Transcript for:
Financial Instruments

hi everybody this is CA J Chava faculty for CA final financial reporting so in this particular video you can watch the entire topic of financial instruments that is 109 indas 109 indes 32 and 107 this complete lecture covers everything each and every part of the topic where I have covered all the things in details although I have already uploaded One Financial instrument lecture previously in the last one year but that was a old recording and that recording was not covering some of the important portion but now this recording covers maximum portion of the financial instrument and some new portion also like d recognition of financial asset like impairment of financial asset also so this complete recording is recorded in a English language and even a uh non-english student or those students who cannot understand a good English they can also watch it with a simple English language so complete this entire video in just 12 hours in the 12 hours you will be able to solve all the questions of financial instruments and please don't forget to like this video share with your friends and do comment on this video regarding the feedback and please I'll be waiting for your feedback so that I'll I'll get the motivation thank you so much and please watch this video till end so that you can get the good amount of knowledge and conceptual understanding along with the practice thank you so much good morning once again guys how are you all fine so today is our first topic which is financial instrument see Financial instrument has indas 32 indas 107 and 109 basically 107 is a disclosure based standard okay it doesn't cover any practical issues or calculation part it is only it covers only a disclosure part not much relevant for exam purpose it is relevant for the Practical oriented it is a practical oriented topic which is relevant for the disclosure purpose for of the financial state ments so basically our major focus should be on 32 and 109 our major Focus will be on this 32 talks about the definition part presentation part what is financial instrument what is financial asset what is equity what is financial liability how to present them in the balance sheet so it covers 32 covers all these parts 109 covers the recognition part the accounting treatment accounting treatment of financial asset accounting treatment of financial liability so 109 covers the accounting treatment and the measurement part like it says measure the financial asset at fair value now how to calculate that fair value how to calculate the present value so the recognition and measurement part is covered under 109 and the presentation the definition the meaning part is covered under 32 okay so first of all uh as far as the notes are concerned if you can see in the notes our unit one is basically the basic knowledge about financial instrument the topic name is financial instrument whether it is inds 32 it is indas 107 it is IND 109 the topic name is financial instrument okay so we'll discuss the first of all we'll discuss the basic knowledge of financial instrument now whenever I start this topic now I actually show the schedule three portion of to my students like where the financial instrument basically we show we present in the balance sheet so just look at the balance sheet first of all to understand properly see this is the company's balance sheet this is the schedule three as balance sheet format as for schedule three now here you can check the asset the non-current asset okay it's fine property plan and equiv it's fine but come to this this portion come to this area financial asset so in the in the non-current asset heading there's a subheading financial asset and in this some adding there's an investment there's a tradeable there's a loan and others so this entire category covers under this financial instrument indas 32 109 107 this entire category in the non-current asset part now come to the current asset part current asset part again there's a separate category financial asset Investments trade rebles cash and cash equant bank balances loans other other these all are Financial assets which are covered under our topic today's topic okay now come to the equity and liity side now equity and liability so this portion Equity is also covered under Financial instrument this Equity portion now come to the liability part so non-current liability nonc Li Financial liabilities all these are covered under this our today's topic except lease liabil because Le liity is covered under 116 leers so except this Le liity like borrowings PID pbls other Financial liabilities are covered under Financial liabilities which which we are going to discuss today again in the current liab part same except Le liity so if you can check if you can see the importance of this topic from the balance sheet point of view at least 50% of the balance sheet is covered by single topic 50% of the balance sheet so topic is very important definitely from balance sheet point of view major portions are coming under this financial asset Financial liability and Equity part so we are going to understand it from balance sheet point of view definitely and from pandle point of view also so this is the importance of this topic as far as balance sheet is concerned where the financial asset we are presenting where the financial liability we are presenting where the equity we are presenting these all things are here okay come back to the point now what about unit unit one talks about unit one basically talks about the the definition the meaning of financial asset Financial liability equity what is financial asset what is financial liability what is equity let's start from the basics only first of all we'll understand what is financial asset what is financial liability and what is equity guys are you understanding okay now look at the screen only okay now see Financial instrument is the 10 Financial instrument it says it is a contract between two parties you are the party I am the party it is a contract between one two persons or two parties one entity and another entity what is the contract the contract basically give and take contract suppose the contract between J Chava and laka J Chava will give the service to laka Academy for teaching and laka will give me the money okay lxa will pay me so for J cha for laka has a dor trade receiver can I say or not yes so after my completion of services I will be able to complete my money from lxa understood or not so basically there's a contract between Jay and lxa and under this contract one party has some asset one party has some asset like Jay so Jay what what asset Jay has J has a trade receiver in the name of lxa I want to recover myy money from lxa and other party has to pay other party has some obligation for payment what which one the other par is lxa so fin what is financial instrument Financial instrument is basically one contract between two entities where one entity can create asset financial asset what finan financial asset and other entity can create either Financial liability or Equity I just show you in my balance sheet we have shown the balance sheet now that there may be Equity there may be liability so for one party there is asset financial asset for other party either Financial liability or Equity this is the financial instrument definition but until unless we understand the financial asset definition Financial libility definition we cannot understand this particular definition properly so okay uh I'm leaving this definition first of all we'll understand what is financial asset we understand what is financial asset if you can if you can talk about the financial asset there are 1 2 3 4 5 six six important points so financial asset covers six parts six parts all these six are Financial Assets Now first can you please read from the board yes if you have cash in your pocket if you have bank balance it's a financial ass understood or not so look at this balance sheet I told you financial asset and it is cash and cash equivalent it is bank balance so one uh inds 32 says that financial asset means number one cash or cash equivalent like it can be the bank balance Bank deposits in the name of fixed deposits in the name of saving deposits in the name of recurring deposits in the name of current account whatever it is you have the bank balance you have the fds fix deposits it's your financial asset default understood or not okay second any Equity instrument of another entity you are holding equity share of Reliance you holding equity share of infosis you are holding equity share of C Capital you're holding Equity shares of any any company any other company not your own equity share not your own equity share Okay so if you holding if you have invested your money in the equity share of another company it's your financial asset by default guys are you understanding or not so from balance sheet point of view there it is it is under this category current asset and it is under this category financial non-current asset like Equity guys are you understanding or not yes tell me understanding or not yes so two important points one what is financial asset cash or bank balance simp simple second Equity investment Equity investment simple understood or not so these two are very very simple now the main technical part thir point I'll read contractual right to receive cash contractual right to receive cash I just given you the example of laka and Jay Chava so once my service will become over I will have the right to receive cash from lakia understood or not so it says financial asset means any contractual right what is contractual right where there's a contract and such contract will give me the right to receive my money guys are you understanding or not yes so tell me uh basically what is uh the contractual right to receive what is to receive to receive either cash or or suppose lxa said sir J sir we'll not give you cash we'll give you the Equity shares of Reliance I said okay it's fine then also it is financial asset for me now tell me I have contractual right to receive the equity share of Reliance company from lxa so equity share of Reliance company as the point number two as for the point number two is is financial asset now so the third condition says if I have contractual right to receive 1 lakh rupes cash it's my financial asset if I have contra right to receive 1 lakh rupees value of equity share then also it's financial asset for me not understood yes yes so if I have contractual right to receive one lakh rupees then it's a financial asset if I have contractual right to receive the equity shares valuing one lakh from laka then also it's a financial asset for me are you understanding or not let us talk about your contract with lxa student and lxa now your contract with lxa says you have the right to receive service not cash not Equity instrument you have the right to receive service and lxa will have have the right to receive cash so for lxa it's a financial asset understood or not but for you it's not a financial asset because Serv right to receive service is not a financial asset it's a not non-financial asset understood or not yes okay so third number point is clear or not yes so please say first all the three points what is financial asset cash bank balances Equity investment Equity investment okay cont contractual right to receive cash or any other Financial assets any other financial asset M Equity investment Equity sh okay guys understood or not suppose in instead of equity share lxa told me that they will give their company their own companies bonds their own companies debentures or bonds I said yes okay so now they will give my uh they will give me the the bonds or debentures of their own company that is again a financial asset why because in debenture in a bond there's a contract that I will I will be reimbursed after four years after five years what is technically Bond the bond basically gives the guarantee that the company will pay me after 3 years after four years so I have the contract again I have a contractual right to receive cash but not right now right now I got my bonds and after three years or four years the bonds will be redeemed and I will get the cash are you guys understanding or not so technically it's again a right to receive cash guys okay fourth one fourth one the contractual right to exchange to exchange the financial asset or fincial liability with another entity under the conditions which are favorable to The Entity under the conditions which are favorable to The Entity suppose I have share of Reliance you have a share of infosis you have a share of infosis and I have a share of Reliance okay and uh just for the sake of example let us assume I have the share of infosis which is having a value of 100 rupees just for the example so I have infosis sorry Reliance share valuing 100 rupees you have in forces share valuing 200 rupees one share 200 one share 100 understood yes so there's a contract between us that after 1 month I will hand over I will hand over my two Reliance shares two Reliance shares 100 each to you and in exchange you will give your one infosis share to me one ins forces share having value of 200 and one relian share having value of 100 so I will give you how many shares two shares two shares 200 rupees and you will give me one share of 200 200 rupes it's a exchange exchange of two Financial assets see Reliance share and ences share is also financial asset now as for the second number part are you guys understanding or not okay so what we did we have a contact to exchange our own Equity investment with each other after one month guys are you understanding or not after one month we'll exchange these shares what happened after one month basically infosis share infosis share becomes 250 rupees one share becomes 250 and Reliance share becomes 110 110 okay so how many shares I'm going to give you two so one 110 multiply by two 220 and you will give me 250 worth of share so tell me who is in a favorable situation me why I'll get one enforces share now valuing rupees 250 and I'm going to give you two relian share valuing rupees 220 so technically I'm getting 30 rupees extra yes now technically there was a contract not to exchange the share there was a contract without exchanging the share without physical delivery we'll settle the contract in cash next settlement there was a understanding between you and me that we'll not exchange the share actually I don't have the share you don't have the share there was a basic understanding that after one month we'll exchange it in the form of net cash only now tell me what right I have technically I have this right yes yes 30 rupes not cash settlement now so I have the right to contractual right to receive because of exchange of under which I'm in a favor condition so it becomes my financial asset are you guys understanding or not tell me yes so there are so many contracts between the entities where the entities exchange their financial assets and liabilities with each other and one party is definitely under a favorable situ and the second party is definitely under the unfavorable situation the party who is in a favorable situation will create financial asset the party who is an unfavorable situation will create Financial liability simply guys are you understanding or not so Four Points First Cash not only cash cash and bank balance Equity Investments contractual right to receive cash or any other financial asset from another enti cont contractual right to exchange any financial asset or any Financial liability where the one party is under the favorable situation understood or not Four Points clear yes sir you can write the example of Reliance and enforces net settlement here okay in short understood or not okay fifth Point leave it uh right now for the timing only I'll discuss the fifth point after some time sixth Point what is sixth Point cont derivative contracts so derivative contracts like Futures options have you heard the derivative contracts yes Futures options have you heard these terms yes okay they are covered under the AFM part also AFM subject also and other than AFM some may may have invested their money in the derivatives also Futures fendo you must have under uh uh understood Futures options swaps forwards so so these are the derivative Parts we'll discuss the derivative part in this chapter also in the unit three don't worry derivative accounting is also covered under the financial instrument only so derivative accounting is covered I'll discuss discuss it separately in this chapter only only for the sake of understanding derivative contracts can also be the financial asset or financial liability it depends the it depends on the favorable or unfavorable position if it is a favorable position for us it becomes a financial asset it if it becomes a unfavorable position for us it becomes a financial liability so except for the fifth point the E point I discuss with you the remaining Five Points of financial asset can you please tell me what are the five points cash and Bank balances Equity Investments cont contractual right to receive cash or any other financial asset contractual right to exchange any fincial asset or liability under the favorable situation and derivative contct understood guys now for more understanding for more understanding look at this now building building is not a financial asset it's a non financial asset because as per the definition is there any building no no huh no definition mostly focuses on cash equities right to receive cash it mostly focuses on the cash part understood or not so building it's not a financial asset receivables rebles laka I I I need to receive my money from them yes inventory no inventory no see you have your inventory you will sell it in the future you will get the money because right but right now you don't have any contract to sell it yes understood or not yes see I printed my books I printed my books 500 sets I thought I will sell sell these books to the students but I haven't got any single student till now I have my inventory of 500 set of books but I haven't got any particular order purchase order so it becomes my inventory once I got the purchase order I received the money from student now oh or or suppose I haven't received a money but I got the order some student says that sir we'll purchase 10 book sets we'll purchase 10 book sets now I got the order I got some Advance also I delivered 10 book sets already now I have contractual right to tell me I have contractual right to and you will become my reable and you will become my financial assist but unless I have sold it it becomes my inventory and there is no contract with anyone no contract with anyone means it is not a financial asset it's a non-financial asset guys understood or not yes okay next see Advanced Tax technically it's a financial asset but it is basically a tax related item so tax related items are covered under indas 12 income taxes indas 12 income taxes so tax related items are covered under income because see Advanced taxes technically VI the financial asset because suppose you are paying Advanced Tax and when you will file your it return income tax return and you may get that refund so refund will be the the right to receive cash but if it's a it's a tax related item so it is not covered here so no loan given yes yes because we have contractual right to receive cash advanc r no because whenever I pay my rent to the landlord I will get the services I will have the contractual right to receive service understood or not or advanc rent I I paid I paid advanc rent for the next six months it becomes my asset but it's a non-financial asset because against that rent I will not get any money I will not get any equity share I will get the apartment to reite there I will get the premise to use understood or not so technically it's a service it's a service contract and service contracts are not Financial assets next three month rent deposit with landlord as security why yes it's a three month cash given to them as a security once I will leave the premise I will get my security deposit back yes so I have a contractual right to receive cash tell me okay Advan to supplier why no it's a contractual right to receive Goods it's a contractual right to receive Goods see I have given you the supplier advance for the goods purchase so I will receive the goods in the future and to receive the goods is not a financial asset it's non-financial asset guys do you have any doubt huh no intangible asset no no investment property no so investment property in the form of land or building tell me no Capital work in progress it is a it is a building Capital work in progress no investment in debur and Bs yes why yes right to receive cash contractual right to receive cash because once the Denture will be redeemed we'll get the cash okay invested in Gold no gold hard gold you have do you have any contract it's a gold you have the gold in your hands so it's any is there any contract to receive cash against the gold no so gold just like inv is not a financial asset but you have invested in Gold bonds yes now you have the right to receive cash understood or not Equity shares yes right of use set it is covered under Lees basically roou leases it's not a financial asset cash and cash equalent yes yes Perpetual dead instrument that is Perpetual bonds or debentures yes here we have the right to receive interest yes perpetuity means it will not be redeemed okay it will not be redeemed basically every year I will get the interest only interest only so the principal is not redeemable so as far as principal portion is concerned it is not asset but as far as interest portion is covered every year I will get the interest amount so it will it will become my financial asset guys are you understanding or not yes last Lee receivable for lesser it's again a financial asset because lesser says I have given my property to the lessi against which I will get the lease rent money Le receivable so cont contractual right to receive cash guys understood or not yes tell me understood or not yes all right so have you understood the definition of financial asset yes any doubt no okay now come to the financial liity part Financial liity part now Financial liity just opposite of financial asset just opposite what we read here just opposite leave ignore the first two points because there is no opposite of cash there is no negative cash there is no opposite of equity investment so no opposite of cash no opposite of equity investment so leave these two parts but here there was a contractual right to receive now see read this contractual obligation to deliver cash understood yes or to deliver another financial asset contract between laka and Jay Chava for Jay Chava it was a financial asset you remember yes because J Chava will will get one lakh rupees of cash either cash or one lakh rupees of equity investment you remember now now from point of from the laka point of view it will become Financial liability why lxa has to deliver 1 lakh rupees cash or deliver lakh rupees worth of Reliance Equity shares or infosis Equity shares so Reliance and Equity Reliance Equity shares or infosis Equity Shares are Equity investment made by lxa now lxa will deliver it to me so for lxa Equity investment was financial asset and such financial asset lxa will delivered to me now again read it contractual obligation to deliver another financial asset guys understood or not so lxa will deliver its own Financial affect to me so for lxa it becomes a financial liability have you understood this or not any doubt you have okay next next contractual obligation to exchange the financial asset or liability under the please read it under the unfavorable I have already given you the example in my example in my earlier example what what what was the example two Reliance One infosis you remember I'll get one infosis worth of 250 now and you will get two Reliance worth of 220 now but we decided to settle it without any delivery so I will get 30 rupees cash you will pay you will pay because of this exchange you will pay understood or not so you are you are under the unfavorable situation guys understood or not yes after some time I will give you the Practical uh exam oriented example also for this point don't worry first point contractual obligation to deliver cash or any other financial asset second Point contractual obligation to exchange asset or liability under the favorable unfavorable situation uh fourth Point leave it because it is again related to the E number Point uh and fourth sorry third Point leave it and fourth point is derivative instrument under the unfavorable unfavorable situation okay tell me loan taken yes crors yes yes salary payable yes salary payable payable in cash now contractual obligation to deliver the cash credit balance of data my data is having there but it is having a credit balance see it depends now my deor has a credit balance that means I already took the advance from my data huh that means uh in future I need to deliver the goods Services tell me so if this is the case then it's not a financial asset because I have to deliver the services or Goods but suppose there's a credit balance of my data and the contract is now ended I need to settle this credit balance in cash only then it will become my financial liability so it may be yes it may be no generally no depent are issued yes huh yes provision for income tax tax related items no security deposit accepted refundable yes yes it's a liability for me Financial liability for me obligation to deliver cash guarantee contracts see guarantee contracts again sometimes may be Financial liability we'll discuss its technical Parts after some time so yes it may be it may be preferential Capital redeemable mandatory company should preferential mandatory redeemable tell me yes or no yes because it is redeemable in cash contractual obligation to deliver cash guys are you understanding or not yes okay dividend proposed it's proposed just proposed so it's no but once it is declared yes when it is declared it becomes obligation for the company to to pay the cash within 30 days as for the company's act so it becomes yes it becomes yes guys understood or not Financial guarantee again same yes maybe tell me are you comfortable with the definition part now huh yes okay so what we understood basically we understood that what is financial instrument Financial instrument what is financial instrument it's a contract contract between two parties one party has Financial assets other party other party has either Financial liability or now let us understand the meaning of equity the other party either has Financial liability or Equity so what was Financial liability what was the basic definition of financial ability obligation to deliver cash can I say this tell me this is a basic definition other than that there was obligation to exchange a derivative and so many things but the basic part is obligation to deliver cash cash now Equity is just opposite of financial liability what is equity Equity means no obligation to deliver cash no obligation to deliver cash not at all not at all there is no obligation to deliver cash you purchased equity share of Reliance you purchased equity share of Reliance for you it's a equity investment it's a financial asset for Reliance think from Reliance point of view Reliance have taken the money from you yes what general entry Reliance has to pass bank account debit to equity share Capital so bank account debit it's fine to equity share Capital now tell me do Reliance have any obligation to pay you back after some period of time Equity doesn't have any maturity period tell me guys equity share does it have any maturity period no and this is the reason it's a most risky riskier in investment do you guys know this now whenever we purchase any equity share of any company it doesn't have any specific period of maturity guys do you know this or not I'm not talking about preference share I'm talking about equity share equity share doesn't have any maturity period so Reliance is not taking any obligation if your share of Reliance came down by 20% 30% Reliance is not obliged to pay you or Reliance is not obliged to reimburse you Reliance will be obliged only at the time of liquidation at the time of winding up if Reliance goes liquidated then Reliance has to pay you after payment of all the liabilities of Reliance and if the money remains in the company then only they will they will pay you otherwise you will not be paid so tell me Reliance has any obligation towards your towards your equity share no so no obligation but Reliance took the money from you but they don't have any obligation to pay cash so for Alliance it becomes a equity so in a simple language what is equity Equity means anything which is in the form of capital in the form of capital see you become a chared accountant you started your own operation own startup you you contributed your money in your business you are the owner of the company now so you contributed your own money in the business please listen to me everyone you started your startup you invested your own 10 lakh Rupees in your business suppose it doesn't work after two years and three years it doesn't work since you have invested your money 10 lakh and you have taken other liabilities also you have taken the bank loan also suppose 15 lakh 20 lakh whatever but it doesn't work and you close down your operation once you close down your operation what you will do you will first repay your liability or you first you will take your own 10 lakh tell me what you will do when you close down your startup you will sell your assets and when you realize the cash what you will do you will repay your liability F or you have to you will you will take your money back tell me you're the owner of the company obviously you have to repay your lities partner you have to pay to the others now first of all why it's obligation to pay to the others but as far as your capital is involved for you yourself you are not oriz so in the same way when you become the owner of the company in the form of equity investment so you have invested your money in the Reliance now you are becoming the owner now so Equity investment means the ownership so when you become the owner of the company so it's your company so for you only it could not be obligation any time understood or not yes sir so when you invested your money in the infosis when you invested your money in the Reliance you invested your money in the form of capital you became the owner of that company and for that company you are not the obligation you are the owner and that is the reason it is equity understood or not so what is the difference between these two liability and Equity Financial liity we have something to pay to others they are not the owners and Equity we don't need to pay to others because they are owners guys are you understanding or not okay so this is equity no obligation to pay cash no obligation to deliver cash this part is understood or not okay so what is equity Equity basically means a residual interest in the net assets of the entity like residue what what you residue the remaining balance like once the company will get liquidated after paying all the outside liabilities whatever the remaining balance will be there it will be paid to you so for company you why you are Equity because company is saying that if something is remaining then they will pay you otherwise not so you becomes the equity for the company see read this read this what is this Equity holder cannot claim on the company if he she can claim he's not Equity he's someone else like he's the liability for the company so as a equity shareholder you cannot claim on the company that give it give my money back you cannot claim on the company and that is the reason company saying that you are the equity for us for company you are not the liability you are not the obligation understood or not okay the most important characteristic of Equity instrument is it doesn't have a contractual obligation no contractual obligation under Equity guys are you understanding so equity share Capital yes reserves and surplus yes redeemable preference share no it's a li it's a financial liability basically what is that Financial liability irredeemable yes yes it is as good as Equity IR redeemable means the principal is not repayable so yes Perpetual debt instrument IR redeemable yes both are yes as far as principal part is concerned for interest part it is a liability interest we need to pay dividend we need to pay every year for principal IR redeemable okay 100% compulsory convertible debentures convertible means convertible into Equity tell me yes so is there any obligation to deliver cash no what is my obligation obligation to deliver in my own equity share so whenever I give you my own equity share you will become My Equity that means at any time I'll not pay you any cash so no obligation but that means it becomes Equity no obligation understood or not okay next huh convertible debentures at the option of holder like I'm giving you the option like after I I issued my debentures to you okay now if you want cash I'll pay you cash if you want equity share I'll give you equity share after five years what do you want you say so tell me for me it is actually the financial liability it is not the equity because if you are asking for the cash I have to repay you understood or not share warrant share warrant it is as good as Equity because in future I will issu Equity shares convertible debentures at the option of what is that H right here convertible bonds debentures at the option of issuer if conversion into Equity if conversion into Equity is favorable if conversion into Equity is favorable for issuer if conversion is not favorable for issuer see it's totally dependent H because issuer has kept the option with itself that I will decide after five years that what I need to do I may give you the cash or I may not give you the cash instead I will issue my own company's equity share but it totally depends on the favorable or unfavorable situation of the issuer after 5 year if issuer thinks that converting into Equity is in a favorable situation definitely it becomes here it becomes Equity equity and here huh it becomes the financial liability it depends understood so depends in redeemable preference share with non-cumulative dividend yes yes of course IR redeemable and even the dividend is not cumul cumulative but dividend until unless I declare the dividend I I don't need to pay it so noncumulative dividend is redeemable definitely it is as good as Equity because I don't have any obligation to repay understood guys so did you understand the definition of equity now three important terminologies we understood what are that financial asset Financial liability and Equity understood guys yes sir in short financial asset means contractual right to receive cash short okay what is financial liability contractual obligation to deliver cash and what is equity no obligation to deliver cash it's a residual interest understood or not yes sir so okay so these are the financial asset Financial liability and Equity any doubt in that part tell me any doubt in that part no sir done yes sir all right can you please write here convertible instruments convertible instruments such as debentures bonds convertible instruments such as debentures and bonds debentures and bonds example entity issued 10,000 number of debentures of 100 each on 1 April on 1 April convertible after 3 years convertible after 3 years into Equity shares case one conversion is fixed that means 50,000 number of equity will be issued case two conversion is variable conversion is variable that means issue of equity shares after 3 years based on market price after 3 years market price of equity market price of equity after 3 years case three case three conversion of at least 40% of principal conversion of at least 40% of princip into 20,000 number of equity rest 60% may or may not be converted okay these are the three cases now we need to identify in this entire example we all need to identify is this the equity instrument or financial liability instrument from entity point of view because entity has issued the 10,000 number of debentures I asked you question that but from entity point of view we need to identify is this debenture a financial liability or an equity we need to identify now listen to me very carefully listen to me very carefully there are two terminologies number one the consideration received today entity has issued 10,000 number of debentures of 100 can you please multiply how much how much much amount H that means rupees 10 lakhs okay this 10 lakh is the consideration is basically the company received today it is a consideration this is the first term consideration the second term settlement settlement future settlement Now read this convertible after 3 years into so what it becomes settlement it is a there are two terms one is today's consideration and the second is Future's consider uh settlement have you understood or yes one is consideration and one is settlement guys understood yes okay now if consideration is fixed listen to me consideration is fixed that this much I will definitely convert in the Future No Doubt at all the consideration this much I will definitely convert in the Future No Doubt at all and all so the settlement is fixed that that part will be converted into equity and this Equity settlement is also fixed that how many shares I will give you I have already decided here understood or not yes that means on day one on day one on the date of issue both are fixed what both how I received 10 LH rupees now out of this portion what is to be converted that is fixed portion how much I will definitely convert it it is already fixed and against which I will give you how many number of shares settlement is also fixed if this is the situation it is it is the equity instrument it is the otherwise all other situations are Financial liabilities all other situations are so for equity for instrument becoming Equity there must be a condition fixed and fixed consideration should be fixed settlement should be fixed f2f test is there it is called f2f test fixed to fixed test what is fixed and what is fixed if these two are already fixed from day one it's Equity instrument guys understood or not yes so you can look it entity issued 10,000 number of debentures which are convertible so if at any time you need to think that whether convertible instruments are Equity contracts or liability contracts they will be Equity contracts all the convertible instruments will be Equity contracts only when f2f test pass what is f2f test consideration is fixed settlement test is fixed if f2f test is passed then this entire contract is the equity instrument otherwise all other situations are Financial liability case one tell me tell me Equity it's Equity why from day one I'm saying I will give you how many shares 50,000 I will give you ,000 when huh now look at the analysis if you will clearly uh listen to meina then only you will have to have to think and properly conclude the point is still we haven't concluded so first of all look at me and listen to me see the concentration was 10 L now huh yes and in the first case in the first case I will convert uh I will convert debenture they'll convert uh this 10 lakh rupees into how many shares suppose the market price of equity share after 3 years is just 25 rupees please multiply 25 rupes multiply 50,000 12 lakh ,000 that means uh that means 10 lakh Rupees today is the consideration and in future I will give you but I don't know right now how much I'm going to pay you understand or not now instead of 25 it's 15 rupees suppose after 3 years it's just 15 rupees you have to accept it that means I taken 10 lakh Rupees from you right now yes and I'm saying that after 3 years I will get you only 50,000 numbers whatever would be the market price I will not be obliged to give you any other thing at all whether it will be of 15 rupees it will be of 25 it will be of 20 it will be of 21 it will be of one rupee I will not take any guarantee any obligation to pay you extra amount yes sir are you guys understanding or not I'm not taking any guarantee or to any obligation that means technically today only I told you that I will give only 50,000 numbers whatever the price would be it doesn't matter for me tell me so from day one I'm not taking any obligation from day one I'm not taking any obligation to repay you exact 10 10 lakh Rupees because the consideration was 10 lakh now see whenever you pay uh sorry whenever you uh give me the 10 lakh Rupees what will be your uh expectations that after 3 years you will get at least 10 lakh Rupees suppose the price after 3 years is 12 rupes 12 rupes multiply 50,000 6 lakh I'm giving you 50,000 numbers having a market price of six lakh and how much amount you gave me what was your expectation 10 lakh but I have given you 50,000 numbers I'm not obliged to give you now 8 lak rup Sorry 4 lak rupees more so for me this is not obligation for me this was from day one only I told you that I will give my 50,000 numbers only and only whatever it would be so technically I'm not taking any obligation for this 10 lakh Rupees from day one only from day one only I told you that I will give you 50,000 numbers whatever the value would be so that means there is no obligation in this case in this case there is you may be in a favorable situation you may not be in a favorable situation please don't think from your point of view think from entity's point of view because from your point of view you are the investor yes in any way you it's it's a financial asset from your point of but from entity point of view What entity should recognize it should recognize Financial liability or Equity entity will recognize Financial liability only when entity has definite liability for 10 lakh Rupees do I in this case one do I need to pay or do I need to uh convert in the exact 10 10 lakh Rupees value no do I have any obligation to give you that much Equity where it should be at least 10 rupes no that means I don't have any obligation understood or not yes so here I can say the f2f test is getting passed what is f2f fixed consideration that means after 3 years I will convert 10 lakh rupees into fix settlement what is fix settlement 50,000 50,000 forget about the price market price whatever the market price in this situation company is not guaranteeing you to pay exact 10 lakh Rupees but now compare this situation with the second case conversion is variable issue of equity share after three year based on market price of uh Equity after use the calculator please suppose market price suppose market price was 50 rupees tell me how many Equity sh I will give you 10 lakh divided by 50 20,000 suppose the market price was 20 10 lakh divid by 20 suppose the market price was uh 25 10 lakh divided by 25 40,000 suppose the market price was uh 100 huh in all these market prices my objective is to settle entire 10 lakh try to understand my objective is to settle to settle entire 10 L sometimes I need to pay how much 20 20,000 numbers huh or I need to pay sometimes 50,000 numbers or I need to pay what the numbers or I need to pay, but my objective is to settle 10 lakh exact understood or not so here company's taking obligation to settle exact 10 lakh but in this case one company is not taking any obligation to settle entire 10 lakh company is saying I will give you 50 whatever it would be I'm not obliged to settle over overall 10 lakh Rupees I will give you 50,000 shares now whatever the market price of that 50,000 shares after 3 years it it doesn't matter for me you may get more value you may get less value I am not obliged for anything guys are you understanding or not yes sir huh so here the settlement was fixed 50,000 that means fixed but here the settlement was variable it becomes a financial liability because in these cases company takes full obligation to settle entire consideration of 10 lakh Rupees whenever the settlement is variable whenever the settlement is variable that means compan is having intention that I need to pay full 10 lakh Rupees in any situation I may have I may have to issue more shares or I may have to issue less share because I have to settle 10 lakh Rupees but here company's not at all worried I accepted 10 lakh from you I received 10 LH from you I not at all worryed after 3 years I will give you 50,000 whatever the value it doesn't matter for me whether it will be of 10 lakh 12 lakh 15 lakh 7 lakh 6 lakh 4 lakh it will be zero I'm not obliged to give you extra understood the company situation yes so first situation was fix settlement Equity second situation was variable because settlement is not fixed now can you please tell me the third situation conversion of at least 40% principle now tell me I told you f2f test f2f means consideration should be fixed settlement should be fixed now don't look into the settlement first look into the consideration is the consideration is fixed which is to be converted only 40% the rest 60% may or may not be converted that means the remaining 60% consideration is not fixed to be converted tell me now yes so now tell me conversion of at least into rest 60% may or may not be converted what is the uh what is the nature of this instrument as far as 40% is concerned it's Equity why it's Equity fixed to fix is fulfilling what is fixed to fix 40% consideration is fixed to be ConEd into fixed numbers it is it is it is fulfilling the definition of equity understood or not and the rest 60% why we may or we may not if we we are not connecting we have to give the cash to deliver cash is a financial liity and if we convert it then how many numbers the settlement is also not fixed understood or not because For the Rest 60 per portion the settlement is also not there so that means it's a financial liability it's a hybrid contract which is having 40% part is equity and 60% part is a financial liability guys have you understood or not yes sir now understood everything yes sir so in the notes see this is the table this is consideration this is settlement if consideration is fixed settlement is fixed then only it is in all other cases fixed variable variable fix variable variable all other cases Financial liability have you understood this or not yes guys clear to you yes sir this is for what type of contracts this is this is for convertible type of contracts convertible convertible uh instruments convertible instruments uh was a heading also this convertible instruments convertible instruments such as debentures and bonds so whenever any anyone ask you that whether convertible instruments are Equity or financial liability your answer should be based on f2f f2f test understood or not yes okay there is another term called putable in instrument portable instrument portable now there is uh to to Define this term there is a simple term called put option have you guys heard this word yes huh yes how many of you haven't heard this word or the first time for you put option okay any anyone else put option what do you mean put option right to right to sell right to sell so put option means right to sell you have the right to sell your goods you have the right to sell your property at a fixed amount right to sell at fixed price fixed price right to sale at fixed price suppose this calculator this calculator is there now what's your name ano this calculator belongs to ano now I have given the right to him that ano you can sell this calculator to me at 1,000 rupees at, rupees after one month and suppose if anyone else is giving you offer for more than you can definitely sell to them otherwise you can definitely sell to me if the market price of this calculator after 1 month becomes 1100 how much 1100 what he will do he will sell to me or to anyone outside because he has the right to sell to anyone but suppose if the market price after one month becomes 900 I have guaranteed him that I will pay, yes tell me he is having right to sell this property at, for him it's a right and for me it's a obligation understood or not because I have guaranteed 1,000 rupees understood or not so putable instrument works like that now instead of this calculator this is equity share this is what I issued my equity share to ano at, rupes at R th000 rupees and in this equity share there is no option attached option whatever it is put no put option it's a simple ordinary equity share simple ordinary equity share tell me ano is the shareholder I am the issuing entity tell me this equity share for ano is a financial asset yes Equity investment and for me it's a equity Capital yes bank account debit to equity share Capital yes for me it's a financial liability or Equity Equity Equity it's a simple ordinary share understood or not yes one year passed two years passed three years passed after 3 years I gave one option to him that ano you have 3 months to think if you want you can sell this Equity back to I will definitely give you 5,000 rupees but you have only 3 months guys have you understood or not yes sir now you may have a question sir why you are giving these kind of options I will take a premium from ano to give this option I will I will uh earn something like ano I will I will give you one option that if you want to sell this equity share to me I will repay you 5,000 rupees exact don't worry and you have the option if you don't want you don't sell it to me you can sell to the market also in the market also but if you want this option I need 100 rupees premium how much premium 100 rupes premium I want ano gave me the premium sir what will be the accounting of Premium we'll discuss it further we have that part so please do not look into the premium part okay leave it I accepted 100 rupees as the premium okay for how many months he has the option premium is non-refundable premium is non-refundable okay huh now in this three months what option anop has right to S sell at how much amount 5,000 when he will exercise his right when when the market price is more than 5,000 or less than 5,000 suppose he's getting 6,000 rupees from the market for this share he's getting 6,000 from Market only will he exercise his right no he'll say oh no not an not at all he'll say okay it's fine 100 rupees gone but then to he's in a favorable position by selling it share in the market only now so when ano will exercise is right when the market is definitely lower than the offer price offer offer what was the offer price huh suppose in the market the uh the market price is 4500 and I have given the offer at 5,000 tell me will he exercise the option yes B yes and if he's going to exercise an option what will be the accounting treatment from the point of view of so leave accting what would be the classification from the point of view of entity earlier I treated this Equity as a equity yes it was an ordinary Equity should I change the classification from Equity to financial liability why it is ordinary equity for me but do I need to change the classification now why market price is 4500 in this three months ano can exercise the right and I have to pay 5,000 cash so now again now what it becomes it becomes a financial liability for the company obligation to deliver cash to an so tell me when I should change the classification from Equity to financial liability when the market is in favor of an guys are you understanding or not yes huh yes can you relate this point with uh that definition part of financial liability the definition part of financial liity this was contractual obligation to ex exchange you remember exchange huh tell me so technically here now it becomes whenever I provided the option to ano that you want to convert it into cash or you have the option to sell it to me this ordinary Equity becomes putable Equity now the name is also getting changed earlier it was ordinary Equity ordinary instrument ordinary instrument means equity share now it becomes putable instrument what is putable instrument where the holder has right to sell and such right is given by issuer against premium premium is non-refundable and th this this particular instrument becomes portable now tell me what is the nature of portable inst instrument Equity or financial liability huh when when the market is in favor of holder understood or not so generally putable instruments are also Financial Li but still me when they are not Financial liability when it is not Financial liability when it is not in favorable favor of holder understood or not tell me yes so this is the basic uh understanding about putable instrument guys have you understood or not yes tell me guys have you understood or not yes I'm just giving you simple 5 to 10 minutes reading homework that after your class either you are traveling or what you just need to read these Five Points regarding portable instrument I will discuss with you tomorrow because I want you to first read it you understand it and then I will discuss you so it's a just five minutes homework of reading can you do this yes after the class and before coming to the next class you have to read these five points to understand only you will have a doubt but you have to understand and then only I will discuss with you can you do this yes huh if you want you can take the uh when when we'll take the break you can take the screenshot if you don't have the books right now you can take the screenshot afterwards okay understood guys so what is the basic uh nature of portable instrument what is the basic nature basic nature means it is it a equity or financial liity simple what is a basic nature Financial liability but sometimes it becomes Equity subject to these five conditions if these five conditions are fulf it becomes Equity so I'm giving you the homework to read these five condition in all other cases its basic nature is same Financial liability understood or not okay any doubt till now guys any doubt till now no all right so now the unit one is completely fine these all are the irrelevant portions non applicability and all tell me have you understood this much part Financial instrument financial asset Financial liability equity portable instruments fixed to fixed f2f everything is understood or not any doubt you have huh see if you want you can take a break of only 5 minutes before starting this unit to just a break of five minutes for fresh up all right I'm resuming all right guys I am starting please be silent unit two recognition and measurement of financial instrument unit two recognition and measurement of fincial instrument now we already understood financial asset Financial liability and Equity here we'll understand the types of financial assets what are the types of financial assets we'll understand the types of financial liabilities their initial recognition their subsequent measurement and all see now as far as Financial assets are concerned dors are Financial assets loans are Financial assets investment in equity shares or financial assets investment in debentures bonds are Financial assets fixed deposits are Financial assets these all are financial asset but what is different their nature is different all Financial assets are not having same nature they are not having any same nature like you cannot compare the dettor with the fixed deposit yeah you cannot compare the loan with the investment Equity all are having the different nature so definitely when they all are having different nature the accounting could also be different you cannot follow the same accounting for all of them you cannot follow the accounting for debtors and investment in equity same No it should not happen so to make a proper accounting to make a proper accounting account uh presentation measurement we divided these Financial assets into three categories into three categories Financial assets are divided into three categories I discuss the category I'm not naming them right now see you may now you you may have the books also but until unless I refer my books or I want I will tell you that please look into the books please look at me only and listen to me only and don't get distracted first of all listen it properly then only look into the books otherwise you will not understand so I'm just letting you know that there is no single accounting treatment for all type of financial assets there is no single accounting treatment for all type of financial liabilities no not at all it's not possible there are different different accounting treatments for different type of financial assets so first of all we should classify our financial Assets in a particular category there are three different categories same as far as far as liability is concerned Financial liability there are two categories so in financial asset there are three categories in financial liability there are uh two categories and in equity there there's no category why there is no category in equity because Equity is a residual remaining balance so for residual kind of items there is no uh classifications there is only one classification that is equity so financial asset how many categories three liability two and Equity no understood okay now what are the names of financial assets categories of financial assets the first category is financial asset classified as amortized cost I'll call it AMC amortized and C for cost AMC category amorti cost the second category is fair value through oci FV ocii fair value through oci sometimes it's called FP oci fair value through oci I'm not taking through as a t so fbt oci or fvc FB oci and the third getting is fvt PL fvtpl so there are three categories of financial assets understood how many categories three categories of financial assets depending upon the nature now debtors may go to one particular category loan will go go to particular category investment Equity may go to some other category investment dentur some other category so first of all I identify which category they belong then follow the accounting treatment so AMC is having different accounting treatment fpci different accounting treatment fbl different accounting treatment understood yes sir in the same way in the same way if you come to financial liability part they have two categories amortized cost and fvtpl only two no need to look into other Pages don't worry only two categories Financial liity only two categories how many two what are the categories AMC and fbt they don't have any fpt oci guys understood or not yes sir okay now first of all let's understand the categories these are very important these are very important and exam oriented points what is AMC category like which financial asset you will put into AMC how to identify the AMC category now please understood it properly financial asset at amortized category amorti cost AMC category means we satisfy two conditions we satisfy two conditions one is hold to collect business model and second one is SPI SPI means solely payment of principle and interest you can write it solely the payments of principal and interest SPI here it is WR solely payment of principal and interest SPI it is already written in the book full form solely the payment of principal and interest okay now let us describe it hold to collect business model test if I'm the investor I said listen to me concentration is very important for this chapter I the investor and I have any financial asset in my hand consider equity share consider fixed deposits consider dtas consider investment in debenture first of all is there any maturity date is there any maturity date as far as fixed deposit is concerned yes there's a matur as far as investment in debenture is concerned maybe maturity debenture is having a limited period equity share No majority out from AMC because any instrument if there is any maturity period Then only it will come under this category so what is the basic requirement maturity maturity is the basic requirement maturity period should be there guys are you understanding not yes now still I haven't discussed the first point first point I haven't discussed I am just concentrating on the maturity period so any maturity period in fixed deposit yes it may come any uh uh investment in debenture maturity period yes it may come investment in equity debtors yes deor three months after 3 months they will give me the cash now so three months is the maturity now yes Bill receivable yes yes matur they will come under here now read the first point what is the what what are they saying my objective to hold this till the end of maturity before end of maturity I will not sell it I will not s suppose I have FD for 5 years I'm not going to premature it before 5 year I will hold it till fifth year and my objective is to collect all the cash flows what are the cash flows in my FD what are the cash flows what cash flows mean what I'm going to get in future interest and principle I will collect all cash flows first year cash flow second year cash flow third year cash flow fourth year cash flow fifth year cash flow I will collect all the contractual cash flows contractual here means promised cash flows promised yes understood or not yes tell me guys understood or not so my objective to hold this investment till the maturity end so that I should collect all the contractual cash flows if this happens then the first condition is satisfied the first condition name is hold to collect I am holding it to collect all contractual cash flows till the end of majority understood or not this is the reason why I told you that there must be the maturity if there is no maturity period for any financial asset this will not come under under this category first condition is clear yes huh yes any asset financial asset is in your mind right now you should you should think about any financial asset so that it should cover it is covering or not here any any asset in your mind BS bonds okay take a bond you purchase a Gold Bond a sovereign Gold Bond central government issues that Sovereign Gold Bond it has a maturity of 8 years minimum 5 years maximum 8 years five year lock in Period actually so it is a maturity of eight years so yes it is a maturity having a maturity now what is the basic nature of that so gold bonds the nature is government will pay you every year 2.5% simple interest how much simple interest it will will pay you 2.5% simple interest okay and after eth year they will pay you they will pay you the whole amount based on the market value of the gold based on the market market value of the gold after 8th year but if you want you can redeem before 8th year but after five years but five years a lock in period you can redeem if you want at the time of sixth year also at the time of seventh year also before 8th year if you want you can redeem it before now tell me what is your objective if you are you are having objective to hold till 8 year then only it will cover under this suppose if you are having intention to sell it before 8 year then it will not come here now understood or not yes sir first condition is okay yes now read the second condition first of all SPI means solely principle and interest nothing else only two things here we talk about what cont contractual cash flow means promised in the contract what cash flow is promised to me that I will get principal I will get interest I will get premium I will get capital gain I will get this much I will get other income so contractual cash flows means what are the cash flows which is promised to me as an investor by the company they promised me they will give me this much they will give me that they will give me this amount this is a cash flow and why word contractual is there because it is promised now connect this with SPI SPI contractual cash flow characteristic test read that are solely payments of principal and interest on the now if now now identify any particular financial asset where they are promising you as you are the investor they are promising you that they will pay you principle exact principle and and interest these two things they will definitely pay you uh their contractual terms are give rising to the payment of principal and interest nothing else they will give you principal and interest as far as sovereign gold bonds are concerned 2.5% simple interest will be given to you okay but at the end of 8th year exact principle will be given to you that that is not actually uh promised the they will give you the money as per the market rate of the gold tell me guys suppose if the gold rate has been reduced drastically after 8th year you may not get your principal are you guys understanding or not so whether they are committing for solely the payment of principal interest no you may get your lower amount of principal or you may get the amount which is lower than the principal yes you will get the interest but you may get a lower principal understood or not yes tell me a dear yes it may not be the under AMC category so sir what kind of asset will be under AMC category fixed principle and interest uh let us talk about simple debentures fds FD FD first of all talk about FD FD are you are you going to get the principal interest yes tell me yes which category okay instead of fix deposits debenture simple debenture redeemable after 50 years tell me what what you will get during five years you will get interest and after 5 year you will get principal tell me both the conditions are fulfilling or not yes what is the first condition your intention to hold it till maturity what is the second condition you will get at least two things what are the two things principle and interest you will get it in any way if this happens then the category uh then then your asset will be categorized under which category cost tell me understood or not yes H yes understood read the examples even the trade receival are also uh AMC so why trade receival there's no interest in that why tradable see first of all tradable definitely you have to wait till maturity because your de you have given two months time three months time to your deor before two months will before two months they are not going to pay you okay then are they having principal interest yes definitely sir where is interest in that letter see you are you sold gos at 50,000 Rupees to your dettor for three months credit Suppose there was not any credit credit and if you sell the same Goods in cash you must have sold at 48 maybe less than the value less than 50,000 see whenever we sell our Goods on credit definitely the price is slightly higher than the cash price are you understanding or not so technically I'm charging extra amount from my data because of the credit period that extra amount is in the nature of interest only understood or not and this is the reason why I'm telling you that better contains the interest not in the name of interest in the name of some other item understood or not yes clear guys yes so these are the examples of uh AMC category Financial assets can we move on huh okay so what are what are the basic features of AMC category huh hold to maturity SPI contractual cash flows understood okay staff Advance simple uh you are my staff you're my employee I have given you one lakh rupees loan yes staff advance means loan so I have given you one lakh rupees loan for five years after fifth year you will repay me the principal amount and during the five years you will you will pay me the interest amount loan how staff advance means loan staff advance means loan okay staff advance means not the advance against salary it's not Advance against salary because if it becomes Advance against salary it's not a financial ass you are giving me the service okay it's a loan all right yes sir can we move ahead yes okay tell me in this category will the equity investment will come amorti amorti category Equity investment will come here or not why no maturity no SPI and is not guaranteeing you the principal and interest entity is not obliged you remember now entity is not having any obligation for the principal and interest and it doesn't have any maturity so uh Equity investment is not come is not coming under the amortized cost category guys understood or not now AMC is done uh second category name is FV oci second category name is fvt o c i fvt oci if you could read it the second condition is same only first is slightly different first of all read this here it was hold to collect only here it is hold to collect and sell objective is achieved by both the holding the asset in order to collect contractual cash flow and sell the assets before the invest matures means now you tell me my intention is not clear I may hold it till maturity or if the market demands or if I require the cash before 8th year before maturity I may sell my investment if I get the good opportunity if I get the good opportunity from Market I may sell it and I recover my money so ultimately my objective will be achieved either see my objective is to recover my money now how can I fulfill my objective one I can fulfill my objective by waiting till maturity but I can fulfill my objective instead of waiting till maturity uh by selling it in the market I can if I can get the good opportunity my objective is to recover my money guys are you understanding or not so here the objective is getting changed I may s it before maturity if that happens and the same SPI solely the payments of principal interest this instrument will become categorized under which category fbt all others that means other than M AMC other than FPA all others are uh categorized under the third residual category which is fvtpl fvtpl is a residual any asset which could not cover under AMC which could not cover under FCI will definitely cover under F all other are FP understood or not so first of all read the examples of uh financial asset FP oci maturity period may be more but your investment intention is only for one year two year so your intention is to sell them after two three years again asking same question Equity investment can it be categorized here why no maturity and the second Point same no uh the no guarantee of principal and interest it talks about the guarantee basically princible interest understood or not last category fvtpl last category fvtpl Now read it this is a residual category Financial assets fall under this category are generally those asset which whose contractual cash flows are not fix not fixed not guaranteed actually not fixed means not guaranteed and they does not generate cash flows on specified dates they are not giving a guarantee that in on this date you will get interest on this date you will get the principal not specified anything such as investment in investment Equity is definitely categorized under this category why why no maturity no contractual guarantee of any principal interest so it is categorized under FPL guys have you understood this yes any doubt any doubt no just a minute read this question 112 question 112 entity anticipates cash expenditure in a few years entity invest invest it excess uh cash in short and long-term Financial assets so that it can fund the expenditure when when the the need arise definitely in future when they will uh require the cash for that requirement they invested their excess cash somewhere okay for the future purpose many of the financial assets have contractual lives that exceed the entity's anticipated investment period means they are saying that maturity period may be more but their investment period may be less suppose I have invested in a fiveyear bond but my intention is to hold them maybe sh two years only so many of the financial assets have contractual lives that exceed the entity's anticipated investment period okay The Entity will hold the financial assets to collect the contractual cash flow and when an opportunity arise it will sell the financial asset to reinvest the cash in financial with a higher return whenever they got the good opportunity they will sell that particular investment and invest their money in another investment huh okay the managers responsible for the portfolio they are having different different portfolios and for different portfolio managers are remunerated based on the overall return generated by the portfolio evaluate the business model tell me primar it seems fpci why first of all they are saying whenever the opportunity Ares they may sell their investment and reinvest their money into another tell me guys now you can see the answer is very good answer they have they have drafted the answer properly the the objective of the business model is achieved by both collecting contractual cash flows and saing the entity will make the decision on an ongoing basis about whether collecting contractual cash flow or selling will maximize the Returns on the portfolio until the need arrives for the investment cash and definitely this is based on what the answer should be FCI in contrast consider an entity that anticipates a cash outflow in five years now they have changed the situation basically they are saying consider an entity that ENT and cash outflow in five years to fund the capital expenditure and invest excess cash in short-term financial asset when the investment matures The Entity reinvest the cash in new short-term financial asset The Entity maintains this strategy until the funds are needed at which time the entity uses the proceeds from maturity maturing Financial assets to fund the capital expenditure only sales that are insignificant in value occur before maturity the objective of this contrasting business model is to hold financial asset to collect contractual cash flows that means what I require the cash after 5 years before fifth year I don't want my money uh anything so what I decided I thought K let's invest this money in a short-term investment short-term means one year one year maturity period investment because I don't want to take big risk so I invested my money in short-term Investments so this is my strategy that I require the cash after 5 year now I will invest it one year or for two year and whenever the twoe maturity will will close I get my money and I will again reinvest it in another shortterm I will do do this the cycle will repeat till 5 years so technically what I'm doing investing for entire maturity period of 12 months or two years technically and this if this is happening my intention to is to hold them till majority definitely in that case AMC in that case it is a AMC but if it doesn't if it is not the case that means because they are saying shortterm Financial assets if this is not the case and whenever I got the good opportunity it becomes fbd so that ultimately what matters the company's intention is matters understood or not so category or the nature is based on the company's intention have you understood or not so Market question number 112 of the question bank is very important this is the question see basically what is the code question fi means financial instrument SM means it's a ICI model question it's 112 112 means what it's a 12th number question of this category uh I have in financial instruments these are the categories basically category number one 100 category all the questions of identifying financial asset Financial liity Equity are kept in this category the second category is 200 types of financial assets the third categor is recognition of I have categorized all the questions into different categories all such categories are different different number of questions different different type of questions so this is important for exam purpose like whenever we in exam we know that this category is very uh important for us and we are not feeling comfortable so directly uh we can open this and all the questions we can practice okay so I haven't categorized like IC model different questions RT be different I categorize it in the uh in the order of accounting treatments okay SO2 was a question a very important question all right can you please read 114 please refer 114 D issues preferential to G limited holder has an option to convert these preferential to equity of the issuer any time up to a peri of 10 years if option is not exercised by the holder preference Shares are redeemed at the end of 10th years examine the nature of financial instrument instrument they are asking but definitely they are asking from entity point of view or holder point of view see for holder point of view definitely Holder will get either cash or Equity instrument financial asset but from entity point of view it may be a liability or Equity why it is uh you need to you need to tell me the answer in respect of that that f2f is the fix to fix option is there or not correct the option is given to the holder now yes the option is given to the holder now it's totally upon the holder if he require the equity we'll give them the equity if he doesn't require we'll give the give them the cash that means the settlement is not fixed and hence it primarily it is a financial liity instrument which instrument Financial liity read the answer properly it is also known as hybrid instrument why hybrid both the characters of financial liability and Equity are there what is the character of financial liity here see we we have to pay interest every year this is a characteristic of financial liability obligation to pay cash at the end of 10th year I will give I may give you principal cash again a characteristic of financial liity but at the end of 10th year if you want I will issue the equity share equal to the principal value so now now I will give you equity share equal to principal value if here if there is a fix to fix settlement for such Equity then there will be the equity instrument so this is a hybrid instrument basically which covers both the characteristics of financial liability and Equity understood guys yes done all right question number 208 please read question number 208 yeah AMC or f oci f oci why opportunity to sell in the market before that understood now yes all right so these were the three categories of financial asset name amorti cost FV oci FPL all right now let's discuss the accounting treatment of all the threes all the three treatment accounting treatment for all them first of all amortise cost first of all amorti cost please remind in your mind amorti cost what were the two conditions listen to me look at me please what was the condition all to collect wait wait wait hold to collect means you are going to get all the promised consideration from day one till 10th year you know all the promise consideration that you are getting yes yes understood or not yes you know all the consideration that yes you will get this you will get this you will get this you will get this you can you are expecting all the 10 years commitments com promise considerations okay fine and your intention is to hold until 10th year fine what you will get principal and SPI principal and interest situation is very much clear from first year to 10th year you will get all all interest and principle properly on a specified dates IND says let's make present value all the cash flows you know it that whenever you will get the cash flow first year end second year end third year end fourth year end fifth year end and so on discounting them and calculate the present value you know now what is present value discounting and all so discounting them calculate the present value record the financial asset at such present value understood or not yes but but but but discounting them that means to calculate the present value I need a discounting rate such discounting rate should be effective rate of interest the term is effective rate of interest e r effective rate of interest rate of interest now what is that effective rate of interest technically please look at me please listen to me first of all I'll discuss it properly don't worry because there is there are some technical ter comes here what is effective rate of interest let me give you one example simple example I have given I have given a loan to you for five years I have given a loan to you for 5 years for me it's a financial asset I categorize it under AMC because after 5 years I will get my money back maturity period is clear okay I given you a loan of 5 lakh rupees for five years at a interest rate of contractual interest rate of 8% how much 8% 8% every year you will pay me 8% interest but after 50 year I demanded I'm I'm in the contract only I said not only 5 lakh you have to pay me 550,000 you have to pay me 50 ,000 extra premium now again what are the terms of the contract 5 lak rupees loan yes 5 lakh rupees loan for five years interest rate is 8% every year you will pay me 4,000 8% at the end of fifth year you will not pay me 5 lakh you will pay me, 550,000 tell me 50,000 I'm getting extra in the name of Premium that 8% is known as coupon rate or contractual rate what is 8% coupon rate and contractual rate but when it comes to effective rate so technically effectively effectively I'm not getting only 8% I'm getting more than 8% return on this five L what is my return by giving loan to you by providing loan to you what is my return what is my income only 8% interest or that 50,000 extra huh % so technically my return is 8% or more than 8% more than 8% maybe 9 or 10% tell yes suppose it's 10% considering 50,000 extra 10% would become the effective return understood or not yes interest rate is 8% contractual rate is 8% but I'm not I'm getting uh 8% interest as well as 50,000 extra in overall sense if I could calculate a single rate which represents the interest as well as premium then it should be 10% and such 10% is known as effective rate understood or not so do you understand what is effective rate yes H so for discounting you need a effective rate not the contractual rate sometimes the contractual rate is different and effective rate is different which rate you want effective rate sometimes they will give you the effective rate in the question in in the name of market rate effective rate is also known as market rate Market interest rate guys have you understood or not yes now the accounting treatment of amorti cost amortized cost at what value you will record them read it read itow present value of cash flows because you know it that till maturity you how much cash flow you will get then you will make a present value right which rate effective rate plus minus now what is this plus minus transation cost anybody what is this plus minus transation cost trans cost means processing fees legal cost documentation expenses these are the transacation cost technically so transaction cost may be the outflow transacation cost may be the inflow it is a transacation cost I will give you one example with for this let me give you one simple example so uh heading is AMC example please write it AMC example entity has given loan I dictating also don't worry entity has given a loan to another entity of rupees 10 lakh of rupees 10 lakh for four years for four years interest rate interest rate is 10% per an market rate is 12% per enom market rate is 12% see now this market rate is what effective rate market rate will will become the and 10% is what contractual rate okay understood yes yes entity incurred 25,000 rupees expense on documentation 25,000 rupees expense on documentation all right guys calculate at how much value loan asset which is financial asset is recognized initially at how much value it should be recognized initially now how to calculate this see uh just answer me one thing giving loan by entity is outflow of entity or inflow of entity outflow and incurring this 25,000 expense again is a outflow of entity or inflow of entity outow so both are outflow outflow outlow need to be added or not and this is the reason why I said transaction cost to be added sometimes transaction cost could be less deducted why suppose instead of incurring 12,000 I'm charging 25,000 from uh the borrower that you have to pay me 25,000 initially that it becomes my inflow tell me so giving outflow giving loan is outflow and charging you 25,000 is inflow so technically this is this is to be net off so when you will add transaction cost when you will deduct transaction cost transation cost sometimes could be added sometimes it could be deducted when the person who is giving loan at the same time who is incurring the cost added who is charging the cost deducted understood or not yes okay so here here CCF contractual cash flows CCF contractual cash flows Year One year two year three year 4 tell me what are the contractual cash flows loan is 10 lakh and contractual interest is 10% every year I will get interest of one lakh one lakh one lakh and last year 11 lakhs last year 11 lakh understood yes okay and present value at the rate of 12% present value at the rate of 12% how much I want the total amount it's 939 253 huh 939 253 it's 939 253 so I applied to calculator short bricks okay to save the time so we need to save the time in the class because we don't have enough time for each and every figures like here I need to write here we don't have the time so 939 253 so our financial asset is 939 253 plus what was the documentation expenses plus transaction cost 25,000 so our total financial asset becomes 960 4 253 964 253 how much loan you have given to them 10 LH but what amount of asset you are recognizing you know what is the interpretation by giving 10 lakh Rupees loan you are expecting to recover only this much rest rest is your loss so what general entry you will pass General entry is loan asset account debit 964 253 space bank account credit it's 10 lakh that means by giving a loan of 10 lakh I'm expecting to giving uh expecting to recover only and only 9 lakh 64,0 253 the rest is my loss can you please calculate the loss value 25,000 sorry 35 74 it's a loss it's a loss which is transferred to P account it's a loss balancing figure so by paying rupes 10 lakh by giving rupes 10 lakh advance or loan to someone I'm expecting to recover in the form of inflation and considering inflation all I am expecting to recover 964 253 this is your ca Final in as accounting when you were in intermediate your as accounting was like loan accounting debit Loan account debit to bank 10 lakh 10 lakh and P account debit to bank 25,000 transation cost transfer to P this was your ca Intermediate Accounting now this is your ca final accounting this is the difference between your as and NDS why I told you it is not requiring your exam but to make your mind what is happening right now in this in this chapter because in this chapter so many things will happen which have you have never seen earlier and which were totally different in C inter are you guys understanding or not in CA intermediate you you basically recognize the loan at whatever the value you have given the agreement value but India says no nothing like that it it doesn't happen India says record your asset at the estimated value of the recovery how much you will get it what amount of loan you have given doesn't matter you have given 10 lakh Rupees are you getting 10 lakh are you getting back your 10 L no you are technically getting back 964 only for you the asset is 964 only because the basic meaning of asset is right to recover money so how much right you have to recover 964 in the terms of present value so rest is your loss you cannot recover the money so why it is a loss because you given the loan you given the loan at 10% instead of because the market was 12% now so 2% is your opportunity loss so you are booking the loss of opportunity loss 2% guys have you understood or not yes simple thing this is your AMC so what is the accounting treatment of AMC what we have understood accounting treatment please yeah please present value of cash flows present value to be done attive rate of interest transation cost to be added or deducted when when added outflow outflow added but outflow and C you recovering inflow to be net off deducted understood guys clear next treatment next next asset FCI at what value you will record it fair value means market value fair value means Market again same plusus cost same third FPL at what value but but but but here in this category transaction cost need to be charged to the P only okay so what is the accounting treatment overall accounting treatment tell me what is the overall accounting treatment Amor cost present value of CCF what is CCF ual cash flow sir why we are not doing present value of CCF for fpci because our intention is not to hold till we may sell it before so how can we say that our CCF is still maturity we are not sure understood or not we could sell it in the market that means it may have a market value and if it is a market value so recognize it at fair value understood yes and last one is fair value through profit loss at fair value but the transtion cost will be charged to the profit and loss I hope till now it is completely fine any doubt any doubt okay let us talk about fbt oci and fvtpl category right now what was the example AMC category huh now I have some examples for FP and FB category look at the example please we bought share of infosis at how how much value huh huh 2 rupees Foundation cost okay on quarter ending fair value market value these Shares are designated as first of all what is the accounting treatment of f initially recorded fair value cost to P done yes now before understanding the question please please please before understanding the question that was I we discuss initial recognition at balance sheet date what we will do at balance sheet date you will again do fair value remeasurement you will again do fair value remeasurement understood or not yes fine yes sir and at the time of sale the profit or loss shall be booked in the p and at the time of sale if there is again transaction cost suppose you sold the enforces share the broker charge you the fees so at the time of sale there is again transaction cost same transaction cost will be transferred to P because this is what category ftpl category every time transaction cost P yes sir understood or not yes now initial recognition accounting at what value you purchased assume it it as a market value only trans cost is so what is your outflow 21102 2102 yes but at what value you will recognize the asset because it is which category and this transation cost will be transferred to and bank account credit by D accounting done yes done yes okay okay subsequently the share becomes huh initially it was calculate the profit 150 you haven't sold it you haven't sold it you are remeasuring it at every balance date you will remeasure them at fair value book The Profit or loss okay what what is the entry investment Shar account debit to fair value gain the the the category name is value through that means every time you will have a gain or loss through P transfer always to P understood or not yes done yes further further further read this if we s the sh at and trans cost is trans cost transferred to see entry yes done entry done okay transtion cost always transfer to P entry done now initially you recognize that then you that 25 now the what is the what is the book value of your share what is the book value of the share 2250 yes now you sold it at now you will have a gain of where you will transfer P because the category name is FPL understood or not yes done yes so fvl category always do but transation cost to be transferred to this was but at the same time if we discuss means balance sheet date see what will you do what is this regular income means you will get dividend from the company you have Equity investment now yes so regular income always transfer to okay at balance sheet dat what will you do what will you do what will you do what will you do remeasure you will do remeasurement at which value and any change will be transferred to P so this is a fvtpl category it's very simple any income any loss any transacation cost always transfer to P nothing else done guys yes sir done or not but instead of FPL if I talk about FB oci what will you do first of all what will you do initial recognition at and what about transation cost add or less depend okay understood or not yes okay and now again fbci balance sheet date balance sheet date FB first of all what about regular income interest dividend recorded in the regular income will always transfer to P even though it is a fbt oci category you all understand o what is oci oci means other comprehensive income okay wait oci means other comprehensive income basically the purpose we are talking why oci why pnl what is that lies over here this is your profit and loss you transfer the incomes incomes incomes expenses expenses all expenses in your pnl but there is one more category one more classification other than all items there is one more category called this category what what is the name some incomes or expenses may not trans may not be transferred to P sometimes they are transferred to separate category which is known as oci why we are doing so they are like unrealized profits unrealized losses unrealized gains and we need to be we need to shift them temporary at some other location we don't want them in our pandle they will disturb our profit are you guys understanding or not some items of incomes or expenses which are unrealized in nature I don't want them in my pandle because they will disturb me to take any decision they will disturb my investors and shareholders they may have different uh uh decision- making then so I don't want to disturb their thinking so I decided that these items I don't want to keep in my pandle somewhere else but these are also income and expense so apart from pnl there is another separate category temporary category technically which is called oci I put them in separate bucket see p is a main bucket and OCA is another bucket I don't want to keep them in the main bucket for the timing until I realize them so I kept them in the different bucket whenever I will realize them properly I will put them in the main bucket understood or not so that OCA is a that that particular bucket only now you understood it properly okay so what is the accounting treatment of fbt oci so initially anytime any kind of regular income is there you will transfer to P why P why P see it's a it's it's a o why because the realized profit realized profit regular income you already got that which kind of income will be transferred to O unrealized regular income is realized okay now second point you have to read all you all have to read first of all reasure them at fair value any changes will be transferred to oci this is unrealized in nature unrealized since it is unrealized guys understood or not yes understood or not yes now third number point on d d recognition means when you sell them D recognition of financial asset under this category whatever whatever amount of gain or loss you you kept in a different bucket what will you do with that that bucket transfer that bucket into the main bucket main what is the main bucket pandle accumulated balance in oci in respect of such financial asset shall be reclassified to the P account understood or not means it becomes realized gain or loss there is one exception there is one exception I will discuss it separately don't worry I will discuss it separately so tell me what is the accounting treatment of fbci accounting treatment initial recognition Fair Val trans cost to be adjusted not to P okay sub regular income hand at balance she date what to do fair value preasure fair value because of which there's a change gain or loss transfer temporary to oci when you s them oci reaccumulated to the P there is one exception there is one exception that exception we'll cover it separately till now any problem any problem no last amorz cost before discussing the subsequent measurement I given you the example written example uh what is the initial recognition ofor cost what is the initial recognition ofor cost no I'm not asking the amount actually what is the initial recognition treatment of cost present value of CC F at effective rate of interest plus minus action cost understood now yes compare with the 10 lakh Rupees you will get the loss and profit huh such loss profit transfer to the now subsequent measurement subsequent measurement income always transfer to P at balance sheet date what will you do because initially it was measured at present value so at balance she again it should be measured again present value of remaining CCF initially it was present value of all CC at balance she it should be present value of remaining CC understood guys that's it simple done yes all fine done or not yes okay guys what is the what should be the category of equity investment what should be the category of equity investment means I'm asking you is it AMC is it fbci or is it is it FPL FPL is a default category huh there is exception there is exception sometimes you can categorize this Equity under under fbto oci fbt oci is not default category but sometimes you can categorize under fbto now what on What basis or on which situation on what basis on on which which situation this is the exception in your book this is the situation yes anyone can explain have you understood the points yes what is there it is only dependent on held for trading what is held for trading if you purchase the equity investment and your intention is to trade them always fpn always F your intention is for a long-term purpose holding for the longterm purpose then you can categorize them as f o or if you want you can continue under f PL also understood a lot so if same fi I have to write investment in equity two situation held for trading not held for trading held for trading always fvtpl always fbp not head for trading options fvtpl or fvt oci not held for trading means long-term long-term holding so you have a choice if you follow this fbt oci if you follow this fbt oci then fair value gain obl loss transfer to oci only and on D recognition what was the requirement under fpi on D recognition the accumulated oci is reclassified to P that will not apply here that will not apply here this is the exception what is the general rule of FPA category on D recognition the entire accumulated gain or loss is transferred to P from from one bucket to another bucket that doesn't apply here if you are following if you're following this option for Equity investment you cannot transfer from one bucket to another bucket so sir what to do directly transfer to reserve and surplus instead of transferring to P transfer directly to General Reserve so on D recognition accumulated gain obl loss acate gain or loss shall be directly transferred to reserves and surplus say retained uh say retained instead of pel account instead of P account so this is the requirement done guys yes okay come here example number six same question infosis you purchase the infos share at how much value much cost quarter ending value becomes but but but but you now designated them as f f oci now what is the first rule of f oci fair value recognize that fair value plus minus transaction cost so plus minus transtion cost this that means this time you will record the asset at 2102 what is the entry investment account debit to bank 21102 you haven't transferred two two Rupees to the P directly adjusted in the cost of the asset this understand or not no next quarter ending value becomes 2250 what what would be done investment account debit to OC why OC it's again but it's a it's a it's which category is this oci category you remember now yes sir so 148 how 148 2250 minus 2102 understood or not now suppose if we sell these shares at again there's a transaction cost of this time again transtion cost no need to transfer to p no need to transfer to P this is this is which category so adjust the transtion cost with the proceeds 2500 you got and you have a transaction cost of three what is the net proceeds what is the net proceeds 24 97 and what was the book value 2250 the remaining amount transferred to O oci and tell me it is a d recognition now after d recognition will you transfer this oci to P or directly to retain earning directly to retain understood now yes same understanding you can get with another example with another example example number four please read example number four I giving you 5 minutes you have to refer by yourself right now example number four please read it first entry clear any doubt okay here one end it becomes 2610 this entry clear yes yes any doubt because you transfer the gain to so see the extract of P under P there's a separate bucket bucket name is huh other can you transfer this fair value in the oci guys understood or not done yes and there's another SOI statement of changes and Equity what is this SOI full form is a statement of changes in equity it discusses all the changes in the equity items so it looks like this in your schedule 3 there's a format of this this is the share application money amount the equity component of resonance surplus De instrument ocii Equity cash flows of reolution surplus exchange gain this is basically the other equity statement okay so during this oci came from pnl of 21,000 Equity investment through oci guys understood yes next year next year initially it was uh sorry last time it was 261 0 now it becomes 2580 there's a loss are it was a again okay in the P separate bucket in the name of loss tell me and in the SOI last time SOI you you transfer it it was profit now it is 21 profit and for the year it is a loss so balancing figure becomes in oci the balancing figure becomes 15 yes understood or not yes now third year sold at 26 last time it was 2580 okay you have a gain of but you transfer the gain to why because of the exception because of the exception what was the exception see inds recommends that you should follow this one but if you are following this one you can never transfer any gain or loss you can never accumulate any G or gain or loss to pnl you have to keep keep them in oci only and directly transfer to retained earning so this is the reason why we are transferring them to the oci keeping and oci now in the pnl again 4,000 what was the last time balance, huh, this time there's a profit 4 it becomes 19 directly transfer to retain earning done directly transfer to retain earning OCA account debit to General of retained earnings better done yes tell me any any doubt in that any doubt in that all fine yes okay now let's discuss some more examples uh more examples means more practical examples and exam oriented questions for these categories especially AMC category because am MC category is the most important for exam so example number seven is for the AMC category example number seven is for the AMC category a limited has made a security deposit whose details are described below make necessary General entry for accounting assume market rate is 12% market rate means effective rate of interest market rate means effective rate of interest okay what are the details the details are date of security deposit you given the security deposit on 1411 it will be matured matured that means this security deposit is having the maturity five years it's having a maturity now so intention to hold till maturity if this proved then which category will be AMC description leases that means for leasing purpose suppose I took one land I took one land on lease from the government of India and I have to pay them as a security deposit other than the rental amount other than the rental amount of the land I have to pay them as a security deposit how much security deposit I I have to pay them 10 lakh and for how many period the lease is that means after 5 years the security deposit will be given back to me tell me which category it should be AMC or FP oci AMC y AMC because there's a maturity period and Our intention is to hold the lease for five years before fifth year we will not cancel the lease before fifth year we'll not cancel and if we are not canceling the lease the security deposit will not be refunded before fifth year so technically the category would be would be AMC sir what about SPI what about I'm not asking the full form what about SPI is it is it proving or not yes principal at least we are getting now yes so principal as well as interest or only principal also works so we are what what after five years what what amount we'll get principal 10 LH we have given after five years we'll get the 10 L amount understood or not yes so a discounting rate is 12% so this category is what now tell me in this category in this category just asking you one year two year three year four year 5 year what is the CCF first year zero you will get nothing why why you will not get anything security deposit I have given to them and in there's a zero% secur deposit so what is the contractual rate of interest zero so in the first year you will get zero second year you will get zero third year you will get fourth year and fifth year you will get entire 10 lakh understood or not so you have to do present value like this present value of 10 lakh at 12% fifth year can you please do it 5 lakh 67,2 427 so you booked the asset at which amount 5 lakh 67,500 but you have when the secur you have deposited rupees interpretation by depositing 10 lakh Rupees you will be able to recover only 567 in the present value terms rest is your loss understood or not this loss will be considered as a lease expenditure because you are giving the security deposit for leasing purpose or treat it as a lease expenditure for five years amortize this in the five years understood guys understood or not yes so look at the entry properly if you have any D doubt you can ask me the entry uh ask me the doubt I will discuss this separately but any any doubt on this any doubt no now at what amount you recognize the secur deposit huh 5 lak 6742 what is this it's a loss technically but instead of naming it as a loss we are naming it as lease expenditure and we'll recognize it in the five years of lease period understood or not now your assets Book value is but after five years how much you will get repaid 10 LH so uh you have to recognize every year interest interest income so can you please calculate 567 427 multip by 12% 680 91 becomes the interest income what is the entry what is the entry security deposit account debit to interest income now let's check the facts let's check the facts wait inds accounting what example was that seven yes huh yes sir tell me you booked the security deposit as financial asset initially at what amount 567 you book the interest income at first year end at what amount please calculate everyone okay now what is the closing balance please do it immediately 6 635 51 opening balance 635 518 again interest to be booked 12% 76 262 okay closing balance 7 1 1 78 780 opening balance 7 71 780 interest closing balance 7971 94 94 opening balance 7971 7971 94 interest 956 3 956 3 3 closing balance 8 9 8 9 2 57 opening balance 8 9 28 57 wait wait wait interest uh and here we'll get 10 lakh Rupees at the end of 10 L now so interest be rounded off because of the uh rounding of error just make a balancing figure 107 143 yeah if you could directly calculate then almost same calculate 107 all same understood or not and at the end you get your money back 10 lakh Rupees guys understood or not now tell me every year you book the income now first year second year third year fourth year fifth year and total tell me how how much income you booked 6891 Plus 8 uh sorry uh 76262 plus 85 413 plus 95663 plus 10743 432 57 432 572 every year you booked the lease expenditure also that prepaid lease expense you remember that 432 572 573 divid by 5 every year you book the re expense 86515 86515 same same same same and the total becomes 4 3 2 5 72 or 3 whatever can you see the overall impact is nil huh your income and your expense is nil but every year you are recognizing some income some expense some income some expense some income some expense this is basically indas accounting and when you were in CA inter intermediate what was your as accounting as accounting was security deposit to Bank 10 lakh Rupees and after 5 years bank account debit to security deposit 10 lakh Rupees no income no expense so this was re accounting but for the better presentation this indas accounting is there have you understood the concept guys huh yes so this was example number seven AMC any doubt on that yes all right staff advance means staff loan This is highly important for exams highly important for exams and staff loan is also covered under AMC category staff loan is also under AMC category okay now we'll discuss the accounting treatment of Staff loan staff Advance with the help of one example example number eight please read example number eight properly first of all for okay so now staff loan there's an employee to whom entity has given the loan of at what rate but the market rate is 9% to tell me what is effective rate huh so e becomes 9% so what is 6% coupon contractual rate coupon contact whatever you say now what are loan terms equal principal installment in five years as well as interest on the so every year I will I will get my money back in the form of equal Principle as well as interest every year on the remaining portion guys understood or not first of all we need toal the CCF CCF contractual cash flow so 15 divide 5 so every every year you will get 3 lakh three lakh three lakh three lakh three lakh okay first year what is the first year interest rate 6% on 15 LH calculate so 3 lakh and 90,000 it becomes 3 lakh what is the remaining balance 12 lak 6% 72 to 3 lakh principal and 72 interest 372 in this way have you understood this CCF should I explain it more or you understood understood you understood this CCF now now present value at 9% you remember now effective rate so what is the value what is the present value 13 lakh 88965 interpretation interpretation by giving 15 lakh rupees of loan we will be able to recover only 1388 rest is our loss we are giving it to employees so rest is our employee benefit expense previously we give it for lease so rest rest was our lease expense here it is our employee expense understood or not so what is the entry loan to staff 1388 we'll be able to recover this much only employee benefit expense Tri 1 035 to bank guys understood yes understood or not yes done yes now tell me every year I need to book the interest income at which rate at which rate income will always be booked at effective rate understood a lot so what to do with this earlier in the least case we amortize it again here also we will amortize it if we are expecting that our employee will give us service for the for for five years but if we are not expecting any services from him then immediately transfer to P expecting Amo not expecting P understood or not okay so either defer and amortise or directly transfer to P now see The Ledger account of loan to staff initially you recognize a loan at now calculate my 9% 1257 or 06 it's income understood or not at the end of first year how much CCF you got you remember now CCF yes so closing balance becomes 1123 guys have you understood or not yes this is your staff Advance further years I I haven't discussed here but you you you are comfortable now huh tell me how to what to do in the second year opening balance will be 11 what will be the amount of interest in the second year amount amount amount 1123 972 multip by 9% one 1 15 this is the interest income and what is the buy Bank amount, 3 lakh 72,000 then you will get the closing and so on and so on and so on and so on understood or not sir what about this triple1 035 employee expense what about this amorti over the 5e period P transfer to P understood or not so now read the treatment Now read the treatment yes read it without interest or concessional rate of interest then such Advance should be recognized by applying done yes sir which category now wait this Advance was 15 LHS 15 L now exceeds 1388 if I'm not wrong huh H then the ex is called compensation expense I haven't WR the expense it is expense understood or not yes sir then five years written off okay if not identifiable then at immediately done any doubt no so this was our staff loan under AMC you can do this by yourself also okay example number nine if you have any doubt you can ask me in the further classes don't worry so till now any doubt till now any doubt no because now see from beginning what is financial instrument what is financial asset what is financial liability what is equity what is putable uh f2f test conversions all are done then in the unit two financial asset three categories AMC went to record when to when to identify in the F oci went to identify in the F PL this was done then the treatment of each and every part AMC uh let's discuss the treatment now first of all AMC initial recognition present value of CCF plus minus transaction cost okay further at balance sheet date regular income P regular income regular income to be calculated at which rate effective rate effective rate understood at balance sheet date again at balance sheet date again remeasure remeasure at present value of remaining ccs understood or not that's AMC done second category po initial recognition plus minus transation cost all right subsequent measurement regular income P balance she dat remeasurement at Fair changes oci keep it in temporary okay D recognize s what to do book The gain or loss on sale to P now because it is realized and this o reclassify to P exception Equity investment if categorized under fbci do not reclassify to TL directly transfer to retainer understood or not last category FPL initial recognition transaction cost P andl regular income p Balan fair value changes p d recognition P everything P so can I say AMC and fvtpl has nothing to do with oci yes AMC and FPL has nothing to do with from day one to Day end last till maturity they have they do have any with the OC for o there is only one category f o next uh staff Advance how to to treat staff Advance AMC present value of CCF at which rate effective rate means market rate the difference will be treated as employee expense employee expense to be amortized over a period of loan every year you have to book the income at which rate effective rate understood or not yes uh security deposit leases which category AMC same present value of CCM which rate effective rate effective rate difference will be treated as lease expense to be Amo every year interest income transfer to P done any doubt because this was this was the financial asset part now the next is going to be the financial liability part next is financial liity part shall we start or shall we take a break okay thank you thank you so much all right shall we start so guys our next point is financial liability next point is financial liability look into the board same under Financial liability there are two categories one is amortized cost and the second one is fair value through profit and loss only two categories treatment is almost same treatment is almost same present value of cash flows at effective rate of interest plus minus transaction cost now here please uh mind it this is a financial liability not asset in asset you invest your money initially in asset there's a outflow initially in liability there is a inflow initially so now asking one point you took a loan you took a loan it's a inflow yes and separately you incurred processing fees you incurred processing fees it's a transaction cost it's outflow what will you do inflow minus outflow understood but you took a load hit inlow at the same time you charge something from the lender what is that inflow inflow plus inflow so simply inflow minus outflow we need to do and if both are inflows then add understood yes okay so Financial liability initial recognition same present value of future cash flows at effective rate of interest plus transacation cost or minus transation cost depends it this is for the amortized cost second category is fvtpl again same fair value transation cost to be transferred to P same to same treatment as far as initial recognition is concerned same to same treatment is there okay now when we talk about financial liability especially for the amorti cost First of all make a chart first of all make a chart Financial liability Financial liability under two categories all right so those two categories are amortized cost and fvt pl amortized cost and fvtpl now under amortized cost again there are two categories again there are two categories one is compound financial instruments and the second one is non-compound financial instrument guys compound Financial instrument means hybrid hybrid instrument means it has characteristics of financial liability as well as Equity it has characteristics of financial liability as well as Equity you remember my case three example yes this was 40% example you remember yes that was so hybrid instrument Financial liability and Equity there are two components are there in the compound Financial instrument and non-compound financial Li instrument is a pure Financial liability pure completely it's a financial liability no equity component is involved all right again since it's amortized cost category for all amortized cost category we want effective rate of interest we want effective rate of interest in all the questions AMC category means effective rate of interest we want every time so for the purpose of accounting we need effective rate of interest if you have books please highlight we need effective rate of interest that is called irr for the financial liability measurement at amortized cost so to measure the financial liability we need effective rate of interest the effective rate of interest will be given in the question or will we need to calculate now it depends sometimes it is given in the question or sometimes we need to calculate the effective rate of interest not every time you it will be given suppose if it is not given in the question you have to calculate but how to calculate we'll understand it so it's a compound it may be non-compound all right so now how to identify which is compound which is non-compound first of all come to example number 12 example number 12 Comm limited issued 9% bonds 20,000 numbers of 100 each that means 20 lakhs at 10% discount please solve it along with me now your first step should always be to check the actual process proceeds tell me what is our actual proceeds as per the example actual proceeds at issue date at issue date at date of issue what is actual proceeds 18 18 lakhs it is our actual proceeds although you are issuing 20,000 numbers of 100 face value 20 lakh but logically you got only 80 l in your hands so the loan is of 18 lakhs not 20 lakhs effectively is of 18 lakhs interest is repayable annually principle after four year in cash with 12% premium oh my God there's a CCF and in such CCF there's the interest principal repayment and PR premium also now the name could be premium but it is as good as kind of Interest so it technically now tell me uh what is the rate of interest coupon rate what is the coupon rate huh but tell me is it actually a 9% effective rate why we are paying 12% premium extra and we are getting only 18 lakh rupees of loan and we'll pay 20 lakh plus 12% so effectively the interest rate could be higher than 9% are you guys understanding or not yes but where it is it is not in the question look into the question the coupon rate is 9% it is not given what is effective rate it is not given in the question is it is it given no we need to calculate it so this is the actual proceed if I talk about CCF can you please tell me 1 2 3 4 can you please tell me 1 2 3 4 CCF every year how much I need to pay 20 L multip by 9% 80 180 180 last year 180 plus 20 lakh plus 12% 22 lakh these are the effective rates uh sorry these are the cash flows contractual cash flows but I need to make the present value now at which rate at effective rate but effective rate is not known to me effective rate is is not known to me effective rate is missing but in any way it is more than actual contract rate it is more than actual contract rate actual contract rate is 9% but effective is definitely higher than that why because of discount of 2 lakh and because of Premium of 240,000 so overall 440,000 I'm paying extra apart from interest it should not be 9 it should not be 10 it should not be 11 12 it it should be more than 12 13 are you guys understanding or not how to calculate we'll assume two rates you must have read it in your ca intermediate times IR internal rate of return financial management subject FM so if you if you forget about this don't don't worry we assume First Rate First Rate as let us say 14% we'll assume it as 14% can you please calculate all these things at 14% can you calculate the present value at 14% 18 lakh 57,000 exact 5 yes 7 at 14% is 1850 how much amount I want I want this much but my rate should be that when I make a discounting the present value of all these things should be equal to 18 lakh but at 14% it's not equal to 18 lakh I want 18 lakh I have to increase the rate so that the amount could be more reduced so the second rate let's take 16% let's take 16% 1794 623 17 94 623 623 1794 623 so yes now at 16% it is less than 18 lakh so definitely my effective rate could would be between 14 to 16 you got this for 15 yes okay so let's take it 15 only not an issue okay 15% at 15% we got 1794 so our effective rate could be between 14 to 15 consider lower rate as a base consider lower rate as a base I took it as a base and my ultimate Target is 18 lakhs my destination is 18 lakhs so what I will do 14% lower rate and I know it is the effective should be more than 14 so more than 14 means plus okay now I'm not writing down the formula I'm writing down the overall logic what is the logic increase in rate increase in percentage that's 1% interpolation technique basically in mathematics we call it as interpolation so we increase the rate by 1 percentage you can see from base you increase the rate VI so your amount is getting reduced decrease in amount decrease amount tell me how much huh 5610 5 this is my base do not forget this from base the amount reduced to 1794 I don't want to reduce till 1794 I want to reduce from base I want to reduce only till 18 so tell me how much I want what to reduce it 507 so X will be the increase can you please calculate interpolation cross multiplication cross multiplication it should be 14 90 all right 14.90 approximately this is effective rate of interest and this effective rate of interest we'll apply to our financial liability understood guys let's revise it again again once more we issued the debenture or Bond whatever it was at of 20 lakh Rupees at 10% discount so our actual proceed was 18 lakh whatever the actual proceed it is our loan it is our Loan financial liability now we calculate we we determined our cash flows it should be made it should be discounted using effective rate effective rate is missing we cannot use contract rate because we are paying extra 2 240 and even we got less 2 lakh so our interest could be definitely higher than that have that 9% so we followed the interpolation technique and we got our effective rate now whatever we'll do we'll make an accounting as per 14.9 what accounting do initial recognition bank account debit to loan bank account debit to loan 18 lakhs bank account debit to loan 18 lakhs sir why you are treating loan at 18 it's of 20 now at ual proceed would be Tre as loan actual came in your hand actual came in your hand what is the actual amount came in your hand 18 L understood or not now Loan account if you create Loan account by Bank 18 lakhs you will calculate the interest expense ear in the asset side we were calculating interest income the interest expense at which rate 14 14.9 effective rate T calculate 268 200 and at the year end we paid how much 180 to balance 1888 200 and so on in the same way we will calculate our interest guys are you understanding all right yes all right next this was non-compound this was non-compound instrument so for non-compound instrument also we need effective rate of interest Now read this question 501 it is almost same as my example which we discuss right now B limited issued on 148 9% debenture whose face value is 20 lakh at a discount of what is the initial proceed 19 LHS companies to redeem 50% debentures on 31st March 11 at 7% premium and balance will be redeemed on 31st March 13 at 10% premium on 31st March 12 20,000 will be distributed as cash bonus to the deure holders now if you can calculate the CCF can you please tell me the CCF of this question you issued the Dentures on 148 so 8 9 9 10 10 11 11 12 12 13 5 years now yes calculate uh can you please tell me the CCF it's a 9% denture of 20 lakh face value so first year 180 second year again 180 third year third year again 180 plus there is some redemption in the third year there is some reduction in the third year look at this 50% debentures on 31st Mar 78 7% premium so 20 lakh multip by 50% 10 lakh 10 lakh plus 7% premium 10 lakh 70,000 Redemption understood guys yes sir next 112 huh, 90,000 why 90 because 50% is getting redeemed now the remaining will be 90,000 in the the same year 20,000 bonus redistributed extra and in the last year again 90,000 interest along with 10% premium 11 lakhs so these are the cash flows but where is effective rate effective rate is given or missing it's missing in the same way you can calculate the effective rate will you calculate by yourself yes huh right now or after the class want to calculate right now complete the portion right now right now T immediately what HS you have First Rate is 12 and second rate 13 so at 12% what was the amount 1 19 39078 and 13% 187 so it's 12% plus this is basically base you increase the percentage by one your amount could will decrease by how much 59 7 and you will decrease it what was your initial proceeds so decrease till 19 39078 yes 12 66 percentage this becomes the effective rate of interest any doubt so this was non-compound now come to the compound part come to the compound category all right so I told you compound category means hybrid both equity and liability this is compound both equity and liability so when we have compound instrument we need to bifurcate it into two parts the equity part to be recorded separately and the liability part to be recorded separately always we can't record them as a one instrument we need to allocate it in two parts okay the entire proced to be allocated into two parts that is how we need to make accounting but how two parts how to determine first we will calculate the financial liability part and the balancing figure will be equity because Equity definition is residual value so residual value me means balancing figure so we'll calculate it we'll calculate Financial liability Parts first so please write it compound Financial instrument compound Financial instrument first calculate initial proceeds calculate initial proceeds initial proceeds could be face value minus discount or Plus premium guys understood then calculate Financial liability calculate Financial liability which is present value of contractual cash flows at effective rate of interest calculate Equity calculate equity which is initial proceeds minus Financial liability all right so this is going to be the step for compound Financial instrument I will discuss some more steps like when it will be derecognized what to do with the equity portion when it will be redeemed then what to do Holder will Avail the share or cash what to do there are so many things we'll discuss it one by one come to example number 11 come to example number 11 can you please read this example 11 for done now common limited issued convertible debentures now they say convertible that means it is a compound face value 50,000 numbers at 8% interest 8% is a coupon rate parum for five years debentures are convertible like the option of holder after five years same debentures with no conversion rights if we could issue no non-convertible debentures the market rate of interest for those would be 11 so this will become effective rate of interest now I said first of all calculate the initial proceed can you please tell me what is the initial proceed what is the initial proceeds yes 50 LS second one is calculate Financial liability present value of CCF what is CCF okay in this question what is CCF how many years are there every year I need to pay 4 lakhs and last year it is at the option of holder now so if Holder will ask the Mone ask for the cash cannot deny so it also becomes the contractual cash flow if it ask so I'm taking 50 Lo principle in the cash flow because if he require cash I cannot deny like no no no I will not pay you I will give you share I cannot deny and hence I am taking this 50 as a part of cash flow understood or not although it is dependent on the decision of holder but if he wants then I have to pay so now present value at what rate 11% calculate please 44 laks 45,000 615 so this becomes the financial liability what are the steps initial proceeds now what is equity huh 50 lakhs minus 44 45 615 H five 5 43 85 so it becomes Equity now look at the general entry what entry we need to pass bank account debit 50 lakhs to 8% convertible deure it is a financial liability and to 8% convertible denture it's a equity both are separate categories tell me from balance sheet point of view where this will be shown noncurrent liability and financial liability guys understood or not in financial liability it's a borrowing it's a borrowing see this here understood guys but what about this other Equity other Equity means now look at the other Equity component this is other Equity where will you keep keep it this one Equity component of compound Financial instrument here you will keep them the equity part guys understood or not yes this is other equity now what will you do with the liability portion recognize the liability you charge interest can you please calculate is it is it correct or not please check our effective rate was 11% now calculate 489 018 correct now you paid 4 lakh rupees through bank and the closing Valance was like that how many times you do this uh working five years huh five years so first year second year third year fourth year in the fifth year when you calculated the interest and you paid rupees 4 lakh four lakh four lakh four lakh four lakh four lakh what was the remaining amount will be left 50 lakh and see the remaining amount left was 50 lakh balance Carri it down now at the end we'll ask holder what do you want we'll ask holder what do you want option one option one what he said I I need cash okay you need cash we'll pay you convertible denture liability we already have a liability of 50 lakh now see this is the book value this is the book value of the remaining liability we already created the liability of 50 lakh to be paid sir you paid it what about that Equity component you remember Equity comp which we transferred here now it is of no use it will be transferred to the retained earnings we have to be transferred retained so to be transferred to the retained earnings journalism guys done and if the holder offs for Equity option then what will you do the liability of 50 lakhs this liability of 50 lakh will be reclassified into Equity PR understanding or not this liability of 50 LH which is having credit balance debit side it is car carried for carried down it is having a credit balance it is to be reclassified to equity see the entry 8% convertible debenture Financial liity to 8% convertible debenture Equity guys have you understood huh so what I did here in the second case in the second case what what this what is this financial liability reclassified to Equity those who have the book please return it write it Financial liability reclassify to equity and then I will issue the equity shares I will issue the equity shares see the equity sh have be issued now once I reclassified the financial libility to equity the equity balance has been now 55 lakh how how 55 lakh because earlier we transferred Equity 5 54,000 and now this 50 L has been transferred now you will issue the shares you will issue the shares 8% convertible debenture Equity account debit two equity share Capital two security premium reserve guys understood or not now how come these figures are done uh basically here no number of equity Shares are not there only but uh it's assumption basically it's assumption so here I can mark the arrow assuming one lakh numbers at 10 each assuming one lakh numbers at 10 each okay so this is compound Financial instrument is it done yes any doubt No Doubt should I give you one question will you try right now okay this is the question question number 609 try this first is comfortable should be all right guys do I need to discuss it have you done so this is the answer 8850 960 1 14940 and what about the first year interest 78077 all right these are the interest portions of every year and at the last if the holder option elects to convert the option into ordinary shares then this would be the entry this would be the entry conversion understood guys yes sir if you have any doubt you can ask me you don't have any doubt no interest for the purpose of recording interest or the cash flow interest cash flow interest now yes cash flow interest to be to be calculated on the face value it depends on the year ending it depends on year ending if the year ending is July to June year ending year ending we need to check what is the year ending they are assuming the year ending is June all right come to one more question which is important for your exam question number 607 look at the question first of all guys look at the question it's a question of non-compound instrument okay non compound instrument he limited has made a borrowing of RBC Bank borrowing of RBC Bank for 10 lakhs for 10,000 at a fixed interest of 12% fixed interest rate coupon rate or effective rate coupon rate loan processing fees were additionally paid this is a transaction cost tell me what you will do see 10,000 is inflow or outflow 10,000 is inflow or outflow inflow and 500 is inflow or outflow to net off so what is our net loan 9,500 is the net loan okay so see this initial measurement transaction Price Less processing fees the in the net net loan is 9,500 understood or not yes now the loan is payable for year half yearly installments so in this these are very rare question where they ask the uh points half yearly or quarterly basis so now half clearly how to deal with this 2500 halfly installment I have to repay 2500 2500 2500 2500 four times it becomes 10,000 so to repay this 10,000 four halfly installments of 2500 2500 2500 2500 principal amount loan amount this date of loan this finishing date would be two in the two years because half early half early four times repayment repayment of loan starts from 30th September because it is 1 April so first half will complete on 30th September September installment this interest rate 12 this interest charge look at the interest charge look at the interest charge what it says interest to be paid quarterly interest to be charged quarterly charged it is to be charged quarterly so interest quarterly to be charged but uh uh the repayment of loan would be paid halfly guys understood or not so can you please tell me the CCF amount every time what will be the CCF what will be the CCF first of all what is our initial proceed 9,000 now for CCF can you please tell me uh when we took the loan 1 April huh 1 April so April May June quarter ending interest calculate the interest on 10,000 3 calculate the interest on 10,000 at the rate of 12% perom huh so first CCF is 300 on which date 30th June 30th June okay X1 okay July August September once again three months same 10,000 so this time 300 interest as well as 2,500 principal so 2800 C c f got that point or not no got that point yes okay September October November December three months on on what amount 7,500 because 2500 has been repaid so calculates on 7,500 31st December X1 yes Tell Me 2 25 January February March again 3 months on 7500 that means 225 and further 2500 31st March 22 huh yes 2725 again now the remaining balance becomes 5,000 5,000 12% 3 months so June 150 September 25 + 150 2 26 December 75 March 25 so this is the CCF this is the CCF you or not it's still wait wait wait now how would the loan accounted be in the books of a limited consider IR 16.6 they have already given you the IR so if they have already given you the IR no need to recalculate it you already have the IR but it is per anom basis it is based on perom it is based on perom guys what will you do divide by four why four quarterly you have to charge the interest understood or not huh yes all right so if we make the account Loan account by Bank 9500 tell me q1 Ending by interest what will you do how much amount please calculate 9500 multip by 16.6 percentage mtip 3 by 12 3902 390 39425 39425 394 exact uh round off huh okay we calculated it month-wise you can calculate on Day Day wise also day wise also AA two bank what was the first interest you paid so two balance 95 9 and so on understood or not will you be able to the the solve the remaining part tell me guys so it's a very most important question the question number was 607 and similar similar question came in May 22 exams tell me have you understood this thing yes oh now I'm giving you one example you try to solve it will I give you sir sir okay please write down one example loan taken 15 laks at 9% interest for four uh 5 years for five years principal equally to be paid plus interest on balance loan processing fees loan processing fees 80,000 loan processing fees 80,000 paid effective rate of interest missing first year payment on time first year payment on time second year default second year default not paid anything now I want you people to uh to solve the question till second year end and then I will further discuss this part default W part I'll discuss but till this default like er is missing you have to calculate the ER first then first year accounting then the second year balancing okay you calculate do it first year interest is 135 yes huh yes second year okay 1 8,000 third year interest 80 81,000 fourth year interest 54,000 and then 27,000 okay so now total CCF View you will calculate first year 435,000 second year it should be 48,000 third year it should be 3 lak1 81,000 then 354 then 327 overall CCF you got that now based on these overall CCF please calculate the ER but yes what is the actual proceed actual initial proceed 14 lakh because it was 15 lakh now and processing fees was 80,000 so minus inflow minus outflow so net inflow is 14 lakh 20,000 so you need a rate which should be when you discounting uh the all the CCF it should be equal to 1420 so logically the interest rate is 9% but the effective rate should be more more than 9% you can take First Rate as a 10% assume First Rate as a 10% assume First Rate as a 10% at 10% it should be 14h 63724 is it 14 63724 at 10% it's fine it's fine 14h 63,000 724 as per my calculator at 10% but what we need we need 14 lakh we need 14 lakh means we need to uh we need a lower amount so we need to increase the rate increase the rate means you should take 12% of 13% instead which one will you take 12 or 13 H 13 sorry 11 so take 11 12% whatever it is 12 or 13 so 12 if you are taking 12 then 35 1.12 it's 13 lakh 95358 at 12% anyone 12% 133h 95358 at 12% 13 lakh 95,000 358 now interpolation technique you have to calculate 11.35 no 11.35 okay huh the Gap is much more it should be lower actually so interpolation 11.33 at what rates 10% and 15 15 11 what per ages 10 and 12 11.28 11.28 okay so all right 11.28 or you you can 11.3 as a rounding off 11.3 so finally you guys got the rate 11.3 let's take 11.3 commonly for all of us okay for the simplest calculation 11.3 is the effective rate of interest everyone now make a first now Ledger Ledger account create a ledger account account of a loan Ledger Ledger account and uh post all the first year transactions post all the first year transactions 11.28 but but take 11.3 please everyone please take 11.3 for Simplicity now make a ler account Loan account first of all credit side buy Bank 14 by Bank 14 lakh 20,000 now what will you do interest calculate the interest 160 460 to bank 435,000 debit side and balancing figure comes to 11 45,46 1145 460 first year done now come to second year interest second year interest no 1145 460 into 11.3 1 29 437 now wait second second year there's a default wait second year there's a default so it should be two Banks zero do it do it do it to bank zero and calculate the closing balance all right uh chart book is here but they don't know actually so there is another parcel of chartbook they will give you to me okay yes all right so can you please tell me the loan account second year onwards second year onwards what you did buy balance 145 460 okay by interest 129 437 yes but payment payment zero payment is zero two balance 2 48 9 1 27 489 48 97 so what happen next write down on third year default continue on third year default continued third year also default continued okay same default that means we haven't paid the third year balance also second year balance also it is getting outstanding day by day on beginning of fourth year loan was restructured beginning of fourth year loan was restructured with new TOs with new new terms loan was restructured with new terms now what are the new terms borrower has to pay borrower has to pay 6 lakh rupees perom from the end of fourth year onwards loan modification fees loan modification fees 50,000 also to be paid immediately guys what we are discussing is modification of financial instrument it is the most crucial part of this chapter modification of financial instrument so whenever in these kind of questions if you see the basic uh if you see the question in initial points of the question you will find this is a non-compound instrument you noticed it's not a hybrid it is not a financial liability and Equity part it's only a financial liability so initially it was right now basically this question belongs to non-compound financial instrument but how to deal with the modification we are discussing right now okay now they are saying loan continues till third year in the third year loan also continue and in the fourth year there was a modification and what is the modification lender is saying okay you just paid six lakh six lakh six lakhs three times huh okay six lakh six lakh 6 lakh three time as well as you have to pay 50,000 right now as a modification fees guys understood or not yes this six lakh first six lakh when we have to pay first six lakh when we have to pay end of four year fourth year end of fourth year we have to pay now how to deal with this modification how to deal with this modification first of all we have to check whether the modification is modification uh the changes in the modification is up to 10% less than 10% or the change in the modification is 10% or more we have to apply this test like whenever there these kind of modifications are there now we have to calculate is there any change in the liability because our liability balance is what how much of liability balance right now Book value it is at the end of second year the loan continues on the third year Now the default continues on the third year so what should be the balance of third year what should be the balance on third year okay carrying amount of carrying amount of loan at third year end fourth year beginning yes how much 14 lakh 18 18 960 this is the loan at the third year beginning uh third year end or fourth year beginning third year end or fourth whatever okay it's fine now what are the revised terms what are the revised terms further in further three terms we need to pay six lakh 6 lakh six lakh and right now 50,000 so 0 1 2 3 right now we need to pay 50 then 6 lakh then 6 lakh and again 6 lakh calculate the present value at what was our initial effective rate of interest 11.3 please calculate sorry years huh second and thir the starting from the starting from the fourth year yes the loan is restructured no no no the it is restructured restructure now the period is also CH three years of course six I I haven't tell you that okay borrow has to okay borrow has to pay 6 l parum from the end of fourth year for three terms for three terms write this s for three terms okay so three times he need to pay six lakh six lakh six lakh okay fine now calculate the present value with this original effective rate of interest calculate the present value rise amount as end value tell me 15 61 612 yes 15 08 61 22 including 50,000 yes yes everyone yes sir got this figure now compare the carrying amount with the revised amount is there any change yes huh yes tell me tell me what is the difference 1586 1 2 - 14 18 19 960 huh no 8 96 52 he's not in a move to his study right now your earlier answer was wrong now okay you are not accepting your mistake you are saying it's calculator's mistake W 89 652 so this is a difference now calculate in terms of percentage 89 652 divided by original carrying amount was 148 960 6 31 8 32 6.32 percentage change guys since this change is less than 10% the treatment is different if the change is 10% or more the treatment is different we'll discuss both the both the treatments don't worry Have you understood what I'm saying huh what we did till now we calculated two figures We compare two figures what are two figures no we compare two figures right now at the time of modification carrying amount at the date of default at the date of change modification revised value at the data of modification we compared two things revised value and revised value means also the present value of the revised amounts at effective rate of interest so we got the difference and we got the percentage since the percentage is quite low less than 10% the treatment will be different if the percentage is 10% or more the treatment will be quite different now what will be the treatment let us let's let's continue write it please conclusion since the change is less than 10% change is less than 10% it is considered as modification it is considered as modification apply following rules apply following rules step one deduct the modification fees from current carrying amount do it deduct the modification fees from current car carrying amount what is the current carrying amount 14 18 960 minus 50 tell me 13 68 9 60 60 this will become current loan step number two calculate new effective rate of interest calculate new effective rate of interest based on rate revised CCF based on Revis CCF that means at new er the present value of revised CCF is equal to is equal to 1368 960 now we would calculate the new rate overall new rate we would calculate so just like you did initially now your initial proceeds become 1360 of 960 and what is your CCF CCF 1 2 3 6 lak 6 lakh six lakh now calculate that rate where you apply the present value should be equal to 1368 please apply I think at 10% it's 14 92 Tri 1 but we want 1368 we want 1368 so rate should be uh decre sorry we need to reduce it rate should be increased more than 15 at 16% 13 47 34 54 474 34 10% and 16% calculate the rate new effective rate is 15 04 15 15.1 15 point it's fine done guys let's complete the loan account please I think it was second year now you created your loan account till second year no huh second year in your Ledger Ledger Ledger second year so third year buy balance what was the balance of 1 2 74 8 97 1 274 8 97 again the default continued you remember again the default continued uh 1 2 7 4 8 97 + 11.3 144 063 to balance 14 18 960 fourth here buy balance 14 18960 now please do it please look at look at the board 146 980 now follow this modification step number one step number one you paid the modification fees so here two bank 50,000 now your net loan becomes 1368 960 now buy interest expense at what rate new rate 1368 960 * by 15.1 206 713 and you will pay at the year end two bank 6 lakh rupees the balancing figure is 9775 673 guys tell me fifth here buy balance 975 673 byy interest H 147 3 327 to bank 6 lakhs to balance 52 5 L 23,000 sixth here buy balance 523 we have to take the balancing figure because uh last may we have to pay six lakh now so take the interest as a balancing figure due to rounding of error 77,000 right this was modification all right tell me look into the steps dear they are not actually easy very much and you you you can forget these steps uh probably in 2 three days so look at the steps what we have done at the time of mod ification that is very important see this read this question yeah quite similar it's default continued in the year fifth 6th 7th and 8th alone reschedule agreement took place at the end of 9th year end of 9th year as per the agreement poor limited is required to pay 220 lumsum at the end of 10th year so technically what is the modification date on mod modification date is 9th year end or 10th year beginning so 10th year beginning you have to compare two things one the one is carrying amount and the other one is revised value revised value is 22 is to be paid at the end of 10th year so revised value means CCF present value what is the new CCF the new CCF is 220 tell me guys so this is the question you can you can uh also try it at your home and we can discuss it in the tomorrow's class of course this was came in November 23 Paper and one more thing I should tell you about this question tell me the effective rate of interest it's given it's given coupon rate is 10% coupon rate is 10% I'm saying effectiv rate is also 10% because there is no transaction cost there is no processing fees there is no any other cost at all so whenever there is no processing fees Whenever there is no transaction cost the interest coupon rate and effective rate is always same so effective rate is same and this is the reason why they have they given this question only for five marks because no need to calculate the effective rate working now effective rate working is not required in this case technically sorry compounding it simply says 10% interest we need to pay and the principle to be paid at the end of third uh 12th year simply so 10% will become the effective 10% will become the coupon rate the loan is 120 which is the exra amount all right 6 B okay let's do it see see see please don't don't talk I don't want any kind of further discussion on this if you you want to talk then please invest your time on solving instead of discussing discussion will make no sense on this so first of all loan is 120 loan is how much 120 okay interest rate is huh 10% term is 12 years any processing fees any transaction cost no hence effective rate of interest is 10% simply in that case the the question becomes very simple the you will recognize the loan at 120 only now what you will do this is your loan although they are not asking us to make a ledger account but I mean I'm showing you the Ledger account byy bank 120 by interest tell me how much well you will pay the interest and the balancing figure becomes 120 108 120 it's 12 interest and 12 you paid now the balancing figure is same 120 yes so technically every year the balancing figure should be 120 120 120 120 120 when the default happen in the fifth year now so now can I say let's continue uh uh fourth year by no not actually fifth year only fifth year by opening balance 120 by interest 12 two balance 132 is it so say yes sixth year two balance tell me 145.230 15972 159.5mm 193. 26 n9th year ending done yes sir so now 10th year beginning two balance 19326 now what is a re rescheduling 2 to be paid to be paid at the end of oh to one year discounting do the one- year discounting what we did compare two things compare two things what we compared in the last previous question compare the carrying amount compare the carrying amount and revise the present value so what is our carrying amount our carrying amount is 19326 and Revis present value okay revised present value 220 uh uh divided by 1.1 right tell me 200 200 so tell me the difference difference is 6 74 in percentage terms in percentage terms 6.74 divided by 193. 26 multip by 100 3949 same treatment to be done now if same treatment to be done what is our step number one there is no modification in the question there is no modification fees in the question so what to do same amount is the current value current loan value now what to do just calculate the new effective rate of interest considering 220 we need to pay in the last year so remaining balance will be the interest amount understood or not so what they are asking Book value of the loan at the end of the 10th year additional amount to be paid to the bank on the account of rescheduling so additional amount to be paid how much additional amount to be paid how much 6. 74 understood or not tell me guys so roughly we did this question but it's very quite simple understood K yes okay so first thing I discussed the the change is less than 10% if the change is more than 10% then there's a term called extinguishment what extinguish extinguishment accounting if the change if the difference change is 10% or more we have to follow the extinguishment accounting now what is this extinguishment accounting close the old loan and treat the new conditions as a new loan close the close the old loan means whatever the carrying amount close the old loan and whatever the new Lo new terms are there consider them as a completely fresh loan and difference is T to p understood guys we'll do this question first of all tell me till now have you any doubt huh no all right come to example number 14 come to example number 14 please example number 14 loan taken off R 50 lakhs contractual rate 12% term is 5 years repayment terms processing fees at the beginning 2 lakh see since there is a processing fees definitely the AR should be different have you understood or not yes equal principal plus interest installment at the ah sometimes they may ask you equal principal and interest installment only equal principal name equal principal plus interest should be be equal emi emi yes Emi should be equal so how will you calculate the Emi whenever they ask you now so the formula of Emi is formula of Emi is loan amount divided by annuity Factor as per coupon rate loan amount divid by annity Factor as per coupon rate what is a loan amount huh 50 L what is your coupon rate and what is the number of years five years now to five years anity please calculate please calculate 5 years annuity 3 3.65 please calculate the Emi 13 lakh 86 86,000 963 963 this is your repayment cash flow every year this is the formula of annual Emi technologically it's not Emi it's eii equated monthly installment it's equ yearly installment it becomes the kind of Emi what your basic understanding okay done with this yes now so at the end of every year we need to pay how much 13 863 93 63 and the processing fees is now can you please tell me what is the effective rate of interest where it is given where it is given it is given after restructuring it is not given as a part of initial accounting because see they are giving at the beginning of third year borrower approach to the bank requested for restructuring as for the new terms and these four are the new terms so you cannot 13% for the initial accounting okay so what is the effective rate it's missing you have to calculate will you calculate no do not calculate it will waste your time it's it's 13.6 see we know now how to calculate why should why we should waste our time on 81 part see with the interpolation Technique we all know it's a basic C intermediate thing so I'll not waste your time on this thing so what is effective rate of interest say 13. 68 accept this fact accept say 13. 68 sir it's given 13. 68 okay now since it's given see Institute will give you question where they can ask you so many things so I'm preparing you considering all the things suppose they are not giving you the ER you have to find out the ER now from past one hour we are finding the ER from two three examples now why we should repeat this all things yeah let's come to the new place H so 13.6 is the ER now continue okay now what happened what happened here at the beginning of third year what they are saying begin beginning of third year wait wait wait beginning of third year borrower entity approached the bank requested for restructuring as per the new terms so guys you have to calculate carrying amount at the date of modification first because as soon as the modification Ares you need to comp two things what are the two things carrying amount and revised value so you need to calculate the carrying amount first of all how will you calculate either you make a ledger account huh don't look at me all it's not audit or law it's F you have to solve it all right so installment I'm telling you the proper way installment installment was 13 963 okay and effective rate of interest is and initial loan amount initial loan of course of course of course 48 lakhs instead of making Ledger account don't make Ledger account Institute is not going to ask The Ledger account what institute will expect you create that schedule interest schedule make an interest schedule here opening outstanding interest installment closing it is as good as a ledger account but in the form of a statement so first year the opening outstanding is 48 LHS multi uh now calculate the interest at the rate of 13.68% 656 640 installment was 1386 963 closing balance 409 40 69 6 7 7 second year 40 69 677 yes 55 installment H 32 39 so this becomes the carrying amount at the end of second year at the beginning of third year I think modification is being done in the beginning of third year H beginning of third year so you got your carrying amount at modification date 32 39 446 what are the modified terms look at the question now this is is the question what are the modified terms properly read and then tell me the okay have you checked the revised terms yes okay now revised terms present value how to calculate now how many years 0 1 2 3 4 zero year and is there any modification fees 50 every year now I have to repay 1250 1250 1250 the present value at Old ER what is the old 30 1.68 13. 68 calculate the present value 37161 163 37 16 163 is it so yes am I right or no yes compare compare this with this what's the difference difference 476 770 percentage 476 717 divide by 32 39 446 14 14 point 72 it's extinguishment conclusion it's extinguishment extinguishment means extinguishment means closing down the old loan and create a fresh loan what I said close the old loan create a fresh loan with modified terms and new effective rate of interest create a fresh loan with modified term and new effective rate of interest so close the old loan what is the carrying amount of old loan 32946 394 46 46 create a fresh loan with modified terms what are the modified terms four years 1250 1250 1250 1250 modification 50,000 and new market rate is also given new market rate is also given 13% so CCF 0 1 2 3 4 50,000 1250 every year present value at the rate of 133% present value at the rate of 133% calculate create a fresh loan 30 68,000 089 create a fresh loan what general entry we have to pass old loan debit old loan debit two new 133% loan difference P how much 528 that's all this was this was this was what extinguishment how will you remember it's fine okay less than 10% what you will do what are the steps even how to know that it is 10% or more or less than 10% compare two things yes start from the start from that thing first of all compare two things carrying amount present value of Revis values revise CF revise amount compare it what happened difference uh less than 10% or 10% or more even if it touch 10% it's extinguishment accounting now less than 10% it's simple modification accounting what's simple modification accounting modification fees deduct from the existing carrying amount then calculate new based on new terms understood yes that's all the second 10% or more now 10% or more means extinguishment account now extinguishment accounting what do you what do you what will you do close the old loan carrying amount debit now create a fresh loan fresh loan create a fresh loan of fresh loan based on new terms and new huh now there is also one suspense here sometimes they will not give you new e what will you do calculate you have to calculate new understood yes sir so sir everything is written yes here everything is written here the modification part is written don't worry and uh in modification there are two approaches approach one approach two ICI always follow second approach which I discuss with you this is extinguishment accounting that means 10% or more this is less than 10% this is 10% or more I have discussed everything with you even all are All Things are Written guys understood or not yes you please read this one you please read this one even even not this not this you first of all start reading from here for this purpose what done and if you want to read do not read this part this part is only important for then so this was modification extinguishment and uh uh modification all okay we'll discuss one more thing modification in compound financial instruments means hybrid compound financial instruments look at this question question number 701 question number 701 can you please read this question first all see question is simple till this point after this it becomes modific okay so let's start solving this now company has issuing is issuing 6,000 8% convertible debentures with a face value of 100 each so number one what is any initial proceeds what is initial proceeds H six lakhs since this is a compound Financial instrument so tell me the financial liability which is present value of CCF now what is CCF it says there's an option to convert the debentures into Equity shares of company at a conversion price of 110 per share if they converted interest is payable annually in cash at the date of issue V smart could have issued non-convertible debt with a fiveyear term bearing a coupon interest rate of 12% so 12% becomes the effective rate now CCF 1 2 3 4 five overall five years now H now interest is to be paid annually so 6 lakh multiply by what is the real coupon rate 8% 6 lakh into 8% 48,000 plus what is the principal H 6 lakh now you may be confused so I'm clearing your confusion because sir why you are writing this 6 lakh where it is written unless the question will tell you that debentures are compulsory convertible you will always treat them as optionally convertible and if there's a option that that means we may have to pay the cash also so I'm treating this question it is convertible it is written convertible it is not written mandatory it is not written compulsory sir it is not written optionally we will always assume optionally if nothing is mentioned option to option to convert huh so there is an option alth although it is written but then also unless they are telling you that it is a mandatory convertible compulsory convertible it is optionally and here there is option that means principal may be paid in cash so please calculate the present value as per 12% 5 lakh 13,000 4 513 485 513 485 so tell me the equity component 86515 done this is our initial recognition yes fine now what happened further on 1st April 24 what was the initial date 1st April 21 Now 1 April 24 that means after 3 years so after three years uh calculate the carrying amount now modification modification 1st April 24 after 3 years how to calculate carrying amount year one opening Financial liability 513,000 485 interest install closing how much 61 618 installment 48 527 103 63 252 how much 6508 559 438 so carrying amount of financial liability 559 438 carrying amount of equity it doesn't change Equity initially was 86515 86515 now you got the carrying amount same same uh approach carrying amount compare carrying amount and revised amount now revised amount read the question on first a the convertible debenture has a fair value of 660 convertible debenture has a fair value of 660 so now revised value is equal to 660 but revised value of financial liability and revised value of equity it needs to be distributed into two parts they are giving you revised value over of the overall instrument overall instrument is 660 revised value fair value B smart makes a tender offer to the debenture holders to repurchase the debentures for 660 which the holders accepted that's fine okay at the DAT of repurchase it could have issued noncon convertible debt with a 2year term bearing a coupon of 9% effective has been changed so how to calculate this revised value of financial liability if it continues for 2 years more than CCF 48 and 648 the present value at 9% new effective rate calculate the present value for what is the value 589 445 so balancing figure is equity balancing figure 705 now compare the revised values and uh carrying values Financial liability equity carrying values 559 438 Equity 86515 revised value 589 445 705 what theen increase in financial liability what happened decrease in equity War Pass P debit to 8% convertible debt Financial liability decrease in equity 8% convertible debt toity sorry Equity increase decrease in equity everything we have to transfer it to from generalism Equity increase decrease everything we we have to transfer it to generalism like if there is any increase or there is any decrease in equity transfer it to General Reserve but if there's an increase decrease in financial liability it will be affected it will affect the P all right now what the last they are saying tender offered to debenture holders to repurchase the debenture for 660 which the holder accepted they accepted the offer now if they accepted the offer then pay them holders accepted the offer what entry you will pass see you have your carrying amount initially you increased your carrying amount by this value now tell me the Revis carrying amount is this now and the Revis carrying amount of equity is this now and this total becomes 660 so you're paying it entry is 8% convertable Deb Financial liability debit 589 445 8% convertible debt Equity debit 70555 to bank done done uh please do not ignore this without reading so right now immediately we solve the question now immediately read these steps all the steps are written for following the questions so please read this first of all for for we first calculate the carrying amount then we calculate the revised value we compared them we calculate the difference difference in FL transfer to pnl difference in equity transfer to other Equity settle the amount of FL and Equity as per the question requirement in the question they asked holders accepted the offer if the question holders doesn't accept the offer we continue the carrying amount revise carrying amount with the new new interest amount every time calculate the finance cost for the further years normally guys understood or not so this was the modification of compound instrument earlier we did modification extinguishment of non-compound instruments done guys in the same way you can do modification of Staff Advance read this it's quite similar staff Advance staff loan fin asset read the same again increase decrease you compareed the carrying value with the revised value whatever increase or decrease is there okay it may increase the asset or it may decrease the asset because sta Advance is an asset financial asset now you calculate the revised value based on revised effective rate of interest if given otherwise original now what to do with the difference difference is adjusted with the unamortized employee cost you remember in staff Advance we have UNAM employee cost yes employee cost need to be amortized in further five years huh yes Suppose there is a employee cost of 5 lakh and the loan term is 5 years you you decided to amortize it every year one lakh one lakh so after two years how much has been amortized and what is unamortized part three lak is untied part okay okay now there's a modification in the staff loan and staff loan is getting now the revised value is getting increased the uh the carrying value I'm giving you some figures just let me know the carrying value value was 1862 the revised amount becomes 1750 tell me what happened it's decreased how much huh 1ak 12,000 it is decrease of financial asset so it is decrease of financial asset what entry we should pass normally naturally as per your common sense what entry we should pass P to asset now instead of PML transfer this 112 to that unamortized part are you remember unamortized how much was unamortized what three lakh so what entry you will pass uh you will pass employee expense employee expense one one two two financial asset now uh unamortized balance becomes 3 lakh plus 112 it becomes 42,000 to beze further than the three years guys understood or not so what what what uh we did what is the Bas basic change what is the basic change in any difference you will carry you will transfer it to the employee expense and again same employe expense to be amortized understood or not yes suppose instead of this this is 1950 now tell what happened this is 1950 it's increase how much 80,000 88,000 financial asset is increased what entry you will pass tell me financial asset to employee cost employee cost now employee cost is getting reduced so you have uh now three lakh - 88 how much two lakh to be amorti in further two two years or three years three years understood or not so same works like this you can refer the example number 16 in my book it is given tell me guys understood or not yes now you have uh if you want you can refer the example immediately right now or if you want you can refer the example afterwards and you can take a break because it seems by looking at your faces that you you guys are now getting tired by looking at your face so you you can if you want you can take a break you want that or we should continue huh break okay let's have a break okay tell me do you want me to discuss more questions on this modification extinguishment see overall in this modification extinguishment what we have studied till now although we completed the conceptual part compound Financial instrument we did one question 701 from question bank then non-compound instrument in which we discuss one modification question I written one example then we discuss extinguishment accounting example number 14 we discussed we again one discussed one more question from November 23 yes for sta advance I haven't discussed any question or example but I have I discussed that it is completely same only anoti balance need to be changed so do you want me to discuss few more questions one or two questions or want me to continue further continue okay your wish but if you want me to continue further so tell me one thing first uh I can expect can I expect a self study time today in the night after the class yes yes because how you will be able to ask me the doubts or continue in the next class because see suppose if I say that we did question number 14 example 14 now there is one more example 15 there is example on 16 is Staff Advanced modification which we discuss only so see until you attempt this question now unless you attempt this question you won't find any kind of confidence so this is the reason I asked you that if you want me to continue further it's perfectly fine for me but you have to at least refer these examples uh today after the session before the next class so that you would be able to ask the doubts from me in the next class will you try for this yes huh yes so you have to this is your homework example 16 this is your homework example 15 so example 15 and example 16 are your homework along with that putable you remember now putable points reading all right so now we are moving further for some other topics other topics of financial instrument this is a heading miscellaneous provision in this heading there are so many small small points which are relevant for exams so we'll cover the major points first of all and then we'll cover the remaining miscellaneous Parts afterwards so the first point you can see is financial guarantee contracts and commitments in the morning session I told you that guarantee contracts may be the financial liity you remember yes huh Financial guarantee may be I told you that I will discuss on that so now the time has come so Mis this provision May First Financial guarantee contracts and commitments do not read anything first listen to me you are the borrower you went to a bank to borrow money now bank is ready to give you the loan at 13% rate of interest how much 1% 13% rate of interest you said that's too much uh reduce the rate or give me the discount so Bank said that okay we'll be able to give you the some discount on this interest rate we'll give you at 11% the condition is you have to give some guarantee from other party so Bank wants guarantee from other party for this loan if bank got the guarantee from another party on borrowers behalf borrower will get the advantage of 11% loan situation is clear everyone yes what is the situation normally the loan is 133% but after guarantee it will it will become 11% who will give the guarantee on borrowers behalf some third party will give the guarantee understood or not yes now the third party could be the holding company of the borrower borrower is a subsidiary company so third party could be the holding company or third party could be the other party Outsider guys asking once again situation is clear or not yes huh yes okay so situation is clear that means now you can understand that we can take we can we can have the concessional loan subject to the guarantee such guarantee is known as Financial guarantee what is that so borrower is taking loan definitely it's a financial liability for him bank is giving loan definitely it becomes a financial asset for bank but there is a third party there's a third party who is guar who is guar to what to whom Bank on behalf of borrower so now we are not talking about borrower we are not talking about Bank we are talking in the books of garer guar has to record Financial liability in respect of the guarantee given and that is the topic we are going to understand right now that is called Financial guarantee contracts and commitments whenever the guarant gives guarantee on borrowers behalf what guarant has to record that's what we are understanding right now situation is clear yes sir huh now the same thing I will discuss with you with the help of example first of all and then we'll refer one question also question is almost similar but we'll refer first of all example to understand it better so now see this loan amount is 50 lakhs at 9% with guarantee 9% with guarantee means if the guarantee is given the loan the rate of interest would become 9% market rate is 12% without guarantee means if third party is not guaranteeing the loan the loan would be the loan interest would be 12% so how much Advantage borrower is getting huh Advantage borrower is getting 3% in the books of garer guarant has to record this 3% as a financial liability what I said because of garer how much Advantage borrower is getting so guer will record 3% as a liability understood or not yes why because of its guarantee borrower is getting the interest of 9% if borrower defaults in future guarant has to reimburse only up to 3% so its own liabilities only up to 3% not more than that are you understanding or not guarant is not liable for the entire loan guarant is liable only for that Advantage value which is getting incurred for the uh borrower understood or not yes sir so tell me how much Financial liability need to be recorded by garer 3% how much 3% now in in what ways let's look into this question term is four years principal repayment in fourth year principal will be repaid in fourth year guar has charged 1 lakh for this service Oho so guarant is giving guarantee not at free of cost guarant is charging for that how much guar is charging L one lakh so by charging one lakh I'm giving you guarantee I'm giving guarantee on behalf of you so that you could get the advantage of 3% have you guys understood or not so tell me what guarant got 1 l 1 lak but what is the liability of garer approximately 3% okay guys understood or not yes sir so there are three uh two rates one 9% and the second one is calculate the cash flows based on 9% calculate the cash flows based on 12% so that we could calculate the difference you can calculate the difference directly also calculate the differences directly also now technically what is the difference 50 lakh multip by 3% so what guarant will say guarant will say that I have liability to the extent of 3% that means I have to pay 150,000 for the first year if borrower defaults tell me second year also 150 third year also fourth year also it seems that this financial guarantee contract for guaran is as good as Financial liability under AMC AMC you remember amorti cost category huh yes let me ask one question how many how many categories of financial assets what but how many categories of financial liability what F what is the basic rule about AMC how what is the initial recognition criteria present value of CCF at the rate of you remember now and what is plus minus transtion cost what is er market rate effective full form is effective rate of interest market rate you remember now yes so now think from guarant point of view guarant has liability of 9% guarant has liability of 12% or garer has liability only to the extent of tell me which option which option huh guar has liability of only so guarra has liability of only 3% such liability will be categorized under not an FPL and what is the basic rule of AMC present value of CCF based on based on CCF is what what for garer what is CCF guar has to has to be entire 12% or 9% or just 3% so basically CCF or guarant is what 3% understood or not yes so what we have done here we calculated this 3% guarant liability 150 150 150 150 now how to do present value for present value what is effective rate of interest tell me in this question is there any effective rate of interest given yes 12% the market rate 12% it is given please calculate and please use the calculator at least how much 455 602 the guar will book the liability by this amount is the garer charging anything very small amount very that means the remaining is the expense for the garer so see the see the entry see the accounting entry bank account debit 1 lakh guer is charging only 1 lakh two Financial guarantee liability account how much 455 60 the rest will be the rest will be expense the rest will be expense sir why you are debiting investment account wait do not look into this it's fine it's it's it's okay it's correct but in normal cases it's PN but the rest will be loss are you guys understanding or not see the guarant is recognizing 455,000 of liability that he's charging so the rest is it is its loss understanding or not yes if guarant is a holding company of a subsidary guarant is aing instead of charging loss it's instead of charging to pnl guarant will charge it to its investment account guarant will say that it's my it's my subsid are so consider this as my investment in subsidary I invested in the form of guarantee understood or not so this is the reason why investment account is getting debited so if the guar is a holding company investment account will be debited if the guar is not holding company normally pay account will be debited anything yes is not an exactly exactly AMC categories it's it's AMC category and the second one is the prudence concept in the further years we'll book the income also we we'll book the uh income also and that to in the pnl ultimately it will get set off you you remember in the morning as accounting ands accounting as accounting we don't do anything suppose this is as accounting suppose if you follow as accounting what will you do no entry it's a contingent liability guarantee he is a conent liity if you remember in your ca intermediate days so no entry but as per inds we have to account it for and when you are accounting you have to book the difference in anywhere so you are booking the difference in pnl because of the AMC category in liity there is no fpci there are only two categories AMC and fpn example theage I'm giving to the fin statement will not be accurate No no no not not that image I'm giving to the uh users is considering the prudence concept and we follow prudence concept from our 11th class Commerce student so technically we are giving the image to our shareholders that see we are prepared for it what AG we are giving to our shareholder considering this entry we want to let everyone know but everyone means investors that we are prepared for this whenever happens in future there there is happens in future we already booked the law we already booked the provision so again coming forward one more thing technically by debiting to P I'm setting aside a part of the profit of shareholders by telling them see this is 5 355 I not give you right now I may give you in the future but right now we have given the guarantee this may be we may use it so I'm setting setting aside the part of the profit understood or not the let the question Complete because uh in further points amortization will be there let just wait for some time so entry would be either P will be debited or investment account will be debited why investment holding company holding company will not treat it as a expense it will treat it as okay it's my investment kind of investment in kind okay so fine guys anything to ask except amortization amortization I'll discuss okay now it's fine done how much guarantee we booked how much guarantee we booked 455 602 so it it will become my financial liability under AMC under AMC now Financial liability under AMC look at The Ledger account I will make a ledger account of this financial liity AMC first of all posting of 455 by Bank by P 45 55 602 first year done no default first year done no default okay if there is no default I have to reverse my portion of the liability what liability I have recorded considering four years default but out of which first year has been done now so proportionate liability I have to reduce now tell me before that I have to book the interest because I book the liability at 455 present value technically it is 150 150 150 150 it is a 6 lakh now so I have to book the interest first of all can you please calculate how come it's for 54 672 at the rate of 12% opportunity cost understood yes so I book the interest first year first year nothing happened if first year nothing happened I have to reverse 150 and see I reverse this 150 in my pnl I reverse this 150 in my P by reversing the 150 in my P what general entry I have passed Financial guarantee liability account debit to P technically I'm booking income what I'm booking so first I booked what first I booked expense now I'm booking that is setting off guys understood or not the closing balance would be the closing balance would be what 360 274 have you understood understood till now I haven't completed the points now and still is still some points are pending have you understood till now what happened from beginning first of all what we did we calculated the difference between 12% and 9% the difference is basically the liability for me for me means who is me guarant for guar the liability the liability is only to the extent of difference so how we booked the liability present value of difference CCF is difference for for making present value calculation we took market rate as ER what entry we have passed if we are charging anything bank account debit if you are not charging anything pay account debit or investment account debit when investment account will be debited parent company or holding company or to to financial liability yeah Financial guarante liability at present value understood guys yes now first year done what will be done what will be happen now we'll book the interest cost at effective rate of interest we book the interest cost are you done or not yes first year done no default was there we revers the liability guys understood or not yes the remaining balance becomes 360 274 any doubt at the end of first year question says question says there is a 5% probability of default at the end of first year questions says there's a 5% probability of default what is probability of default probity probility of default by borrower if borrower will make the default ultimately who is liable guaranteed to the extent of that 3% now huh so probability of default is 5% can you please calculate the default see uh how to calculate the default we default we'll calculate the default to the extent of maximum amount so what is the load amount huh only 5% probability is there so multiply by so what amount will be there 2 lakh inds says your your closing balance of liability should be carrying amount all probability of default whichever is higher which one is higher suppose instead of 250 there is a 4 lakh what will you do you have to remeasure your liability at 4 lakh understood or not yes but right now no need to remeasure the probability of default is 250 we already book the liability by 360 our liability is already more are are you not understanding you not understanding huh understood so the pro as for the probability of default we may have to be 250 but we already have booked how much so no need to remeasure it guys understood or not yes so remeasurement of financial guarantee liability at a higher of that is carrying amount and expected loss Financial liability need not be remeasured at it has already been shown at the higher amount of 360 which is more than the expected loss due to default have you understood this this point or not sir suppose if it is higher probability of default then what then we need to remeasure theity and transfer the loss to the pandle once again understood yes suppose this is 4 lakh what will you do here the closing should be now how to tell the account how to tell you the account here by loss to be loss to be booked in the P how much amount 39 7 to 6 we have to book the loss if there's a four probability of default have you understood Maxim huh the maximum was 455 in terms of present value okay in terms of present value at the initial recognition understood yes tell me understood or not what were the steps what you did first of all initial recognition what you did present value of difference difference of CCF at which rate effective rate at effective rate what entry you passed bank account debit Financial uh sorry uh payal account debit or investment account debit two Financial guarantee liability under amorti cost now every year book the interest cost and reverse the liability because there is no default and at the year end check the probability of default compare it with the carrying amount if the carrying amount is higher ignore if the carrying amount is lower pre-measure through P understood guys yes can you please try this question right now at least for the first year for the second year I will definitely continue with you but for the first year can you please try this question right now for so as per the question 8% is the interest it is with guarantee or without guarantee h guant guarantee loan amount is 10 lakh interest payment are made at the end of each year principal is repaid at the end of the loan term sunlimited had not issued Guarantee Bank would have charged Moon limited interest rate of 11% so what is the difference 3% 3% of 10 lakh is 30,000 30,000 for how many years huh years so 30,000 30,000 30,000 present value at the rate of 11% what was it 73320 is Mo huh all right all right so now moon is charging anything it is return yes no what it is written I think Sun limited does not expect to recover any amount from move name would have charged Sun limited does not charge limited for providing the guarantee for providing the guarantee so what ENT what entry sunlimited has to pass sunlimited is a sub holding company basically of moon tell me what entry has to be passed investment account debit to financial guarantee liability okay 73,000 something something understood or not now what happened in the first year end 31st March 2012 there's a 1% probability that Moon limited May default that means the first during first year there was no default so can you please calculate your first year interest on 73 80 64 so first year interest you calculated 8064 all right guys yes huh and there was no default so need 30,000 need to be reversed 30,000 need to be reversed so what is the closing balance you have see initially you booked what amount 73 31 311 you booked interest 8064 reversal goes to pnl interest also goes to pnl so what is the carrying amount 51 and what is the probability of default how much whichever is higher so it is already at 51 375 no need to change it okay now the next year next year what to do tell me opening 513 75 interest would be charged 56 51 reversal 27026 yes this is a carrying amount what is PD 3% default probability that means now what you you will do not reverse you have to remeasure remeasure how much 2974 will be transferred to pandle by remeasuring is understood or not yes huh so tell me what is the overall pandle impact in your second year I want you to calculate the overall second year pnl impact tell me Interest 5651 this 2974 reversal is there 30,000 which is to be created what is the total of these two 5651 oh sorry 86 and this is 30,000 difference 21375 come to the question yeah 27037 what is that ours is different round rounding of difference okay 21 385 and ours is 21375 10 Rupees difference guys done or not tell me any doubt on this point see this is the chart of financial guarantee please read it immediately debit effect is clear great effect done anything to ask they are saying loss alans expected loss on default that means probability of default pod and they are saying initial recognition less cumulative amortization that means carrying amount whichever is higher such difference transfer to the PID all right guys this was Financial guarantee now the second part second point loan employee expenditure we give the loan to staff at concessional rate we book the loan at present value of CCF the rest part we book the employe cost you remember yes now in instead of a staff loan or loan by employer to employee there's a loan by parent to subsidiary same concept loan by parent to subsidary same concept amortized cost present Val of CCF effective rate of interest again there will be the difference but instead of charging to employee cost parent will charge it to investment account it will considered it as its investment understood guys yes I'm giving you one situation please uh write it example holding company holding company gives 12 lakh rupees loan 12 lakh rupes loan to subsidary at 5% interest at 5% interest market rate is 9% market rate is 9% repayable after 3 years equal principal repayment equal principal repayment show the accounting of loan at initial recognition date in the books of holding and subsidary show the accounting of the loan at initial recognition date in both the books please uh calculate for yes done what is the initial accounting holding subsidary tell me what was the present value of CCF 11 lakh 16,000 yes 67 5 which and what was the initial loan 12 12 lakhs okay and uh you did CCF and present value of CCF then okay so holding company what holding company do holding company will pass entry uh Loan account debit which is financial asset 11h 16, 675 investment account debit 83 83 to bank which is 12s what subsidary will do bank account debit 12 lakhs Lo 11 16 675 to to equity M other equity basically what it will do other Equity other Equity the name could be anything other Equity means contribution from parent or whatever it is what 833 25 and you know what in the Consolidated financial statements this all will get set off how this loan will get set off with the loan yes this investment will get off this other Equity because when you consolidate we calc we we compare the uh consideration We compare the investment value consideration value with the net asset value so consideration will include this much and net asset value will include this also so ultimately it gets set off in the consolidation the effect will be nullified guys are you understanding or not this is the first case where holding and subsidiary are doing this transition but there are two three more cases other than this look at the cases look at the situation now situation one if loan is repayable on demand do you understand Demand repayable on demand what is that that means the term is not fixed whenever I will ask you pay my money back I'm not saying that I'm giving you loan for two years 3 years four years 5 years just take it and give me back my money whenever I ask this kind of question came in the exam twice these kind of questions this is very important they will give you two three situations they will give you two three situations if loan a this may come in the mcqs also in the case studies also so they will give you two three situation The Situation Number One is loan is repayable on demand no need to do any present value accounting nothing thing because loan is repayable on demand it's a current asset it can be the current asset or current liability read the point what is written entire consideration received or discharged shall be treated as Financial liability and financial asset in the respective books Finance cost of income shall be recognized at Contra contractual interest only now no need to consider the effective rate whosoever is having book please write here ignore effective rate of interest ignore effective ignore ER ignore effective rate of interest ignore effective rate of interest Financial liability shall be recognized as current liability for subsidary why subsidary will record it as a current liity why because it's repayable on whenever holding ask me I have to pay so as far as subsid is concerned subsid will record it as and as far as holding is concerned may be current asset may not be because holding will know when I will when I'm going to get uh demand understand or not so if holding know that I will demand after two years he will book the asset as non-current but subsidary shall always book the liability at current because whenever they demand it has to pay understood or not so this was the first situation guys understood yes the second situation you just did it second situation example just we did it please read we we did it uh immediately now everything was discussed yes huh yes yes okay situation two was there okay now consider the example see the same example first sitution the loan is repayable on demand second the loan is repayable after three years current market rate of interest 10% it is the question we did it third situation the loan is repayable when ABC has funds to repay the loan what is that subsidary when subsidary has the funds to repay then it will be rep what should be the answer now it depends on subsidary when subsidiary will have the fund they will return me how to book the loan again the maturity is not confirmed the maturity is not confirmed then we cannot treat it as AMC no effective rate no present value at all here IND says that subsidiary and holding both have to estimate the period and accordingly they book the current asset or non-current asset current liability or non-current Li that's it fine just like first situation just like first situation see the answer loan shall be recorded at 10 lakhs full value current or non-current classification shall be based on estimation guys any doubt you can find its question also see this is a question where there are four situations now read this question four situations question number 905 so I forget to tell you about this uh coding rmp rmp M this question is not from ICI module this question is either RTP based or MTP based or past exam paper based so further here it is written from where it is taken so whenever here the SM is written that means that belongs to IC module so when this return this is return that means RTP or MTP or past exam paper sometimes you may find Om o means other material other material could be like I referred some Singapore C Institute material also from there also I took some question other material could be my own examples just like I did it today only I gave you some written examples so that other other om based on that okay so read these four situations for so now loan is of 10 ls all right and uh basically first situation what is the first situation what is the answer what should be the answer for subsidary is always current liability rep on demand and for holding depends either current or non-current depending on his demand okay his estimation okay second yes tell me simple AMC based the present value is given 810 150 what will you do entry entry say the entry Loan financial asset account debit 810 investment account debit difference amount to bank 10 lakhs subsidary bank account debit 10 lakhs two Loan financial liity 810 510 two Equity contribution other Equity huh interest to be calculated both of them at which rate at 10% guys understand a lot yes in the consolidate financial statements all will give get set off okay third again based on the estimation they both have have to record the loan as it is either current or non-current last further the company is also planning to Grant interest free loan uh is also planning to Grant interest rate loan from M limited to KK limited that means subsidiary to holding okay in the subsequent period what will be the accounting treatment of the same under the applicable index yes dividend very good whenever the subsidiary company plans to provide loan to huh holding company at concessional rate or free rate suppose suppose the second situation is same suppose the side loan is interest free and will be repayable after three years just s the companies now this loan is given by subsidy to holding what will you do for holding company what entry you will pass for holding company what entry you will pass tell me bank account debit 810 510 huh no sorry sorry uh holding company got 10 lakh now 10 lakh loan two Financial liability 810 two what holding company will treat it as dividend income what it will treat divid inome dividend income how much 189 189 850 41 490 490 guys understood or not what subsidary will do financial asset loan two bank 10 debit huh dividend dividend that means other Equity divid should be paid from the other Equity res Surplus so 18941 0 so please remember this point in your special noting in your special noting create two situations loan is given by parent then parent will uh debit the investment account loan is G loan is given by subsidary then parent will credit the income dividend income simple so create your special points immediately I yes done guys let me ask you once again the treatment of transaction cost since morning we are discussed we have discussed so many things now tell can you please describe me the treatment of transaction cost what you do for transaction cost H AMC under AMC what you will do under AMC adjust adjusted to the yes it is to be adjusted with the asset value or liability value right yes okay AMC then FB oci again adjusted to the value of the financial asset okay transfer to pnl this was in respect of financial asset come to financial liability what you do transaction cost in respect of AMC same adjusted with the liability fbl charge to P now trans cost in respect of equity there are three items now financial asset Financial liability and Equity financial asset there were three categories AMC you understood F you understood FP you understood Financial liability amcp FP you understood now if you are incurring any transaction cost or if you collecting any transaction cost in flow outlow in respect of equity item what will you do transfer to equity other Equity any transaction cost you are receiving you are paying in respect of equity item which item Equity transfer to other Equity transfer to and you are doing this thing right from your CPD CA Foundation is securi premium whenever you issue your sh equity share Capital you collect the security premium it's also the transaction cost you are collecting now where you keep it other Equity you don't transfer it to any P VL you remember my uh today morning example on this port uh portable instrument Prem you remember I collected a premium 100 rupes premium to give him the right to sale I told you that I will tell you the accounting treatment of Premium huh so that premium is what I'm giving the option him option to him to My Equity shareholder that let's give the put option but I need a 100 rupees premium that premium is again the transaction cost I'm charging transfer it to other Equity understood or not so whenever you incur transaction cost in respect of equity Equity you will transfer it to other Equity first of all write this so write like this only make a summary transaction cost transaction cost for financial asset number one AMC category adjusted in financial asset account F oci category adjusted in financial asset account F PL pnl account for financial liability AMC category adjusted in financial liability account FPL category transfer to P account for Equity or Equity transfer to other equity always inflow outflow both done but one more question is there in respect of this transaction cost for compound Financial instrument what is compound Financial instrument Financial liability as well as Equity what will you do you have to allocate you have to allocate in the proportion of their respective values allocation is required allocate transaction cost to financial liability and equity in ratio of their respective values shall I give you the example yes H yes okay write the example 9% debenture convertible debenture issued rupees 15 lakhs for 3 years there is option to convert in into Equity effective rate 12% interest to be paid annually transaction cost 1 lakh how will you do this first of all ignore the transation cost calculate the initial proceeds that is 15 lakhs it is already calculated uh present value of CCF concentrate on present value of CCF yes first of all what was initial proceeds first of all right now know the transation cost because you have to allocate it into two parts so initial proceed you have to follow right now 15 lakh only second present value of CCF 13 91 this becomes Financial liability so what is equity one 80 83 now allocate the transaction cost 1 lakh rupees of transaction cost to be allocated between these two numbers 909 794 7 to allocation in the ratio of this value and this value this value and this value understood yes now tell me the treatment what is the treatment of this transation cost what is the treatment of this transation cost as per our chart the treatment of this transation cost is adjusted in the financial liity and the treatment of equity is is transferred to the other Equity so what entry we should pass bank account debit it was 15 lakh minus transaction cost 1 lakh that is 14 lakhs 15 minus 1 two Financial liability loan account how much see technically the loan account was 1391 917 but you have to adjust it now the transaction cost 927 94912 3 two Equity Loan account Equity portion again you have to adjust in the equity only 10808 uh 3- 7206 yes 1 87 guys understood or not yes huh yes now there is last step recalculate effective rate of interest for financial liability you know why actually what you did you adjusted the transaction cost with the with this value now in any way what was your CCF by the way 1 2 3 what was the CCF 135 135 135 plus 15 lakh this was your CCF present value at 12% could not be equal to this now it should be equal to 1391 now but now your amount is getting Disturbed so you have to recalculate you have to recalculate the considering present value at which rate should be equal to one to 9 9123 understood or not you have to recalculate this by interpolation technique which we are which we use to calculate understood tell me guys so what happened with this transaction cost now trans cost to be allocated between these two once it is allocated in the financial liability portion you have to recalculate the effective rate of interest guys done or not in my concept book you will find this entire thing of transaction cost here everything all the things are written here see this transaction cost for financial asset for AMC for FCI for FPL transaction cost for financial liability for AMC for f Bill transtion cost for Equity even I the example I written here the same example I covered here also you can do the homework also and the same question came in the exam also I'm not getting right now where it is but it is in the exam also this is the question 610 question number 610 so any doubt till now any doubt guys sir we are not position we are not in a position to ask any doubt now huh which one one the question man question this one anything you want to ask no doubt at all all right so overall what we did till now we started Financial instrument with Basics we understood the definition of financial asset liability equity portable conversion f2f test and all then we moved on towards unit number two we discussed types of categories of financial assets hold to hold to collect hold to collect and sale SPI and the residual category fvtpl we discuss their overall recognition part how AMC Works how FOC Works how a FPL Works exception not held for trading held for trading the treatment of FCI then the subsequent measurement what to do at the balance sheet date then Financial liability AMC category compound instrument non-compound instrument then modifications extinguishment uh ex less than 10% 10% or more all these test staff Advance modification St Advance modification uh changes to be transferred to the unamortized cost compound Financial instrument modification then Financial guarantee contracts then trans transtion cost transation cost loan given by holding to subsidiary subsidiary to holding all these we discussed okay any doubt till this point everything is fine as of now everything is fine okay see today since it's a first day and I'm also getting tired because of the traveling issues and all so I'm right now uh concluding this session okay because uh somewhat I I also feel that I'm also mentally tired basically so from tomorrow we'll uh start the session at probably at 8:15 what time8 8:15 and we'll try to uh uh cover at least till 6:45 or 7:00 okay so today I'm uh concluding bit early so you also have the time to read to understand to revise and uh to do your homework also which I have given you so that you would be in situation to ask the doubts uh tomorrow at least uh few doubts you can ask by yourself okay so we can cover your doubts also and we we can uh continue the session Financial instrument tomorrow also I expecting to complete the financial instrument part in the uh first half like till lunch probably and then after lunch if possible after lunch we'll start consolidation and business combination that means the second topic would be consolidation business because these two are the your your priority topics definitely H so I'll I'll go according to your priority only so I am hoping that uh we'll be able to complete the financial instrument till 1:00 if possible and after that we'll continue with the business combination consolidation before concluding the session tell me one thing do I need to maintain this speed or do I need to get bit slow or bit fast what fine this is fine huh okay hey I'm I'm asking because some some freshers are also there first time who are doing first time because of this also and some for others there may be maybe sh speed may be slow also so if this is fine then we'll continue with the same speed tomorrow right yes huh okay thanks a lot guys all right guys good morning everyone morning how are you all fine okay so homework status huh okay have you done with this okay so if you have any kind of doubt first of all you can ask me then we'll proceed further if you have done with your homework any doubt you have then you can you can ask me first no doubt that means you haven't done your homework huh done so no doubt theat to the am extinguishment and modific ific one question said yes yes yes I I'll discuss it right now there is SL difference only slight difference I'll uh give you some example in our book only there is one example we can say that yes the modification part and the extinguishment part is uh considerably uh we can consider it as same but there is a slight change between these two as far as entry is concerned only the presentation is concerned okay when the ER we need find out so I'll discuss right now that particular thing okay because that is important so I have to discuss it okay and other than that anything else no okay so now let me ask some of the points have you done this example 15th number huh see example number 14 we did yesterday it was of extinguishment and example number 15 is also extinguishment but you know what what is the difference between these two examples in example number 15 you have the revised ER given in the question you have the revise given in the question but in question number example number 15 you don't have the revised ER you have you don't have to revise have you have you noticed this point so what what we should do compute okay and in the same way in the questions like modifications uh where there's a there's a change of less than 10% again we need to compute ER so she's asking Serv it's it's the same thing like we need to compute the ER there also where the change is the less less than 10% and in the case of extinguishments also when the ER is missing same we need to calculate so it is the same treatment basically yes we can say it's the same treatment but the change is in extinguishment the entry is old Loan account debit to new loan but in modification we don't do this kind of things we uh adjust the existing loan only are you understanding or not that means the old loan carrying amount continues and for the extinguishment the entry will become old Loan account debit to new loan and the difference starts to pay if any if any understood or not so this is only the difference between these two things okay so this question is very important for exam I must tell you this is very important question for exam so now since you are you all are saying that you have done with this question so I will discuss the other type of question with you guys uh which is in our question Bank okay see this question number 703 the question number 703 from our question Bank on 1st January 2010 XYZ issues 10 years bonds for rupes 10 lakhs XYZ issues 10 year bond for B 10 l bearing interest at 10% payable on 31st of December each year the bonds are redeemable on 31st of December 2019 for RUP 10 lakh see we have issued the bonds for rupees 10 lakh we will redeem it for rupees 10 lakh the coupon rate is 10% there is no cost or fees are incurred no cost or fees are incurred that means the coupon rate 10% is same as ER we discussed this yesterday whenever there is no processing cost Whenever there is no transaction cost whenever there's no premium no discount in that condition the coupon coupon rate will become the effective rate okay the effective rate is therefore 10% so what are the terms and conditions they are giving to us it's question number 703 they are giving uh first of all loan he shows 10 year bond loan Bond loan Bond of 10 lakh interest rate 10% effective rate 10% term what is the term 10 years since there is noow cost at all effective R is 10% next see they are saying Bing interest of 10% payable on 31st December each year that means the interest is payable every year and the B bond is rable on 31st December I have to call them just wait so uh interest is payable on every year so what is the CCF technically what is a CCF CCF is interest interest interest interest so on so on so on and the last interest plus principal this is a CCF simply okay but we don't need to find out is separately write the CCF because we already have now so the loan should be booked at 10 lakh if the is same interest rate andl are same the loan should be booked at the same value so please note it down this thing since interest rate and er are same hence Financial liability shall be recognized at transaction value transaction value that is 10 ls it should be recognized that transaction value understood so your loan is return 10 lakhs now what is the main concern in that case now they are saying on 1st January 15 that is after 5 years XYZ and the bond holders agree to a modification in accordance with which no further interest payments are made modification in accordance with which no further interest payments are made now I we don't need to pay any interest after the fifth year that means in the six sixth year onwards the contractual cash flow changed initially what was the contractual cash flow interest interest interest interest interest interest and the last year interest plus principal but after fifth year sixth year from sixth year onwards no interest no interest no interest no interest and what what they are saying the bonds are redeemed on the original due dat only for rupees 16 lakhs legal fees will be 50,000 so in that case first of all first heading initial recognition Financial liability uh sorry initial recognition bank account debit to bond Financial liability 10 lakhs to bond Financial aity 10 ls all right after five years at modification date at modification date the carrying amount of loan Financial liability is still 10 lakhs tell me how it will become 10 lakh only because both are same now interest and both are same you will record the finance cost at 10% you will pay the finance cost at 10% so every opening closing opening is equal to closing tell me yes okay so what is the revised term revised terms revise the terms 1 2 3 4 five because for the further five years the CCF would be 0 0 0 0 and 16 lakhs and additionally there's a modification fees modification fees also there 50,000 okay so these are the revised terms understood or not our first step of modification says calculate the percentage of change how much change it is it is it less than 10% or 10% or more so calculate the difference between carrying amount and revised value that means present value of revised CCF so how to calculate at Old so 0 1 2 3 4 5 50,000 negative 0 0 0 0 16 lakh negative present value at 10% can you please tell me it's 10 lakh 43,000 474 it's 10 lak 43,47 so it's a revised value now what is the difference 43 474 which is approximately 4.35 percentage because you will divide it by 10 LH now carrying amount it is approximately 4.35 percentage so what is that extinguishment or modification it's a modification conclusion conus it's it's modification it's modification all right that means no need to derecognize no need to D recognize old Alan no need to D recognize old so this becomes a step number one now step number two step number two when we don't need to D recognize the old loan that means the old loan will be continued now but with the new so new effective rate of interest shall be calculated shall be calculated and modification fees shall deducted modification fees shall be deducted from existing carrying amount we have written the steps yesterday under modification you need to do two important work first calculate the new ER and adjust the modification fees from the existing carrying amount what is your existing carrying amount 10 lakhs so adjust it net carrying amount becomes 950 is it so yes yes because it's 10 LH 10 lus 50 950 now how to calculate the new what is the new B the clent error so new effective rate of interest should be such that while discounting of revised C CF the total present value should be equal to 950 should be equal to 950 what is the revice CF what is the revice CF 0 0 0 0 16 lakhs so only need to do 16 LH now only so hit and try and error 16 lakh divided by if we do 10% 1.1 1 2 3 4 5 it's 9ak 93,000 so at 10% at 10% it's 99347 I want 950 the lower amount so I need to increase the rate 11% 16 lakh divided 1.11 1 2 2 3 4 5 ah it it is coming 9 lakh 49,000 52 I think it is approximately equal to 11 it is near by 11% because we want 950 and our answer is 949 552 you can accurately calculate by comparing these two figures please calculate all right so what we what is rate 10 99 so 10.99 is the rate so 10.99 is the rate 950 is the existing carrying amount if you make a ledger account it was your buy balance brought down it was 10 lakh you paid the modification fees to bank 50,000 it becomes your 950 now at the end of sixth year it was sixth year your at the end of sixth year you calculate the interest at 10.99% of 950 can you please calculate 10445 and uh you paid nothing to bank zero because R CCF was 0 at the last only it is 16 lakh so to balance carry down can you please calculate 1054 405 and so on guys understood or not now compare this example with my book example number 15 come back to the example number 15 which was homework which was homework book example number 15 now in the book example 15 loan of 50 LH 10% interest turn is four year repayment equal principle only ENT extra no other charges therefore is the same do you finding these things same as that question you did yes the question number was 703 so it is conly same okay but first year repayment on time second year default in case of in payment of principal only interest is paid okay fine beginning of third year Bank agrees to make the following modifications outstanding loan of 750,000 now to be repaid in five years in equal principal interest should be paid at same 10% assume it is not a market rate now it is not a market rate they are saying that interest will be 10% but it is not the effective rate apply extinguishment accounting ignore 10% tax we are we are assuming that it is extinguishment okay it's extinguishment fees of modification is fees of modification is one L guys understood or not so everything is same just we need to apply the extinguishment accounting what we should do in the extinguishment accounting D recognize the old D recognize the and recognize the and other than that one thing more ER should be calculated new is is not given it should be calculated or not tell me so you did your homework if you if if you have done your homework so all things you have done like the current carrying amount is 375,000 you know it huh yes okay now when we follow extinguishment accounting revised is not given when we will calculate the revised based on revised present revised uh CCF so revise CCF 1125 1050 975 9 how come is it is it everyone everyone been able to calculate how 3750 now to be repaid in five divide divide 5 37 50 divide by 5 it's 750 750 750 750 and interest to be charged extra 10% so on the first time 3750 on multiply 10% 3 L70 5,000 + 750 it's 11 25 on the second time on the second time 3750 minus 750 it's 30 lakhs 30 L multi 10 3 lakh 3 lakh plus 750 it becomes 1050 so you we know that how this these figures arrive okay it is return over there and in the first year there's a modification Feld also is it so or not okay so we calculated and we calculated by interpolation technique the new of 11.13% now I'm completing this example because the entry is missing in this part so if I complete this example what will be the the journal entry what the entry old loan debit 37 50 to new loan same 3750 old Loan account debit to new Loan account 3750 only the interest will change old Loan account debit to new Loan account understood guys yes earlier the old loan was having coupon rate of 10 er of 10 now old new loan is having coupon rate of 10 but ER of 11.13 because of the revised repayment schedule and modification fees of one lakh understood guys so old Loan account debit to new loan further what you will do further what will you do Now new Loan account new Loan account buy old loan 3750 now if this is the revised CCF first of all we are paying one lakh to bank one lakh immediately at which year beginning of third year so so third year beginning third year beginning now we'll calculate the interest cost at 11.13% can you please calculate 3750 minus 1 lakh 3650 into 11.13 percentage 4 lakh 6,000 245 we paid to bank we paid we paid how much 11 lakh 25,000 to balance 29 LS 31,5 245 so do you asked me the question you asked me the question what was the question the extinguishment accounting and the modification accounting same in case if we are if the ERI is missing it is it is almost same only a slight difference of the entry here in the extinguishment accounting we are passing entry of old loan debit to new loan but in the modification accounting we haven't passed any such entry we continued the same loan that's it almost all other things are same okay so just for comparison you can compare your example number 15 with question number 703 both are almost same but accounting is different extinguishment accounting and modification accounting only a slight difference presentation for which calculation this 11.13 why we have deducted interest calculation see why uh for this 11.13 percentage calculation we took this one lak also so one lak is a kind of repayment so it's a kind of repayment not here and repayment it is at the beginning of the year if you will not for interest concusion if you will not deduct this from this and calculate interest directly on this on the last year at the end your account will not tell you we should not charge it to p see wait see this read this read this approach one increase decrease the existing carrying value of the financial liity and calculate the revised present value based on revised terms and difference is charge to P any fees or cost of modification transfer to P your view approach two deduct the fees cost of modification from the existing carrying amount of liability calculate the ER this is the rate at which the discount of future cash flows to be adjusted with the carrying amount approach to is more preferable why because if you charge if you are charging your modification fees in the P you are ultimately not recognizing the interest cost properly because we yesterday we talked about effective rate means what it consider all the charges with itself and yesterday we studied that under AMC the transaction cost is adjusted with the loan amount only so it is as good as a transaction cost now if we are charging it to P we are not following the proper rule so hence this is the reason the approach when one is not preferable okay all right so that was about modification and extinguishment and all any other doubt have you done question number 16 question number 16 is St loan modification any doubt no so will be revised revised term revised terms yes yes of course okay anything else all right so shall we move on further okay yes again 3750 is a new loan huh so we calculated now in the same example you're talking about example 15 yeah okay see we calculated the new cash flows the new what's your doubt why no need it's it's make this loan account till end your loan account will get telled 100% it will it will be telled that means at 11% the present value of all these things are already equal to 37 lakhs 50,000 so no need to calculate okay okay come to the point uh come to the page number 27 .37 if you have the book and come to page number 27.3 7 there's a small point reclassification from Equity to financial liability or financial liability to equity there is very small point reclassification from Equity to financial liability or financial liability to equity see we all know what is financial liability obligation to pay and what is Equity no oblation so what they are saying reclassification from Equity to financial ear it was no obligation now it isbl portable instrument ordinary instrument becomes putable instrument you remember the example I have given yesterday earlier I shoed the ordinary shares after so many years I gave the option to him that if you want I will pay you back in in a one month time I will pay you back that if you exercising this option so it becomes a putable instrument and now I will repay you so Equity becomes Financial liability why Versa Financial liability could could become the equity also so whenever these kind of things happen What will be the treatment let's discuss if an entity redeems all its issued nonp putable instruments and any putable instrument that remains outstanding have all the features and met all the conditions The Entity shall reclassify the putable instruments as Equity from the date when it redeems the non-p putable instrument in the next page the table is there reclassification from reclassification to so when the financial liability becomes Equity it was Financial liability now it becomes Equity how to do what to do you will carry the same amount of financial liability now in the name of equity let me remind you with yesterday's one question when I discuss with you the compound Financial instrument I have given I I don't know I have given the example or any question compound Financial instrument can you see the check your copies you have solved one compound Financial instrument question compound Financial instrument question uh okay come to this example number 11 yesterday's example number 11 in my book also this is there is example number 11 quickly read the uh important terms please quickly read the terms it was a compound convert debenture okay overall the issue proceeds was 50 lakhs 50 lakh we divided them in two parts 4445 and 554 okay at the end of the term there was two cases you remember holder opts for cash payment and holder opts for Equity conversion you remember or not huh now see in case of case two in case of case two you were you were having the balance carried down by rupes 50 lakh in the name of liability this was a liability and at the end of fifth year the balance of the LI was 50 LH but the holder told us that they don't want money they want the equity share can I say this is the case of financial liability conversion to equity yes conversion of financial liability to equity so it is a case of financial liability converted into Equity see what entry you are doing the financial liability account debit to equity at which value at same value this is the point I'm discussing right now with this point with this point what was the page number 27. 38 27. 38 39 so when the financial liability gets converted into Equity you don't need to change any amount the amount would be same same amount that is carrying value on the date of reclassification as far as difference is concerned not applicable because you are carrying this at the same amount so what is the rule what is the rule whenever the financial liability gets reclassified into Equity no need to change the values no need to remeasure the values the equity will be carried at the same value at which financial Financial liability was being carried understood or not yes you can refer here you can refer example number 11 here you can refer example number 11 case two example number 11 case two all right right when you when you reclassify the equity into Financial liability now you are reclassifying the equity to financial liity that means earlier we don't have any obligation to pay now we have an obligation to pay it becomes Financial Financial lities have two categories AMC and FPL leave the FP main category is and you recognize the AMC at present value of CCF so you need to remeasure the financial liability you need to reasure Sir why we are not reasuring the equity because Equity is a residual interest why to remeasure understood or not yes huh you may have a question in your mind that sir when we are classifying from Financial liity to equity we are not reasuring it why because Equity is a residual interest no need for that but when the equity becomes Financial liability Financial liability should be carried as per the AMC category at present value of revise CCF so you have to reasure it and any differ because of re measurement will be transferred to equity not in P I will I will show some calculation with the examples don't worry so when the equity is reclassified to financial liity we need to remeasure at at remeasure this at fair value that is present value of CCF and trans transfer the difference to equity all right guys so the example is the example is ordinary share converted into putable share putable equity share ordinary share converted into putable equity share earlier it was ordinary share so it was my Equity Capital but now I have given the option to the holder that if you want your money back I will pay you but you have only one month time so now it becomes a putable and putable it becomes that it becomes a financial liability now I have to uh measure it at present value of cash to be paid if cash to be paid within a month then no need to calculate the present value if cash to be paid after two years then we need to calculate the present value guys are you understanding or not let me show you the example please write one example Equity reclassified to financial liability 5,000 number of shares issued number of equity shares issued at 12 rupees per share face value 10 these are ordinary shares what entry you will pass bank account debit how much 60 60,000 two equity share Capital 50,000 2 Securities premium 10,000 equity share Capital will be transferred to share Capital Security will be transferred to other Equity sir why we are not transferring this 10,000 to pandle yesterday I told you one thing any transaction cost in respect of equity any charges in respect of equity shall always be transferred to equity you remember the chart I prepared yesterday chart where yes this is the thing so transaction cost in respect of equity transfer to other Equity always remember yes okay so other Equity now after 3 years entity grants option to above Equity holders to pay cash to pay cash equal to market value of uh sorry to pay cash at the rate of 20 rupees each at the rate of 20 rupees each all right for this purpose entity charged one rupees per share premium option premium we charged premium for that after 3 years entity grants option to above Equity sholders to pay cash at the rate of 20 20 rupees each for this purpose entity charge one rupees per share option premium case one market price per share is expected to be higher than 20 rupees case two market price per share is expected to be lower than 20 rupees tell me one month one month now you guys are the equity holders I already shed my 5,000 shares to you for me you are my Equity but now today I'm giving you one month option that if you want I will pay you 20 rupees each when I issued these shares I issued at that means you invested your 12 rupees in my company but today I'm giving you option to pay back 20 rupees will you exercise one case oneise why market price is higher than 20 that means what you will definitely love to sell your share in the market yeah why you will sell your share to me and accepting 20 rupees you would love to sell your share in the market and get more than 20 so you are not going to exercise this tell me not there so as far as case one case two as far as premium is concerned first of all I charge a premium ofes one per share tell me one per share multiply by how many number of shares are there 5,000 what entry The Entity should pass as far as premium is concerned bank account debit 5,2 should I charge to the p no should I charge it to the Pendle no I charged premium in respect of equity now so it should be transfer to the other Equity so to other Equity that means retained earnings 5,000 same entry same entry fore two case two but now case one says market price is higher than 20 no need to reclassify Equity into Financial liability since market price is expected to be higher shareholder will not exercise his option he would s in market and case two tell me case two we will definitely going to exerise so what we should do reclassification from reclassification from Equity to financial liability is required what entry we should pass equity share capital account debit earlier it was 50,000 guys understood or not now we need to create what Financial liability tell me at what value present value in case there's a period of more than 12 month here there's a period of 1 month so at what value at the current transaction value 20 rupes fair value how much amount I need to pay them 20 rupees now calate 20 huh one lakh very good 20 rupees multip by 5,000 what to do with the difference what to do with the difference other Equity that means I can I can transfer the difference to other Equity that means I can write off my difference from the earlier security premium account from this uh this uh 5,000 and the rest portion to other Equity directly I'm transferring the other Equity understood guys me of final you should use either AMC me orp is an exemption we not using the AMC no no no we are properly following the method but the point is here we are not we have not purchased a new Financial liability here we have converted Equity into Financial liability and in case of conversion the difference goes to other equity as far as new Financial liability is concerned whenever we recognize Financial liability initially we transfer the transaction cost in the financial liity portion only so that is different and this is the reclassification is different thing can you please tell me with the help of amount fin same caring am we just discussed now same caring amount see this there is any cost hasc what be p p because it is from final liability to equity transfer to P so this was reclassification from Equity to financial liability entry understood or not huh this ENT now huh for for getting the option you guys need to pay the premium for getting the option not for exercising if you want this option then I'm ready to pay you uh give you but you have to pay me 5,000 rupees now in future you are exercising it or not it doesn't matter okay reverse reverse yes so sir how to reverse it will become the from Financial liity to equity same car amount so what do other Equity the same carrying amount one L should be should be transferred to the equity only carrying it is not cost extra cost now suppose after the the one month got expired okay in this thing two options in this case holder exercised the option or option expires here Financial liability debit to bank option expires Financial liability one lakh again create equity share Capital but you can create equity share Capital to the EXT of face value face value and the rest portion other equity but I haven't changed any carrying amount it was a carrying amount of one lak now it's a carrying amount of one lakh so whenever you transfer just let me show first of all whenever you transfer your financial liability into Equity transfer is made at same caring amount understood or not you will do this thing all right e done guys okay if you want you can do this question also it's same there's another example of financial liability converted into Equity or Equity converted into Financial liability this is the buyback option or return put option obligation to purchase own shares that is same putable you can do this you can read this by yourself this is the same thing read if you want you can read it now immediately read it please D number Point page number 2.36 for for you remember one chapter in your ca intermediate accounts buyback of shares huh yes buyback of equity shares so buyback of equity share is a best example of reclassification of equity to financial liability because buyback of equity share what what it was earlier it was a equity share Capital but now company is giving the buyback option that we are ready to pay you so ultimately it becomes the financial liability so it's a best example of that so putable instrument buyb all these are same we collected the premium we collected the premium transfer it to equity then Equity transfer to financial liability at the remeasurement and we charge interest on such Financial liity if you are if you are measuring the financial liability at present value of CCF then you charged interest on such Financial liability on settlement date if the option is exercised liability account debit to bank if option is not exercised again the liab is to equity so same example we have done right now and the same things are given here guys understood all right transaction cost you did your example 25 huh example 25 it's a very important example for exams all right done with this now three important concepts are now remaining in the financial instrument one is impairment one is impairment second one is D recognition and third one is derivative contracts derivative including hedge accounting it's my personal experience that impairment and B recognition almost 80% students don't actually focus on these two things impairment part of the financial instrument and the D recognition part of the financial instrument almost 80% guys don't focus on these things they they used to think that these are are the theory topics and Theory will not come because the uh yes there's a major theory part but the Practical is also involved and today what I will do I will discuss this point with the help of practical questions so that you should understand the theory and if they ask any Theory or case study you will be able to write the theory so we have three topics the derivative part is totally different before that we have two topics one is impairment and the second one is D recognition Okay so we'll disc discuss it one by one now first of all impairment page number 27.45 first of all impairment of financial assets and laws alls page number 4 27.45 first of all let us let us revise all the things please listen to me let us ride all the things initially what we understood what is financial asset you remember yes let's talk about financial asset only initially what we understood what is financial asset ass okay then we discuss the category of financial assets AMC FB oci FPL then we further moved on to the initial recognation of financial asset under AMC it's present value of CCF plus minus formation cost f it is a fair value plus minus formation cost f b it's a fair value only then we further move on for the balance sheet date recognition we discussed that the regular income is always transferred to P at balance sheet date as far as AMC is concerned we recognize the interest income as per effective rate of interest at Bal if this is f we recognize the revised fair value and change this transfer to oci as far as FPL is concerned we recognize the fair value gain or loss directly to P we also discussed that when you derecognize the financial asset under FP category the entire activated o shall be reclassified to P we also discussed one exception that Equity investment if not held for trading and you are designating them under fbci you cannot reclassify the activated oci balance to P instead you have to directly transfer it to retained earning all was discussed we discussed the staff loan treatment of financial asset you are giving loan to your staff at concessional rate or free of cost you will recognize the loan at present value of CCF the difference will be amortised over the life of the loan as employee employee benefit expenses then we further move okay one more thing we discussed the security deposit accounting Lees security deposit okay then we further moved on we discuss the modification in a staff loan whenever the modification arise We compare the carrying amount with the revised value the difference if if any difference is there the difference we treat it as unamortized employ benefit expenses okay now there is a time to move on further and discuss the impairment of financial asset we discuss the meaning we discuss the initial recognition we discuss the subsequent measurement at balance sheet date we discussed the modifications now there is a time to impair your financial asset but first of all please look into this timeline we started our journey from here the financial asset meaning part then financial asset initial recognition part we discuss AMC FCI we discuss financial asset subsequent measurement at balance sheet date part understood or not yes then we discuss the modification part financial asset is Staff loan modification part can you please tell me the nature of uh examples of financial asset what are the examples of financial asset cash okay leave it investment in equity shares leave it can I say dors tell me I'm asking the examples only next yes investment in debentures and and bonds tell me staff loans Yes Loans to subsidaries very good all these are Financial assets can you see one thing is common in all of them there's a fixed recovery are betters I know the amount to be recovered from Myas investment in debentures and bonds I know the amount of debenture and bonds that will be redeemed to me sta loan I know the amount of loan recovery from the staff loan to subsidary same what is the common thing what is the common thing exact recovery I know one more common thing is that the huh yes very good risk of repayment one common thing is bad debt provisioning there's a there's a risk of repayment on debtors there's a risk of repayment on staff loan there's a risk of repayment on subsidary even that there's a risk of repayment by the company of which I purchase a debentures and bonds there's a risk of repayment in all of them in case of investment in equity shares there is no risk of free payment because investment in equity is always Equity from company's point of view compan is already telling you that they are not responsible for that so there are some of the assets when there's a risk of repayment and when the risk arise we need to understand the impairment part impairment of financial asset are you guys understanding or not yes no yes so why we are understanding the impairment portion because some of the financial assets may contain the risk of repayment and if there's a risk of repairment we need to make the impairment so what is impairment impairment means means reducing the carrying amount of the asset in so many times you guys you guys must have known the banking NPA Provisions you must have heard the are banking NPA Provisions standard assets substandard asset doubtful asset what was that impairment in your ca intermediate in your ca Foundation you used to calculate the provision for bad and doubtful debt what was that impairment so impairment is not a new for you it's only a new term a new term or a or a change in term earlier you people call it as provision for bed de now in this chapter we don't call it as provision for bed debt it is an impairment the terminology has been changed you guys are you understanding or not so what is inair meing the value of theet why reding the value you have risk of repayment on your debtors on your staff loan on your subsidy loan on your investment in debentures you have risk of repayment you may not get the full repayment on time so you are making a provision and when you are making a provision you are ultimately creating you are ultimately doing impairment impairment technique are you are you understanding or not so what is impairment impairment means creating provision for doubtful Dex creating provision for doubtful de creating provision for out Debs understood and reducing the value of financial asset if there is risk of repayment that is called impairment now there are so many names one name is provision for outf debt other name is impairment the third name is loss announce we call it loss allows also so these are the terminologies please you have to understand this the uh treatment is same okay so loss allows impairment provision for doubtful Debs it's completely same tell me on which financial asset you will make a provision there are two financial asset one the the risk of repayment is uh not there one the risk of repayment is available on which one you create the provision when there's a risk of repayment how would you know that there's a risk of repayment how would you know that risk of repayment is there experience what indicators yes indicators he's not picking up your call huh he's ignoring you just like that so in in proper terminology he is insolvent or he is filing the insolvency yes tell me yes so basically when you can see that your deor or your financial asset or the company in which you have invested your money in the form of debentures are not credit worthy or they are not properly responding you or they are not repaying repaying you on time definitely the risk of repayment gets increased understand or not we call it significant increase in credit risk what we call it significant increase in credit risk okay but when my deor is regularly paying me when my dor or company is regularly paying me properly there is no default from their side is there any need to make the impairment Banks do it yes definitely because the nature is different their operation nature of operation is different banks do that understood or not so in normally Banks do that but is there any is there any requirement to make a provision other than that there is no requirement almost there is no requirement but just like banks in our chapter Financial instrument they have also told us that even though there is a very low risk of repayment at least create a basic provision based on the probability of default now I'm using some terms you should write it you should write it some of the terms I will I will discuss right now first first of all write the term significant increase in credit risk significant increase in credit risk what does it mean when the data defaults see we are just uh discussing some situations when the data defaults so the significant there's a significant increase of uh significant increase of credit risk so in case of default now there is another term called credit impaired credit impaired credit impaired now what is credit impaired anybody have heard this word credit impaired when you ultimately lost the asset no possibility of getting the money Vijay Malia simple example vij Malia credit impaired are you guys understanding or not so credit impaired asset means you lost it now you are not going to recover any money probably that is called credit impaired please write this so what I told credit impaired means no possibility of recovery almost irrecoverable almost irrecoverable with understood third word is probability of default P probability of default pability of default Dash we estimate the impairment amount based on default probability in the future we estimate the inment amount based on the default probability default probability in future that means we always calculate the probability of default at the balance sheet date that how much probability is there that you guys can default on my repayment understood the thums yes sir okay now please if you have marker or pen please uh uh some important points you need to mark first of all under uh this indas when we do impairment the method name is expected credit loss method expected credit loss method highlight this portion expected credit loss method what does it mean we estimate that how much loss we could have based on the probability of default based on the probability of default okay let us discuss one example come to example 26 example 26 staff loan given of rupes 10 lakhs 10 lakh Rupees of the staff loan given oh sorry sorry not this example example 27 sorry is it wait wait wait okay fine it's it's 26 only 26 26 26 only his stop Lo given of R 10 lakh repayable in four equal principle and interest separately so 10 L 4 250 interest separately can you please calculate the interest also please calculate interest hurry up 10 lakh 3% then 750 3% then 5 L 3% 250 plus how much interest 30 second year 250 huh 500 third year 250 15,000 fourth year 250 7, 500 total 280 272 500 265 okay now market rate of interest is it becomes do the present value tell me what is the loan financial asset is 8 lakh 73,000 287 you found this amount or what yes okay first year payment received on time okay first year payment received on time so here first opening balance 873 287 interest at the rate of 9% 78 596 installment 280 closing balance 671 88 3 second year 671 883 9 % 6049 69 uh but at the end of first year it is expected that remaining principal can be recovered only after 5 years and no interest will be recovered they are saying it is expected that remaining principal can be recovered only after 5 years and no interest will be recovered they said they are expecting they are expecting that remaining principle can be recovered only after 5 years and no interest will be recovered that means here we are unable to recover it and tell me the carrying amount 732 352 732 352 huh this is of course at the end of second year but what is the carrying amount at the end of first year now at the end of first year it is expected that remaining principal can be recovered only after five year and no interest will be recovered at then of first year they are saying this so tell me what at in your balance sheet first year balance sheet first year and balance sheet what is the financial asset you are showing 671 88 now at the first year end what risk you have tell me what risk you have as per the question non repayment of interest and principal you will be able to recover only after five years first of all most of the student ask me sir this is modification now so this looks like modification I said read this it is expected modification is when you and your party has decided the new terms so don't be confused it is not modification modification happens when we both decide on the new terms when we both make some new revised terms it is not a revised term so most of the student confused between impairment and modification modification happens when you and me decide the new terms that now you will pay me after five years you will not pay me the interest is it so no it is expected that means this question belongs to impairment not modification your data haven't haven't told me that he's he will pay me uh like this I'm expecting that he he's going to pay me like this only guys have you understood the difference now so this is quite different from modification now I expecting to recover my principle only after five years and no interest I'm going to recover so okay what is my remaining portion of principal what my remaining portion of principle 7 lakh please make the present value of 750 after fth year considering 5 years the present value of 750 750 divided by 1.09 4 lakh 87,000 448 or 9 okay 449 so this is a revised value of principal revised value of principal only because interest I'm not getting in the future so now compare compare this is the financial asset now uh estimated or expected recovery value recovery value is 4 lakh how much 4 lakh 87,000 449 this is present value of 750 for5 5 years at 9% this is estimated recovery and this is what this is carrying amount impairment means reduction in the value of the asset so you have to reduce the value of the asset of 671 883 to 487 tell me how much reduction is there how much reduction is there huh 1 lakh 84,4 34 so impairment when expected recovery is lower than carrying amount that is 6718 - 487 449 184 434 this is impairment in CA intermediate what entry you you Ed to pass for provision for outf Debs you guys must please tell me immediately what entry you used to pass for provision for B out for debt which account debit pay account debit to provision for down debt you remember now pay account debit to provision in the same way you pass the entry you pass the entry see the entry is impairment loss account debit to loss allowance here the loss allowance is known as provision for doubtful debt provision for doubtful debt and loss account impairment loss account which transfers to the payle which transfers to the payle by passing this entry impairment law L that is pnl to loss allows 184 434 now in your balance sheet you can show financial asset loan at 671 883 less loss alls 184 434 you can show like this 487 449 you may have a question in your mind that sir why we haven't reduced the asset directly it's a provision it's not a real bad debt I'm expecting that he will not pay he haven't told me that he's not going to pay I'm not recognizing the bad debt I'm recognizing the provision if I recognize the bad debt then yes I have to do to asset but I'm not recognizing my bad debt actually are you guys understanding or not yes huh creating provision and recognizing bad de both are different thing recognizing B debt means I'm not 100 I'm I'm now 100% sure that you are not going to pay me understand that so I'm not saying that you are not going to pay me I'm just saying that it will it will be not possible or I I'm expecting that I may not recover the value so in that case I'm not going to reduce my asset I will create the provision come on guys you know it very well in CA intermediate also you used to do this huh some faces I'm getting like they are not understanding this thing but actually in say intermediate also we used to do like this huh I think in that time you haven't asked this question from your teacher that why sir why provision why not to better it was a simple understanding that back that we recognize only when we we finally came to a conclusion that we are not going to recover it but we recognize the provision that we know that we may not recover some of the portion but we don't know how much it is understood or not so this is very simple entry just like provision for that de understood okay so this is called impairment this is the first history of impairment any doubt on this huh easy yes what you did in the impairment how you calculate the impairment loss just like modification what you compared you compared the car amount not revised actually what the uh the estimated recovery now don't say revised value don't say revise value why I'm not why why why you should not say revise value revise value means as per the modification it is not modification you compare two things what the two things are carrying amount and expected recovery amount understood or not so when the expected recovery is lower than the caring amount it is your inment it is the first stage of this impairment part is still more to come any doubt on that huh this was expected credit loss method expected credit loss understood okay giving you one example you have to solve it should I give you the example for practice okay write the example invested in 12 lakh rupees debentures of a company at 20% premium coupon rate 10% perom invested in 12 12 LH debenture of a company at 20% premium coupon rate 10% perum redeemable after 5 years redeal after 5 years interest to be received interest to be received every year at end of first year interest is received but issuer issuers financial position is not strong hence we are expecting that principal repayment will get delay by two more years without interest for those For Those Years also interest recovery is expected by 7% perom only solve it now all yes done for two more years for that two years no interest yes first of all have you noticed that you need to calc the first of all how many of how many of you have done this need to calculate the ER first of all because there's a premium of 20% guys I'm telling this every time when there's a transaction cost when there's a premium the coupon rate and the ER would always be different so first of all ER is to be calculated since there is additional premium paid now invested amount what was the invested amount 12 LH plus 20% 14 L 50,000 14 L 40,000 H uh present Val oh sorry CCF CCF huh 120 120 120 120 1320 1 year second year third year fourth year fifth year a is the rate at which present value of all these CCF should be equal to 1440 what 5.33 see at 10% we cannot take 10% as AI because we are extra we are paying extra 20% premium that means our income def is definitely less than 10% are you understanding or not so first of all uh at 6% if we do 120 divide 1.06 it's 14 lakh 2,000 6% it's 14 lakh 2,000 193 I want 14 lakh 4, 40,000 the amount should be higher the rate should be lower so 5% at 5% 14 lakh 597 69 okay so lower rate I took a base this is base 5% plus increase in percentage one decrease in amount 57 57 57 57 6 I need to decrease the amount to 1459 769 - 1440 19769 x percentage it's 5 34 uh ER Institute is definitely going to test you in these kind of things these are the very basic things we already understood in the yesterday's class but most of you are not actually concentrating on these things these issues amum was there we need to calculate the but only few students have noticed this thing anyway now what is the initial recognition what is the initial recognition uh investment account debit investment in debenture financial asset to bank 14 lakh 40,000 investment debit to bank understood guys yes now next balance sheet date based on the questions requirement on the end of first year okay so end of first year so year 1 outstanding 1440 year uh interest income uh 1440 multip by 5.34 it's 76 896 uh it is a the the receipt the receipt interest we received is 120 the closing carrying amount is 1396 896 so we got the carrying value we got the carrying value what but what the company is expecting estimations now estimations can you please tell me the estimations estimation of the further years what are the estimations 1 2 3 4 now there are only four years now H interest will be only 7% instead of 10% so 12 lakh multiply by 7% expecting only 84,000 of interest to recover in the next four years what about the principal recovery after 2 years that means in the fifth year zero sixth year end sixth year end principal portion will be there only how much exact 12 L now yes exact 12 lakh I should do this 0 + 12 L okay 0 0 interest plus 12 LH expecting this recovery what what should do present value at the rate of 5 34 can you please calculate 117377 9 very good anybody else 1173 779 yes 1173 779 so this is estimated recovery so what is the impairment loss 1396 8 9 6 minus 1173 779 22317 what generry will pass impairment loss P andl debit to loss allow 22 3 117 22317 this is the technique for impairment this is the first part we discussed still now feel B comfortable with this again saying this is not a modification this is not a modification modification happens only with the mutual consent of both the parties this is not as for as the mutual consent this is our estimation that we will get this money all right so till now it's fine this was the imper first part we'll discuss some more imper things now okay so I have a chart on impairment you have to write this everyone everyone please write this chart first of all to make you understand first of all write this properly impairment of financial asset I will dictate it also impairment of financial asset bracket loss allowance loss allowance means provision for downfield debt impairment of financial asset loss allows provision for outf Deans now first of all apply expected credit loss method ecl apply expected credit loss method ecl apply expected credit loss method e okay now what is the formula of expected credit loss method formula of expected credit loss method is this this is a Formula what is the formula financial asset amount that is amount of financial asset you can write also the carrying amount carrying amount of financial asset this is basically financial asset carrying amount multiply by lgd lgd full form loss given default I will explain it everything don't worry first of all write it properly multiply by lgd multiply by P pod means probability of default sir what is lgd lgd means probability of unrealized cash flow lgd loss given default Pro lgd meaning meaning of lgd is probability of unrealized cash flow this is what this is 12 month ecl the method name is ecl expected credit loss so this is 12 month ecl this is Lifetime ecl ltcl lifetime e 12 month e lifetime E I told do just to write only I will explain everything after your writing 12 month ecl lifetime ecl now how to apply this ecl method apply this method on there are two situations there are two situations Situation Number One specify specific identified financial asset a specific identified financial asset so what is that a specific identified financial asset suppose bank or any financial institution wants to create a special provision Orit a specific customer like VI MAA n Modi these are specific customers have their specific scams so on such specific customers if we want to make a provision if we want to make the impairment what we do we record the impairment loss like this just now only we did two examples this is called we did two examples so this is the same so what we did we compared the carrying amount We compare the carrying amount that means present value of agreed CCF with the present value of estimated CCF to be realized means recovery expected recovery We compare the carry amount with the expected recovery what we will get we will get the impermanent loss I already written we refer example number 26 of the book you can also refer the additional example we we just uh discussed the now the second approach second approach see this approach was a specific identified financial asset the second approach is on all Financial assets combined combined approach on General basis We call we may also call it combined approach combined approach on all Financial assets on General basis now we can apply uh app apply lifetime ecl apply lifetime e always on short-term Financial assets such as betas apply lifetime e always on short-term Financial assets such as DS apply 12 month e apply 12 month e 12 month e or lifetime e depending on the credit risk in financial asset depending upon the credit risk depending upon the credit risk in financial asset if there is a low credit risk apply 12 monthly s if there is a low credit risk low credit risk appli 12 month e if there is moderate or above then moderate credit risk credit risk is moderate or above above means significant what I said credit risk is low apply 12 month credit risk is moderate High significant then apply lifetime so what is Lifetime what is 12 mon I'll discuss it don't worry then journal entries General entries impermanent loss account debit to loss alls I said financial asset to be shown at gross value only we discussed this point that you know you not recognizing the bad de you recognizing just a provision but second entry see the second entry once financial asset is derecognized once financial asset is derecognized lost or sold lost that means you you you finally came to a conclusion that you are not going to recover your money lost your financial asset is lost now what will you do the above provision you created now you reverse this provision and write of the financial asset above provision loss allows debit why debit because ear it was credited so loss allows debit to financial asset suppose here the loss allowance was 500 CR so here 500 two suppose the asset is 700 what will you do what will you do suppose the asset is uh getting reduced by 700 but you created the provision of only 500 now what will you do charge to P it additionally okay one more Point how to charge the interest in that case that means how to recognize the income in case of impairment of ass sets because you are expecting the lower lower value so how you are uh expecting to recover the income or recognize the income how to charge the interest if you are applying 12 month e method if you are applying 12 month e method you charge the interest on the gross value of financial asset you charge the interest on Gross value of financial asset if you are applying lifetime e if you applying lifetime e then check the risk credit risk is moderate too high credit risk is moderate to high again you charge the interest on Gross value only again you charge the interest on Cross value only credit risk is moderate to high charge the interest on Gross value just like here but if credit risk is significant or the asset is credit impaired credit impaired means lost you are unable to recover then you will charge the interest on the net value only charge the interest on net value only so what is net value net value is like this this this is gross value this is net value gross value means assets carrying amount net value means assets carrying amount reduced by loss alls I'm writing here this is net value this is gross value so net value carrying amount of financial asset minus loss allow to date understood guys wait wait wait no doubt right now sir what is 12 month e write the definition definition definition in simple terms what is 12 M AC 12 month e next 12 months agreed CCF I I I'll detate it don't worry it is written in Hindi actually so what is 12 Monon e please write please write I I'll dictate probability of unrealized cash flows in next 12 months please write probability of unrealized cash flows in next 12 months probability of unrealized cash flows in next 12 months this is called 12 month e now write lifetime e probability of unrealized cash flows probability of undiz cash flows for the remaining lifetime of the asset for the remaining lifetime of the asset then now let's discuss this first of all sir what is ecl expected credit loss sir what is expected credit loss Credit Credit means I want to recover my money it is in credit I gave my credit credit I have G the credit to betters now I expecting some loss I expecting some loss so it is called expected credit loss method okay now sir what is 12 and E 12 month e 12 month e means in next 12 month what what recovery I'm expecting or what non recovery I'm expecting only for the next 12 months suppose I gave the loan to my staff to him what is the name David I gave the loan to David and the loan period is 5 years how much so five years consider five years is a lifetime what is the total lifetime of this uh loan five years now this five years is a lifetime first year D will pay me something second year he will pay me something third year fourth year fifth year 12 month e means I I had to estimate that in the next 12 month what is my recovery and am I expecting that to recover or not I I don't need to think about the second third fourth fifth years recovery I just need to concentrate on the next one year recovery if my one next one year recovery is at stake or I'm not expecting to recover something from that one year recovery that is called 12 month ecl understood or not yes that mean suppose David told me that sir after first year end I will give you 5 lakh rupees as a as a repayment so I have to think that in this five lakh is there any risk is there any probability of unrealized cash flow from this five lak I'm saying yes out of this five lakh deid will be will be able to pay me only four lakh that means one lakh is the unrealized probability unrealized cash flow probability are you guys understanding or not yes so this is called 12 month e now you you tell what should be the lifetime is David will pay me five lakh five lakh five lakh five lakh five lakh five times tell me what is Lifetime is I have to check the probability of not only first five L I have to check the probability of unrealized cash flows of overall 25 lakhs have you understood the point or not this is called 12 month and lifetime any doubt in that no any doubt no anybody uh what is Lifetime is and anybody can anybody can describe lifetime is expected unrealized probability of expected unrealized portion for the overall five in the overall five years how much money David is not going to pay me in the overall five years that is called lifetime what is 12 month how much money D is not going to pay me in the next in the coming 12 months guys have you understood yes okay 12 month is Lifetime fine now yes sir okay this is 12 month and lifetime is here now what is the basic formula of calculating the impairment loss the basic formula is financial asset carrying amount suppose I charged or uh in my books deid is my financial asset and deid is being shown at 22 lakh rupees my financial asset is being shown at 22 lakh rupees so the formula is 22 L rupees multiply by multiply by if I'm suppose I'm applying only 12 month AC how much so I will say that in the next 12 month how much amount I'm going to recover 5 LH but how how much out of this file how much is expecting not to recover it suppose I'm in percentage form I'm expecting only 2% I I not I I will not be able to recover 5% I won't be able to recover 3% I won't be able to recover understood or not so that is called probability of unrealized cash flow so suppose in the next uh overall unrealized cash flow probability I'm expecting suppose overall I won't be able to recover the 10% value tell me guys or not and what is the default probability of deid I'm expecting that deid is a nice guy but he may default and the probability was only 5% there's only 5% probity that David May default and if he's defaulting he will not pay me 10% what is the relevance of these two percentage understood or not what is 5% what is 5% will debit default or not only 5% chances he will default default if he will default then how much he'll not pay me 10% understood these two percentage yes one is p full form probability of default if it happens then lgd L given default if default happens then what will be the loss what is the 5% and if it happens then what is this that means how much loss will be there because of the default understand or not calculate 22 LH into 10% into 5% 11,000 so I will create the provision of 11,000 only because there is only 5% probability and that two 10% realization understood or not so this is my impairment loss of 11,000 guys have you understood or not so this is the basic formula of impairment loss you apply this formula for this approach only but you have clients not like David you have clients like Vijay Malia and you want to make a specific provision on vij Mala customer then bank will not apply this formula that probability of default and this and this Bank says that the no this is not probability of default already default it already defaults and it's it's our special customer we will create the provision especially on this separately so apply this technique we already understood this technique anything any doubt in this technique we understood are two examples right but customers like David customers like you all now I don't want to create provision only on deit I want to create provision on all of you on combined basis I don't have enough time to make the calculation on each and every customer try to understand Banks mostly what what banks mostly do standard assets substandard assets Bank what do Bank overall Bank classify their customers into different different categories so I'm also classifying my customer into two categories one is is specific and other one is common understand not so if bank or if any entity wants to create the provision on common basis on common basis the formula would be this that means this understood or not huh but when we go into this common approach basis like you all are my dors and I want to make the imper provision on all of you first of all I have to classify all of you into categories if you all are my shortterm daters shortterm daters means up to 12 months only that mean you are going to pay me in 2 months 5 months 4 months 7 months 8 months 9 months I I will always applies which technique why lifetime see in any way 12 month is year life is will be same in that case now because my data's overall life is seven months understand so I will apply always apply Lifetime on my shortterm datas but as far as long-term datas are concerned it totally depends on the credit risk now I just identify each one of you based on your credit risk involed suppose I find David as riskier more riskier significant riskier its category will be lifetime I find him as less riskier its category will be 12 month is year so all of you either will be categorized into lifetime or 12 month if you all are longterm no okay now depending upon the credit risk either I will apply 12 month e or I will apply lifetime e once again asking you what is 12 month e in the next 12 months what is the probability of him to default and how much I will not get understand lot what is Lifetime suppose he is in a lifetime category and his total overall period of loan is 10 years what is Lifetime in all 10 years what is the probability of default of him and how much he not going to pay me understood or not depending upon the credit risk understood or not okay so formula is simple what is Formula again please tell me the formula assets loan amount carry amount multiply by loss given default into probability of default done in question in exams the loss given default and probability of default will be given to you percentage form will be given to you you're are not supposed suppos to calculate these things okay whatever it is you apply this you calculated the uh loss the entry would be impairment loss account debit to loss allowance what is loss allowance de what is loss allowance provision for doubtful Debs and you will show this provision just like this in the bance you will show it like that now if you feel that your financial asset you are not going to recover your financial asset now you lost it finally and you going to deize then loss all will be derecognized to financial asset if there's any difference it will be transferred to the P you remember your seeing intermediate days Banking Company chapter uh performing assets non-performing assets Bank used to charge the income on performing assets on acral basis but income on non-performing assets on cash basis kind of same situation here income how we would charge our income on deid on all of you how would I charge my income if I'm applying 12 month e on all of you I would charge my income on the gross value of asset if I'm applying Lifetime on of you then also I will check the credit risk if it is up to mod or high again I will charge my interest income on Cross value but if there is a sign significant risk or the asset is lost lost credit impaired I will charge my income only on the net value that means after making provision what is the net value I will charge my income only on that guys understood or lot in banking system Bank used to charge the income on acral basis on all performing assets and Bank used to charge the recognize the income on non-performing assets on cash basis this is different this is like he uh we charge the income on Gross value we charge the income on net value depending upon the CED risk understood or not that's it this is the overall strategy of impairment I I have one question also pending example number 27 but before that if you have any doubt or you want to ask anything you can ask the the time of the Lo not see so same mostly we use the same ER why because see you change the ER only when there's a mutual consent of repayment change in the repayment schedule when there's a modification this is not a modification so you use the same a second of specific what will be the do have any no it depends on the Judgment of the entity only that I will apply the specific identification in this sign we follow yes yes yes yes yes see for charging interest it doesn't matter which category you belong I know signicant whether it is this this technique or this technique good question okay shall we shall we discuss example 27 yes huh please find please uh open your example 27 on this example 27 can you please read first of entity acquired 7.5% bonds of rupes 500 lakhs interest is payable annually principle will be payable after four years at 8% premium intention to hold till maturity that means this asset has been categorized under AM AMC entity acquired 7.5% bonds of 500 lakhs only one question am I asking without reading further things is the coupon rate and effective rate would be same or different why coupon rate is 7.5 princip after four years set that means will be will be different mostly higher because we get the extra 8% premium okay so without discuss all the Four Points please do not look into four points will you calculate huh okay it's 9.24 25 26 whatever it's 9.24 25 25 25 or 26 basically the sum of present CCF of 7. 37.5 interest every year plus 540 principal at the end of the fourth year and effective rate of interest should be 500 equal to 500 that means it should be 9.24 understood so I'm not wasting the time on discussion more discussion on this it's 9.24 percentage simply so we would recognize the interest cost at 9.24% every year okay this is the affecting rate of interest now consider this repent schedule come to this everyone consider this rep your opening amount was 500 opening amount was 500 con such 500 apply 9.24 percentage how much 46.2 and the repayment will be 37.5 CCF the closing value should be this and so on and like this suppose if no default happen if suppose in the next four years default is not going to happen we'll recover everything and the closing balance of at the end of the for will be zero right this is this is our this is our estimation that if instead of any default if we recover everything properly on time this will be done everyone dose yes so our interest income would be 46.2 47 47.8 8 and 47 192 but what happen when there is some expected default so please read first number point please read first number point now and please concentrate first your end interest wow no default no significant increase in credit risk very good if there is no significant increase in credit risk hence what we apply you remember now huh on overall common approach we apply either 12 month or lifetime when we apply 12 month when there is when there is less risk very low risk so no significant increase in CR risk we apply what 12 what is the 12 month P zero that means noine 0% huh probability is z zero zero probability of default that means no under no no uniz cash flow will be there what what was the formula what was the formula carrying amount mtip by loss given default multip by what is the carrying amount at the first year end first year end 5087 to 8.7 multip P of anything you apply multiply by 0% the answer always be zero now so the at the first year end the impairment loss is zero the impairment loss is zero guys understood or not this was the first year any doubt shall we move on to the second h Huh first year end initial recognition there was no risk at first year end again there is no significant increase in Risk you remember banking companies banking companies need to create the provision on standard assets also four just like see what I told it doesn't depending on uh risk even the risk is low you have to apply 12 month but if 12 basically based on 12 month if the probability of default is zero then the inment will be zero understood or not so you are concentrating you are concentrating that sir since there is no risk why we are thinking about the impairment we should think about the impairment considering probability of default in the next 12 months all be given in the question so in this question what is p zero so what is the inent amount zero okay read the next here in wow no wow 12 month P now 1.5 what to do what is the formula carrying amount of second year please identify the carrying amount of second year huh 58.2 okay 51 18.2 multiply by multiply by what is the probability of default there are only 1.5% chances of default and if it occurs the Voss would be 20% so multiply by 20% calculate I'm calculate the impairment loss 1.55 is it is 1.55 tell me what general entry will you pass what general entry will you pass impermanent loss account debit to loss alls understood or not yes sir second year done yes third interest not receive oh my God there's a default and if interest is not received now significant increase in cr r what which e you will apply lifetime so as per lifetime what is the probability of default 8% and if a default occurs what will be the hand value 90% will beiz value if the default occurs so tell me what is the uh formula what is the formula carrying amount carrying amount carrying amount so first of all come to this the last closing value will become the opening value apply the interest as per 9.24 it's 47.88 please do it have you got your payment have you got your payment so what is the closing balance 566 it's the closing balance after default so on this 5660 multiply by what is the p p p p 8% and if it occurs 90% I will not recover calculate how much it's 40 7 five or six what6 overall 4.76 will be lost out of which 1.55 already been provided for 1.55 provision already made in the last year now how much provision do I need to make9 39.2 X expected whatever approximately guys understood or not how this 39.2 going to arite closing provision minus opening provision during the year provision done okay almost done last year please look into the last year now four interest borrower IBC initi IBC what is IBC insolvency bankruptcy but credit impaired the asset is lost IBC initiated credit imped what do uh when the asset is Cre imped what we should do as per the chart what we should do first of all we should apply the lifetime and interest is to be charged interest is to be charged on net value look at the interest chart look at the interest summary look at the interest summary interest will be charge on what is net value what is the net value the gross value carrying minus loss dat so see this interest is charging like this can you please explain this why we are doing this one why we are calculating this like interest on this bis this is your gross value yes this is your gross value and this is the loss still date so gross value minus loss still date into 9.24 the interest would be 48 54 guys understood or not yes have you recovered anything have you recovered anything yes only 80 lakhs principal is expected to recover so you recover you are expected to recover 80 rupees so what will be the what will be the closing Balance 5 34. 62 you have to write off this you have to write off you have to write off 534 62 what kind the loss allows you have earlier 40 point so entry loss allows debit 4076 asset you reduce 5 3496 rest is again your impairment loss you charge it to P 18 you are going to recover no need to D recognize guys understood or not if anybody having doubt you can ask me see 566 was the gross value 48.54 can you please add them add both of them 566 plus 48.5 .54 it becomes 61 4.62 out of which how much I'm expecting to recover so 80 will be my asset so definitely the rest portion I need to De recognize how much I need to D recognize 5 34.6 i d recognize and if I'm D recognizing this if I'm D recognizing this then out of which I already created the loss Al provision of 4.76 so rest loss I need to book immediately again that is 4 9386 done guys this was your impairment loss any doubt tell me any doubt so this was your impairment waiting for a response on doubt otherwise we can have a break now break or uh can you move further okay so if you don't have the doubt we we can take the break of 10 minutes and then we'll resume the session with the next portion of the uh particular topic is a D recognition now I'm sure that these things this especially this impairment you haven't uh uh done with this properly I think most of the students actually don't see this kind of thing most of this obviously there are some students 20 30% who have this kind of this see these things all right so let's have a break for 10 minutes and then we resume the S all right so guys next point is dnation D recognition of financial asset ofet so we understood that Financial assets are of three categories AMC fbp o fpn first of all what they done recognition refers to the timing of removing a financial asset from the balance sheet yes financial asset from the balance she is called any G or loss previously recognized in oci shall be recycled to pay except for the equity instruments which are not held for trading designated we already discussed that if Equity investment is there which is under FB o like the general rule was if the asset belongs to FB o entire accumulated o shall be to pay in case of DN of financial asset but this is not going to happen this is not going to happen if Equity investment is categorized Equity this is the exception we already discussed this so now we are discussing how to recognize the financial asset of this ceg how to recognize the financial of this category how to sorry how to recognize the final effects all when we say d recognize so by J entry it's not that much uh it's not that much Rel because G we all know that financial asset it's a simply when you recognize finet financial asset debit when you recognize two financial asset so as far as ENT are concerned very simple but there are some other points which we discuss under first of all when condition when the respective risk ands are transferred what is risk ands are transferred ownership but we are not talking about the assets like calculator and PC and we are talking about the financial assets how do ownership will be transferred invest equity share it is transfer so now I'm not the shareholder the person to I transferred he will get the dividend now so all the risk all the rewards are transferred in case of equity instrument I have investment in denters I the deur of companies I transferred such deers to another person now he will take the interest he will have all the risk of non- recovery so I transferred the investment in debenture I transferred the investment in equity share I transferred the dors dors how could the detas be transferred factoring correct factoring I transferred the detas to some other person other party known as Factor agent Factory where that other party will recover the money from that dat and I will get my money from the factor agent so when we transfer our asset we need to see whether the risk and rewards are also transferred or not if yes then the D recognition will occur next cash flows are expired maturity over cash flows are expired the cash flows are expire redeemed after years cash are exp you need to transfer to another person another party now I will not the P term is closed so cash flows are expired D recognize the asset cash flows are transferred that is transfer of right to receive future cash flows FD is in my name but I transfer the right to receive cash flow interest to some other party that FD is my but whatever the interest I will receive now it will be credited in your bank account I am transferring the right to receive interest on fd2 are you guys understanding or not so it is again transfer of Rights last cash flows as received will be transferred immediately with a condition that original owner cannot sell the financial asset suppose I cannot transfer the F in your I cannot transfer the interest amount in your account uh like directly I cannot uh request the bank to transfer the interest amount in your account okay but what I did as soon as I receed the interest in my account I will pay you I will give you that interest as it is and the time I G I cannot save my financial asset so technically I have the financial asset but as soon as I receive all the cash flows the same cash flows I need to transfer to you that is again here all the cash flows belongs to you they are transferring from my s in that case I have to D recognize my financial asset because whatever cash flows I'm receiving I'm transferring it to you technically this financial asset belongs to you only I'm just the uh I'm just the of that cash flows not so again in that case I will deize my financial asset so these are the the cases of D recognition not so important it's only one thing when you transfer the risk or Rewards or when the cash flows are expired simple now this is very important Market important this is very important two types of D recognition can happen one is full D recognition the other one is partial D recognition full D recognition entire financial asset ised parti a portion of cash flow is transferred to you the rest portion I'm keeping in my a portion of cash flow is being transfer that is called partial D recognition and partial D recognition the entire financial asset is divided into two parts the retained part the transferred part the financial asset you have to uh uh bifurcate into two parts guys are you understanding or not yes look at the example partial D recognition carry amount of financial asset is one uh 10 lakhs is 10 L retained part carrying amount is 40,000 transferred part carrying amount is 60,000 what general I will pass in my balance sheet right now the asset is been shown at 10 lakh this is 4 lakh this is six lakhs asset is being shown at 10 I transfer one part of the asset who carrying amount is 6 lakh and transferred at 520,000 what entry I should pass first of all the entry would be financial asset retained part debit 4 lakh financial asset transferred part debit 6 lakhs to financial asset earlier only financial asset was being shown in my books now I bifurcated my financial asset into two parts there are two Financial assets one retained part one transfer part now I'm selling which part what entry Bank on debit how much 520 P debit loss 80 to financial asset transferred part six lakh but first entry is relevant first of all I have to bate my financial asset into two parts you understood or not yes done with this okay done okay now see you remember now in our cash flows in our contractual cash flows there's a interest as well as principal huh it happens or not interest principal interest principle now transferred portion could be anything suppose I transferred only the interest part princi I rain with me suppose I transfer only principal part interest with me suppose I transferred interests 50% part and principles 50% part suppose I transferred interest 80% part and principles only 10% part proportionately are you understanding what say yes huh so transfer anything partial transfer partial transfer you can transfer of the interest rate you can transfer whole of the principal rate you can transfer portion of the principal and portion of the interest rate are you understanding yes it could be anything in any way okay see example number 28 come to this example bank has advanced loan having carrying amount of 10 lakh bank has advanced a loan having carrying amount of 10 lakh with contractual interest rate of 8% per now carrying amount is 10 lakh contractual rate is 8% remaining term is principal r at so every year what what will get interest interest interest Bank transfers the right to receive interest cash to another party at tell me which part we transferred only interest part we transferred which part we WR huh principal part the main question arise how will you bate this 10 lakh into transferred part and retained part contractual cash flows present value okay how contractual cash flow present value tell me see what is carry am 10 lakh what is the transferred part huh so tell me the transferred part CCF tell me every year every year huh tell me what is the present value uh any effective yes 9% calc the present value 3 1 172 what is the retained part what is the r part CCF 1 2 3 4 5 what is the part CCF last year 0 0 0 0 how much huh what is the present value 6 931 so what to do how to bate this in the ratio of this and this this is treated as fair value fair value in the ratio of fair value of both the parts in the ratio of fair Valu of both the parts please by it fair this is the fair value of transferred part fair value of retained part please do not talk and please calculate please bate in this ratio transfer part 3 2 3 7 65 what is the retained part 6 76 2 35 now which one we sold transferred part at what amount we sold 3 lakh so you got a loss 23,000 so how to bate the how to BU for four values what is four Val of transtion por not H so what we understood right now if we make a summary if we make a summary what we understood for partial D recognation step number one the total carry amount of financial assets into transferred part and retained part in the ratio of respective four values Fair values could be fair values could be present value of respective for then step number two save the trans part and and recognize gain o loss in P recognize gain loss and P all right can you do this example 29 please look into this example look into this example that for then right look at another example look at another example of 30 D recognition of financial asset against another financial asset entity is holding 11% convertible Dees of another entity with the carrying amount of 12 lakh we are holding 12% company 12 caring amount it got the option of conversion and a such other entity gave us the option to convert the debentures into Equity we received Equity shares of entity having a fair value of 1350 now we would recognize our debenture and we recognize our Equity investment at fair value what will be the general entry General entry is investment in equity at fair value two investment in debenture the carry am and we got a we got a g why we transfer the why we transfer the if suppose we are this Equity under F that exception but suppose if we are not designating F we are designating then instead of O there would be P it depends so here I if designated at FC then G should be bed in O understood guys so your one asset is getting exchanged with another asset you have debenture now debenture are gone you got Equity so you record the equity value you the difference is profit or loss either P or o it depends what following understood a lot yes any doubt any doubt no because the h now any doubt no sir ask it's quite easy now but in this portion ofion the next things are going to be very difficult and they are time conving because now we are going to discuss the factoring part of financial asset the factoring respect of factoring now come to the sixth Point transfer of financial asset transfer of final asset when neither substantial rights and risk are retained nor transferred sometimes there are situations like you cannot identify whether I transfer the risk reward or I retain the risk reward I don't know what to do like we could be in a position but we are not in we are we cannot determine whether the risk and returns have been transferred or not we Cann identify because if we want transfer we should be if we transfer understanding transer confusing situations this is why the heading is transfer of financial asset when neither substantial risk retained nor substantial B rewards retained or transferred we could not determine so there are some important situations concentrate on situations the basic golden R is control is your control over the asset lost or not control over the asset is lost or not control over the financial asset is lost if yes control or fin is lost then apply the recognition apply B recognition control over financial asset is not lost it is retained withing it is retained withing do not D recognize do not beog let me give you one example can you what's the name can you please come here come here your name is an anoop now anoop is providing Factory services please do not uh go with the uh comic discussion please it is very important so here important for you as well as him so he will he will get distracted when you smile so please so an provides Factory services to all the entities now what is called what is Factory Services basically he he provides uh the collection Services Factory means the collection Services what is collection service collection of thingss on behalf of the entity from entity and G to entity now Factory services are of two types are of two types with risk without risk what is risk risk of B with B risk without B risk there can be two cases case number one I have my data of 5 lakh I want you to collect the risk will be yours the risk will be yours I have my dat of how much value you collect you go and risk will be yours just give me the amount right now and it's your data tell me transfer huh should I doize my obviously yes I repeat that I sold my datas to ano understood or not what ano will give to me see how much of is what when I told him that it's your dat it's your risk give am right now how much amount less than obviously not exactly because I to so I will first of all analyze my data's position obviously we do the homework about my datas so I told sir I will give you 350,000 in full settlement in against this 5 I said yes tell me what entry I should pass entry entry bank account 4 L account deit 50 two 5 LH got the datas now an was able to recover only 4 lakh what is my part in that nothing an able to recover 490 what is my part in that nothing understood the first case yes sir done yes second case I have 5 rup of letters I want you to collect and said sir but thisis will be your I not take the risk anything means whether control is transferred to no the risk is not transer an is just providing you the collection Services what 100% risk is with me okay so I tell told me sir I will pay you 485,000 how much 485,000 and risk will be yours sir only so his part of only 15,000 if he would be able to recover entire five lak he will keep the 5 with him only understood or not suppose he'll be able to recover only 490 out of 5 lakh who will be the 10,000 factor or Jer I will here 10,000 I have to repay 10,000 to reime are you guys understanding or not any case ano has ano should get F lak full understood or not yes again Ask giving you one same situation how much I have okay aop Factor gave me 485 I transferred to factor this without without B debt risk now in that case without bu risk if an could be able to recover entire par with us it's fine but if would be able to recover 4 M pay 5,000 I have to and I have to re in any Cas get in that Cas tell me my control over is lost or not not lost in that case says do not derecognize the asset consider 485 as a receipt as aity consider I took a loan just a finan facil I don't I need to derecognize my asset 485 what should I pass bank account debit 485 to financial liability under AMC category for 85 so what about five five datas will be continued in my books understand or not okay this entry I passed fin so what happen next time case one factor recover full 5 L tell me what to do correct Factor by you anything no huh no no so what should I do Financial liity I will recognize at 485 two de I will D recognize financial asset I will D recognize at 5 LH and I will get the interest cost of 15,000 because I took a liab now fin so is my interest cost fin is it understood yes everyone yes so suppose case two Factor recovered 495 only what should I do I need to Bear 5,000 for tell me what entry should I pass first of all Financial liability 485 it's over fine two get us how much 5 495 because I still can recover from my i l control see he he is not able to recover the money from him but one more so how much he recovered how much could Rec so I will definitely go one try understand not yes okay and how much I will pay to anop 5,000 so what is my cost interest cost again what is my interest cost again 15,000 same I paid to a loop to factor 5,000 tell me again understand or not yes now tell me in my books what is financial after this entry Z what is fin ENT 5,000 I went to my to recover my I recover 500 rupees want pass bank account debit 500 loss account debit 4500 to financial asset deers 5,000 now you understood the case two yes thank you you understood the case totally yes huh properly yes so what is the basic thing control control the control is transfer then the control is transfer only then you D recognize the asset otherwise the asset will be continued if you are not giving the risk of B debt to him you will continue your dat us and if he could not recover he still will continue DET us understood or not yes case three case three Factor recovered Factor recovered zero tell me Factor couldn't recover anything what pass Financial liability account debit 485 I will pay I have to Reb get is L so I have to reimburse to fact how much 5 LH still my interest cost is so you have to understand interest cost is already predefined is already predefined ,000 from very first contract understand that but still I'm having my books 5es of I could I could be able to recover 3 l rupes tell me recovered bank account debit three loss account debit two five understood or not simple Yes okay very good so all the entries all these are uh things only this is your homework example 31 case one case two everything is a homework it's your homework see we call it when the no risk is transform we call it recourse recourse acting what do we call it what recting no no riskus transfer okay so all the cases are discussed for alop I discussed there also second number Point example number 32 J limited all the cases are here all the cases are here everything I discuss with you right now guys understand or not second type without recourse what do without recourse risk is transferred all so tell me r stand for what should I do I lost the control I lost the control sh whatever I received from ano is it my financial liability no I I assume that it is sold asset is sold not so read this type two this part only m e done only the last part now D recognition only last part case three it is very crucial with partial records an come here once again ANUK is providing good Services okay what was the first case risk first risk first case was with risk so I D recogniz my asset an ano gain me 450,000 in full settlement but what the second case without risk and is not taking a single rupee risk so I recognize my asset in I recognize the new huh now the third I'm transferring some risk I'm retaining some risk means I have 5 how much 5 lakh I want you to collect those 5 lakh rupees on my behalf he asked me sir what about risk so I told him you take you take the full risk he told me sir the full risk sir I take risk to the extent of four lakh how much he take risk to the extent of so four lakh risk transfered and one L risk retain retained it is called partial D recognition can you understand this is a parti the transferred part the retain part yes huh so with the example how much to dat are five lakhs for collection factoring Services factoring how much risk with 4 rupes of badb risk how much risk are how transferred 1 lakh guys understood or not yes okay Factor gave me at 470,000 Factor entire 470,000 how much 4 lak 70,000 so once again I have total five letters I asked Alo to please collect it to please collect it and who said sir I will be able to manage four lakh ofs one L will be yours I said okay since I have given the collection services to a loop of 5 rupees a loop sent me how much value I collected 470,000 understood guys yes tell me 100% risk is transferred or not no 0% risk is transferred partial risk is transferred yes huh yes okay partial risk is transferred what I will do step number one is Step number one first of all D recognize the full asset for the for the full tell me bank account debit 470 5 LH but whether I have transferred 100% risk technically it's a partial but IE the full full since iiz the full asset but I haven't transferred the full risk I will create one new asset tell how much risk one L so I pass second step step two I will make a new asset create create new asset of 1 lakh the name would be contining involvement inors account debit one lakh continuing involvement in detas account debit 1 L this is the name of the asset this is the name of the asset first of all I recognize the 100% asset then I'm saying oh no no no no no I still have some involvment in my bets to EXT of how much one lakh and if ano couldn't recover that one lakh I will be able to recover so this is my asset and if ano couldn't recover I have to reimburse to ano tell me to Associated to Associated liability account one lakh so what is the logic of this entry debit logic I will explain credit logic I will explain separately debit logic I still have the right to collect one lakh rupees if I will fail so it is my asset and if if fail I have to reimburse one B is because already gave me 470,000 entirely 5 rupes now is saying sir Bisk is l l so that couldn't recover L you have to p so why Associated because I recover it I will pay to have you understood the logic should I explain one once again or already understood fine now D will give you one more Point entity is expecting 20,000 BB although I have the continuing involvement of one L one lak rupees in my dors I have the risk up to one lakh but we are expecting like no no no only 20,000 will be B de how much how much transfer how much risk I did transfer but I knew that this one L lost only 20 will be lost only okay only 20 will be lost so make a provision of second make Aion of separately how do you make the provision provision so to provision is kind of kind of CR thing now so third entry step number three make a provision make a provision entry is loss that means pnl debit 20,000 to provision 20,000 now instead of provision I will write Associated liability the same now I'm telling you please do one common entry combining all three steps what should be the entry do one common entry combine entry for all tell me okay Bank 470 ha loss 30 hair loss 20 50 H the loss 50 okay continue asset 1 lak two financial asset 5 lakh Associated liity how much 1 lak and 20 how much 120 this entry would be passed tell me understood the entry how can you understood this in one go not possible you you haven't understood the entry you must have the doubts see first of all first of all do not go into the name the name could be anything please understand this that is the I told you that okay if you are not comfortable with the mean now comfortable so first of all please do not concentrate on the mean concentrate on logic behind it so you can AR but first of all Logics not part okay first of all first of all one one again one again first of all refer my full example before asking any doubt okay I'm discussing with you overall dat was okay I transferred overall data collection services to him at which amount he will collect overall he will collect overall 5 and he gave me 470 but what he told four lakh risk I transferred how much risk I hav't transferred one lakh in the first entry I assumed that for the timing let's assume that I transferred 100% risk since I transfer 100% risk I be recognize 100% ass not yes any doubt on first entry no now how much risk I have transferred huh one lakh so one lakh risk is mine yes but when I would collect this one lak only when he fails suppose he collected the entire 5 L now would I be able to collect my one L still so I have the only suppose if we if we achieve his Target if he got entire ballet whe still would I be able to collect the rupes no that is the reason I'm creating a separate asset that I'm assuming that suppose whole letters are gone I still have one L but whole datas are gone I will try only whens this is the reason I created a separate asset to show my users of the financial statements to show my shareholders that see datas for over 5 will con but we make that is the reason we are we are sh a separate asset continuing involvement understood understood the debit part yes no if he fails I have to reimburse to him to reimburse to him Associated Li I again saying please do not IC uses this one Associated liability understood okay if he couldn't recover if he fails I have to remember so my life I will reimburse him and I will try my best to collect my money on my continued involment understood but other than that I know that only up to 20,000 would be the bad debt only up to and that is also not sure I'm assuming I'm expecting that only 20 will be B de not more than that so your C inter what and general use to pass for provision for credit profit and loss account to provision so it is the same ENT profit and loss account to provision but say that instead of provision keep the same name keep the same name associate liity hence I did this yes okay actually we don't we don't have any fin L right now we are just assuming that 20,000 may get right that is a separate thing with this is a separate thing H but in balance sheet you right in balance sheet I will show contining involvement here 1 lakh and opposite side I will show Associated liability here 120 just uh like this not like normal procedure we do trade receival minus provision okay okay according to you you're right our Li is maximum one lak and my continuing enrollment is but out of which how how much I may L 20 20 provision provision you looking to me in a doubt situation I'm saying I have the employ involvement of one lakh but I still expect that 20 I may not recover so how much I have Contin but out of which I may not recover how much so technically how much I will be able to recover and my liability is maximum so what is the net effect so net effect is 20,000 technically the N is 20,000 just the way of presentation is different why it is ay it is not s it has some values we have to respect it okay and above all it's ICI tell me clear so what you will pass even I you saying for logic purpose do these three steps in rough work exams but rough work do this these three steps what the step one what is step two recognize new asset and new why new asset because your involment is there up to one L why to and step three make a provision for expected loss in the name of associate liity understood or not then combine the entry simply it is called your partial recourse whatever example I discussed with you the same is example number 33 you have to do it by yourself not yes this was the recognition and it's over it's fine okay so tell me I told you one before these two topics yes doubt H I thought you have some doubt liting something so I told you one thing before discussing impairment and D recognition that most of us us most of us in student won't concentrate on these two things I hope by discussing these two things you must have learned the new uh New Concepts in this yeah see modification extinguish everyone know everyone know about thec F everyone when we talk we talk about principles we actually don't focus on the things actually so I just tried my L best to make a focus on that part also that is also important in okay so I tried my best and we have so many examples of datation so many cases once you refer it in your home you can ask me the out from the next day guys have you understood yes I recommend you to at least do example number 37 must try master so unit number two is over now we are left with derivative part derivative and hedging part derivatives and hedging part if we can continue half an hour at least then we'll continue will we give the break it's fine okay half an hour we'll continue so now we are starting the derivative portions which portion derivative how many of you have read the derivative chapter in how many of you the chapter only basic guid also works this is basic guidance this chapter in this requires only basic guidance not that in depth uh knowledge no how many of you have not even comptiable are not comparable with the basic knowledge also one two only two rest all fine so I can ask the questions properly on derivative from you all just a second e spe for all right so guys derivative contracts first of all financial instruments financial instruments has two type of contracts one primary second derivatives primary conts are loan given it's a primary Financial instrument Equity investment it's a primary Financial instrument loan taken primary Financial instrument that is like everything we discussed already till unit two is primary inst derivative also taate can you say forward contracts are also don't have any option yes definitely Market will decide but uh there is some customized the deror also but yes almost uh you can say that t uh contracts are primary contracts like loan given taken vors equity instruments and all these are primary instruments derivative instruments are not the primary why first of all derivative the value of the derivative the value of the instrument is dependent on some other underling so what is the underline underline could be the Nifty underline could be the weather forecast underline could be the cricket match between India verus underline to the the the the what I can say uh the price of anyer underline P the price of gold underline py the price of onion underline py the price of anything this is underline and based on that it decides the underline decides the value of the derivative understood or not yes yes let me give you one simple example if milk is the underline C is the derivative no the price if there's an increase in the price of the L definitely the price of cod will get increased so Cod is a derivative instrument of Hulk the simplest example I'm you huh just to make them understand I'm doing this kind of example see basically C is made from so any instrument which is made from underline is a derivative understand yes so and derivative the basically uh the identity the self idty derivative is actually uh created out of the underlying asset underlying asset could be stocks index Nifty could be gold could be any commodity any weather forecast any any Cricket any gaming whatever it is that underline from which we created one particular contract understood or not so price of the underline sorry price of the Dera is dependent on the price of underline understood or not yes okay so this is called derivative now derivative are of some important classifications direct are some important types first is Futures see Futures second is options third is forwards for fourth is swap okay these are the four four most important derivative which we will discuss other than that we'll discuss IND derivatives what we will discuss individ and other than that we'll discuss hedge accounting so we need to discuss six items first is what Futures let this let's discuss future first Futures before disc discussing the Futures and all derivatives you just need to focus on the characteristic part of the these are the characteristics on the deror focus on the characteristics for the first characteristic is its value changes in response to a change in the M card Nifty stock Nifty Nifty the whole Nifty is dependent on the is the top 50 shares of the company top 50 company shares so if there's a change in the top 50 shares definitely the index will a change so Nifty is what Nifty is the derivative of all the stocks not yes so any stock index any share any foreign exchange rates US Dollars rates interest rates RV rates these all are underlining if they get change our contracts value can get change second it requires no investment or very little investment now here it is not like no no investment or little investment little here means in percentage form it is little not in amount form like contract very huge contracts basically these contract are placed in LHS and crores so comparativ with the contract value very big but the investment is in percentage form like 5% investment suppose how take a calculator suppose you want to invest in a li index want to invest in the Nifty index and suppose currently I'm just taking the any value suppose currently Nifty is at 20,000 let's say so you want to invest your money on Nifty so Nifty is currently showing at 20,000 now if you want to invest in Nifty the minimum units you have to purchase is a lot size basically you cannot make your own Lots so minimum unit size is 100 unit size 100 number so tell me 20,000 multip 100 20 lakh so you will treat this 20 lakh as a contract value what is a contract value I don't to just invest suppose the 10% portion how much I I provided 2 L Rupees to my broker in the Nifty futures in the Nifty Futures I purchased and I provided 2 lakh rupes to the broker for this investment so entire value of the contract is but I invested only two l a very little investment so derivative requires either more investment or very sir very investment why no investment some some contracts are customized like forwards suppose uh we are deciding we are discussing on the weather forecast for the tomorrow you guys are saying that tomorrow there there won't be any rain is this a rainy season here everything R so you are saying that some people of you are saying that tomorrow there will be some of you are saying will not be so we bet like it will be there or not okay so but anything so it's a bet of you some of you are saying that tomorrow will some of you are saying but for this contract you haven't invested anything it is a customized contract no it is not a legal contract you cannot bet on the for weather forecast illegally so technically you haven't invested any money you just discuss it you have a b and you will decide you will pay to each other depending upon tomorrow's weather so technically derivative contract times requires no investment or if it requires investment very little investment this is a basic feature of derivative third it is settled at a future date it is settled at a future date on future dat it get S like it is ultimately dependent upon the Futures events Futures UNC or conditions you cannot have any control on that future event are you guys understanding or not suppose you are features so you are estimating that either n will go up or will go down but you don't have any control ony yes huh you don't any control on Lefty so if we don't have any control on Lefty so it is very certain in the future itative contract guys are you understanding yes one more important point if it may settle on net basis what is that net basis examp 20,000 if it is 20,100 the 100 rupes will be settled okay unlike in case of Reliance company share or enfor a share you can have the delivery of that share in your demate account but you cannot have the delivery of nifty you cannot have the delivery of nifty you have to settle settle it on net basis like you invest you you entered into a contract today Nifty is 20,000 and you are expecting that Nifty will get will will go up after one month suppose after one month Nifty becomes 20,2 so 200 increase is your gain and you will get 200 Rupees at a cash only understood yes huh yes whether you have to invest 20,000 no no oh that's fine whether you have to invest 20,000 no whether you will get the delivery of your Nifty in your debit no after one month what will get only the portion either you will get or you have to pay it depends understood or not so these are the four characteristics of uh derivative contract first value change in response to a change in underline second second no investment or very little investment second future date and requires net cash settlement no physical delivery guys understood or not so these are the derivatives basic characteristics now when we come to the accounting of derivatives the accounting of derivative mostly starts on the balance sheet date accounting of derivative mostly starts on balance sheet date now first of all uh few important points I must say regarding derivative Futures no need to WR no need to WR Futures what are Futures basically future is a contract basically it a contract so in this contract there are two different situations La Futures short Futures long Futures means we are expecting buy now sell letter is a terminology of AFM please keep it with you we are expecting we are expecting PR we are expecting what price if you are optimistic about the market huh if you are optimistic about Market bullish bullish thinking so if you're optimistic about market then Market will go up yes I need to invest right now so you will go go with the long features what is short features is beish thinking you are pessimistic about the market you think that market is definitely uh going down in the days you will invest in the down Market how down Market how Okay short Futures we are expecting price fall we are expecting price fall understood yes see this is the mobile now I have this mobile I offered uh uh suppose I offered you that if you want you can purchase it at 50,000 Rupees in next one month in next one month you can purchase this mobile at 50,000 Rupees okay one month you wait you waited for one month in the market this mobile having a market value of 60,000 tell me will you purchase this from or not yes why you are expecting yes price will raise then I will I will exercise my option understood or not yes did you understood yes suppose the market price becomes 60,000 and I offered you at 50,000 ,000 what will you do if this is not a derivative contract I will give the physical delivery of mobile phone okay and you will give me 50,000 but suppose this is a derivative contract we are not going to settle this physically me what we do 10,000 I will give you only understood or not yes now same mobile mobile now I have this mobile but I'm thinking that very soon the market value is breting down very sold the market is V I'm concerned about the mobile I want to sell it but I know the market is going down what I I found one buyer I found one buyer he guaranteed me rupees 50,000 value how much I told him that just please give me one month to think about this he said yes he will wait for me for one month only that uh I will he will purchase from me this mobile at how much value 50,000 till month end the mobile market value of the mobile goes down to 45 what should I do it to, sell it to the committed party at how much, 50 see the market is getting down less than even 50 I have the right to sell it 50 understand not this is called shop sales this is called short futur short sales so in short Futures whenever the market will go down I will have a profit because I have the right to sell at 50 even the market is at less than 50 so in short when the profit when the market is getting and in the long Futures you have profit simple and why Versa La situation versa so in Long FES you always a profit then the market will go up and in short uh you when the market goes down long gain situation Market market up short gain situation Market down not so let's make a summary no again Market goes up from contact value there will be some base price the contract value if the market goes up Beyond that value you earn game short tell me when will be game Market goes down Beyond contract value losses are vice versa done yes this is Futures now how to make the accounting write the example on first march on 1 March we bought following future contracts we bought following nift Futures PA long contract long contract at 20,900 100 units short contract at 21,000 01 0 15 minutes 2 months expiring both the contracts will get expired after two months on 30 1st March Nifty 1 month on 31st March Nifty 1 month is 20,000 990 show the accounting solution date of contract what was the date of contract 1 March no entry sir why it's just a contract sir have deposited some margin or money yes but I'm not talking about the entry for margin money I I will give any details if I would have given you some details like on first March we deposited some security deposits or margin then margining guys understood or not no entry for derivative B sheet date balance sheet date check the position check the position long contract what was the base value when will you be in a g situation when the market will go up so tell me it's up or not it's up or not how much 90 so it's your gain but have you recovered your gain in Money Cash no you will record the receivable asset so at balance sheet date record the asset derivative long Futures financial asset debit to fair value gain pnl d are always categorized under fbt category except under hedging except under hedging they always recognize under FP category tell me what was a game 90 multiply by number of limits how much 9,000 tell me one more the next contract was when will be gain position when Market goes down you booked the value at 210 1 Z now it became 2990 tell me it down or not it's down how much how much 20 again it's your game entry derivative short Futures financial asset two fair value gain how much, so you will record these two entries you will record these two entries guys understood or not yes settlement date suppose on settlement date Nifty becomes Nifty becomes 20 050 tell me what will you do Nifty becomes 21050 in long and in short what is your position long a gain short a loss short a loss first of all long what will we do you will get the bank balance bank account how much what was the original contract value 20,900 20,900 minus 21050 150 into 100 what was the last asset you created derivative long features derivative long futures 9,000 again there's a gain of 6,000 yes C spe the contct at 210 10 now it becomes 21050 it is getting increased you sh so you to loss you have to pay to bank how much you have to pay 40 multiply by 50 units how much 2,000 H what uh asset you have created here short Futures so you have to reverse the asset derivative short Futures th000 so loss fair value loss payl it's 3,000 understood yes done so guys this was Futures forward same as Futures there the forward contract which is same as Futures only difference between forwards and future is Futures are regulated by the forwards are also regulated by market futures are regulated by some uh regulation Authority okay forwards are Market oriented but they are OTC over the counter contracts OTC mutually decided terms and condition will decide mutually and we regulate only that but Futures are regulated by the by some Authority they have so there's a for there same same long short same everything understood any doubt no doubt are you sure okay so now let's take a break Futures is done forward the same after the break we discuss options swaps and derivatives anding okay thank you guys uh there's a lunch break now of how many minutes 45 okay all right shall we resume yes sir okay so we understood the options uh sorry Futures and forwards if in Futures and forwards they tell you that we need to pay the margin so this entry is required initial margin account debit to bank this margin would be refunded like at the end of the contract this will be either settled with your fair value gain or loss and the net Valance will be given to you next one is options next is options okay option contracts option contracts same just like Futures they have two positions option contracts they have two position S one call and second is put call means right to buy what right to buy right to buy at lower price market price is higher but you have the lower price market price is higher so under options you have the right to buy so what buy buy a share buy any underline okay you actually don't buy physically you SLE it on a net basis okay you set it on I told you you have the right to a calculator at 50 rupes Market 60 rupees so you set it this at so call right to buy at lower PR market price is higher put right to sale at higher price market price is lower in the market the C sold at 50 rupees but you have the choice you have the option to sell the same at 60 rupees so you will have a gain of 10 Rupees on net basis okay these are the contracts now to get the option to get the to get this right because we are talking here we are talking about right here we are talking about right to get this right option holder needs to P the premium to who to the option writer who gives the option so there are two parties there are two parties one option holder other option writer option holder option writer option holder option holder has right option writer has obligation the same right we discuss this one option holder has the right to buy at lower price market price is higher in that condition option writer cannot deny if he is exercising his right to buy option writer cannot deny if he is exing his right to S option writer cannot deny he has the obligation understood or not so if option holder has right to buy writer has obligation to sell if option holder has right to sell writer has obligation to BU understood or not who gave him right who gave him this right wrer free of cost huh premium so right is given at some charges which is called premium charged by option writer premium is charged by option writer you know insurance contracts yes option contract works like that same similar to insurance contracts under insurance contract there are two parties two insurer that means client and insurance company okay insurance company charges premium and urer that is client has the right to claim if something happens understood or not if something happens he has the right to claim and the insurance company will charge the premium guys are you understanding or not so it works like that the writer is acting as a insurance company and holder is acting as an insurer client writer is charging the premium as income and holder is giving the premium as an expense simply guys are you understanding or not right one example what is today's Nifty can you please check Mr J has chased 217 Mr J has purchased two month call option from kak Securities C security is a option writer Mr J has purchased 2 month call option from kak Securities on Nifty index on Nifty index current Nifty is 21710 21710 points okay lot size 100 units purchased one lot purchased one lot J paid a premium of rupees I paid a premium of rupees 20 per unit guys what do you mean by call option WR to buy at at lower price righty to buy at lower price okay so you know what this point means Jay has the right to buy at 217 710 even the price increases in the market Jay will purchase this Nifty at 21710 even if Nifty goes up if suppose tomorrow the Nifty goes 21715 J has the option to purchase at this price if Nifty has 21725 J has the option to purchase purchase that if niy is 21700 J has the option to purchase this but J will not Avil this option why he can buy in the market from the market directly cheaper price guys are you understanding or not so J has the option to purchase at this price understood or not okay on 31st March the contract date was 1st March contract date was 1st March on 31st March Nifty one month is 217 217 28 on 30th April Nifty becomes 21700 discuss the accounting for Mr Jay and kotak okay books of Mr J first of all 1 March what did premium treat premium as an expense for J simply expense more entry option premium debit to bank yes tell me how much premium he paid 20 mtip 100 2,000 option premium will be transferred to P now on 31st March what J will do check whether J is in a profit or not how much profit Jay has the right to buy at 21710 but now the Nifty becomes 21728 wow Jay will definitely have the option to to gain 18 rupees so tell me here J is in a position to J will record one asset derivative option financial asset debit to fair value gain fair value gain charge to P how much 18 rupees 18,800 done can you see still J and a loss by these two entries still J in a loss why he paid the premium ex more 20 rupees he paid the premum so his break even point is 20 rupees huh his breaking point is 20 rupees okay 30th April tell me what happened the J Avil option why Market pric what lower what J will do J Will reverse the asset reverse the asset reversal of financial asset entry fair value loss P andl two derivative options financial asset how much 1,800 done yes I'll show you one alternate accounting for J answer would be same alternate accounting on 1st March instead of charging to P Jay Jay will make a financial asset create a financial asset by this value ,000 J will create a financial asset of this value entry would be option premium financial asset debit to bank 2,000 instead of creating uh instead of charging to pel J will create the asset sir why asset just thinking that I paid 2,000 is the premium Now I want to recover this anyway so this is my expected recovery so it becomes my asset so instead of charging to P I will treat it as asset now on balance sheet date compare the value compare the value 21710 and 21728 there's 18 rupees of receivable so what Jay thought earlier that I'm going to receive 22,000 rupees but now only 1,800 is getting uh recoverable so the asset should be uh D recognized by 200 rupees so here 18 rupees gain is this out of which 2,000 already booked so J will be recognize J will pass the entry P account debit means Fair loss account debit fair value loss debit to option premium financial asset 200 J booked the loss of 200 earlier he booked the asset now he booked the loss 200 reversal of asset now the asset remaining Valance of asset is yes 1,800 now on 30th April on 30th April J X right huh no so his remaining asset has been D recognized so D recognize the asset what entry you will pass fair value loss P debit to option premium how much now compare both of the Alternatives compare both of the Alternatives you will get the final answer in your pnl same that is 2,000 you will get your final answer in your uh P and L as same all right which one you want to followed only 200 in the pr8 so what actually you want you you want to justify this first method how why tell me in this you are booking same 2 full expense second scenario 1,800 so how this is this is to be justified by cut off procedure just let me know one thing here you are booking net net 200 and in the next year 1800 here you are looking net net neck neck tell me how much you booking and here how can you justify the P effect is same in both the cases so what's the problem so both the alternative are same even the P effect is also same which one you follow first follow first one in my book only second one is written and this is the reason this is the reason I actually discuss the first one PRI in priority I know that first one is quite easy and quite understood uh it is it is easy to understand and this is the reason I discuss it in first prity because in my book second method is any written now there's no problem so anyways now books of CeX Securities books of K only first uh uh first way okay 1 March what reip receipt of Premium bank account debit to option premium it becomes expense income sorry income in P how much 2,000 31st March tell me what happened holder is a gain position so O writer has the obligation to pay so how much fair value loss debit to derivative option Financial liability how much 800 so net debt it's a gain of 200 net net it's a gain of 200 30th April whether option holder exercise is right so what option writer should do D recogniz liability derivative option Financial liability debit to P fair value gain how much okay done so this is option contract and any doubt huh no you can try example 40 at home sometimes options accounting Works differently look at example number 41 example number 41 uh please try to read first so Mr by following Equity index options the seller writer of these option is Mr B date of purchase 29 March type of option S&P cnx Nifty call expiry May 31st premium per unit 15 number of units 200 It Strike price is 880 this is the booking price booking rate contract rate since this is a call option to Mr a has the right to purchase at 8 even if the market price is higher understood now I told you that sometimes the option contracts accounting Works differently based on the information given in the question now Mr a has paid how much of these so 15 multiply by 200 huh I discuss with you the second alternative asset approach please think from that point of view this question requires that approach only you paid 15 rupees premium so what will you do first of all you will create the asset by 15 rupees please do the entry please do the entry option uh derivative option financial asset account debit how much derivative option financial asset account debit to bank how much 3,000 as per 15 rupees and 880 is the strike price booking price now on 31st March call option for May 2003 is Strike price 880 the closing rate of the premium is six per unit what does it mean what does it mean the option you purchased for 880 booking you purchase at now the same option on 31st March you can purchase and it is available at 6 rupees what will you think it's your loss why see you have uh booked the contract at how much 15 rupees but on 31st March other party can book it the same go that at 6 rupees so it's a loss for you now how much loss 15 six how much lost 9 rupees so 9 rupees book uh D recognize 9 rupees asset D recognize the asset by 9 rupees D recognize the asset by 9 rupees okay done more entry Fair loss account debit to derivative auction premium asset okay now on the settlement date what happen price becomes 882 and you have opted for 880 tell me R profit only yes you will be able to recognize only 2 rupees your asset is standing at 6 rupees yes initially your asset was standing at 15 rupees you reverse the asset by 9 rupees your asset is standing at 6 rupees you are recovering two rupees so 4 rupees loss do it entry what entry yes what ENT Bank account debit 2 rupees multiply by whatever the value number of units 200 bank account debit 4 400 rupes 2 multi 200 fairly loss 4 rupes multi 200 to option contract financial asset 6 rupees understood no your asset was standing at last time asset was standing at 6 rupees now you reverse your asset by 6 rupees recover 2 rupees in the bank the balancing figure 4 Rupees is a loss entry is bank account debit loss account debit to asset bank account debit 2 rupees loss account debit 4 rupees two asset 6 rupees you recognize your asset at which value initially look at that you recognize asset at 15 on balance sheet date you booked a loss of 9 rupees yes so your asset balance becomes and on settlement date you are recovering so your loss is because your asset value Val for 6 rupees now understood done so this second approach asset approach is useful for this kind of question where they are giving you the premium amount they are changing the premium amount every time understood guys so this is your option contract now the next one sweps the next one is sweps now interest rate sweps work when you took a loan from bank at fixed rate but you wanted the floating rate you understand fixed rate and floating rate yes huh you took a loan from bank at fixed rate but you want the loan at floating or V Versa you took the loan from bank at floating rate but you want the loan at fixed rate so what will happen some other third party will provide you swiping services to uh to understand sorry to swap your interest from fix to floating party will provide you sorry okay so let's discuss this with one example first of all loans and SBI we took Lans and SBI at 10% fix rate now IC is giving Services of floating rate interest is due at quarter ending you took a loan at 10% fix rate now you want you took a loan at fixed rate but you want floating rate after some time so IC is giving you the service for floating rate okay what will happen suppose at the quarter one ending the floating rate is floating rate is wow great now see the floating rate is 9% you are in a favorable position how how see basically when you have made a contract with ICA now now ICA is responsible for that 10% part to the SBI IC will pay 10% on your behalf actually IC will not pay on your behalf but let's understand it that ICI will pay on your own your behalf how much it will pay 10% and you have to pay to LC how much 9% technically you are at 1% gain in real life IC will not pay 10% to SBI on your behalf I will reimburse to 1% understood or not so what what is the situation what is the position favorable or unfavorable if there's a favorable position what will you create asset and if if it is unfavorable position liability so check the entry check the entry derivative SWAT financial asset to Fed G how much 1% amount then bank account debit to D to swep we recover the amount from IC it is receivable it is received and then we P paid to the SBI guys understood or not second quarter see the next quarter the rate becomes 10.8 tell me what will do you have to reimburse you have to even pay to the IC how much point8 so point8 you will create a liability all right then you will pay it and then interest will be charged at the rate of 10% as usual guys any any doubt so under swap either you will create ass set or you will create live ility depending upon the your floating and fixed rate positions are you in a favorable position create asset you are in a unfavorable position create liability guys understood or not only one thing to be noticed here is this this is important on this we I will Mark you one question 1308 question number 138 can you please read this first of all this point only if interest rate swaps pay variable get fixed pay variable get fixed just like this SBI uh example we are getting fixed from IC and we are paying we want to pay the variable M floating is prepaid if any swap contract is a prepaid in nature is a prepaid in nature then these are not derivative contracts this because the initial investment are not little or very less you remember under derivative contract there were four characteristics the value changes in response to the change and underline second no investment or very little initial investment here the very little initial investment or no investment condition is not fulfilling because this contract is a prepaid in nature it says if this contract is a prepaid in nature that means you have already paid entire interest value of the REM remaining number of years in advance that means you have paid all the interest in advance it is your initial investment which is very big hence considering this fact that you have paid entire interest value see now what is basically prepaid IC told me that they are ready to give me the floating rate the condition is my loan period is 5 years I have to pay full fiveyear interest in advance to IC then IC will reimburse me as per the floating rate now I have to pay interest from first year to fifth year in advance only now to IC it becomes a very huge investment to enter into this swap contract and this is the reason this is not the characteristic of derivative contract so this swipe accounting will not be derivative accounting will not be followed here guys understood or not so you have to refer question number 138 please mark it and give uh mark it as a homework question number 138 okay for the next is edate derivative see we understood that option contracts are derivative contracts Futures are derivatives forwards interest SWS are derivatives when we are discussing this options Futures the whole contract was derivative contract igate derivative is different igate derivative is the whole contract is this but only a part is derivative the other part is not derivative contract the other part is other than derivative is a normal contract entire contract is not derivative contract in the entire contract some portion belongs to derivation and the rest portion is a non-derivative part so Ade derivative means a particular derivative characteristic is attached is inded with some host contract are you guys understanding read the first two lines read the main introductory part end means attached with one contract that is called end Ed derivative okay read the third example to to understand it read the third one first of all please read the third example company pqr sells Furniture to the company XYZ in USD both the companies are located in India yeah tell me one thing when both the companies are located in India why they are doing the transaction in USD why they entering into USD transation there could be some risk factor or any particular company I'm discussing the hybrid contract is the entire sale contract which is will be settled in the USD now this is a hybrid contract see in this two things are important first the sale of furniture now sale of furniture is it a derivative contract no selling furniture is a derivative contract no it is a host contract main the host which represents the entire contract but this furniture sale is being entered into at which currency US USD so USD rates may change your inflow outflow tell me yes or no yes USD rates may change your inflow outflow the one who is purchasing the furniture has to make payment in USD to make payment in USD he has to purchase the US Dollars first from the market and he is having a risk of increase in the value of the dollar are understanding me yes so this is the this is the particular point where you need to understand that there's a risk of increase in the foreign currency I may enter into the forward contract to save my money this is called a derivative portion which is attached with the main contract what is the main contract sale of furniture sale of furniture at which value USD USD at which currency US USD now USD is the functional or the home currency of both the companies no the home currency is INR Indian rup so the one who is purchasing the furniture is having some risk tell me what is the risk he has fluctuation increase or decrease increase of foreign currency value increase of US dollar value currently the US dollar suppose is trending at 85 rupees and he has to make the payment after 6 months because the fit will get delivered after 6 months so I I'm having a risk of increase in the dollar if the dollar gets increased by 85 Beyond 85 suppose it increased to 87 I will have to be a 2 rupees extra yes tell me now yes so to save to save my position in this situation what I have to do I should enter into the forward contract are you guys understanding yes forward contract which one long or short see I did my part because I have written h& every notes I don't know uh you you why you are guys not replying properly guys you can refer your notes also instead of discussing first of all refer the notes in Futures also we uh talked about this long and short I want to purchase the US dollar I want to purchase the US dollar and I'm worried that US dollar may get increased it's a long contract why long if I book the price today at 85 even even the market it will get increased I will purchase at only 85 understood or not so I have to enter into long contract if I'm entering into long contract that will become the derivative guys are you understanding or not yes okay so the host contract is the rupe sale contract the embeded derivative is the foreign exchange rupe uh rup dollar forwards the forwards is the uh 10 derivative part which is attached with the main contract are you guys understanding now to make you more understand I will discuss one important example not example one question from the question Bank okay come to this question question number 1405 405 and Dera for company a it's a very technical question please concentrate company a and Indian company whose functional currency is rupe enters into a contract to purchase the Machinery from an unrelated local supplier company a is Indian company supplier is also local same country Company B functional currency of the B is also rupe both companies are having same functional currency no risk if they do the contract in the rupee only there is no derivative huh see you are here for basically studying you are paying your fees in pounds dollars rupees now and they are asking the fees in rupees only so the transaction is in rupees only is there any risk uh to either of the parties no no no currency risk technically but but when the currency risk will involve when the currency will currency RIS will involved yes yes yes suppose when when the academy ask you to pay in dollars huh who will have the risk both the parties may have the risk uh you have the risk of increasing the currency value and Academy decreasing currency value are you guys understanding or not but both are having risk of change in the currency value yes Al the transaction was not in currency trans is not for Trans was the teaching transation was services but this service contract has been uh has been entered with the help of dollar so dollar is a for foreign currency and if any of you are entering into derivative contracts or forward contracts or you enter into a future contract you might invol your derivative with the main host contract are you guys understanding or not okay now the contract is denominated in USD says the Machinery is sourced by Company B from a US based supplier okay why company B is asking for dollar because Company B is saying that I will supply you the Machinery only when I will purchase it from the foreign supplier so B is first of all purchasing the machine from foreign supplier foreign supplier will ask me for the payment in US dollar and in the same way I'm asking you the payment in what as soon as I receive the US dollar I will pay him so technically I'm not in RIS so who is in a risk purchaser purchas in this contract who is in a risk purchaser in the same way if lxa ask you the fees payment in dollar because I ask them the fees payment in dollar lxa has to make the payment in to me in dollar that is the reason they are asking you the fees in dollar who is in a who is in a risk you student are are in Risk why correct if the rate of foreign currency will goes higher you have to bear the extra amount because you need to make the payment in dollars to lxa and lxa is lxa is not in any risk because lxa as soon as lxa will receive the money in dollar he will reimburse it to the faculty so here in this example only the purchaser is in Risk purchaser what purchaser is doing purchaser is purchasing the machine so Machinery purchase is a host contact but there's a risk of foreign currency where purchaser could get into the forwards this becomes a derivative contract understanding or not huh explain me what is a hold host contract who don't explain other people who don't explain explain me purchase of Machinery from the Indian supplier is a HST contract what is derivative making payment making payment us where there's a risk of increas in currency you could get into forwards that forward derivatives becomes the embeded derivative understood or not you see it is not mandatory for you to enter into derivative contract if you want you don't enter okay so it is not mandatory for you to enter into derivative contract but it's a situation that suppose if you put inter to derivative contract you May uh save your bit money understood or not yes so we are discussing this question considering all this situation okay now payment is due to Company B on delivery of the machine when Company B will deliver us the payment will be made on that date only so look at the dates different dates are given look at the different dates are given contract date is 9 September this is 9 September contract delivery and payment date is 31st December here we will get the delivery and we'll make a payment purchase price contract is for how much 10 lakhs 10 lakh US dollar purchase contract understood guys yes USD forward rate on 9 September for 31st December maturity 67.8 USD rupee spot rate on 9 September 66.4 so here the spot rate is 66.4 and forward rate is 67.8 all right next USD rupe forward rate for 31st December on 30th September 67.5 30th September means quarter ending quarter ending here the revised forward rate becomes 67.5 and last deers spot rate becomes 67 the spot rate becomes 67 now please do not talk do not discuss whatever I will discuss with you I have to write it you have to write it because there are so many things to understand and that is actually the very technical issue and Technical topic embeded derivative if they are going to ask any question now these kind of question definitely ask because they don't have any other variety of questions probably they they they may ask these kind of questions only in the end derivative so please do not talk and discuss if you want to discuss anything discuss at the at the end of this question okay now because so many things I have to assume right now and you have to write it okay now once again what is the contract purchase of when you will get the machine in future when you will when you have to make the payment so today what you have to do nothing what you have to do nothing H you got the you got the machine today no you have made the payment today no what entry you will pass entry no entry now technically so 9 September no entry since no delivery and no payment concentration is important very much now but on the line September only I could enter into the forward contract to save my money tell me I'm not actually entering into the contract but if I would have enter into the contract at what value at what rate I booked at what rate I should book 67. I'm not entering into any derivative forward contract but if I would have entered into that contract the rate would become so write this please on this date purchaser has option to book the rate at 67.8 to book the rate at 67.8 but assume that it doesn't B actually now you could have booked it at 67.8 but assume that it doesn't booked the company does not enter into any contract the company does not enter into any contract you might not understand it properly only at the last entry you will get all the proper informations so please concentrate only so we could enter into a contract at 67.8 but we haven't entered actually done okay now come to the balance sheet date tell me what rate it becomes it becomes 67.5 what does it mean okay on 30th September just think one thing that you could enter into this contract at 67.5 earlier look could enter into it 67 as a purchaser what do you want you want a lower rate or higher rate lower rate lower rate so now try to understand from here to here you are in a favorable position because on 9th September you could enter into a contract at you haven't booked but if you would have entered into contract you you have to book the r at but you ignored it and now the rate becomes now you are feeling happy that it's good that you haven't the contct earlier how much profit you got actually it is not actual profit it is just opportunity profit huh opportunity gain it is how much3 and this opportunity gain is embeded in your machine contract actually you need to recognize it separately the ID derivative has to be recognized separate from the main contract this is the main objective of the inds that the derivative which is attached with the main contract we need to detach it and record it separately record the machine separately record the derivative motion separately understood or not yes even if not understood say yes because at the end of the last entry only I will be able to clear you all the things all the facts so right now right now on 9 September if we would have entered into the contract forward contract to save our money what was the rate but we haven't entertained this now the rate becomes so tell me as a purchaser are you guys feeling happy or unhappy happy so happy now happy Means fair value gain or Fair Val loss F book the fal on 30 30th September book the f 30th September feeling happy since rate reduced by 30 rupees 30 P okay multiply it with the dollar 30,000 so $10 L ENT fair value loss P debit to derivative oh game game G derivative forwards debit to fair value G three lakh rupees 3 lakh rupees 3 lakh rupees Share value gain understood now tell me on 30th September but again you are you haven't entered into the contract actually still we haven't entered into any forward contract actually now tell me what is the next date the main delivery date the main payment date check the rate huh tell me you could have entered into the contract at 67.5 but you actually did not and the rate becomes feeling happy or sad why because if you would have entered into the contract at 67.5 you would have to pay you would have to purchase the dollar R for 67.5 but today the dollar rate become 67 now you can go you can go to the market and purchase the dollar directly from the market at 67 now yes huh without booking the rate so now again you are feeling happy tell me how much profit five again create your asset 31st December feeling happy by5 ENT derivative forwards financial asset to fair value gain how much but now there's a delivery date and transaction payment date now tell me you are taking the delivery of machine you are making the payment of how much 67 so pass the entry uh purchase of machine purchase of machine and making payment purchase of machine and making payment what entry we should pass making payment to bank as per 67 67 multip by 10 lakh how much 60 67 LS 6 7 lakh he said 67 lakhs 6 7 lakhs 6 70 LHS payment of 6 70 lakhs earlier you have a derivative forward now financial asset you have now yes how much financial asset you already have three lakh and 5 lakh 8 lakhs please reverse it reversal two derivative forwards financial asset how much 8 lakhs record the machine record the machine at balancing figure tell me 6 CR 78 lakhs in this way machine has been recorded at which value machine has been recognized at which value 6 78 lakhs 6 cr78 lakhs if we would have applied the normal accounting if we would have applied the normal accounting that means non inds non inds you know what what general entry we need to pass 9 September nothing 30th September nothing 31st December only entry machine account debit to bank 6 CR 70 lakhs 6 CR 70 lakhs now why this embeded derivative accoun is important and relevant try to understand here in the embeded derivative we are recording the machine at 6 uh 678 lakhs instead of 670 lakhs we are recording the machine at its original order order time value when you have placed the order on 9th September look into the date look into the rate of that date the rate was 67.8 67.8 multi 10 is equal to 678 lakhs so technically what we are doing we already entered into the contract on 9th September and 9th September the rate was 67.8 considering that we record we are recording the Machinery at 67.8 as a host contract and we are separately recognizing the derivative part as 8 lakh rupees understood or l so this is the this is the portion under EMB derivative you record the embit derivative separately from the host contract have you understanding or not so technically what we did IND says andate derivative need needs to be detached from the host contract the host contract should be recorded at its normal value not normal rupee value why value suppose the contract should not be the contract is not at USD the contract is not at USD so at what price machine would have been recorded at the price uh as on the order date so you are recording the Machinery at same price as on our date whatever the fluctuations you are booking separately understood or not whatever the fluctuations you are booking separately this is called embeded derivative which is to be separately accounted for guys understood or not yes this is the basic accounting of Ed derivative so instead of recording the machine at 670 lakhs you are recording the machine at the rate actually appearing on the order date if this contact would have been ined into the normal currency rupee currency the order date transaction value would be the same understood or not uh okay I'm trying one another way suppose Company B my supplier is asking me to the for the payment in USD only but right now only on the order date only tell me what uh in that case what would be the entry on 9th September I'm asking a single question on nine September now what was the rate 66.4 understood but forward rate I'm saying. forward rate 67.8 forward rate for the 3 December now yes I I have to book the machine rate forward as per the forward rate okay so I'm just asking you thing that suppose if there was not a not a credit period there was not a credit period what would be the case he is asking me to make the payment in dollar and to deliver the machine immediately I would have paid the amount immediately on the same date huh there was no fluctuation uh risk in that yes my inds says that if you want to record the derivative part separately so the fluctuation risk should not be involved in your machine in your sale in your purchase keep them separately and record the purchase sale separately both things are separate record the purchase sale as for the ordinary value and record the fluctuations separately this is the basic principle of derivative understood e in the same way you can do question number 1406 1406 as homework now the last one is hedge accounting e all right the last point is hedge accounting have you heard the term word hedging yes what does it mean okay reducing the risk managing the risk okay so uh in our cabus hedging has very limited portion which is covered here in the indas hedging see hedging is a very bigger term and uh hge accounting is also a very very big portion overall but indas covers a very uh limited portion to make you understand that what is hedging what hedge accounting needs to be followed and the types of hedging Institute has majorly focused on the theoretical part of the hedging but the problem is we cannot understand the theoretical part without any example or without any practical portion so I have covered one practical portion of hedging in my book I don't know the example number 403 so that particular hedge accounting has been covered with the help of example 43 before discussing H accounting please listen to me guys hedging is managing the risk what risk Financial Risk what is Financial Risk sir there are so many Financial Risk but we will concentrate only on the foreign currency fluctuation risk which one so whatever I'm dictating now some of the points we need to write immediately please because very short very limited points but that is to the point things are there so please write first point here we'll discuss we'll discuss the risk of the risk of change in the risk of change in value of any asset or liability the risk of change in value of any asset or liability value of any asset or liability due to foreign currency fluctuations due to foreign currency fluctuations or any other factors second Point second Point next Point Suppose there are foreign currency datas Suppose there are foreign currency datas comma here we have risk of decrease in the foreign currency value here we have the risk of decrease in foreign currency value here we have risk of decrease in foreign currency value suppose a foreign creditor what is the risk suppose a foreign crator foreign cror suppose we have foreign crater we have a risk of increase in foreign currency value any item next Point any item next Point any item where the risk is involved is known as hedged item any item where risk is involved is known as hged item any item where risk is involved is known as HED items such as foreign currency debtors foreign currency loans foreign currency creditors these all are HED items foreign currency debtors foreign currency loans foreign currency debtors foreign currency loans foreign currency crators these all are hedged items okay done what what you call them hged hged items okay next point to manage the risk to manage the risk to manage the risk we may enter into derivative forwards Futures options to manage the risk we may enter into derivative forwards Futures options and this is called hedging instrument hedging instrument this is called hedging instrument so I discussed two terminologies what are two terminologies hedged items and hedging instruments what do you mean by hedging hedge items those items where risk is involved where there is something risk some risk is involved there okay and the next one is hedging instrument instrument hedging instrument hedging instrument is basically the instrument which you use to manage the risk it may be the features forwards options understand guys okay now next there are three types of hedge there are three types of Hedge First Cash Flow hedge First Cash Flow hedge cash flow hedge cash flow hedge means cash flow h means there's a risk of there a risk of change in cash inflow or outflow there's a risk of changing cash inflow or outflow there's a risk of change in cash inflow or outflow guys listen to me now suppose you are expecting to receive $10,000 from your DOR how much1 $110,000 but you are expecting a decrease in the dollar value a decrease in the so you are you are you are having a contract to receive $10,000 from your better in the next two months but you are expecting a dollar reduction in those two months you are expecting a dollar reduction if this would happen tell me is there any risk in your cash in flow yes what you may you may receive the reduced cash why because the B price will get down understood or not so this is called Cash Flow hedge understood or not whenever there's a risk of change in the cash inflows and outflows and we enter into a hedging contract this will become the cash flow hedge understood or not second fair value hedge second is fair value Hedge second is fair value hedge risk of change in the value of any Asset Risk of change in the value of any asset other than cash risk of change the value of any asset other than cash other than cash means risk of change the value of any asset other than cash you have the shares you have the shares of any particular listed company you are having risk that the value May got the market price may get reduced you are entering into the Hedge accounting you are entering into the derivative forward contract to manage its reduction you have the building even a non-financial asset you have a building and you are you're not going to sell this building but you have a risk that its value in the future may get reduced you entered into a derivative contract to manage the reduction to manage the risk of reduction it's a fair value hedge because here there is no cash inflow or outflow risk so when whenever there's a cash inflow outflow risk and you enter into a derivative contract this is a cash flow hedge Whenever there is no cash flow cash inflow outflow risk the risk of changing the value of the building value of the share value of your stock value of your inventory value of the land value of any asset you have and you enter into a derivative contract to manage such risk it's a fair value hedge understood third last third hedge of net investment in foreign operation hedge of net investment in foreign operation see foreign operation means foreign subsidiary foreign operation means foreign subsidiary you are worried about your foreign subsidaries investments value you are worried about your foreign subsidiaries investment value you you you are worried uh like you think that your Investments may get reduced because it is in your foreign currency so whenever you enter into any derivative contract to manage the risk of that investment in foreign operation you are entering into the hedge of net investment M so in the third type of hedging you have a foreign operation you can write it if don't know foreign operation means foreign subsidary so you have your investment in foreign subsidary investment must be in the foreign currency so now you are worried that your investment value may get reduced because of the reduction in the foreign currency value so you enter into the derivative contract such hedging is known as hedge of net investment in foreign operation understood the these three yes huh now we discussed this cash flow hedge most importantly because this is relevant for the Practical paper uh practical question uh come to the example number example number 43 come to example number 43 Reet limited an inds company sold Goods on credit to a foreign customer for 3 months for three months credit of rupees $1 lakh reg company sold Goods to foreign crator foreign customer for 3 months credit of $1 lakh date of sale 1st March exchange rate 80 rupees on 1st March you know what on 1st March on 1st March you will record the transaction as foreign better account debit foreign deor account debit two sales inds 21 says use the spot rate what is the spot rate 80 multiply by one lakh 80 lakhs IND 21 says use the for spot rate all right next rajat has Financial Risk in the cash flow of above transaction that dollar may fall tell me what is the risk cash flow cash flow risk so to manage this cash flow risk if Raj rajat entered into any derivative contract it will become the cash flow hedge rajat has rajat has risk of change in cash flows if rajat enter into any derivative contract it is known as cash no hge done done guys no therefore rajat limited entered into the forward contract to sell dollars at 78.3 you know what rajat has booked the rate at 78.3 rajat has booked the rate at 78.3 means after 3 months when rajat will get the dollars now $1 lakh he will be able to sell the dollars at 78.3 understood guys on 31st March spot rate was 79.1 so First Watch what is the rate 80 what is the forward rate moved forward bed 78. you know what rajat has fixed its loss rajat has fixed its loss his risk is being managed now rajat is sure that his loss cannot exceed Beyond 1.7 1.7 lost to rajat and it is fixed loss means now in the market currency value fluctuates rajat has a fixed loss of 1.7 are you guys understanding or not yes so 1.7 means 1.7 multip by 1 lakh 170,000 fixed loss to rajat 170 understood guys yes and a two month forward oh sorry 31st March 23 okay now 31st March 23 what was the spot rate 79.1 and a two month forward contract on dollar being sold at two month here it was 3 month 2 month forward it's 78 20 on settlement day the rate becomes 78 done I'll tell you some Logics actually because before discussing the Hedge accounting please use the heading no hedge accounting if there is no hedge accounting if there is no hedge accounting one we have hedged item that means dors other we have hedging instrument that is for word if there is no hge accounting we have dors and we have forwards here we have datas we will apply in as 21 rules those who don't know about inds 21 I'll tell you don't worry forwards we'll apply inds 109 rules simply long short Fair valuation pay guys all right yes first of all indas 21 rules indas 21 says 1st March initial recognition foreign dats to sell book at sport eight what foreign to S amount 80 lakhs leave the forwards now 31st March IND 21 says forward foreign deers are your foreign currency monetary items foreign currency monetary item should be recognized at closing rate look at the closing rate please ignore the fors the closing rate how much you recognize the at 18 it becomes 79.1 B the loss exchange difference which is transferred to P to foreign dors how much 90 where you will transfer this ex difference P now on 31st March after 31st March there's a 1 June the rate becomes the rate becomes 78 so first June what entry will pass bank account debit you you receive received you received 70 8 lakhs exchange loss account debit P to foreign deers forign dat how much initially it was 80 it was reduced to 90 redu by 90 79 L 10,000 what is exchange loss one lakh 10,000 now derivative contract derivative contract tell me on 1st March no entry you enter into d contract at what rate look at the Timeline diagram diagram 78.3 now on 31st March the for rate becomes tell me are you in loss or gain you are in gain you are in gain you booked the contract at 78.3 already in any anyway you are going to get 78.3 PESA now suppose if you haven't booked this contract and booked the contract on 31st March you the contract will be at 7 78.2 now the recovery sure now at 78.3 yes so recovery sure at 78.3 otherwise this rate has is getting reduced 78.2 so what is the uh what is the point gain or loss gain so here derivative forward financial asset to fair value gain fair value gain P how much 0.10.1 multip by 10 10,000 and on 1 June again the rate become 78 uh 2 to 78 tell me rate becomes point2 reduction it's a gain tell me what entry will pass derivative forward financial asset to fair value gain now recover all your money what is the year 23 okay now summarize it Financial year 2223 what is the P account effect what is the P account effect here you B 90 ,000 in the P you book 10,000 gain in the P it is year ending so net effect was what 90 minus 10 net effect is what 80,000 expense and in the next year 2324 23 24 next year in the next year 1 lak 10,000 loss 20,000 profit effect 90,000 expense look at the final expenses first year you booked guys please reply first year you booked 80,000 second year you booked total 170 that was already fixed that was already fixed but this is not the accounting this is not the Hedge accounting this is the accounting without hedge but we are not following hedge accounting we are basically treating the derivative separately and treating the Hedge item separately but if we do the Hedge accounting come head accounting head accounting says change H item transfer to cash flow hedge Reserve account take say changing hedging instrument transfer to cash flow hedge Reserve account a actual loss of 170 to P account from cash flow H Reserve account what is the relevance of first point what is the relevance of first point right first ENT first ENT say it's completely same okay yes second entry any change if you can interpret any changes expected instead of doing this and doing this create one special account which is called as cash flow hedge Reserve account cash flow h has Reserve account do not disturb the payle you transfer the entire exchange gain or loss to cash FL high res account you transfer the entire fair value loss to the cash flow has Reserve account what about this guys what about this what is an actual loss. 1.7 what are the actual months three months I think dat was of 3 months when when you have entered into the contract it was of three months so 170 divided by 3 divided by three me H one entry you will pass you will book the P lost to P from cash flow H Reser to cash flow has Reser how much 56 667 56 667 next next last entry again coming back 1 June bank account debit how much we got cash flow H Reserve in of charging to p, 1 lakh 10,000 to foreign debtors 791 even this tell me cash flow hedge Reserve are you understanding yes instead of charging profits and losses directly in the pandle difference is directly in the P we are maintaining a separate account called Cash Flow has Reserve where we are transferring all the stuffs exchange gains exchange losses Fair gains or losses and transferring to P only the relevant loss which is 170 now one more entry we need to pass P account debit to cash flow hedge Reserve how much how much H 170 divided by 3 into 2 1 13 can you please prepare the cash flow has Reserve account for your checking purpose that's yes then posting done 31st March it was two letters 90 by derivative 10,000 i p balancing figure baling figure who get us H 20 delete it must be delete so what is the difference between hedge accounting and non hedge accounting under non-hedge accounting without any uh no hedge accounting we were transferring all the gains and losses directly in the pandle so under HED accounting what we did we actually book the loss of 170 proportionately every month so this is the matching principle only nothing else all right guys this was your cash flow hedging only Institute has given cash flow hedging question no fair value hedging and N investment hedging so this is it it's done cash flow hedge is done now that's all so here you do uh Financial instrument is finally completed if you have anything to ask me you can ask see those who have question bank now you may find so many questions with QR codes you may have seen QR code in the question Bank someone having question bank so those having question Bank you may find these kind of QR codes so QR codes are basically the video sessions I have already reced the video sessions for this particular solution so entire question Bank contains these QR codes uh with special exam oriented questions but of course that are not in English so those who understand Hindi they can see the video sessions what is the meaning of that video session basically suppose this is the question on hedge accounting now if you don't want to if you if you don't understand this question or if you can't solve this question by uh it by your own so you can just scan this QR with your phone as soon as you can scan my video session will come up to solve the entire question you can uh watch that video and uh the playback speed is also adjustable 1.25 1.5 so immediately you can you will get the solution in a video session so this is basically the QR code attached with the question now not only with this question in the entire question Bank containing both the volumes I have given this QR code facility with almost all the exam oriented questions in every chapter this QR facility but the only disadvantage you may have is that is in Hindi language so those who understand Hindi they can they can definitely figures mostly I have taken in the English my figures I use the English words okay so this is the advantage you can get in this particular book for all the questions so so those who have my question bank for examination purpose you are you you must refer all the questions containing QR code definitely your practice will be finally done with all the things don't worry okay so that's it this was Financial instrument guys it was a very big topic so we covered all the things properly and uh any doubt if you have anything if if you have in your mind you can ask me no oh