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Financial instruments problem

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)

04 August 2013

Please cann anyone guide in understanding the tradgy of financial instrument in Accounting Standard 30. My question is - While we are calculating Debt(Finacial Liability) and Equity (Finacial Liability) thgen after when putting the same in ledger we just calculating interest on amount of Debt (Financial Liability) by the discouting on rate of simillar debt rate which is having no voting rights. PLease guide me in details.

I just want to confrim logic behind it. Journal and leger are clear to understand on my part.

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3 Replies

JAINENDRA JAIN (ACS/CA) (1668 Points)
Replied 04 August 2013

WHEN A COMPANY ISSUES THE DEBT HE IS GIVING SOME ADDIIONAL FEATURE TO THE MEMBERS LIKE OPTION TO CONVERT THEM INTO EQUITY OR SHAREHOLDERS FUND OR OTHER BENEFIT WHICH ACCRUE TO THE DEBT HOLDER.

SINCE COMPANY IS ISSUING DEBT HAVING SOME EXTRA FEATURE THAN OTHER DEBTS IN MARKET THE RATE AT WHICH IT ISSUES THE DEBT IS ALWAYS LESS THAN THAT PREVALLING IN THE MARKET SINCE MARKET DEBT ARE NOT HAVING ADDITIONAL BENEFITS OTHER THAN INTEREST.

SO WE USE THE RATE PREVAILING IN THE MARKET FOR A NORMAL OR SIMILAR DEBT INSTRUMENT SO THAT WE CAN RECOGNISE OUR LIABILITY IN A FAIR VALUR AND OUR FINANCIAL STATEMENTS ARE NOT MISSTATED.

HOPE U GOT MY POINT.

IF NOT, PLS REPLY.

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 04 August 2013

thanks for reply first, dear sir I want to know that since Equity(Financial Liab.) is also a liab. then why we just calculating liability on interest part only. for eg. Issue 10% debenture of of rs. 500000 Debt(F.L)-- Int 124365 (Discounted) euity- 375634 we just recognizing 124635 as F.L why Not balance of rs. 375634. Tell me Sir.

JAINENDRA JAIN (ACS/CA) (1668 Points)
Replied 04 August 2013

BECAUSE FOR THE EQUITY PORTION WE DONT NEED TO PAY CASH WE WILL HAVE TO ALLOT SHARES.

AND FOR THE RECOGNITION OF FINANCIAL LIABILTY UNDER AS-30,31,32 SETTLEMENT OF LIABILITY MUST LEAD TO OUTFLOW OF CASH WHICH IS NOT IN THE CASE OF EQUITY.

HENCE EQUITY ARE NOT RECOREDE AS LIABILITY