Financial instruments are contracts that give rise to a financial asset in one entity and a financial liability or equity instrument in another entity. They encompass a broad range of financial assets and liabilities, such as cash, trade receivables, loans, bonds, derivatives, and equity instruments. These instruments represent a key aspect of an entity’s financial activities and can include both basic and complex arrangements.
Indian Accounting Standard (Ind AS) 109, “Financial Instruments,” prescribes the principles for recognition, classification, measurement, and derecognition of financial instruments. It sets out guidelines for how entities should account for financial instruments in their financial statements. Ind AS 109 covers various aspects, including:
Classification: Financial instruments are categorized into financial assets, financial liabilities, and equity instruments. Classification depends on the contractual cash flow characteristics of the instrument and the business model in which it is held.
Measurement: Financial instruments are subsequently measured at amortized cost, fair value through other comprehensive income (FVOCI), or fair value through profit or loss (FVTPL). The measurement depends on the classification and whether certain conditions are met.
Impairment: The standard introduces the expected credit loss (ECL) model, requiring entities to recognize impairment provisions for expected credit losses on financial assets. This addresses the potential future credit losses even before they are incurred.
Hedge Accounting: Ind AS 109 provides guidance on hedge accounting, allowing entities to mitigate the impact of volatility in the financial statements arising from changes in fair values of hedged items and hedging instruments.
Derecognition: The standard outlines the criteria for derecognizing financial assets and financial liabilities and provides guidelines for assessing whether control has been transferred.
