Accounting Standard 30 deals with the Measurement and recognition of the
Financial Instruments .
This is an important subject in today's scenario where predominant markets have collapsed and many companies are down the drain
It covers all the financial instruments in the balance sheet and also some non financial assets/liabilities like the Loans/Receivables and sets up guidelines for valuation and accounting.
The framework of AS has been predominantly copied from IAS 39 under IFRS and considering the convergence from 2011 to IFRS this is a very important standard
Now coming to the Background
It has been years since Shares/Derivatives etc have reached the common man and the impact of these instruments are still very high in the society at large infact until recession.
When the markets were in huge upturn many people joined the markets leaving out other money making games like Horse races etc Thus there was a growth and simultaneously new conceots getting introduced. The stakes became bigger imagine a person dealing on a Bundle which can include a thousand shares per bundle and the prices are speculated and agreed at a specific price and for delivery at a specific date so how are we accountants to estimate the losses it was really a great challenge and in the process we lost many control issues
the failures have resulted in the great recession now you will all know the sub prime crisis where the House Loans of the not so credit worthy people were divided into pieces by investment banks and were sold a with an attractive name as a hedging instrument having a return these were called the CDO's Collateralized Debt Obligations.
These were potential bomb shells but no one realised and had put the money now when the time came to collect the principal loan from Borrower all lifted their hands and banks landed into trouble. Entire Lehman brothers were wiped off .
An investment banker with a Merchant came to street so pretty dore consequences hence the focus is now bigger and stronger on this AS
nishant market was good , everybody was investing his money more money more return more growth ????
but nobody examined, the worth of the instrument, nobody knew ,that they were indirectly financing the Bank loan Housing loan
nishant u mean to say ... no body was recognsin the loss
thats where the FAIR VALUE concept is important and is discussed in AS
nishant bt that comes to our basis A/cting standard to recongnise loss
for Hedeg accounting
and other complex instruments
where the nature changes every day
How will you know the Loss in case of a CDO .you will never know it is a chain of so many people after you ,who have to pay First the Borrower ,then the Prime lender then the Investment bank then some more agents then the final investor .
Now how do u expect an investor to calculate this risk thats the whole point and a great challenge for accountants
Now i will start with the Segments of the AS and applicability
This AS has been made applicable from 1.4.2011 and is applicable for select entities
initially as usual
you may read the exact contents in AS in any case we are under purview of IFRS
and we will be required to comply with this
Now the segments of AS
Whether u have read or not its a 241 page standard thats the biggest in ALL AS we have so far
It has following segments
Fair Value Concept ,Valuation Criteria for Financial Assets and Financial Liabilities
Initial Recognition and subsequent recognition
Issues of classification and reclassififcation
Hedge Accounting
Various illustrations and the accoutning criteria
we must understand the definitions clearly
and do some study on these difinitons
I will be giving you some sites
and you must read the concepts
Now coming to the Definitions
first and foremost of the Fair Value
Fair Value means the amount for which an asset could be exchanged or liability settled between knowledgeable parties and willing parties in an Arms length transaction
now the important points are
and the Arms length transaction
The value should represent the above criterias and should satisfy the Arms length basis
lets try for an example here
When a person sells product A at Rs 10 to a known buyer and then a person sells the same product to other buyer at 12 now here if we examine
the cosideration is there ,Willingness is there but the Knowledge and Arms length pricing is missing
In that case the Fair value has to be taken at Rs.12 considering the bias in first case but we have to assume that the second buyer has market knowledge
Thus we establish a fair value i have taken a very small example
however it is complex in the markets
Now moving on to derivatives
Derivative as you know is a Financial Instrument the value of which changes
or depends on an underlying factor
this can be interest Rate
Credit rating
etc and is settled at a specific future date .
Derivatives have ruled the markets since its inception as the stakes are higher and also there is an option for players in the market to take their chances
Now the best example of Derivative is a Forward Contract and options
as we all know a Forward Contract is entered into for the sale of currencies/ bullions/ commodities at a specified future date at an agreed price
Now the value of the forward contract is not known at the present date as the exchange rates not predictable and the underlying value depend on the fluctuations if the rate is higher then there is a loss for the exporter and vice versa
Options is an very interesting subject and is vast too as some of you may know Option is derivative with the flavour of delight on both parties that is the issuer and the purchaser.
An option is a contract to buy or sell a specific financial product officially known as the option's underlying instrument or underlying interest. For equity options, the underlying instrument is a stock, exchange-traded fund (ETF), or similar product. T
This is the official definition it means that there is a contract for buying or selling an underlying asset or the interest with the option.
The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised, or acted on. And it has an expiration date. When an option expires, it no longer has value and no longer exists.
Options come in two varieties, calls and puts, and you can buy or sell either type. You make those choices - whether to buy or sell and whether to choose a call or a put - based on what you want to achieve as an options investor.
Now the Option has three elements
Person A and person B enter into the options contract A agrees to buy shares of XYZ co at a price of Rs.240/- per share after one month let the date be 4th of June now here in the example
and Mr.B is the Writer of the option
Now how to know whether it is a call or put option
This is a call option as this is a contract for buying and of the contract is for selling it is a Put option
In the same example if A agrees to sell the shares at Rs.240/- at the agreed date then it becomes a put option
Now comes the question of premium
suppose the premium is Rs.10 Now if the Share market goes up and the price of the above share become Rs.265
Thsi position is called "in the money"
and the price of the above share become Rs.265
Thsi position is called "in the money"
Now imagine if the share price remains the same
What a particular options contract is worth to a buyer or seller is measured by how likely it is to meet their expectations. In the language of options, that's determined by whether or not the option is, or is likely to be, in-the-money or out-of-the-money at expiration. A call option is in-the-money if the current market value of the underlying stock is above the exercise price of the option, and out-of-the-money if the stock is below the exercise price. A put option is in-the-money if the current market value of the underlying stock is below the exercise price and out-of-the-money if it is above it. If an option is not in-the-money at expiration, the option is assumed to be worthless.
now suppose as per my expectation market goes to 260/-
then my net gain is Rs.20 minus Rs.10 so we are in the money
if there is a situation where the price is Rs.250 or less
https://www.optionseducation.org/basics/whatis/default.jsp
try www.investorwords.com also
aarey i hve a powerfull Tag prefixxed to my name na ., as C.A
then select "Settlement Mechanism" to knw how the principles we learn in MAFA are practically implemented
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