1st day dicussion is really gud yar. Sir clearly explained all concepts. Its really useful. Tanx a lot yar.
Rajalakshmi
(Student)
(437 Points)
Replied 04 May 2009
1st day dicussion is really gud yar. Sir clearly explained all concepts. Its really useful. Tanx a lot yar.
CMA KNVV Sri Vidya - Sri Kanth
(C.A.Final (New) ICWAI FINAL (New))
(11269 Points)
Replied 05 May 2009
Dear frnds
TO day we are havin discussion at same time i.e. ( 5 - 5 - 20009 )
CMA KNVV Sri Vidya - Sri Kanth
(C.A.Final (New) ICWAI FINAL (New))
(11269 Points)
Replied 05 May 2009
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
CA CS CMA Srinivasan N
(ACA, ACS, CWA Inter)
(1172 Points)
Replied 05 May 2009
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
CA Anand Shukla
(CA)
(33 Points)
Replied 05 May 2009
Its really a innovative and creative thing.... thanks for sharing...
Late CA Sampat Jain
(Chartered Accountant)
(4772 Points)
Replied 06 May 2009
A GREAT WORK DONE BY CA SRINIVASAN N. THANK YOU FOR SHARING KNOWLEDGE A
CMA KNVV Sri Vidya - Sri Kanth
(C.A.Final (New) ICWAI FINAL (New))
(11269 Points)
Replied 06 May 2009
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
CMA KNVV Sri Vidya - Sri Kanth
(C.A.Final (New) ICWAI FINAL (New))
(11269 Points)
Replied 06 May 2009
this is second day's discussion
for the frnds who missed the discussion
CA Sudhir Halakhandi
(PRACTICING CHARTERED ACCOUNTANT)
(13401 Points)
Replied 07 May 2009
GOOD MOVE !!!! CONGRATS AND THANKS!!!
CMA KNVV Sri Vidya - Sri Kanth
(C.A.Final (New) ICWAI FINAL (New))
(11269 Points)
Replied 07 May 2009
thanks sudhir sir
CMA KNVV Sri Vidya - Sri Kanth
(C.A.Final (New) ICWAI FINAL (New))
(11269 Points)
Replied 07 May 2009
Check the attached file of Advance Ruling in Question-Answer Format for CA Final.
Go through this address
https://www.caclubindia.com/forum/message_display.asp?group_id=32709
CMA KNVV Sri Vidya - Sri Kanth
(C.A.Final (New) ICWAI FINAL (New))
(11269 Points)
Replied 07 May 2009
Latest Case Law in Direct and Indirect Tax Law.
go through this addresss
https://www.caclubindia.com/forum/message_display.asp?group_id=32708
CMA KNVV Sri Vidya - Sri Kanth
(C.A.Final (New) ICWAI FINAL (New))
(11269 Points)
Replied 07 May 2009
Dear frnds find the attachment for latest amendments by srbhi bansal
Go through this address
https://www.caclubindia.com/forum/message_display.asp?group_id=32591
LIVE Course on Foreign Exchange Management Act (FEMA)(with recording)
LIVE Course on Foreign Exchange Management Act (FEMA)(without recording)