> Ind AS 109 - Financial Instruments
This Ind AS contains requirements for recognition and measurement. The standards cover all types of financial instruments, including receivables, payables, investments in bonds and shares, borrowings and derivatives. They also apply to certain contracts to buy or sell non-financial assets (such as commodities) that can be net-settled in cash or another financial instrument.
The key concepts of classification, measurement and recognition for financial instruments are discussed in this section.
Nature and characteristics of financial instruments - Financial instruments include a wide range of assets and liabilities, such as trade debtors, trade creditors, loans, finance lease receivables and derivatives.
Embedded derivatives in host contracts - Ind AS 109 specifically prohibits bifurcation of embedded derivatives for financial assets. Embedded derivatives in relation to financial liabilities, that are not ‘closely related’ to the rest of the contract, are separated and accounted for as stand-alone derivatives. Analysing contracts for potential embedded derivatives is one of the more challenging aspects of Ind AS 109.
Classification and measurement of financial instruments - All financial assets and liabilities are measured initially at fair value under Ind AS 109. The fair value of a financial instrument is normally the transaction price, that is, the fair value of the consideration given or received. The way financial instruments are classified under Ind AS 109 drives how they are subsequently measured and where measurement changes are accounted for.
Impairment - Ind AS 109 outlines a three-stage model (general model) for impairment based on changes in credit quality since initial recognition.
Stage 1 includes financial instruments that have not had a significant increase in credit risk since the initial recognition or have low credit risk at the reporting date.
Stage 2 includes financial instruments that have had a significant increase in credit risk since the initial recognition but that do not have objective evidence of impairment.
Stage 3 includes financial assets that have objective evidence of impairment at the reporting date.