Urgent as 30 help

The Accounting Standards Board of the Institute of Chartered 
Accountant of India, which sets the standard for the country, has 
formulated two new Standards on Financial Instruments — AS 30 
(Financial Instruments: Recognition and Measurement) and AS 31 
(Financial Instruments: Presentation). These standards were placed 
in public domain as exposure drafts for comments up to March 31, 
2007 and are now being finalised. While AS 30 is the equivalent of 
International Accounting Standard IAS 39, AS 31 corresponds to IAS 
32. 

Features of AS 30 

The AS 30 is a complex standard and its main objective is to 
establish principles for recognising and measuring financial 
instruments whose definition encompass most items of financial 
assets, financial liabilities in an entity's balance sheet. The 
introduction of this Standard is likely to affect almost all items 
in a corporate/bank balance sheet. It deals with recognition/de-
recognition and measurement of financial instruments as also 
derivatives and hedge accounting. 

AS 30 uses a mixed measurement model. Some assets and liabilities 
are valued at Fair Value and others on cost basis. The concept of 
fair value is central to the standard as also the concept of 
symmetry. Fair value is the amount for which an asset could be 
exchanged or a liability settled between knowledgeable willing 
parties in an arm's length transaction. The standard stipulates 
measurement of assets and liabilities at fair value unless otherwise 
stated. Rationale for fair value stems from the fact that for 
financial instruments the most relevant information is the amount 
that could be realised from disposal. Subsequent measurement of 
financial assets depends upon their classification at initial 
recognition into any of the four categories. 

Financial assets at fair value through P&L (held for trading) 

Held to maturity investments 

Loans and receivables 

Available for sale financial assets 

Subsequent measurement of financial liabilities classified under 
fair value through P&L is at fair value and the resulting 
gains/losses are recognised in the statement of profit and loss. All 
other financial liabilities are to be measured at amortised cost 
using the effective interest method. 

The standard also stipulates restrictions on reclassification 
between categories. No reclassification of a financial instrument 
into or out of the category fair value through profit and loss is 
permitted. The standard however prescribes certain exceptional 
circumstances under which reclassification between `held to 
maturity' and `available for sale' categories are permitted. 

The requirements regarding impairment and uncollectability of 
financial assets constitute an important and significant part of AS 
30. Conceptually at each balance sheet date, an entity should assess 
whether there is any objective evidence that a financial asset or 
group of financial assets is impaired and if so it should determine 
the amount of impairment loss and provide for the same. 

Asset is defined as a resource controlled by an entity having future 
economic benefit. Two key ingredients in this definition are 
resource controlled by an entity and future economic benefit 
associated with it. If the entity loses control or future economic 
benefit ceases, there is impairment and it has to be provided. These 
areas will have significant impact on the financial statements of 
banks, since they are currently following 90-day delinquency norms 
for recognition of NPAs and provisioning. 

The standard also stipulates the criteria to qualify for hedge 
accounting and the recognition and measurement of gains and losses 
for different types of hedging relationships such as fair value 
hedges, cash flow hedges and hedge of a net investment in a non-
integral foreign operation. Derivatives will be recorded on the 
balance sheet at fair values and changes in their fair values will 
be reflected in the profit & loss account unless stringent hedge 
accounting criteria are satisfied. 


Challenges 

Change in accounting ushered in by the standard can substantially 
affect the operation of entities. The implementation of AS 30 has 
the potential to accentuate earnings volatility especially since 
hedge accounting has been defined very rigorously under the 
framework and derivatives that do not qualify as hedges will have to 
be marked to market and resultant gains or losses will have to be 
routed through the profit & loss account. 

Resorting to fair value measurement would pose a serious challenge 
in the valuation of financial instruments underpinning the need to 
develop skills for valuation among accountants, finance 
professionals and prepare for greater level of transparency through 
enhanced disclosure requirements and documentation needs prescribed 
by the standard. 

Appropriate Board oversight and involvement of senior management 
would be a pre-requisite for the smooth adoption. Further, there is 
a need to revamp the MIS and technology capabilities of the entities 
that have to comply with AS 30 for which significant initial 
investment would have to be earmarked. Migration to fair value 
accounting has its own challenges but at the same time it brings in 
enormous amount of opportunities for Indian corporates and financial 
institutions especially in the context of greater integration of our 
markets with international markets. 

The author is general manager with RBI. Views expressed in the 
article are personal