UNIT 5 Accounting & Reporting of Financial instruments

1Q) ACCOUNTING AND REPORTING OF FINANCIAL INSTRUMENTS  
 Definition :   Financial instruments means any contract that gives rise to a financial asset to one entity & financial liability / equity instrument to another entity. 

            As the definition of financial instrument indicates that there must be a contractual right / obligation in existence for something to be deemed to be a financial instrument if there is no contractual right / obligation then there is no financial instrument.

        Financial instruments are classified in to financial asset & financial liability.

 Financial asset : Financial asset is an asset whose value comes from contractual claim. These assets are frequently traded. Financial asset include the following items :
a) Cash
b) Equity of another entity
c) A contractual right to receive cash / similar from another entity / a potentially       favorable exchange of financial asset / liabilities with another entity.
Example :Cash , investments in bonds and equity issued by other, trade receivables, loans receivable etc.

 Financial liability :It means any liability , i.e.,
a contractual obligation to deliver cash / another financial asset or financial liability with another entity under conditions that are potentially unfavorable to the entity.
Example: Loans from other entity; issued  bonds, redeemable instruments like preference shares, debentures etc.

 Classification of financial instruments : Every financial asset that falls within the scope of AS -30 must be classified in to one of the following four categories.(measurement of financial assets)
1) At fair value through profit or loss
2) Available for sale
3) Loans & receivables
4) Held to maturity investment
           In the above list first two are measured at fair value. While other two are measured at  amortized costs. The only exception to this rule is equity instruments. That don't have a quoted market price in the active market and whose value can't be reliably measured. 

 1.At fair value through profit / loss : It has two categories. The first includes any financial assets that is designated on initial recognition as one to be measured at fair value with changes in statement of profit /  loss. The second category includes financial assets which could be classified as held for trading. 

 2. Available for sale : Financial assets are those non derivative financial assets that are designated as available for sale. These are measured at fair value gains or losses recognized directly in an appropriate account. 

 3.Loans & advances :These are non derivative financial assets with a fixed or determinable payments that are not quoted in an active market. Other than ;
-Those that the entity intends to sell immediately.
-Those that the entity upon initial recognition designates as available for sale.
-Those for which the holder may not recover substantially all of its initial investments.
     Loans & receivables are measured at amortized cost using the effective interest method .

 4. Held to maturity investment :These are non derivative financial assets with fixed or determinable payments & fixed maturity that an entity has the positive intention  & ability to hold to maturity. 

Measurement of financial liability : After initial recognition , an equity should measure all financial liabilities at amortized cost using the effective interest method ,expect for ;
1. Financial liabilities at fair value through profit / loss , such liabilities including derivatives that are liabilities should me measured at fair value other than a derivative liability that is linked to & must be settled by delivery of an unquoted equity instrument, whose fair value cannot be reliably measured, which should be measured at cost.
2. financial liabilities that arise when a transfer of a financial asset does not quality for de-recognition / when the continuing investment approach applies.
3.short term payables with no stated interest rate should be measured at original invoice amount if the effect of discounting is immaterial.
4. financial guarantee contracts after initial recognition, an issuer of such a contract should measure , if at higher of -
(i) the amount determined in accordance with AS 29
(ii) the amount initially recognized less when appropriate cumulative amortization recognized, if any.

2Q) RECOGNITION , DE RECOGNITION AND OFFSET.






3Q)**** COMPOUND FINANCIAL INSTRUMENTS



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