The Indian Accounting Standards (Ind AS) framework notified by the Ministry of Corporate Affairs (MCA) in 2015 includes three standards on financial instruments, Ind AS 109, Financial Instruments, Ind AS 32, Financial Instruments: Presentation, and Ind AS 107, Financial Instruments: Disclosures. The guidance provided in these standards is extensive and often complex in nature, requiring significant interpretation and exercise of judgement. The publication highlights some of the practical issues that Indian companies may face in implementing this guidance.

In order to determine the applicability of the financial instruments standards, companies need to identify the items that fall within their scope. The publication includes case studies which assess the applicability of these standards to guarantee contracts and certain contracts for purchase or sale of non-financial items.

Companies often transact in derivatives to mitigate their exposure to various financial risks in an increasingly complex business environment. The case studies on embedded derivatives, put options written on non-controlling interests and the application of hedge accounting principles illustrate the impact that derivative transactions may have on a company’s financial statements.

Ind AS requires an issuer of financial instruments to classify them as equity or a financial liability based on the substance of their contractual terms. As a result, some instruments that were previously classified as equity may be considered as a financial liability under Ind AS, or vice versa. The case studies in the publication highlight various practical issues relating to the classification of preference shares by the issuer.

This publication also includes case studies that highlight the principles relating to recognition and derecognition of financial instruments, covering transactions such as interest-free loans, factoring arrangements and restructuring of loans.

Ind AS 109 requires companies to assess impairment of financial assets based on an ‘expected loss model’. This publication highlights the application of a simplified approach to assessing impairment of trade receivables with the help of a case study.

Companies that have transitioned to Ind AS from the financial year 2016-17 onwards may face challenges in compiling the extensive disclosures relating to financial instruments that are required to be presented in their first annual Ind AS financial statements. The publication includes some Frequently Asked Questions (FAQs) on the methods and techniques that may be used in preparing these disclosures.