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FINANCIAL INSTRUMENTS: DEFINITION AND SCOPE (IND AS 32)

Financial Instrument-: Any contract that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

In this definition, “contract” refers to an agreement between two parties which is enforceable by law. An assets or liability that is not contractual (e.g., an obligation to pay taxes) is not a financial instrument even though it may results in the receipt or deliver for cash.

Financial Instrument encompass equity instrument, financial liabilities, financial assets.

Equity instrument:-Any contract that evidence a residual interest in the assets of an entity after deducting all of its liabilities.

Examples

  • Ordinary shares(that cannot be put back to the issuer by the holder)
  • Preference shares (that cannot be redeemed by the holder or provide for nondiscretionary dividends)
  • Written call options(that allow the holder to subscribe for a fixed number of ordinary shares in exchange of fixed amount of cash)

Financial Asset:- A contractual right to receive cash or another financial asset from another entity.

Examples

  • Cash
  • Investment in shares or other equity instrument issued by another entity
  • Receivables
  • Loans to other entities
  • Investment in bonds & other instrument issued by other entities
  • Derivative financial assets

Financial liability:-Any liability that is contractual obligation to deliver cash or financial assets to another entity.

Examples

  • Payables
  • Loan from other entities
  • Issued bonds & other debt instruments
  • Derivatives financial liabilities

These assets & liabilities are not financial instrument:

  • Physical assets (e.g., Inventories, Property, Plant and Equipment). Control of physical assets create an opportunity to generate a cash inflow but does not give rise to a present right to receive cash or another financial assets.
  • Leased assets, Control of leased assets create an opportunity to generate a cash inflow but does not give rise to a present right to receive cash or another financial assets.
  • Intangible assets (e.g., patents & trademark). Control of intangible assets create an opportunity to generate a cash inflow but does not give rise to a present right to receive cash or another financial assets.
  • Prepaid expenses, such assets are associated with the future delivery of goods & services. They do not give rise to contractual right to receive cash or another financial asset.
  • Deferred Revenue, such liabilities are associated with future delivery of goods & services. They do not give rise to contractual obligation to pay cash or another financial asset.
  • Warranty obligation, such liabilities are associated with future delivery of goods & services. They do not give rise to contractual obligation to pay cash or another financial asset.
  • Income tax liabilities or assets, these are not contractual but are imposed by statutory requirements.

Apart from these items that meet the definition of financial instruments also be apply to some contracts that do not meet the definition of financial instrument, but have characteristics similar to derivatives financial instruments i.e., (gold, electricity, or gas).

  • It can be settled in net in cash.
  • It is not for receipt or delivery of non financial items in accordance with the entity expected purchase, sale or usage requirement.

SCOPE OF FINANCIAL INSTRUMENT UNDER IND AS 32:-

         Financial instrument items                                                         Scope of IND AS 32

  1. Cash deposited into bank                                                               Financial asset
  2. Gold bullion deposited into bank                                                      NO, Financial asset
  3. Trade account receivables                                                              Financial asset
  4. Investment in debt instruments                                                       Financial asset
  5. Investments in equity instrument                                                     Financial asset
  6. Prepaid expenses                                                                          NO, Financial asset
  7. Financial Lease receivables or payables                                          Financial asset
  8. Deferred revenue                                                                           NO, Financial asset
  9. Statutory tax liabilities                                                                    NO, Financial asset
  10. Provision for estimated litigation losses                                           NO, Financial asset
  11. An electricity purchase contract that can be net settled in cash         Financial asset
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