested – do a dry run and one more dry run
Get ready for the volatility in the standard
Arising out of the economic crises IASB is in process of revamping IAS
39. Drafts / discussion papers issued on:-
IFRS 9
Classification & Measurement Æ lesser number of categories of
FIs
Amortized Cost & Impairment
Hedging
Fair Value Measurement Æ new definition of FV
Credit Risk in Liability Measurement
Thank You
ashu01@mpchitale.com

Impact of AS 30, 31, 32 on Banks

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Impact of AS 30, 31, 32 on Banks

Uploaded by

Copyright:

Available Formats

Analysing Impact of AS

30, 31, 32 on Banks

Financial Services Industry – Emerging

 ICAI has no responsibility for its contents

 These views do not and shall not be considered as a

 This presentation should not be reproduced in part or in

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 2

 Increasing sophistication of financial products and

 Increased use of derivatives for risk mitigation and

 No comprehensive standard until now (AS -13, AS - 11

 Diverse practices made comparability of performance

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 3

AS for financial instruments

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 4

The standard is likely to have far reaching implications on

AS 31 – Objective and scope

 Offsetting a financial asset and a financial liability

 Presentation of transactions in own equity

 Accounting for treasury stock

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 6

Contract that gives rise to A financial liability and /or an

Financial Financial Equity

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 7

Financial instruments – examples

 Following are not financial assets and instruments

 Derivative financial instruments

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 9

Does the entity have an unavoidable contractual obligation to deliver or exchange?

When there is a statutory requirement for classification as equity or liability,

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 10

Does the issuer potentially have

Will settlement be the exchange

An instrument with a contingent settlement provision would

 The contingent settlement provision that could require settlement in

 The issuer can be required to settle the obligation in cash or another

 Recognition on BS the financial liability arising out of such

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 13

If an entity re-acquires (buys-back) its own shares, nominal

 Difference between the consideration paid and the nominal value of

 In an era of capital raising by banks this has not been

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 14

Income statement classification of interest, dividends, losses and gains

 Any income statement effect on a financial liability will be recognized as an

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 15

Offsetting a financial asset and a

Practical situations will cause implementation challenges

In practice, netting will be difficult to achieve other than in very limited

 New concept for Indian GAAP

Ashutosh Pednekar, Partner, M. P. Chitale & Co. 16

Ô Recognition & Measurement

Ô Impairment & Derecognition

Ô Derivatives & Embedded Derivatives

Scope of AS 30 – applies to all Financial

 CC, ODs and Loans Repayable on Demand

 Further detailed presentation – popularly called 9 –way

Investments  6 line items to be presented

 3 way categorisation Æ HTM, AFS & HFT

Derivatives  Presented by way of a note and as Contingent Liabilities

Liabilities  No specific categorization other than the line items

AS’ classification of financial

 Financial asset or financial liability designated as such at

Held-to-maturity  Financial assets with fixed or determinable payments and

ICAI has no responsibility for its contents

These views do not and shall not be considered as a

This presentation should not be reproduced in part or in

Increasing sophistication of financial products and

Increased use of derivatives for risk mitigation and

No comprehensive standard until now (AS -13, AS - 11

Diverse practices made comparability of performance

Offsetting a financial asset and a financial liability

Presentation of transactions in own equity

Accounting for treasury stock

Following are not financial assets and instruments

Derivative financial instruments

The contingent settlement provision that could require settlement in

The issuer can be required to settle the obligation in cash or another

Recognition on BS the financial liability arising out of such

Difference between the consideration paid and the nominal value of

In an era of capital raising by banks this has not been

Any income statement effect on a financial liability will be recognized as an

New concept for Indian GAAP

CC, ODs and Loans Repayable on Demand

Further detailed presentation – popularly called 9 –way

Investments 6 line items to be presented

3 way categorisation Æ HTM, AFS & HFT

Derivatives Presented by way of a note and as Contingent Liabilities

Liabilities No specific categorization other than the line items

Financial asset or financial liability designated as such at

Held-to-maturity Financial assets with fixed or determinable payments and

Financial assets at fair value through profit

Near maturity Yes

All valuation has to be

Transferor does not recognize derivatives of the FA / FL separately

Transferee does not recognize transferred FA / FL as its FA / FL

Don’t recognize FA/FL arising out of planned future transactions no

For FA Æ TC are added to amount originally recognized

For FL Æ TC are deducted from amount of debt originally recognized

Present RBI requirement is to charge off TC

Short term receivables & payables

HTM Investments to AFS category RBI permits reclassification

Remeasure it at fair value

The embedded derivative is not An implicit or explicit term in a contract

Risk management objective and strategy for the hedge

Designated FI For its entire fair value or for one

Unrecognized Firm Changes in the fair value through