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All Accounting Standard at a Glance (III)


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AS-25 — INTERIM FINANCIAL REPORTING

        Accounting Standard (AS)-25, ‘Interim Financial Reporting’, issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2002. If an enterprise is required to prepare and present an interim financial report, it should comply with this Standard.

         The objective of this Statement is to prescribe the minimum content of an interim financial report and to prescribe the principles for recognition and measurement in a complete or condensed financial statements for an interim period. Timely and reliable interim financial reporting improves the ability of investors, creditors, and others to understand an enterprise’s capacity to generate earnings and cash flows, its financial condition and liquidity.

        Interim period is a financial reporting period shorter than a full financial year. Interim financial report means a financial report containing either a complete set of financial statements or a set of condensed financial statements (as described in this Statement) for an interim period.

        An interim financial report should include, at a minimum, the following components

(A) condensed balance sheet;

(B)  condensed statement of profit and loss;

(C) condensed cash flow statement; and

(D)  selected explanatory notes.

        An enterprise should include the following information, as a minimum, in the notes to its interim financial statements, if material and if not disclosed elsewhere in the interim financial report:

(a)  a statement that the same accounting policies are followed in the interim financial statements as those followed in the most recent annual financial statements or, if those policies have been changed, a description of the nature and effect of the change;

(b)  explanatory comments about the seasonality of interim operations;

(c)    the nature and amount of items affecting assets, liabilities, equity, net income, or cash flows that are unusual because of their nature, size, or incidence, net profit or loss for the period, prior period items and changes in accounting policies);

(d)  the nature and amount of changes in estimates of amounts reported in prior interim periods of the current financial year orchanges in estimates of amounts reported in prior financial years, if those changes have a material effect in the current interim period;

(e)  issuances, buy-backs, repayments and restructuring of debt, equity and potential equity shares; (f) dividends, aggregate or per share (in absolute or percentage terms), separately for equity shares and other shares;


(f)  segment revenue, segment capital employed (segment assets minus segment liabilities) and segment result for business segments or geographical segments, whichever is the enterprise’s primary basis of segment reporting (disclosure of segment information is required in an enterprise’s interim financial report only if the enterprise is required, in terms of AS-17, Segment Reporting, to disclose segment information in its annual financial statements);

(g)  the effect of changes in the composition of the enterprise during the interim period, such as amalgamations, acquisition or disposal of subsidiaries and long-term investments, restructurings, and discontinuing operations; and

(h)  material changes in contingent liabilities since the last annual balance sheet date.

        Interim reports should include interim financial statements (condensed or complete) for periods as

(b)   balance sheet as of the end of the current interim period and a comparative balance sheet as of the end of the immediately preceding financial year;

(c)  statements of profit and loss for the current interim period and cumulatively for the current financial year to date, with comparative statements of profit and loss for the comparable interim periods (current and year-to-date) of the immediately preceding financial year;

(d)   cash flow statement cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year.

         An enterprise should apply the same accounting policies in its interim financial statements as are applied in its annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements. However, the frequency of an enterprise’s reporting (annual, half-yearly, or quarterly) should not affect the measurement of its annual results. To achieve that objective, measurements for interim reporting purposes should be made on a year-to-date basis.

        Users may refer four appendices attached to the Standard (which though not a part of the Standard) set out detailed illustrations explaining inter alia;

1.  Illustrative format of Condensed Balance Sheet, Condensed Profit and Loss Account, Condensed Cash Flows.

2.  Illustration of periods required to be presented.

3.  Examples of applying the recognition and measurement principles.

        Examples of use of estimates. _ It may be mentioned that the companies required to disclose quarterly results are not required to follow the disclosure-related requirements of the Standard. Thus presentation format is not mandatory. However, it is a normal practice to adopt the recognition and measurement principles.

AS-26 — INTANGIBLE ASSETS

        The Standard is applicable w.e.f. April 1, 2003, to enterprises that are listed companies and/or having turnover exceeding Rs. 50 crores. For all other enterprises these are applicable from April 1, 2004.

        This Standard should be applied by all enterprises in accounting for intangible assets, except intangible assets that are covered by another Accounting Standard; financial assets; mineral rights and expenditure on the exploration for, or development and extraction of minerals, oil, natural gas and similar non-regenerative resources; intangible assets arising in insurance enterprises from contracts with policyholders and expenditure in respect of termination benefits.

        Prominent concepts introduced/emphasised by the standard includes; An asset is a resource; (a) controlled by an enterprise as a result of past events; and (b) from which future economic benefits are expected to flow to the


enterprise. An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use.

        An acquired intangible asset is recognised if it is (a) identifiable, (b) controllable by enterprise, (c) where future benefit is expected and (d) cost of acquisition can be measured reliably.

        Expenditure incurred on internally generated intangible asset is expensed to the extent that it related to Research Phase.

        An intangible asset arising from development (or from the development phase of an internal project) should be recognised if, and only if, an enterprise can demonstrate all of the following:

2.  The technical feasibility of completing the intangible asset so that it will be available for use or sale;

3.  Its intention to complete the intangible asset and use or sell it;

4.  Its ability to use or sell the intangible asset;

5.  How the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;

6.  The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

7.  Its ability to measure the expenditure attributable to the intangible asset during its development reliably.

        The standard is supplemented with two appendix one of which covers exhaustive illustration on accounting of website development cost and software generated for internal use and other one covers various examples on application of various aspect of the standard.

AS-27 — FINANCIAL REPORTING OF INTERESTS IN JOINT VENTURES

 The standards defines what is a joint venture. Some of the important concepts includes; joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity.

 Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.

Proportionate consolidation is a method of accounting and reporting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer’s financial statements.

        The accounting treatments depends on the nature of joint venture which can be one of the three, i.e. Jointly Controlled Entity or Jointly Controlled Operations or Jointly Controlled Assets.

        In respect of its interests in jointly controlled operations, a venturer should recognise in its separate financial statements and consequently in its consolidated financial statements: (a) the assets that it controls and the


liabilities that it incurs; and (b) the expenses that it incurs and its share of the income that it earns from the joint venture.

 In respect of its interest in jointly controlled assets, a venturer should recognise, in its separate financial statements, and consequently in its consolidated financial statements: its share of the jointly controlled assets, classified according to the nature of the assets; any liabilities which it has incurred; its share of any liabilities incurred jointly with the other venturers in relation to the joint venture; any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture; and any expenses which it has incurred in respect of its interest in the joint venture.

        In respect of jointly controlled operations the accounting treatment depends upon whether it is to be accounted in stand-alone financial statements or consolidated financial statement. In case of standalone financial statements the investments are accounted at cost in accordance with AS-13 whereas in case of consolidated financial statements where these are prepared (or required to be prepared) the investment in joint venture is accounted using proportionate consolidation method unless these are subsidiaries in which case these are consolidated under AS-21.

AS-28 — IMPAIRMENT OF ASSETS

         This Standard should be applied in accounting for the impairment of all assets, other than: 1) Inventories (see AS-2, Valuation of Inventories); 2) Assets arising from construction contracts (see AS-7, Accounting for Construction Contracts); 3) Financial assets, including investments that are included in the scope of AS-13, Accounting for Investments; and 4) Deferred tax assets (see AS-22, Accounting for Taxes on Income). — Prominent concepts

introduced by the standards includes: An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Recoverable amount is the higher of an asset’s net selling price and its value in use. — Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. _ Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets.

 Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cash-generating units.

 At each balance sheet date it needs to be assessed as to whether there is triggering event that requires the impairment testing to be made. Triggering event shall be assessed based on external information like fall in interest rate or industry growth rate, change in law, etc., and internal information like forecasts, obsolescence, damage, etc. Where there is a triggering event the impairment loss needs to be assessed at the level of each Cash Generating Unit. Where all the assets of the enterprise are allocated to cash generating unit, only bottom-up testing method is applied and in case there is some portion of asset that is not allocated or corporate assets, then bottom-up testing method coupled with and followed by top-down testing method is applied.

 In measuring value in use the Standard specifies certain factors that needs to be considered in arriving the discount rate and cash flow projection.

        Discount rate shall be independent of capital structure of the enterprise or its incremental borrowing cost. As a starting point, the enterprise may take into account the following rates: the enterprise’s weighted average cost of capital determined using techniques such as the Capital Asset Pricing Model; the enterprise’s incremental borrowing rate; and other market borrowing rates. These rates are adjusted: to reflect the way that the market would assess the specific risks associated with the projected cash flows; and to exclude risks that are not relevant to the projected cash flows.


Consideration is given to risks such as country risk, currency risk, price risk and cash flow risk

        Cash flow projections should be based on reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the remaining useful life of the asset. Greater weight should be given to external evidence; cash flow projections should be based on the most recent financial budgets/forecasts that have been approved by management. Projections based on these budgets/forecasts should cover a maximum period of five years, unless a longer period can be justified; and cash flow projections beyond the period covered by the most recent budgets/forecasts should be estimated by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate should not exceed the long-term average growth rate for the products, industries, or country or countries in which the enterprise operates, or for the market in which the asset is used, unless a higher rate can be justified. Project cash flows shall not consider impact of future capital expenditure or restructuring unless these are committed.

        Reversal of impairment loss is allowed to an extent that would be additional carrying amount of asset had there be no-impairment.

However in case of reversal of impairment loss relating to goodwill additional condition needs to be satisfied.

        The detailed text of the standard spreads across 124 paragraphs and is supplemented with 8 examples (which are not part of the Standard). Users are expected to go through it in detail before applying the Standard.

AS-29 — PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

The Standard prescribes the accounting and disclosure for all provisions, contingent liabilities and contingent assets, except:

(a) Those resulting from financial instruments that are carried at fair value;

(b)   Those resulting from executory contracts, except where the contract is onerous. Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent;

(c)  Those arising in insurance entities from contracts with its policyholders; or

(d)  Those covered by another Standard.

Provisions

The Standard defines provisions as a liability which can be measured only by using a substantial degree of estimation. — A provision should be recognised when, and only when:

1.  (a) An entity has a present obligation (legal or constructive) as a result of a past event;

2.  (b) It is probable (i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and

3.  (c) A reliable estimate can be made of the amount of the obligation. The Standard notes that it is only in extremely rare cases that a reliable estimate will not be possible.

        The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.

        The provisions shall not be discounted.


        Gains from the expected disposal of assets should not be taken into account, even if the expected disposal is closely linked to the event giving rise to the provision.

         An entity may expect reimbursement of some or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers’ warranties). An entity should: (a) recognise a reimbursement when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognised for the reimbursement should not exceed the amount of the provision; and

(b)  recognise the reimbursement as a separate asset. In the income statement, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.

        Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision should be reversed. 

        A provision should be used only for expenditures for which the provision was originally recognised.

        Provisions should not be recognised for future operating losses. An expectation of future operating losses is an indication that certain assets of the operation may be impaired. In this case, an entity tests these assets for impairment under AS-28 Impairment of Assets.

        The Standard defines a restructuring as a programme that is planned and controlled by management, and materially changes either: (a) the scope of a business undertaken by an entity; or (b) the manner in which that business is conducted.

         A provision for restructuring costs is recognised only when the general recognition criteria for provisions are met.

Contingent Liabilities

The Standard defines a contingent liability as:

1.  (a) A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

(b) A present obligation that arises from past events but is not recognised because:

(i)   it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or 

(ii)  the amount of the obligation cannot be measured with sufficient reliability.

An entity should not recognise a contingent liability.

Summary of Companies (Accounting Standard) Rules, 2006

The rules are applicable to Companies whose accounting periods commence on or after December 7, 2006. The key features of the rules are;

   Codified, almost all the accounting standards, accounting standard interpretations and limited revision in one single document

  Reworded certain jorgons, like "Preface to Accounting Standards’ is now referred as "General Instructions",

  Introduced new definition on SME enterprices. (only 2 levels as against present practice of 3 levels)


AS 30, 31, & 32 — FINANCIAL INSTRUMENTS — NOT MANDATORY FOR YEAR ENDED MARCH 31, 2011

Applicability of AS 30, 31 and 32

These standards are not mandatory but earlier adoption is encouraged. It may be mentioned that it has not been adopted by NACAS and thus in case of a company an earlier adoption of these standards might not comply with certain standards like

AS-13 investment: A Company needs to consult accounting experts in such situation. Needless to mention that in case the company wishes to adopt the standard than it shall adopt the entire standard and not a part of it.

ICAI Clarification – Principle of Prudence

Under situation where an item of financial instrument is suffering from losses, than based on principle of prudence the entity shall provide for such losses through its profit and loss account.

Objectives and scope

Financial instruments are addressed in three standards: AS-31, which deals with distinguishing debt from equity and with netting; AS 30, which contains requirements for recognition and measurement; and AS-32, which deals with disclosures. The objective of the three standards is to establish requirements for all aspects of accounting for financial instruments, including distinguishing debt from equity, netting, recognition, derecognition, measurement, hedge accounting and disclosure. The scope of the standards is wide-ranging. The standards cover all types of financial instrument, including receivables, payables, investments in bonds and shares, borrowings and derivatives. They also apply to certain contracts to buy or sell non-financial assets (such as commodities) that can be net settled in cash or another financial instrument.

Nature and characteristics of financial instruments

Financial instruments include a wide range of assets and liabilities. They can mostly be exchanged for cash. They are recognised and measured according to AS-30 requirements and are disclosed in accordance with AS-32. Financial instruments represent contractual rights or obligations to receive or pay cash or other financial asset. A financial asset is cash; a contractual right to receive cash or another financial asset; a contractual right to exchange financial assets or liabilities with another entity under conditions that are potentially favourable; or an equity instrument of another entity. A financial liability is a contractual obligation to deliver cash or another financial asset or to exchange financial instruments with another entity under conditions that are potentially unfavourable. An equity instrument is any contract that evidences a residual interest in the entity’s assets after deducting all its liabilities. A derivative is a financial instrument that derives its value from an underlying price or index, requires little or no initial investment and is settled at a future date. In some cases contracts to receive or deliver a company’s own equity can also be derivatives.

Embedded derivatives in host contracts

Some financial instruments and other contracts combine, in a single contract, both a derivative element and a non-derivative element. The derivative part of the contract is referred to as an ‘embedded derivative’ and its effect is that some of the cash flows of the contract will vary in a similar way to a standalone derivative. For example, the principal amount of a bond may vary with changes in a stock market index. In this case, the embedded derivative is an equity derivative on the relevant stock market index.

Embedded derivatives that are not ‘closely related’ to the rest of the contract are separated and accounted for as if they were stand-alone derivatives (ie, measured at fair value, generally with changes in fair value recognised in profit or loss). An embedded derivative is not closely related if its economic characteristics and risks are different from those of the rest of the contract. AS-30 sets out examples to help determine when this test is (and is not) met. Analysing contracts for potential embedded derivatives and accounting for them is one of the more challenging aspects of AS-30.


Classification of financial instruments

The way that financial instruments are classified under AS-30 drives how they are subsequently measured and where changes in measurement are accounted for.

There are four classes of financial asset under AS-30: available for sale, held to maturity, loans and receivables, and fair value through profit or loss. The factors taken into account in classifying financial assets include:

  The cashflows arising from the instrument — are they fixed or determinable? Does the instrument have a maturity date?

  Are the assets held for trading; does management intend to hold the instruments to maturity?

  Is the instrument a derivative or does it contain an embedded derivative?

  Is the instrument quoted on an active market?

  Has management designated the instrument into a particular classification at inception?

Financial liabilities are classified as fair value through profit or loss if they are so designated (subject to various conditions) or if they are held for trading. Otherwise they are classed as ‘other liabilities’. Financial assets and liabilities are measured either at fair value or at amortised cost, depending on this classification. Changes are taken to either the income statement or directly to equity.

Financial liabilities and equity

The classification of a financial instrument by the issuer as either a liability (debt) or equity can have a significant impact on an entity’s reported earnings, its borrowing capacity, and debt-to-equity and other ratios that could affect the entity’s debt covenants. The substance of the contractual arrangements of a financial instrument, rather than its legal form, governs its classification. This means, for example, that since a preference share redeemable (puttable) by the holder is economically the same as a bond, it is accounted for in the same way as the bond. Therefore, the redeemable preference share is treated as a liability rather than equity, even though legally it is a share of the issuer. The critical feature of debt is that under the terms of the instrument the issuer is, or can be, required to deliver either cash or another financial asset to the holder and cannot avoid this obligation. For example, a debenture, under which the issuer is required to make interest payments and redeem the debenture for cash, is a financial liability. An instrument is classified as equity when it represents a residual interest in the issuer’s assets after deducting all its liabilities. Ordinary shares or common stock, where all the payments are at the discretion of the issuer, are examples of equity of the issuer. A special exception exists to the general principal of classification for certain subordinated redeemable (puttable) instruments that participate in the pro rata net assets of the entity. Where specific criteria are met such instruments would be classified as equity of the issuer. Some instruments contain features of both debt and equity. For these instruments, an analysis of the terms of each instrument in light of the detailed classification requirements will be necessary. Such instruments, such as bonds that are convertible into a fixed number of equity shares either mandatorily or at the holder’s option, must be split into debt and equity (being the option to convert) components. A financial instrument, including a derivative, is not an equity instrument solely because it may result in the receipt or delivery of the entity’s own equity instruments. The classification of contracts that will or may be settled in the entity’s own equity instruments is dependent on whether there is variability in either the number of own equity delivered and/or variability in the amount of cash or other financial assets received, or whether both are fixed. The treatment of interest, dividends, losses and gains in the income statement follows the classification of the related instrument. So, if a preference share is classified as debt, its coupon is shown as interest. But the dividend payments on an instrument that is treated as equity are shown as a distribution.


Recognition and derecognition

Recognition

Recognition issues for financial assets and financial liabilities tend to be straightforward. An entity recognises a financial asset or a financial liability at the time it becomes a party to a contract.

Derecognition

Derecognition is the term used for ceasing to recognise a financial asset or financial liability on an entity’s balance sheet. The rules here are more complex.

Assets

An entity that holds a financial asset may raise finance using the asset as security for the finance, or as the primary source of cash flows from which to repay the finance. The derecognition requirements of AS 30 determine whether the transaction is a sale of the financial assets (and, therefore, the entity ceases to recognise the assets) or whether finance secured on the assets has been raised (and the entity recognises a liability for any proceeds received). This evaluation might be straightforward. For example, it is clear with little or no analysis that a financial asset is derecognised in an unconditional transfer of it to an unconsolidated third party with no risks and rewards of the asset being retained. Conversely, it is clear that derecognition is not allowed where an asset has been transferred, but it is clear that substantially all the risks and rewards of the asset have been retained through the terms of the agreement. However, in many other cases, the analysis is more complex. Securitisation and debt factoring are examples of more complex transactions where derecognition will need careful consideration.

Liabilities

An entity may only cease to recognize (derecognise) a financial liability when it is extinguished — that is, when the obligation is discharged, cancelled or expired, or when the debtor is legally released from the liability by law or by the creditor agreeing to such a release.

Measurement of financial assets and liabilities

Under AS 30, all financial instruments are measured initially at fair value. The fair value of a financial instrument is normally the transaction price — that is, the amount of the consideration given or received. However, in some circumstances, the transaction price may not be indicative of fair value. In that situation, an appropriate fair value is determined using data from current observable transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets.

The measurement of financial instruments after initial recognition depends on their initial classification. All financial assets are measured at fair value except for loans and receivables, held-to-maturity assets and, in rare circumstances, unquoted equity instruments whose fair values cannot be measured reliably or derivatives linked to and which must be settled by the delivery of such unquoted equity instruments that cannot be measured reliably. Loans and receivables and held-to-maturity financial assets are measured at amortised cost. The amortised cost of a financial asset or liability is measured using the ‘effective interest method’. Available-for-sale financial assets are measured at fair value with changes in fair value recognised in equity. For available-for-sale debt securities, interest is recognised in income using the ‘effective interest method’. Available-for-sale equity securities dividends are recognised in income as the holder becomes entitled to them. Derivatives (including separated embedded derivatives) are measured at fair value. All fair value gains and losses are recognised in profit or loss except where they qualify as hedging instruments in cash flow hedges. Financial liabilities are measured at amortised cost using the effective interest method unless they are measured at fair value through profit or loss. Financial assets and liabilities that are designated as hedged items may require further adjustments under the hedge accounting requirements. All financial assets, except those measured at fair value through profit or loss, are subject


to review for impairment. Therefore, where there is objective evidence that such a financial asset may be impaired, the impairment loss is calculated and recognised in profit or loss.

Hedge accounting

‘Hedging’ is the process of using a financial instrument (usually a derivative) to mitigate all or some of the risk of a hedged item. ‘Hedge accounting’ changes the timing of recognition of gains and losses on either the hedged item or the hedging instrument so that both are recognised in profit or loss in the same accounting period. To qualify for hedge accounting, an entity (a) at the inception of the hedge, formally designates and documents a hedge relationship between a qualifying hedging instrument and a qualifying hedged item; and (b) both at inception and on an ongoing basis, demonstrates that the hedge is highly effective.

There are three types of hedge relationship

   Fair value hedge: a hedge of the exposure to changes in the fair value of a recognised asset or liability, or a firm commitment.

    Cash flow hedge: a hedge of the exposure to variability in cash flows of a recognised asset or liability, a firm commitment or a highly probable forecast transaction.

  Net investment hedge: a hedge of the foreign currency risk on a net investment in a foreign operation.

For a fair value hedge, the hedged item is adjusted for the gain or loss attributable to the hedged risk. That element is included in the income statement where it will offset the gain or loss on the hedging instrument. For a cash flow hedge, gains and losses on the hedging instrument, to the extent it is an effective hedge, are initially included in equity. They are reclassified to the profit or loss when the hedged item affects the income statement. If the hedged item is the forecast acquisition of a non-financial asset or liability, the entity may choose an accounting policy of adjusting the carrying amount of the non-financial asset or liability for the hedging gain or loss at acquisition.

Hedges of a net investment in a foreign operation are accounted for similarly to cash flow hedges.

Presentation and disclosure

There have been significant developments in risk management concepts and practices in recent years. New techniques have evolved for measuring and managing exposures to risks arising from financial instruments. The need for more relevant information and improved transparency about an entity’s exposures arising from financial instruments and how those risks are managed has become greater. Financial statement users and other investors need such information to make more informed judgements about risks that entities run from the use of financial instruments and their associated returns. However, the disclosures in IAS 30 (disclosure requirements for banks and similar financial institutions) and AS 31 were no longer in keeping with such developments, and there was a need to revise and enhance the disclosure framework for risks arising from financial instruments. AS 32, ‘Financial instruments: disclosures’, was issued to address this need. AS 32 sets out disclosure requirements that are intended to enable users to evaluate the significance of financial instruments for an entity’s financial position and performance and to understand the nature and extent of risks arising from those financial instruments to which the entity is exposed. AS 32 does not just apply to banks and financial institutions. All entities that have financial instruments are affected, even simple instruments such as borrowings, accounts payable and receivable, cash and investments..