List of Accounting Standards

Accounting Standard 30 (AS 30) deals with financial instruments recognition and measurement. It provides guidance on the recognition and measurement of financial instruments, including derivatives, and the disclosure of information about financial instruments in the financial statements.

Financial Instruments:

Financial instruments are contracts that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Examples of financial instruments are:

• Shares, bonds, and debentures
• Loans and receivables
• Derivatives such as futures and options
• Trade payables and receivables
• Bank overdrafts and cash balances

Recognition of Financial Instruments:

Financial instruments should be recognized in the financial statements when the entity becomes a party to the contractual provisions of the instrument.

Measurement of Financial Instruments:

The measurement of financial instruments depends on the category to which they belong. AS 30 classifies financial instruments into four categories:

1. Financial assets and liabilities at fair value through profit or loss:

Financial instruments that are held for trading purposes, or designated by the entity as fair value through profit or loss, are measured at fair value. Changes in fair value are recognized in profit or loss.

Example: An investment company holds shares in listed companies that are held for trading purposes. The company measures these shares at fair value, and any changes in fair value are recognized in profit or loss.

2. Held-to-maturity investments:

Financial instruments that are held with the intention to hold them to maturity are measured at amortized cost. The effective interest method is used to allocate the interest income and expense over the period of the investment.

Example: A bank holds a portfolio of bonds that it intends to hold until maturity. The bank measures these bonds at amortized cost, and interest income is recognized over the period of the investment using the effective interest method.

3. Loans and receivables:

Financial instruments that are not held for trading or designated as fair value through profit or loss are measured at amortized cost using the effective interest method.

Example: A company provides loans to customers and measures these loans at amortized cost using the effective interest method.

4. Available-for-sale financial assets:

Financial instruments that are not held for trading, not designated as fair value through profit or loss, and not held-to-maturity investments are measured at fair value. Changes in fair value are recognized in other comprehensive income until the financial asset is sold or impaired, at which point the cumulative gain or loss is reclassified to profit or loss.

Example: An insurance company holds a portfolio of equity investments that are not held for trading or held-to-maturity. The company measures these investments at fair value, and any changes in fair value are recognized in other comprehensive income until the investments are sold or impaired.

Disclosure of Financial Instruments:

AS 30 requires entities to disclose information about financial instruments in their financial statements, including:

• The fair value of financial instruments, the methods used to determine fair value, and the level of the fair value hierarchy
• The classification of financial instruments and the basis of their measurement
• The nature and extent of risks arising from financial instruments and how the entity manages those risks
• The amount of any impairment losses recognized on financial instruments

Conclusion:

AS 30 provides guidance on the recognition, measurement, and disclosure of financial instruments in the financial statements of an entity. It is important for entities to comply with AS 30 to ensure that their financial statements provide relevant and reliable information to users.

Here are some practical examples of how Accounting Standard 30 (AS 30) may be applied in India:

1. Recognition of Financial Instruments:

A company enters into a contract to purchase raw materials from a supplier on credit. As per the contract, the company is obligated to make the payment within 30 days of the delivery of the goods. The company becomes a party to the contractual provisions of the financial instrument (the credit contract) when it takes delivery of the goods. The company should recognize the financial instrument (the trade payable) in its financial statements.

2. Measurement of Financial Instruments:

A bank provides a loan of Rs. 1 crore to a borrower at an interest rate of 10% per annum. The loan has a maturity of five years, and the borrower is required to make monthly payments of interest and principal. The bank measures the loan at amortized cost using the effective interest method. The interest income is allocated over the period of the loan using the effective interest rate, which takes into account the cash flows and the time value of money.

3. Classification of Financial Instruments:

A mutual fund invests in shares of a listed company. The mutual fund intends to hold the shares for the long term but may sell them if market conditions change. The shares are not held for trading purposes, nor are they designated as fair value through profit or loss. The mutual fund classifies the shares as available-for-sale financial assets and measures them at fair value. Any changes in fair value are recognized in other comprehensive income until the shares are sold or impaired.

4. Disclosure of Financial Instruments:

A company has issued debentures worth Rs. 50 crore to raise funds for its expansion plans. The company discloses the following information about the debentures in its financial statements:

• The fair value of the debentures as per the latest valuation report
• The basis of measurement (amortized cost using the effective interest method)
• The maturity date of the debentures and the interest rate payable
• The risks associated with the debentures, such as interest rate risk and credit risk, and the measures taken by the company to manage those risks
• Any impairment losses recognized on the debentures

In all of these examples, the entity must carefully consider whether the recognition, measurement, or disclosure of financial instruments is appropriate under AS 30.