Accounting Standard (AS) 32
Financial Instruments: Disclosures
Issued by
The Institute of Chartered Accountants of India
New Delhi
2
3
Accounting Standard (AS) 32
Financial Instruments: Disclosures
Contents Paragraphs
OBJECTIVE 1-2
SCOPE 3–5
CLASSES OF FINANCIAL INSTRUMENTS AND
LEVEL OF DISCLOSURE
6
SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR
FINANCIAL POSITION AND PERFORMANCE
7-30
Balance sheet 8-19
Categories of financial assets and financial liabilities 8
Financial assets or financial liabilities at fair value
through profit or loss
9-11
Reclassification 12
Derecognition 13
Collateral 14-15
Allowance account for credit losses 16
Compound financial instruments with multiple
embedded derivatives
17
Defaults and breaches 18-19
Statement of profit and loss and equity 20
Items of income, expense, gains or losses 20
4
Other disclosures 21-30
Accounting Policies 21
Hedge Accounting 22-24
Fair Value 25-30
NATURE AND EXTENT OF RISKS ARISING FROM
FINANCIAL INSTRUMENTS
31-42
Qualitative disclosures 33
Quantitative disclosures 34-42
Credit risk 36-38
Financial assets that are either past due or impaired 37
Collateral and other credit enhancements obtained 38
Liquidity risk 39
Market risk 40-42
Sensitivity analysis 40-41
Other market risk disclosures 42
APPENDICES
A DEFINED TERMS
B APPLICATION GUIDANCE
C COMPARISON WITH IFRS 7, FINANCIAL
INSTRUMENTS: DISCLOSURES
D IMPLEMENTATION GUIDANCE
CONSEQUENTIAL LIMITED REVISION TO AS 19,
LEASES
5
August 2005 IFRS 7
Accounting Standard (AS) 32
Financial Instruments: Disclosures
(This Accounting Standard includes paragraphs set in bold italic type and plain
type, which have equal authority. Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of its objective and
the Preface to the Statements of Accounting Standards1.)
Accounting Standard (AS) 32, Financial Instruments: Disclosures, issued by the
Council of the Institute of Chartered Accountants of India, comes into effect in respect of
accounting periods commencing on or after 1-4-2009 and will be recommendatory in
nature for an initial period of two years. This Accounting Standard will become
mandatory2 in respect of accounting periods commencing on or after 1-4-2011 for all
commercial, industrial and business entities except to a Small and Medium-sized Entity,
as defined below:
(i) Whose equity or debt securities are not listed or are not in the process of
listing on any stock exchange, whether in India or outside India;
(ii) which is not a bank (including a co-operative bank), financial institution or
any entity carrying on insurance business;
(iii) whose turnover (excluding other income) does not exceed rupees fifty
crore in the immediately preceding accounting year;
(iv) which does not have borrowings (including public deposits) in excess of
rupees ten crore at any time during the immediately preceding accounting
year; and
(v) which is not a holding or subsidiary entity of an entity which is not a small
and medium-sized entity.
For the above purpose an entity would qualify as a Small and Medium-sized
Entity, if the conditions mentioned therein are satisfied as at the end of the
relevant accounting period.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards
are intended to apply only to items which are material.
2 This implies that, while discharging their attest function, it will be the duty of the members of the Institute
to examine whether this Accounting Standard is complied with in the presentation of financial statements
covered by their audit. In the event of any deviation from this Accounting Standard, it will be their duty to
make adequate disclosures in their audit reports so that the users of financial statements may be aware of
such deviations.
6
Where in respect of an entity there is a statutory requirement for disclosing any
financial instrument in a particular manner as asset, liability or equity and/or for
disclosing income, expenses, gains or losses relating to a financial instrument in a
particular manner as income/expense or as distribution of profits, the entity should
disclose that instrument and/or income, expenses, gains or losses relating to the
instrument in accordance with the requirements of the statute governing the entity. Until
the relevant statute is amended, the entity disclosing that instrument and/ or income,
expenses, gains or losses relating to the instrument in accordance with the requirements
thereof will be considered to be complying with this Accounting Standard, in view of
paragraph 4.1 of the Preface to the Statements of Accounting Standards which recognises
that where a requirement of an Accounting Standard is different from the applicable law,
the law prevails.
The following is the text of the Accounting Standard.
Objective
1. The objective of this Standard is to require entities to provide disclosures in their
financial statements that enable users to evaluate:
(a) the significance of financial instruments for the entity’s financial position
and performance; and
(b) the nature and extent of risks arising from financial instruments to which
the entity is exposed during the period and at the reporting date, and how
the entity manages those risks.
2. The principles in this Accounting Standard complement the principles for recognising,
measuring and presenting financial assets and financial liabilities in Accounting Standard
(AS) 30, Financial Instruments: Recognition and Measurement and Accounting Standard
(AS) 31, Financial Instruments: Presentation.
Scope
3. This Accounting Standard should be applied by all entities to all types of financial
instruments, except:
(a) those interests in subsidiaries, associates and joint ventures that are accounted
for in accordance with AS 21, Consolidated Financial Statements and
Accounting for Investment in Subsidiaries in Separate Financial Statements,
AS 23, Accounting for Investments in Associates3, or AS 27, Financial
3 The titles of AS 21 and AS 23 have been changed by making Limited Revisions thereto pursuant to the
issuance of AS 30, Financial Instruments: Recognition and Measurement.
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Reporting of Interests in Joint Ventures. However, in some cases, AS 21, AS
23 or AS 27 permits or requires an entity to account for an interest in a
subsidiary, associate or joint venture using Accounting Standard (AS) 30,
Financial Instruments: Recognition and Measurement; in those cases, entities
should apply the disclosure requirements in AS 21, AS 23 or AS 27 in
addition to those in this Accounting Standard. Entities should also apply this
Accounting Standard to all derivatives linked to interests in subsidiaries,
associates or joint ventures unless the derivative meets the definition of an
equity instrument in AS 31.
(b) employers’ rights and obligations arising from employee benefit plans, to
which AS 15, Employee Benefits, applies.
(c) contracts for contingent consideration in a business combination4. This
exemption applies only to the acquirer.
(d) insurance contracts as defined in Accounting Standard on Insurance
Contracts5. However, this Accounting Standard applies to derivatives that are
embedded in insurance contracts if Accounting Standard (AS) 30, Financial
Instruments: Recognition and Measurement, requires the entity to account for
them separately. Moreover, an issuer should apply this Accounting Standard
to financial guarantee contracts if the issuer applies AS 30 in recognising and
measuring the contracts, but should apply the Accounting Standard on
Insurance Contracts if the issuer elects, in accordance with the Accounting
Standard on Insurance Contracts, to apply that Accounting Standard in
recognising and measuring them.
(e) financial instruments, contracts and obligations under share-based payment
transactions6 except that this Accounting Standard applies to contracts within
the scope of paragraphs 4 to 6 of AS 30.
4. This Accounting Standard applies to recognised and unrecognised financial
instruments. Recognised financial instruments include financial assets and financial
liabilities that are within the scope of AS 30. Unrecognised financial instruments include
some financial instruments that, although outside the scope of AS 30, are within the
scope of this Accounting Standard (such as some loan commitments).
4 ‘Business combination’ is the bringing together of separate entities or businesses into one reporting entity.
At present, Accounting Standard (AS) 14, Accounting for Amalgamations, deals with accounting for
contingent consideration in an amalgamation, which is a form of business combination.
5 A separate Accounting Standard on Insurance Contracts, which is being formulated, will specify the
requirements relating to insurance contracts.
6 Employee share based payment, which is one of the share-based payment transactions, is accounted for as
per the Guidance Note on Accounting for Employee Share-based Payments, issued by the ICAI. Further,
some other pronouncements of the ICAI deal with other share-based payments, e.g., AS 10, Accounting for
Fixed Assets.
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5. This Accounting Standard applies to contracts to buy or sell a non-financial item that
are within the scope of AS 30 (see paragraphs 4-6 of AS 30).
Classes of financial instruments and level of disclosure
6. When this Accounting Standard requires disclosures by class of financial instrument,
an entity should group financial instruments into classes that are appropriate to the nature
of the information disclosed and that take into account the characteristics of those
financial instruments. An entity should provide sufficient information to permit
reconciliation to the line items presented in the balance sheet.
Significance of financial instruments for financial position and
performance
7. An entity should disclose information that enables users of its financial statements to
evaluate the significance of financial instruments for its financial position and
performance.
Balance sheet
Categories of financial assets and financial liabilities
8. The carrying amounts of each of the following categories, as defined in AS 30, should
be disclosed either on the face of the balance sheet or in the notes:
(a) financial assets at fair value through profit or loss, showing separately (i)
those designated as such upon initial recognition and (ii) those classified as
held for trading in accordance with AS 30;
(b) held-to-maturity investments;
(c) loans and receivables;
(d) available-for-sale financial assets;
(e) financial liabilities at fair value through profit or loss, showing separately (i)
those designated as such upon initial recognition and (ii) those classified as
held for trading in accordance with AS 30; and
(f) financial liabilities measured at amortised cost.
Financial assets or financial liabilities at fair value through profit or loss
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9. If the entity has designated a loan or receivable (or group of loans or receivables) as at
fair value through profit or loss, it should disclose:
(a) the maximum exposure to credit risk (see paragraph 36(a)) of the loan or
receivable (or group of loans or receivables) at the reporting date.
(b) the amount by which any related credit derivatives or similar instruments mitigate
that maximum exposure to credit risk.
(c) the amount of change, during the period and cumulatively, in the fair value of the
loan or receivable (or group of loans or receivables) that is attributable to changes
in the credit risk of the financial asset determined either:
(i) as the amount of change in its fair value that is not attributable to changes in
market conditions that give rise to market risk; or
(ii) using an alternative method the entity believes more faithfully represents the
amount of change in its fair value that is attributable to changes in the credit
risk of the asset.
Changes in market conditions that give rise to market risk include changes in an
observed (benchmark) interest rate, commodity price, foreign exchange rate or
index of prices or rates.
(d) the amount of the change in the fair value of any related credit derivatives or
similar instruments that has occurred during the period and cumulatively since the
loan or receivable was designated.
10. If the entity has designated a financial liability as at fair value through profit or loss in
accordance with paragraph 8.2 of AS 30, it should disclose:
(a) the amount of change, during the period and cumulatively, in the fair value of
the financial liability that is attributable to changes in the credit risk of that
liability determined either:
(i) as the amount of change in its fair value that is not attributable to
changes in market conditions that give rise to market risk (See
Appendix B, paragraph B4); or
(ii) using an alternative method the entity believes more faithfully
represents the amount of change in its fair value that is attributable
to changes in the credit risk of the liability.
Changes in market conditions that give rise to market risk include changes
in a benchmark interest rate, the price of another entity’s financial
instrument, a commodity price, a foreign exchange rate or an index of
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prices or rates. For contracts that include a unit-linking feature, changes in
market conditions include changes in the performance of the related
internal or external investment fund.
(b) the difference between the financial liability’s carrying amount and the
amount the entity would be contractually required to pay at maturity to the
holder of the obligation.
11. The entity should disclose:
(a) the methods used to comply with the requirements in paragraphs 9(c) and
10(a).
(b) if the entity believes that the disclosure it has given to comply with the
requirements in paragraph 9(c) or 10(a) does not faithfully represent the
change in the fair value of the financial asset or financial liability attributable
to changes in its credit risk, the reasons for reaching this conclusion and the
factors it believes are relevant.
Reclassification
12. If the entity has reclassified a financial asset as one measured:
(a) at cost or amortised cost, rather than at fair value; or
(b) at fair value, rather than at cost or amortised cost,
it should disclose the amount reclassified into and out of each category and the reason for
that reclassification (see paragraphs 57-60 of AS 30).
Derecognition
13. An entity may have transferred financial assets in such a way that part or all of the
financial assets do not qualify for derecognition (see paragraphs 15-37 of AS 30). The
entity should disclose for each class of such financial assets:
(a) the nature of the assets;
(b) the nature of the risks and rewards of ownership to which the entity remains
exposed;
(c) when the entity continues to recognise all of the assets, the carrying amounts
of the assets and of the associated liabilities; and
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(d) when the entity continues to recognise the assets to the extent of its continuing
involvement, the total carrying amount of the original assets, the amount of
the assets that the entity continues to recognise, and the carrying amount of
the associated liabilities.
Collateral
14. An entity should disclose:
(a) the carrying amount of financial assets it has pledged as collateral for
liabilities or contingent liabilities, including amounts that have been
reclassified in accordance with paragraphs 37(a) of AS 30; and
(b) the terms and conditions relating to its pledge.
15. When an entity holds collateral (of financial or non-financial assets) and is permitted
to sell or repledge the collateral in the absence of default by the owner of the collateral, it
should disclose:
(a) the fair value of the collateral held;
(b) the fair value of any such collateral sold or repledged, and whether the entity
has an obligation to return it; and
(c) the terms and conditions associated with its use of the collateral.
Allowance account for credit losses
16. When financial assets are impaired by credit losses and the entity records the
impairment in a separate account (eg an allowance account used to record individual
impairments or a similar account used to record a collective impairment of assets) rather
than directly reducing the carrying amount of the asset, it should disclose a reconciliation
of changes in that account during the period for each class of financial assets.
Compound financial instruments with multiple embedded derivatives
17. If an entity has issued an instrument that contains both a liability and an equity
component (see paragraph 58 of AS 31) and the instrument has multiple embedded
derivatives whose values are interdependent (such as a callable convertible debt
instrument), it should disclose the existence of those features.
Defaults and breaches
18. For loans payable recognised at the reporting date, an entity should disclose:
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(a) details of any defaults during the period of principal, interest, sinking fund, or
redemption terms of those loans payable;
(b) the carrying amount of the loans payable in default at the reporting date; and
(c) whether the default was remedied, or the terms of the loans payable were
renegotiated, before the financial statements were authorised for issue.
19. If, during the period, there were breaches of loan agreement terms other than those
described in paragraph 18, an entity should disclose the same information as required by
paragraph 18 if those breaches permitted the lender to demand accelerated repayment
(unless the breaches were remedied, or the terms of the loan were renegotiated, on or
before the reporting date).
Statement of profit and loss and equity
Items of income, expense, gains or losses
20. An entity should disclose the following items of income, expense, gains or losses
either on the face of the financial statements or in the notes:
(a) net gains or net losses on:
(i) financial assets or financial liabilities at fair value through profit or
loss, showing separately those on financial assets or financial liabilities
designated as such upon initial recognition, and those on financial
assets or financial liabilities that are classified as held for trading in
accordance with AS 30;
(ii) available-for-sale financial assets, showing separately the amount of
gain or loss recognised directly in equity during the period and the
amount removed from equity and recognised in the statement of profit
and loss for the period;
(iii) held-to-maturity investments;
(iv) loans and receivables; and
(v) financial liabilities measured at amortised cost.
(b) total interest income and total interest expense (calculated using the effective
interest method) for financial assets or financial liabilities that are not at fair
value through profit or loss;
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(c) fee income and expense (other than amounts included in determining the
effective interest rate) arising from:
(i) financial assets or financial liabilities that are not at fair value through
profit or loss; and
(ii) trust and other fiduciary activities that result in the holding or investing
of assets on behalf of individuals, trusts, retirement benefit plans, and
other institutions;
(d) interest income on impaired financial assets accrued in accordance with
paragraph A113 of AS 30; and
(e) the amount of any impairment loss for each class of financial asset.
Other disclosures
Accounting policies
21. In accordance with AS 1, Presentation of Financial Statements7, an entity discloses,
in the summary of significant accounting policies, the measurement basis (or bases) used
in preparing the financial statements and the other accounting policies used that are
relevant to an understanding of the financial statements.
Hedge accounting
22. An entity should disclose the following separately for each type of hedge described in
AS 30 (i.e. fair value hedges, cash flow hedges, and hedges of net investments in foreign
operations):
(a) a description of each type of hedge;
(b) a description of the financial instruments designated as hedging instruments
and their fair values at the reporting date; and
(c) the nature of the risks being hedged.
23. For cash flow hedges, an entity should disclose:
(a) the periods when the cash flows are expected to occur and when they are
expected to affect profit or loss;
7 Revised AS 1 is under preparation.
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(b) a description of any forecast transaction for which hedge accounting had
previously been used, but which is no longer expected to occur;
(c) the amount that was recognised in the appropriate equity account (Hedging
Reserve Account) during the period;
(d) the amount that was removed from the appropriate equity account (Hedging
Reserve Account) and included in the statement of profit and loss for the
period, showing the amount included in each line item in the statement; and
(e) the amount that was removed from appropriate equity account (Hedging
Reserve Account) during the period and included in the initial cost or other
carrying amount of a non-financial asset or non-financial liability whose
acquisition or incurrence was a hedged highly probable forecast transaction.
24. An entity should disclose separately:
(a) in fair value hedges, gains or losses:
(i) on the hedging instrument; and
(ii) on the hedged item attributable to the hedged risk.
(b) the ineffectiveness recognised in the statement of profit and loss that arises
from cash flow hedges; and
(c) the ineffectiveness recognised in the statement of profit and loss that arises
from hedges of net investments in foreign operations.
Fair value
25. Except as set out in paragraph 29, for each class of financial assets and financial
liabilities (see paragraph 6), an entity should disclose the fair value of that class of assets
and liabilities in a way that permits it to be compared with its carrying amount.
26. In disclosing fair values, an entity should group financial assets and financial
liabilities into classes, but should offset them only to the extent that their carrying
amounts are offset in the balance sheet.
27. An entity should disclose:
(a) the methods and, when a valuation technique is used, the assumptions applied
in determining fair values of each class of financial assets or financial
liabilities. For example, if applicable, an entity discloses information about the
assumptions relating to prepayment rates, rates of estimated credit losses, and
interest rates or discount rates.
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(b) whether fair values are determined, in whole or in part, directly by reference
to published price quotations in an active market or are estimated using a
valuation technique (see paragraphs A90 –A99 of AS 30).
(c) whether the fair values recognised or disclosed in the financial statements are
determined in whole or in part using a valuation technique based on
assumptions that are not supported by prices from observable current market
transactions in the same instrument (i.e. without modification or repackaging)
and not based on available observable market data. For fair values that are
recognised in the financial statements, if changing one or more of those
assumptions to reasonably possible alternative assumptions would change fair
value significantly, the entity should state this fact and disclose the effect of
those changes. For this purpose, significance should be judged with respect to
profit or loss, and total assets or total liabilities, or, when changes in fair value
are recognised in equity, total equity.
(d) if (c) applies, the total amount of the change in fair value estimated using such
a valuation technique that was recognised in the statement of profit and loss
during the period.
28. If the market for a financial instrument is not active, an entity establishes its fair value
using a valuation technique (see paragraphs A93-A99 of AS 30). Nevertheless, the best
evidence of fair value at initial recognition is the transaction price (i.e. the fair value of
the consideration given or received), unless conditions described in paragraph A95 of AS
30 are met. It follows that there could be a difference between the fair value at initial
recognition and the amount that would be determined at that date using the valuation
technique. If such a difference exists, an entity should disclose, by class of financial
instrument:
(a) its accounting policy for recognising that difference in the statement of profit
and loss to reflect a change in factors (including time) that market participants
would consider in setting a price (see paragraph A96 of AS 30); and
(b) the aggregate difference yet to be recognised in the statement of profit and
loss at the beginning and end of the period and a reconciliation of changes in
the balance of this difference.
29. Disclosures of fair value are not required:
(a) when the carrying amount is a reasonable approximation of fair value, for
example, for financial instruments such as short-term trade receivables and
payables;
(b) for an investment in equity instruments that do not have a quoted market
price in an active market, or derivatives linked to such equity instruments, that
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is measured at cost in accordance with AS 30 because its fair value cannot be
measured reliably; or
(c) for a contract containing a discretionary participation feature (as described in
the Accounting Standard on Insurance Contracts8) if the fair value of that
feature cannot be measured reliably.
30. In the cases described in paragraph 29(b) and (c), an entity should disclose
information to help users of the financial statements make their own judgments about the
extent of possible differences between the carrying amount of those financial assets or
financial liabilities and their fair value, including:
(a) the fact that fair value information has not been disclosed for these
instruments because their fair value cannot be measured reliably;
(b) a description of the financial instruments, their carrying amount, and an
explanation of why fair value cannot be measured reliably;
(c) information about the market for the instruments;
(d) information about whether and how the entity intends to dispose of the
financial instruments; and
(e) if financial instruments whose fair value previously could not be reliably
measured are derecognised, that fact, their carrying amount at the time of
derecognition, and the amount of gain or loss recognised.
Nature and extent of risks arising from financial instruments
31. An entity should disclose information that enables users of its financial statements
to evaluate the nature and extent of risks arising from financial instruments to which
the entity is exposed at the reporting date.
32. The disclosures required by paragraphs 33–42 focus on the risks that arise from
financial instruments and how they have been managed. These risks typically include, but
are not limited to, credit risk, liquidity risk and market risk.
Qualitative disclosures
33. For each type of risk arising from financial instruments, an entity should disclose:
(a) the exposures to risk and how they arise;
8 See footnote 5.
17
(b) its objectives, policies and processes for managing the risk and the methods
used to measure the risk; and
(c) any changes in (a) or (b) from the previous period.
Quantitative disclosures
34. For each type of risk arising from financial instruments, an entity should disclose:
(a) summary quantitative data about its exposure to that risk at the reporting date.
This disclosure should be based on the information provided internally to key
management personnel of the entity (as defined in AS 18 Related Party
Disclosures), for example the entity’s board of directors or chief executive
officer.
(b) the disclosures required by paragraphs 36–42, to the extent not provided in
(a), unless the risk is not material (see AS 1 (Revised)9 for a discussion of
materiality).
(c) Concentrations of risk if not apparent from (a) and (b).
35. If the quantitative data disclosed as at the reporting date are unrepresentative of an
entity’s exposure to risk during the period, an entity should provide further information
that is representative.
Credit risk
36. An entity should disclose by class of financial instrument:
(a) the amount that best represents its maximum exposure to credit risk at the
reporting date without taking account of any collateral held or other credit
enhancements (eg netting agreements that do not qualify for offset in
accordance with AS 31);
(b) in respect of the amount disclosed in (a), a description of collateral held as
security and other credit enhancement;
(c) information about the credit quality of financial assets that are neither past due
nor impaired; and
(d) the carrying amount of financial assets that would otherwise be past due or
impaired whose terms have been renegotiated.
9 See footnote 7.
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Financial assets that are either past due or impaired
37. An entity should disclose by class of financial asset:
(a) an analysis of the age of financial assets that are past due as at the reporting
date but not impaired;
(b) an analysis of financial assets that are individually determined to be impaired
as at the reporting date, including the factors the entity considered in
determining that they are impaired; and
(c) for the amounts disclosed in (a) and (b), a description of collateral held by the
entity as security and other credit enhancements and, unless impracticable, an
estimate of their fair value.
Collateral and other credit enhancements obtained
38. When an entity obtains financial or non-financial assets during the period by taking
possession of collateral it holds as security or calling on other credit enhancements (eg
guarantees), and such assets meet the recognition criteria in other Standards, an entity
should disclose:
(a) the nature and carrying amount of the assets obtained; and
(b) when the assets are not readily convertible into cash, its policies for disposing
of such assets or for using them in its operations.
Liquidity risk
39. An entity should disclose:
(a) a maturity analysis for financial liabilities that shows the remaining
contractual maturities; and
(b) a description of how it manages the liquidity risk inherent in (a).
Market risk
Sensitivity analysis
40. Unless an entity complies with paragraph 41, it should disclose:
(a) a sensitivity analysis for each type of market risk to which the entity is
exposed at the reporting date, showing how profit or loss and equity would
have been affected by changes in the relevant risk variable that were
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reasonably possible at that date;
(b) the methods and assumptions used in preparing the sensitivity analysis; and
(c) changes from the previous period in the methods and assumptions used, and
the reasons for such changes.
41. If an entity prepares a sensitivity analysis, such as value-at-risk, that reflects
interdependencies between risk variables (eg interest rates and exchange rates) and uses it
to manage financial risks, it may use that sensitivity analysis in place of the analysis
specified in paragraph 40. The entity should also disclose:
(a) an explanation of the method used in preparing such a sensitivity analysis, and
of the main parameters and assumptions underlying the data provided; and
(b) an explanation of the objective of the method used and of limitations that may
result in the information not fully reflecting the fair value of the assets and
liabilities involved.
Other market risk disclosures
42. When the sensitivity analyses disclosed in accordance with paragraph 40 or 41 are
unrepresentative of a risk inherent in a financial instrument (for example because the
year-end exposure does not reflect the exposure during the year), the entity should
disclose that fact and the reason it believes the sensitivity analyses are unrepresentative.
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Appendix A
Defined terms
This appendix is an integral part of AS 32, Financial Instruments: Disclosures.
credit risk
The risk that one party to a financial instrument will cause a financial loss
for the other party by failing to discharge an obligation.
currency risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in foreign exchange rates.
interest rate risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market interest rates.
liquidity risk
The risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities.
loans payable
Loans payable are financial liabilities, other than short-term trade payables
on normal credit terms.
market risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices. Market risk comprises
three types of risk: currency risk, interest rate risk and other price risk.
other price risk
The risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices (other than those arising
from interest rate risk or currency risk), whether those changes are
caused by factors specific to the individual financial instrument or its
issuer, or factors affecting all similar financial instruments traded in the
market.
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past due
A financial asset is past due when a counterparty has failed to make a payment when
contractually due.
The following terms are defined in paragraph 8 of AS 30, Financial Instruments:
Recognition and Measurement, or paragraph 7 of AS 31, Financial Instruments:
Presentation, and are used in this Standard with the meaning specified in AS 30 and
AS 31.
amortised cost of a financial asset or financial liability
available-for-sale financial assets
derecognition
derivative
effective interest method
equity instrument
fair value
financial asset
financial instrument
financial liability
financial asset or financial liability at fair value through profit or loss
financial guarantee contract
financial asset or financial liability held for trading
forecast transaction
hedging instrument
held-to-maturity investments
loans and receivables
regular way purchase or sale
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Appendix B
Application guidance
This appendix is an integral part of AS 32, Financial Instruments: Disclosures
Classes of financial instruments and level of disclosure
(paragraph 6)
B1 Paragraph 6 requires an entity to group financial instruments into classes that are
appropriate to the nature of the information disclosed and that take into account the
characteristics of those financial instruments. The classes described in paragraph 6 are
determined by the entity and are, thus, distinct from the categories of financial
instruments specified in AS 30 (which determine how financial instruments are measured
and where changes in fair value are recognised).
B2 In determining classes of financial instrument, an entity should, at a minimum:
(a) distinguish instruments measured at amortised cost from those measured
at fair value.
(b) treat as a separate class or classes those financial instruments outside the
scope of this AS.
B3 An entity decides, in the light of its circumstances, how much detail it provides to
satisfy the requirements of this AS, how much emphasis it places on different aspects of
the requirements and how it aggregates information to display the overall picture without
combining information with different characteristics. It is necessary to strike a balance
between overburdening financial statements with excessive detail that may not assist
users of financial statements and obscuring important information as a result of too much
aggregation. For example, an entity should not obscure important information by
including it among a large amount of insignificant detail. Similarly, an entity should not
disclose information that is so aggregated that it obscures important differences between
individual transactions or associated risks.
Significance of financial instruments for financial position and
performance
Financial liabilities at fair value through profit or loss (paragraphs 10
and 11)
B4 If an entity designates a financial liability as at fair value through profit or loss,
paragraph 10(a) requires it to disclose the amount of change in the fair value of the
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financial liability that is attributable to changes in the liability’s credit risk. Paragraph
10(a)(i) permits an entity to determine this amount as the amount of change in the
liability’s fair value that is not attributable to changes in market conditions that give rise
to market risk. If the only relevant changes in market conditions for a liability are
changes in an observed (benchmark) interest rate, this amount can be estimated as
follows:
(a) First, the entity computes the liability’s internal rate of return at the start of the
period using the observed market price of the liability and the liability’s
contractual cash flows at the start of the period. It deducts from this rate of return
the observed (benchmark) interest rate at the start of the period, to arrive at an
instrument-specific component of the internal rate of return.
(b) Next, the entity calculates the present value of the cash flows associated with the
liability using the liability’s contractual cash flows at the end of the period and a
discount rate equal to the sum of (i) the observed (benchmark) interest rate at the
end of the period and (ii) the instrument-specific component of the internal rate of
return as determined in (a).
(c) The difference between the observed market price of the liability at the end of the
period and the amount determined in (b) is the change in fair value that is not
attributable to changes in the observed (benchmark) interest rate. This is the
amount to be disclosed.
This example assumes that changes in fair value arising from factors other than changes
in the instrument’s credit risk or changes in interest rates are not significant. If the
instrument in the example contains an embedded derivative, the change in fair value of
the embedded derivative is excluded in determining the amount to be disclosed in
accordance with paragraph 10(a).
Other disclosure – accounting policies (paragraph 21)
B5 Paragraph 21 requires disclosure of the measurement basis (or bases) used in
preparing the financial statements and the other accounting policies used that are relevant
to an understanding of the financial statements. For financial instruments, such disclosure
may include:
(a) for financial assets or financial liabilities designated as at fair value
through profit or loss:
(i) the nature of the financial assets or financial liabilities the entity
has designated as at fair value through profit or loss;
(ii) the criteria for so designating such financial assets or financial
liabilities on initial recognition; and
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(iii) how the entity has satisfied the conditions in paragraphs 8, 11 or
12 of AS 30 for such designation. For instruments designated in
accordance with paragraph 8.2 (b)(i) of the definition of a financial
asset or financial liability at fair value through profit or loss in AS
30, that disclosure includes a narrative description of the
circumstances underlying the measurement or recognition
inconsistency that would otherwise arise. For instruments
designated in accordance with paragraph 8.2 (b)(ii) of the
definition of a financial asset or financial liability at fair value
through profit or loss in AS 30, that disclosure includes a narrative
description of how designation at fair value through profit or loss
is consistent with the entity’s documented risk management or
investment strategy.
(b) the criteria for designating financial assets as available for sale.
(c) whether regular way purchases and sales of financial assets are accounted
for at trade date or at settlement date (see paragraph 38 of AS 30).
(d) when an allowance account is used to reduce the carrying amount of
financial assets impaired by credit losses:
(i) the criteria for determining when the carrying amount of impaired
financial assets is reduced directly (or, in the case of a reversal of a
write-down, increased directly) and when the allowance account is
used; and
(ii) the criteria for writing off amounts charged to the allowance
account against the carrying amount of impaired financial assets
(see paragraph 16).
(e) how net gains or net losses on each category of financial instrument are
determined (see paragraph 20(a)), for example, whether the net gains or
net losses on items at fair value through profit or loss include interest or
dividend income.
(f) the criteria the entity uses to determine that there is objective evidence that
an impairment loss has occurred (see paragraph 20(e)).
(g) when the terms of financial assets that would otherwise be past due or
impaired have been renegotiated, the accounting policy for financial assets
that are the subject of renegotiated terms (see paragraph 36(d)).
AS 1 (Revised)10, also requires entities to disclose, in the summary of significant
accounting policies or other notes, the judgments, apart from those involving estimations,
10 See footnote 7.
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that management has made in the process of applying the entity’s accounting policies and
that have the most significant effect on the amounts recognised in the financial
statements.
Nature and extent of risks arising from financial instruments
(paragraphs 31–42)
B6 The disclosures required by paragraphs 31–42 should be either given in the
financial statements or incorporated by cross-reference from the financial statements to
some other statement, such as a management commentary or risk report, that is available
to users of the financial statements on the same terms as the financial statements and at
the same time. Without the information incorporated by cross-reference, the financial
statements are incomplete.
Quantitative disclosures (paragraph 34)
B7 Paragraph 34(a) requires disclosures of summary quantitative data about an
entity’s exposure to risks based on the information provided internally to key
management personnel of the entity. When an entity uses several methods to manage a
risk exposure, the entity should disclose information using the method or methods that
provide the most relevant and reliable information. AS 5, Accounting Policies, Changes
in Accounting Estimates and Errors,11 discusses relevance and reliability.
B8 Paragraph 34(c) requires disclosures about concentrations of risk. Concentrations
of risk arise from financial instruments that have similar characteristics and are affected
similarly by changes in economic or other conditions. The identification of
concentrations of risk requires judgement taking into account the circumstances of the
entity. Disclosure of concentrations of risk should include:
(a) a description of how management determines concentrations;
(b) a description of the shared characteristic that identifies each concentration
(eg counterparty, geographical area, currency or market); and
(c) the amount of the risk exposure associated with all financial instruments
sharing that characteristic.
Maximum credit risk exposure (paragraph 36(a))
B9 Paragraph 36(a) requires disclosure of the amount that best represents the entity’s
maximum exposure to credit risk. For a financial asset, this is typically the gross carrying
amount, net of:
(a) any amounts offset in accordance with AS 31; and
11 The revised Standard is under preparation.
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(b) any impairment losses recognised in accordance with AS 30.
B10 Activities that give rise to credit risk and the associated maximum exposure to
credit risk include, but are not limited to:
(a) granting loans and receivables to customers and placing deposits with
other entities. In these cases, the maximum exposure to credit risk is the
carrying amount of the related financial assets.
(b) entering into derivative contracts, eg foreign exchange contracts, interest
rate swaps and credit derivatives. When the resulting asset is measured at
fair value, the maximum exposure to credit risk at the reporting date will
equal the carrying amount.
(c) granting financial guarantees. In this case, the maximum exposure to
credit risk is the maximum amount the entity could have to pay if the
guarantee is called on, which may be significantly greater than the amount
recognised as a liability.
(d) making a loan commitment that is irrevocable over the life of the facility
or is revocable only in response to a material adverse change. If the issuer
cannot settle the loan commitment net in cash or another financial
instrument, the maximum credit exposure is the full amount of the
commitment. This is because it is uncertain whether the amount of any
undrawn portion may be drawn upon in the future. This may be
significantly greater than the amount recognised as a liability.
Contractual maturity analysis (paragraph 39(a))
B11 In preparing the contractual maturity analysis for financial liabilities required by
paragraph 39(a), an entity uses its judgement to determine an appropriate number of time
bands. For example, an entity might determine that the following time bands are
appropriate:
(a) not later than one month;
(b) later than one month and not later than three months;
(c) later than three months and not later than one year; and
(d) later than one year and not later than five years.
B12 When a counterparty has a choice of when an amount is paid, the liability is
included on the basis of the earliest date on which the entity can be required to pay. For
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example, financial liabilities that an entity can be required to repay on demand (eg
demand deposits) are included in the earliest time band.
B13 When an entity is committed to make amounts available in instalments, each
instalment is allocated to the earliest period in which the entity can be required to pay.
For example, an undrawn loan commitment is included in the time band containing the
earliest date it can be drawn down.
B14 The amounts disclosed in the maturity analysis are the contractual undiscounted
cash flows, for example:
(a) gross finance lease obligations (before deducting finance charges);
(b) prices specified in forward agreements to purchase financial assets for
cash;
(c) net amounts for pay-floating/receive-fixed interest rate swaps for which
net cash flows are exchanged;
(d) contractual amounts to be exchanged in a derivative financial instrument
(eg a currency swap) for which gross cash flows are exchanged; and
(e) gross loan commitments.
Such undiscounted cash flows differ from the amount included in the balance sheet
because the balance sheet amount is based on discounted cash flows.
B15 If appropriate, an entity should disclose the analysis of derivative financial
instruments separately from that of non-derivative financial instruments in the contractual
maturity analysis for financial liabilities required by paragraph 39(a). For example, it
would be appropriate to distinguish cash flows from derivative financial instruments and
non-derivative financial instruments if the cash flows arising from the derivative financial
instruments are settled gross. This is because the gross cash outflow may be accompanied
by a related inflow.
B16 When the amount payable is not fixed, the amount disclosed is determined by
reference to the conditions existing at the reporting date. For example, when the amount
payable varies with changes in an index, the amount disclosed may be based on the level
of the index at the reporting date.
Market risk – sensitivity analysis (paragraphs 40 and 41)
B17 Paragraph 40(a) requires a sensitivity analysis for each type of market risk to
which the entity is exposed. In accordance with paragraph B3, an entity decides how it
aggregates information to display the overall picture without combining information with
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different characteristics about exposures to risks from significantly different economic
environments. For example:
(a) an entity that trades financial instruments might disclose this information
separately for financial instruments held for trading and those not held for trading.
(b) an entity would not aggregate its exposure to market risks from areas of
hyperinflation with its exposure to the same market risks from areas of very low
inflation.
If an entity has exposure to only one type of market risk in only one economic
environment, it would not show disaggregated information.
B18 Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or
loss and equity of reasonably possible changes in the relevant risk variable (eg prevailing
market interest rates, currency rates, equity prices or commodity prices). For this
purpose:
(a) entities are not required to determine what the profit or loss for the period would
have been if relevant risk variables had been different. Instead, entities disclose
the effect on profit or loss and equity at the balance sheet date assuming that a
reasonably possible change in the relevant risk variable had occurred at the
balance sheet date and had been applied to the risk exposures in existence at that
date. For example, if an entity has a floating rate liability at the end of the year,
the entity would disclose the effect on profit or loss (i.e. interest expense) for the
current year if interest rates had varied by reasonably possible amounts.
(b) entities are not required to disclose the effect on profit or loss and equity for each
change within a range of reasonably possible changes of the relevant risk variable.
Disclosure of the effects of the changes at the limits of the reasonably possible
range would be sufficient.
B19 In determining what a reasonably possible change in the relevant risk variable is,
an entity should consider:
(a) the economic environments in which it operates. A reasonably possible change
should not include remote or ‘worst case’ scenarios or ‘stress tests’. Moreover, if
the rate of change in the underlying risk variable is stable, the entity need not alter
the chosen reasonably possible change in the risk variable. For example, assume
that interest rates are 5 per cent and an entity determines that a fluctuation in
interest rates of ±50 basis points is reasonably possible. It would disclose the
effect on profit or loss and equity if interest rates were to change to 4.5 per cent or
5.5 per cent. In the next period, interest rates have increased to 5.5 per cent. The
entity continues to believe that interest rates may fluctuate by ±50 basis points
(i.e. that the rate of change in interest rates is stable). The entity would disclose
the effect on profit or loss and equity if interest rates were to change to 5 per cent
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or 6 per cent. The entity would not be required to revise its assessment that
interest rates might reasonably fluctuate by ±50 basis points, unless there is
evidence that interest rates have become significantly more volatile.
(b) the time frame over which it is making the assessment. The sensitivity analysis
should show the effects of changes that are considered to be reasonably possible
over the period until the entity will next present these disclosures, which is
usually its next annual reporting period.
B20 Paragraph 41 permits an entity to use a sensitivity analysis that reflects
interdependencies between risk variables, such as a value-at-risk methodology, if it uses
this analysis to manage its exposure to financial risks. This applies even if such a
methodology measures only the potential for loss and does not measure the potential for
gain. Such an entity might comply with paragraph 41(a) by disclosing the type of valueat-
risk model used (eg whether the model relies on Monte Carlo simulations), an
explanation about how the model works and the main assumptions (eg the holding period
and confidence level). Entities might also disclose the historical observation period and
weightings applied to observations within that period, an explanation of how options are
dealt with in the calculations, and which volatilities and correlations (or, alternatively,
Monte Carlo probability distribution simulations) are used.
B21 An entity should provide sensitivity analyses for the whole of its business, but
may provide different types of sensitivity analysis for different classes of financial
instruments.
Interest rate risk
B22 Interest rate risk arises on interest-bearing financial instruments recognised in the
balance sheet (eg loans and receivables and debt instruments issued) and on some
financial instruments not recognised in the balance sheet (eg some loan commitments).
Currency risk
B23 Currency risk (or foreign exchange risk) arises on financial instruments that are
denominated in a foreign currency, i.e. in a currency other than the functional currency12
in which they are measured. For the purpose of this Standard, currency risk does not arise
from financial instruments that are non-monetary items or from financial instruments
denominated in the functional currency.
B24 A sensitivity analysis is disclosed for each currency to which an entity has
significant exposure.
12 See paragraph 8.16 of AS 30 for definition of ‘Functional Currency’.
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Other price risk
B25 Other price risk arises on financial instruments because of changes in, for
example, commodity prices or equity prices. To comply with paragraph 40, an entity
might disclose the effect of a decrease in a specified stock market index, commodity
price, or other risk variable. For example, if an entity gives residual value guarantees that
are financial instruments, the entity discloses an increase or decrease in the value of the
assets to which the guarantee applies.
B26 Two examples of financial instruments that give rise to equity price risk are a
holding of equities in another entity, and an investment in a trust, which in turn holds
investments in equity instruments. Other examples include forward contracts and options
to buy or sell specified quantities of an equity instrument and swaps that are indexed to
equity prices. The fair values of such financial instruments are affected by changes in the
market price of the underlying equity instruments.
B27 In accordance with paragraph 40(a), the sensitivity of profit or loss (that arises,
for example, from instruments classified as at fair value through profit or loss and
impairments of available-for-sale financial assets) is disclosed separately from the
sensitivity of equity (that arises, for example, from instruments classified as available for
sale).
B28 Financial instruments that an entity classifies as equity instruments are not
remeasured. Neither profit or loss nor equity will be affected by the equity price risk of
those instruments. Accordingly, no sensitivity analysis is required.
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Appendix C
Comparison with IFRS 7, Financial Instruments: Disclosures
Note: This Appendix is not a part of the Accounting Standard (AS) 32. The purpose of
this appendix is only to bring out the differences between Accounting Standard (AS) 32
and the corresponding International Financial Reporting Standard (IFRS) 7.
Comparison with IFRS 7, Financial Instruments: Disclosures
This Accounting Standard is based on International Financial Reporting Standard (IFRS)
7, Financial Instruments: Disclosures issued by the International Accounting Standards
Board (IASB). There is no material difference between AS 32 and IFRS 7.
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