Financial Instruments and Liabilities (Ind AS 32, 107, 109, 113)
Ind AS 32, 107, 109 and 113 decide whether an instrument is debt or equity, how it is measured and how fair value is established.
Core rules
- Ind AS 32: a financial liability contains a contractual obligation to deliver cash or another financial asset; equity has no such obligation. Puttable instruments and contingent settlement provisions need careful analysis.
- Compound instruments are split into liability and equity components at issuance using a market rate for a similar non-convertible instrument.
- Ind AS 109 classification: amortised cost if hold-to-collect business model and SPPI; FVOCI if hold-to-collect-and-sell or SPPI equity election; otherwise FVTPL. Transaction costs are expensed for FVTPL.
- Expected credit losses use probability of default, loss given default and exposure at default, with forward-looking information.
- Ind AS 113: fair value is an exit price between market participants at the measurement date; use market, income or cost approach and the three-level hierarchy.
Worked example
A loan of ₹1,000 has a 12-month PD of 1% and LGD of 45%. ECL = 1,000 × 1% × 45% = ₹4.5. If the loan is credit-impaired, interest income is recognised on the gross carrying amount net of the loss allowance.
Traps
- Classifying convertible debentures wholly as equity.
- Including equity transaction costs in the liability component.
- Recognising day-one gains on unobservable inputs without criteria.
- Using 12-month ECL for a credit-impaired asset.