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The accounting standards 30-32 suggest reclassification of financial assets into various sub-categories such as FVTPL, HTM, AFS etc.  These jargons appear to be technical, but in reality we already know them under different name. This article is intended to make the reader understand this fact.

If any benefit is derived from this article, the entire credit goes to Mr.M.P.Vijaykumar whose class room lectures form the only basis. 

FVTPL (Fair Value through Profit and loss account)

Financial instruments meeting either of the following 2 conditions:

a.  Gets classified as held for trading

Which means:

  • Acquired(intended) for sale or repurchase in short term
  • Is a part of a portfolio of securities, which are managed for short term profit booking
  • Derivatives which are not meant for hedging i.e. speculative contracts (note that derivatives can be for hedging or speculation, only speculative derivates come under FVTPL, whereas hedging purpose derivatives come under hedge accounting)

Any of the above 3 condition satisfied, it automatically becomes FVTPL, no other option.

 

b.    Specifically designated as FVTPL (Even when an investment is made with an intention of holding for 3 years, the entity may choose to adopt FVTPL route, although it is not for short term).

So what FVTPL predominantly (mostly) consists of, is short term financial instruments, held for trading.  

HTM (Held to Maturity) – By a simple definition we can call them LONG TERM DEBT INSTRUMENTS

  • Non-derivative financial assets (derivative accounting is already discussed above, so here only non-derivatives will come)
  • Having fixed or determinable payments (Debt, and not equity has fixed payments)
  • Having fixed maturity (again, only for debt, the due date of repayment is known)
  • Entity has positive intention and ability to hold till maturity (eg. Entity invested in govt. bonds with intention to hold till maturity and demonstrate ability to hold, if the entity is loss making company, it cannot demonstrate such ability)

However, the above is subject to tainting rule (behavior as against), i.e:

Either during current year or preceding 2 years the entity has sold or reclassified more than an insignificant amount of HTM investments before maturity, these investments cannot be still classified as HTM.

(Note that classification under HTM is a benefit given to an entity where the items are carried at cost (safe zone) and not FV (volatile zone). So if the entity’s behavior is bad as explained in the tainting rule, it is penalized by moving from cost to FV)

Exceptions to tainting rule:

If the HTM investments are sold close to maturity (eg. a significant amount is reclassified, however the date of sale is 20th March whereas the maturity was 31st March)

  • Major principle amount is already collected (eg. out of 5 lakh debt, 4.7 lakhs already recovered)
  • An isolated event beyond entity’s control (eg. Investment given as part of sales tax deposit. The sales tax officer enforces the sale of that investment, which is beyond entity’s control)

In short, HTM category consists of debt instruments which are long term (because short term instruments are coming under FVTPL)

Loans and receivables

  • Non-derivative financial assets (same as HTM)
  • With fixed or determinable payments (same as HTM)
  • Not quoted in active market, unlisted debt (different from HTM)

Hence this category consists of Debts which are unquoted/unlisted in stock market.

AFS - Available for sale (Residuary category)

These are non-derivative financial assets, that don’t come under any of the above 3 categories.

This predominantly represents equity instruments (as debt instruments are dealt in HTM and LR) that are long term (short term are dealt in FVTPL)

However, it may also include debt instruments (eg.HTM category not fulfilling the condition of positive intention or ability to hold till maturity, i.e. in the above example the loss making company should classify as AFS)

Short term receivables and payables

This constitutes debtors and creditors

MEASUREMENT

A.     Initial measurement – When the entity becomes a party to the financial instrument

It can go to only 3 categories – FVTPL, Short term receivables and Payables and Others (the remaining categories of HTM, Loans and Receivables and AFS will come only in subsequent measurement). Read the below table column-wise and not row-wise.

 

FVTPL or Held for Trading

Short Term Receivables and payables

Other financial assets or liabilities

Measure at

Fair Value

If <=12 months, then at Invoice amount (drs, crs)

If >12 months, then discount at present value of time

Fair Value

Transaction costs (eg.brokerage)

Charged to P&L

 

+ / - to cost (depending upon asset or liability)

 

B. Subsequent measurement (At the date of balance sheet). Read the below table column-wise

What is amortized cost? 

US parlance which means (opening balance + interest accrued – payment made). It is already followed here, for instance, car loan schedule starts with opening balance added with interest computed and deduct the repayment.

 

ST receivables

FVTPL

HTM

Loans & rec’bls

AFS

a.k.a

 

Short term trade

Long term debt

Unlisted debt

Long term equity

 

 

 

These 3 were under the residuary/others category at the time of initial recognition

Subsequent measurement at

Invoice amount

Fair Value

Amortized cost

Amortized cost

Read Note below

FV changes

No impact in P&L as recorded at invoice amt even initially

Recognize in P&L

No accounting for fair value changes, only the interest accounted in P&L

Fair value changes are not applicable since they are unquoted, only the interest accounted in P&L

Recognise in other comprehensive income (OCI) *

 

Note: For AFS category, the FV may be ascertainable (listed equity) or not readily available (unlisted equity). For those which are ascertainable, carry at FV (readily available) and for others at cost.     

*OCI is a statement required under IFRS which consists of items such as revaluation gain/loss appear.  This appears below the regular Profit and loss account.  Whereas presently, until the convergence with IFRS happens, the FV changes should be shown as a part of equity in schedules to balance sheet.

Conclusion:

Based on the feedback received, I shall develop the interest of covering the other areas in these standards in my future tasks.

Thanks for reading and your comments, queries and suggestions are welcome!!

fahim.haniffa@yahoo.com

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