1st day  dicussion is really gud yar. Sir clearly explained all concepts. Its really useful. Tanx a lot yar.

thanks vidya

Dear frnds 



TO day we are havin discussion at same time i.e. (  5  -   5   -   20009 )

 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

      www.investorguide,com

      https://www.optionseducation.org/basics/whatis/default.jsp

      www.businessdictionery.com

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

Friends,

The above extract has been taken from the yesterday's discussion for those who could not participate. This will help new students/members to join the continuation today.

I hope i could make the concept clear. I need your feedback to improve the session. Kidnly keep me posted at srini.ca @ gmail.com

Thanks

 yeh thnx. vidya...!!!

Its really a innovative and creative thing.... thanks for sharing...

A GREAT WORK DONE BY CA SRINIVASAN N.   THANK YOU FOR SHARING KNOWLEDGE A

 we discussed the background behind AS 30  and the collapse of corporate giants  due to various financial instruments and the agreed AS30 tries to bring in the Fair Value concept for the recognition of Financial instruments and covers maximum assets and liabilities  in the Balance sheet  hence all the corporates are going to be affected with this standard including banks 

The new standard is applicable from 1.4.2011  for few companies  and then as usual will be extended  for those who are unaware it is predominantly a copy of IAS 39  and hence will be the same once we converge to IFRS

 We then discussed the definitions  mainly of Derivatives

 Nature of forward contracts and then Options

  Now today we will go further deep into the standard

My agenda for today will be

  Then we will discuss the  initial recognition criteria and Subsequent recognition criteria

Now first the definition of Financial Instruments:

  Financial Instrument is any contract  that gives rise to a financial asset of one entity  and a financial liability or equity instrument of another entity

  Here the definition is inclusive  which covers all the instruments having two effects, it will thus cover both sides of the transaction  an option Holder  as well as Option writer

  A financial asset is any asset that is:

(a) cash;

(b) an equity instrument of another entity;

(c) a contractual right:

        (i) to receive cash or another financial asset from another entity; or

        (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity; or

(d) a contract that will or may be settled in the entity’s own equity instruments and is:

        (i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or

       (ii) A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments. Page10

  Please read the above

This is again an inclusive definition  and has many elements

(a) cash;



The first one is CASH which all of you are aware



 can anyone argue why Cash is a financial asset  Ultimately it is the final money value

nishant Capabable to generate cash and its equivalent independently

 Yes but CASH itself is cash

 Let me explain in AS language

              Currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognized in financial statements. A deposit of cash with a bank or similar financial institution is a financial asset because it represents the contractual right of the depositor to obtain cash from the institution or to draw a cheque or similar instrument against the balance in favour of a creditor in payment of a financial liability.

 AS is very clear on this and the purpose is also well stated

 

Now going to the next item

 (b) An equity instrument of another entity;

 Its the investment in equity of other entity thats also covered here

 Examples of equity instruments include non-puttable equity shares,

some types of preference shares (see paragraphs 38 and 39) and warrants or written call options that allow the holder to subscribe for or purchase a fixed number of non-puttable equity shares in the issuing entity in exchange for a fixed amount of cash or another financial asset.

 

this is from AS



 Moving to the next one

 (c) a contractual right:

            (i) to receive cash or another financial asset from another entity; or

            (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity

 

can you ppl think of one common example here of this element

 Common examples of financial assets representing a contractual right to receive cash in the future and corresponding financial liabilities representing a contractual obligation to deliver cash in the future are:

(a) trade accounts receivable and payable;

(b) bills receivable and payable;

(c) loans receivable and payable;

(d) bonds receivable and payable; and

(e) deposits and advances. In each case, one party’s contractual right to receive (or obligation to pay) cash is matched by the other party’s corresponding obligation to pay (or right to receive).

 nishant what is diff between financial asset and f. instrument

 Financial instrument is a Contract  like options ,derivatives

 Financial assets are non derivatives in general

nishant what is non-puttable equity shares

 even i am little unclear on that word  it denotes irredemable  i guess

ravi demblani financial asset n financial instrument r same??

ravi demblani sir, i m unlcear on financial asset?

 Puttable" denotes an embedded put option; "Puttable" denotes that it may be putted.

 so it means  there will not be any Put option right  which again explains the non derivative characteristic

 Ravi The main difference is that Financial Instrument is a contract of a derivative nature

Nishant do u meant that puttable u cannot offer to sale .. is that ?

  no i mean an option to sale Suppose i hold Shares of Company A and they are puttable it will mean that they are derivatives and the provisions to recognize will change.

Nishant Financial Instrument is a legal agreement involving some sort of monetary value

 nishant and f. asset is non-physical asset, such as a security, certificate, or bank balance. Opposite of non-financial asset.

   The definition of a financial instrument also encompasses a contract that gives rise to a non-financial asset or non-financial liability in addition to a financial asset or financial liability

  For example, an oil-linked bond may give the holder the right to receive a stream of fixed periodic interest payments and a fixed amount of cash on maturity, with the option to exchange the principal amount for a fixed quantity of oil

 

  i was elaboating on the third part

  where there is a contractual right these will include

  Common examples of financial assets representing a contractual right to receive cash in the future and corresponding financial liabilities representing a contractual obligation to deliver cash in the future are:

(a) trade accounts receivable and payable;

(b) bills receivable and payable;

(c) loans receivable and payable;

(d) bonds receivable and payable; and

(e) deposits and advances. In each case, one party’s contractual right to receive (or obligation to pay) cash is matched by the other party’s corresponding obligation to pay (or right to receive).

nishant in easy words can we say its just a inter a/c adjustments . which are real .. and can be done

  For example, a promissory note payable in government bonds gives the holder the contractual right to receive and the issuer the contractual obligation to deliver government bonds, not cash. The bonds are financial assets because they represent obligations of the issuing government to pay cash  and

  The promissory note is, therefore, a financial asset of the promissory note holder and a financial liability of the promissory note issuer.

  so this covers the 2nd clause of Clause C above

  contractual right to exchange financial asset or liability other than cash

 Now the last point where the Financial assets of the nature of Contract which get settled into the equity instruments this will include redeemable pref shares

 

 nishant sir can u gv an example for " contractual right to exchange financial asset or liability other than cash"

         we discussed that promissory note remember

       

 the one where bind was consderation Bond

 nishant but the word other than cash is like .. exhaustive area

  thats the good example of these rights absolutely

 nishant what is the ultimate aim for all this??

 

    Ultimate AIM  is to protect the Financials but will always take a long time to implement

 nishant ok like there is a recievable in my a/c for Mr. x

   nishant also Mr. x has payable in his a/c in my name

  

my next session focus will be on that

 nishant ssoo we can inter adjust as per what u said

  

nishant "inbuilt " can u go in deep a bit  

  That is it should be mentioned in the sale agreement

 nishant also send me the link so that i can take on my own now onwards

 nishant I mean .. if we are in to diff sale .. y we should consider that balaces

  Correct but there should be mutual agreement  at the inception or else how will you value it at the accounting period in general there is no issue in this and it may not be a good example of the second part as it is an eventuality for you to adjust to avoid some hassles

 nishant no y i am saying this .. How will u trace. a person performing all this



it is not a right by itself  See the AS says that there are 2 types

  and second where it is not in Cash

  So your example is an eventual understanding between the parties

  it was not you rplan to adjust in the inception

   so it doesnt fit into the second category thats my view

 nishant Y sir .. If I already have in, my debtors as Mr. X say rs 1000.. And I am again purchasin some materils from him Y sholud I pay to him ...

 But you agreed for sale to X for Cash

 right so it was in the first category

 nishant ya .. I wll show as sale .. but will not gv in cash na

  u r right but the classification is not that way

 nishant i will deduct the balance from mr .x like 1000-200 now 800

 nishant so as per this AS how will u preset tis

 nishant No .. I just want .. how will u present this as per AS

  we have to take the first one as fInancial asset

 nishant the above kind of transcation which normally happens .. everywhere

 nishant the above kind of transcation which normally happens .. everywhere

  and the second one as  financial liability

 we cant adjust without a contractual right

Nishant : so u will say .. that 1000 is my f.liablity say creditors

nishant sorry it will be 200 na

this is second day's discussion 



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GOOD MOVE !!!! CONGRATS AND THANKS!!!

 thanks sudhir sir 

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