Indian accounting standard Financial instruments-Disclosures 32

Concepts:

• Introduction• Applicability• Manner to disclose• Objective• Scope• Disclosure requirements • Comparison

• In recent years, the techniques used by entities for measuring and managing exposure to risks arising from financial instrument have evolved and new risk management concepts and approaches have gained acceptance. The user of financial statements needs information about an entity’s exposure to risks and how those risks are managed. Such information can influence a user’s assessment of the financial position and financial performance of an entity or of the amount, timing and uncertainty of future cash flows.

Introduction

AS-32 provides that the disclosure as required may either on the face of the balance sheet or through the notes to accounts. Generally the practice followed is through the notes to the accounts.

Manner of disclosure

The objective of this Standard is to require entities to provide disclosures in their financial statements that enable users to understand:

• The significance of financial instruments for the entity’s financial position and performance.

• The nature and extent of risk arising from the financial instruments to which the entity’s is exposed: and how to entity manages those risks.

Objective

• 1. This Standard should apply to all Recognized financial instruments. Financial Instruments include Financial Assets and Financial Liabilities that within the scope of AS-30.

• 2. This Standard should not apply to all Unrecognized

financial instruments that, although outside the scope of AS-30.

Scope

An entity should disclose information that enables users of its financial statement to evaluate the significance of financial instrument for its financial position and performance.

Significance of Financial Instruments for Financial Position and Disclosure

Disclosure requirements for financial instrumentsAS-32 prescribes the disclosures requirements for: -

• Different categories of financial assets• Different categories of financial liabilities • Re-classification of financial assets• De-recognition financial assets and financial liabilities• Financial assets pledged or held as collateral• Allowances for credit losses• Compound financial instruments with multiple

embedded derivatives• Defaults and breaches for loan payable• Income, expense, gains or losses recognized in profit

and loss account• Accounting policies followed• Hedge accounting• Fair value determination for financial assets and

financial liabilities • Risk disclosures

Disclosure for financial assets: -

• As defined in AS 30. Should be disclosed either on the face of the balance sheet or in the notes:

• Financial assets at fair value through profit or loss, showing separately;

• Held-to maturity investments;• Loans and receivables;• Available – for-sale financial assets;

Disclosure for financial liabilities: -

• Entity should disclose the following financial liabilities at fair value through profit and loss account:

• Change in fair value of a financial liability, during the period and changes that give rise to market risk.

• Changes in market condition that give to market risk include changes in benchmark interest rate,

(The entity should disclose the carrying amount of the financial liabilities measured at Amortize cost)

Disclosure for Re-classification: -

• If the entity has reclassified a financial asset as one measured:

• At cost or amortize cost, rather than at fair value; or• At fair value, rather than at cost or amortize cost, it

should disclose the amount re-classified into and out of each category and the reason for that re-classification.

Disclosure for De-recognition: -

An entity may have transferred financial assets in such a way that party or all of them do not qualify for de-recognition.

The entity should disclose:• The nature of the financial assets;• The nature of the risks and rewards of

ownership to which the entity remains exposed;

Disclosure for collateral: -

• Collateral given: Disclosure of the carrying amount is required in

addition to the term and conditions of financial assets pledged as collateral;

• Collateral taken: An entity must disclose the fair value and terms

and conditions of assets received as collateral. Which it has a right to sell or re-pledged in the absence of default;

Disclosure for Allowance account for credit losses: -

When financial assets are impaired by credit losses and the entity records the impairment in a separate account ,rather than directly reducing the caring amount of the assets, it should disclose a reconciliation of changes in that account during the period for each class of financial assets.

Disclosure for Compound financial instruments with multiple embedded derivatives: -

• If an entity has issued an instrument that contains both a liability and equity component and the instrument have multiple embedded derivatives whose values are independent (such as a callable convertible debt instrument), it should disclose the existence of those features.

Disclosure for Defaults and Breaches: -

For loans payable recognized at the reporting date and entity should disclose:

• Details of any defaults during the period of principal. Interest, sinking fund, or redemption terms of those loans payable;

• The carrying amount of the loans payable in default at the reporting date;

Disclosure for income, expense, gains or losses recognized in profit and loss account: -

An entity should disclose the following items of income, gains, or losses either on the face of the financial statements or in the notes:

• Net gains or losses for each category of financial asset or financial liability.

• Available for sale gains or losses recognized in equity,• Total interest income and total interest expense from financial

asset and financial liabilities that ate both measured at fair value through profit or loss.

• Fee income and expense (other than the one considered for effective interest rate purposes) for financial assets and financial liabilities not measured at fair value through profit or loss.

• Fee income and expense from trust and other fiduciary activities

• Interest accrued on impaired financial assets• Impairment losses for each category of financial assets.

Disclosure for hedge accounting: -

An entity should disclosure the foll separately for each type of hedge described in AS-30:

• A description of each type of hedge;• A description of the financial instrument

designated as hedging instrument and their fair values at the reporting date; and

• The nature of the risks being hedged.

Disclosure for Fair value determination for financial assets and financial liabilities: -

• Whether the fair value is based on valuation techniques

• Whether the fair value is based on a valuation technique that includes assumptions not supported by market prices or rates and the amount of profit recognized.

• The effect of reasonable possible alternative assumption used in a valuation technique.

Risk disclosure: -

(An entity should disclose information that enables user of its financial statement to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date)

Typically there are 3 risks arise from financial instrument:

• Credit risk• Liquidity risk• Market risk

• Credit risk- The risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

The risk that a change in the credit quality whereby a counter party is unwilling or unable to fulfill its contractual obligation.

• Liquidity risk- The risk that entity will encounter difficulty in meeting obligation associated with financial liabilities. In other words it may not have required cash or cash equivalent to meet its financial obligation resulting in default.

 • The market risk- The risk that the fair value or

future cash flows of a financial instrument will fluctuate because of changes in market prices.

Market risk comprises 3 types of risk:

• Currency risk- The risk the fair value or future cash flows of financial instrument will fluctuate because of changes in foreign exchange rates.

• Interest rate risk- The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

• Other price risk- The risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate or currency risk).

Comparison with IFRS

This standard is based on International Financial Reporting Standard (IFRS)-7, Financial Instrument: Discloser issued by International Accounting Board (IASB). There is no material difference between AS-32 and IFRS-7.