Difference between Ind AS 39, Financial Instruments: Recognition and Measurement and the existing AS 30 on Financial Instruments: Recognition and Measurement

(i) The financial instruments to which Ind AS 39 does not apply include financial instruments issued by the entity that meet the definition of an equity instrument in Ind AS 32 (including options and warrants) or that are required to be classified as an equity instrument in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of Ind AS 32. The existing standard does not exclude the latter. (Paragraph 2(d) of Ind AS 39).

(ii) As per Paragraph 2(f) of AS 30, the contracts for contingent consideration in a business combination in case of acquirers are exempted from the scope of the Standard. However, Ind AS 39 does not include this exemption.

(iii) Paragraph 8.2(a)(ii) of AS 30 states that a financial asset or financial liability at fair value through profit or loss is classified as held for trading if ‘it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking’. Ind AS 39 states that a financial asset or financial liability at fair value through profit or loss is classified as held for trading if ‘on initial recognition it is part of a portfolio of identified financial instruments………’. The existing standard does not use the words ‘on initial recognition’.

(iv) Ind AS 39 does not include the paragraph ‘this would normally be relevant in case of a venture capital organisation, mutual fund, unit trust or similar entity whose business is investing in financial assets with a view to profiting from their total return in the form of interest or dividends and changes in fair value corresponding to paragraph 8.2(b)(ii) of AS 30 when a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.

(v) Ind AS 39 states that ‘an entity shall not reclassify any financial instrument out of the fair value through profit or loss category if upon initial recognition it was designated by the entity as at fair value through profit or loss; and may, if a financial asset is no longer held for the purpose of selling or repurchasing it in the near term (notwithstanding that the financial asset may have been acquired or incurred principally for the purpose of selling or repurchasing it in the near term), reclassify that financial asset out of the fair value through profit or loss category if the requirements in paragraph 50B or 50D are met.’ AS 30 prohibits any financial instruments into or out of the category of financial instruments designated at fair value through profit or loss. (Paragraph 50(b) of Ind AS 39)

(vi) AS 30 states that ‘an entity should not reclassify a financial instruments into or out of the fair value through profit or loss category while it is held or issued’ while Ind AS 39 states that ‘an entity shall not reclassify a derivative out of the fair value through profit or loss category while it is held or Issued.’ (Paragraph 50 of Ind AS 39).

(vii) Ind AS 39 (Application Guidance on effective interest rate) specifically states that ‘if a financial asset is reclassified in accordance with paragraphs 50B, 50D or 50E, and the entity subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase shall be recognised as an adjustment to the effective interest rate from the date of the change in estimate rather than as an adjustment to the carrying amount of the asset at the date of the change in estimate.’ AS 30 does not specify so. (AG 8 of Ind AS 39).

(viii) The following paragraph has been added in Ind AS 39: ‘if an entity is unable to measure separately the embedded derivative that would have to be separated on reclassification of a hybrid (combined) contract out of the fair value through profit or loss category, that reclassification is prohibited. In such circumstances the hybrid (combined) contract remains classified as at fair value through profit or loss in its entirety.’ (Paragraph 12, of Ind AS 39)

(ix) Ind AS 39 modifies paragraph 2(g) of the existing standard as ‘any forward contracts between an acquirer and a selling shareholder to buy or sell an acquiree that will result in a business combination at a future acquisition date. The term of the forward contract should not exceed a reasonable period normally necessary to obtain any required approvals and to complete the transaction.’ (Paragraph 2(g), of Ind AS 39)(Changes shown in bold)

(x) Paragraph 80 of AS 39 states that ‘for hedge accounting purposes, only assets, liabilities, firm commitments or highly probable forecast transactions that involve a party external to the entity can be designated as hedged items. It follows that hedge accounting can be applied to transactions between entities or segments in the same group only in the individual or separate financial statements of those entities or segments and not in the consolidated financial statements of the group.’ The words ‘or segments’ have been deleted in Ind AS 39. (Paragraph 80 of Ind AS 39, paragraph 89 of AS 30)

(xi) Paragraph 97 of Ind AS 39 modifies paragraph 108 of AS 30 to state ‘if a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains or losses that were recognised in other comprehensive income in accordance with paragraph 95 shall be reclassified from equity to profit or loss as a reclassification adjustment (see Ind AS 1) in the same period or periods during which the hedged forecast cash flows affects profit or loss (such as in the periods that interest income or interest expense is recognised). However, if an entity expects that all or a portion of a loss recognised in other comprehensive income will not be recovered in one or more future periods, it shall reclassify into profit or loss as a reclassification adjustment the amount that is not expected to be recovered.’ (Paragraph 97 of Ind AS 39, AS 30, paragraph 108 of AS 30) (Changes shown in bold)

(xii) The financial instruments to which Ind AS 39 does not apply include financial instruments issued by the entity that meet the definition of an equity instrument in Ind AS 32 (including options and warrants) or that are required to be classified as an equity instrument in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of Ind AS 32. The existing standard does not refer to the latter. (Paragraph 2(d) of Ind AS 39)

(xiii) Ind AS 39 does not exempt contracts for contingent consideration in a business combination from its scope while the existing standard provides an exemption. In the existing standard, the exemption applies only to the acquirer. (Paragraph 2(f) of Ind AS 39).

(xiv) Ind AS 39 provides that in determining the fair value of the financial liabilities which upon initial recognition are designated at fair value through profit or loss, any change in fair value consequent to changes in the entity’s own credit risk shall be ignored. AS 30, however, requires all changes in fair values in case of such liabilities to be recognised in profit or loss.

(xv) Ind AS 39 gives guidance on- (i) Reassessment of Embedded Derivatives (ii) Hedges of a Net Investment in a Foreign Operation and Extinguishing Financial Liabilities with Equity Instruments. AS 30 does not give such guidance. (ICAI)