Ind AS 32 & 107: Financial Instruments — Presentation & Disclosures
- Ind AS 32: Debt vs Equity — The Classification Framework
- Compound Financial Instruments: Splitting Debt & Equity
- Treasury Shares & Own Equity Instruments
- Offsetting Financial Assets and Liabilities
- Ind AS 107: Risk Disclosure Framework Overview
- Credit Risk Disclosures
- Liquidity Risk Disclosures
- Market Risk: Interest Rate, Currency & Price Sensitivity
- Case Study: a large private-sector bank — Credit Risk & ECL Disclosures
- Case Study: a leading NBFC lender — Liquidity Risk Disclosures
- Case Study: a diversified industrial conglomerate — FX Risk & Hedging Disclosures
- Comparison: Ind AS 32/107 vs Old IGAAP
Ind AS 32 governs how financial instruments appear on the balance sheet — crucially, the classification of an instrument as debt or equity, and when financial assets and liabilities can be offset. Ind AS 107 governs what you tell investors about your financial instrument risks in the notes. Together, they shape the disclosures that investors, analysts, and credit rating agencies rely on to assess a company's financial risk profile. The classification question under Ind AS 32 carries enormous consequences — debt inflates leverage ratios and triggers covenants; equity does not.
| Structural block | What it covers |
|---|---|
| Purpose of this cross-reference | This article reads Ind AS 32 (presentation) and Ind AS 107 (disclosures) together, since the two standards are almost always applied jointly to the same financial instruments. |
| Presentation layer (Ind AS 32) | Determines whether an instrument is a liability or equity, how compound instruments are split, and when offsetting is permitted — see the dedicated Ind AS 32 guide for the full breakdown. |
| Disclosure layer (Ind AS 107) | Once instruments are classified and measured, Ind AS 107 requires disclosure of their significance to financial position/performance and the nature and extent of risks arising from them. |
| Risk disclosures | Qualitative and quantitative disclosure of credit risk, liquidity risk and market risk (currency, interest rate and other price risk), including sensitivity analysis. |
| Fair value and hedge disclosures | Fair value by class of instrument and the level in the Ind AS 113 fair value hierarchy, plus disclosures about hedge accounting relationships designated under Ind AS 109. |
Ind AS 32: Debt vs Equity — The Classification Framework
The central question of Ind AS 32: should a financial instrument (or its components) be classified as a financial liability (debt) or as equity? The answer is based on the economic substance, not the legal form — and is determined by whether the issuer has an unconditional right to avoid delivering cash or another financial asset.
- Contractual obligation to deliver cash or another financial asset
- Mandatory payments (interest, principal) — issuer cannot avoid
- Redeemable preference shares (mandatory redemption) = DEBT
- Puttable instruments where holder can demand cash = DEBT
- Financial guarantee contracts = DEBT
- Residual interest after deducting liabilities; no obligation to deliver cash
- Ordinary shares — issuer pays dividends at discretion
- Irredeemable preference shares (no mandatory redemption, discretionary dividends) = EQUITY
- Permanent capital instruments
- Options/warrants to issue fixed number of own shares for fixed cash = EQUITY
The test:
- Does the instrument include a contractual obligation to deliver cash or another financial asset? → If yes: Financial Liability
- Will it be settled in a variable number of the entity's own equity instruments? → If yes: Financial Liability (the entity's own shares become a commodity)
- Will it be settled by issuing a fixed number of own shares for a fixed amount of cash? → Equity
Compound Financial Instruments: Splitting Debt & Equity
Compound instruments contain both a liability component and an equity component. The most common example: Convertible Debentures / Optionally Convertible Debentures (OCDs).
A convertible bond has two components:
- Liability component: The obligation to pay coupons and, if not converted, the principal (present value of these cash flows)
- Equity component: The option to convert — value of the conversion right (residual after deducting liability component)
Accounting Treatment
The liability component is then carried at amortised cost using the effective interest rate (10%) — creating interest expense of 10% of carrying value each year (higher than the 6% coupon paid in cash), with the difference accreted to the liability until it reaches ₹100 crore at maturity.
Treasury Shares & Own Equity Instruments
When an entity buys back its own shares (treasury shares), those shares must be deducted from equity — they are NOT recognised as a financial asset. The cost of treasury shares is shown as a deduction from equity (Other Equity). Any gain or loss on sale of treasury shares goes directly to equity — never to P&L. This is a major departure from intuition (many assume share buybacks create P&L gains/losses).
Offsetting Financial Assets and Liabilities
A financial asset and a financial liability shall be offset and presented as a net amount only when BOTH:
- The entity has a legally enforceable right to set off the amounts, AND
- The entity intends to settle on a net basis, or realise the asset and settle the liability simultaneously
Both conditions must be met simultaneously — meeting only one is not sufficient. This is relevant for banks (netting of customer deposits vs loans), derivative master netting agreements, and inter-company balances.
Ind AS 107: Risk Disclosure Framework Overview
Ind AS 107 requires companies to disclose information enabling users to evaluate the nature and extent of financial instrument risks, and how those risks are managed. Required disclosures cover:
| Risk Category | Ind AS 107 Requirement |
|---|---|
| Credit Risk | Maximum exposure; collateral; credit quality analysis; ECL reconciliation; concentration of risk |
| Liquidity Risk | Maturity analysis of financial liabilities; contractual undiscounted cash flows by bucket |
| Market Risk — Interest Rate | Sensitivity analysis (parallel shift in rates); impact on P&L and OCI |
| Market Risk — Currency | Sensitivity analysis (currency movements); hedged vs unhedged exposure breakdown |
| Market Risk — Price | Sensitivity for equity price risk and commodity price risk (where applicable) |
Ind AS 107 also requires qualitative disclosures: descriptions of risk management objectives, policies, processes for measuring and managing each risk.
Credit Risk Disclosures
Credit risk disclosures under Ind AS 107 must include:
- Maximum exposure to credit risk — without taking into account any collateral held (gross carrying amount of financial assets)
- Collateral and credit enhancements: Description of collateral held (property, guarantees, CDS) and its fair value
- Credit quality analysis: Distribution of credit exposure by credit quality grades (investment grade, non-investment grade, Stage 1/2/3 under ECL)
- ECL reconciliation: Opening balance → New originations → Changes in risk → Write-offs → Closing balance (for each stage)
- Concentration of credit risk: Geographic, sector, or counterparty concentrations where significant
- Collateral obtained during the period: Nature and carrying amount of assets obtained through enforcement of collateral
Liquidity Risk Disclosures
The core Ind AS 107 liquidity risk disclosure is a maturity analysis of financial liabilities showing contractual undiscounted cash flows in time buckets:
| Maturity Bucket | Borrowings | Trade Payables | Lease Liabilities | Derivative Liabilities | Total |
|---|---|---|---|---|---|
| On demand / <1 month | XXX | XXX | XXX | XXX | XXX |
| 1–3 months | XXX | XXX | XXX | XXX | XXX |
| 3–12 months | XXX | XXX | XXX | XXX | XXX |
| 1–5 years | XXX | — | XXX | XXX | XXX |
| >5 years | XXX | — | XXX | — | XXX |
Note: the amounts in this table are contractual undiscounted cash flows — including future interest — so they exceed the carrying amount of borrowings on the balance sheet. Companies often include a reconciliation to the balance sheet carrying amounts.
Qualitative disclosures must accompany: undrawn committed credit facilities available, description of how liquidity risk is managed, material liquidity concentrations.
Market Risk: Interest Rate, Currency & Price Sensitivity
Interest Rate Sensitivity
A common format: "A 50 basis point increase in interest rates, with all other variables constant, would [increase/decrease] profit before tax by ₹X crore and OCI by ₹Y crore." The sensitivity applies to:
- Floating rate borrowings: higher rates → higher interest cost → lower profit
- Fixed rate instruments carried at fair value through P&L: rate increase → lower fair value → fair value loss
- Hedge accounting instruments: sensitivity of fair value and cash flow hedges
Currency Risk Sensitivity
"A 5% appreciation of the USD against INR, with all other variables constant, would impact profit before tax by ₹X crore." Unhedged USD receivables → currency appreciation = gain; unhedged USD payables → appreciation = loss.
Case Study: A large private-sector bank — Credit Risk & ECL Disclosures
🏭 a large private-sector bank: Ind AS 107 Credit Risk Disclosures
this composite example is modelled on a large private-sector bank with an asset base in the ~₹25-30 lakh crore range, broadly representative of India's largest private banks. Its Ind AS 107 credit risk disclosures are the most comprehensive in Indian banking:
| Credit Risk Metric | FY25 (Approx.) | Ind AS 107 Requirement |
|---|---|---|
| Gross NPA Ratio | 1.24% | Disclosed as credit quality metric; ECL Stage 3 assets |
| Net NPA Ratio | 0.35% | After deducting ECL provisions |
| ECL Provision Coverage | ~72% | Stage 3 ECL / Stage 3 gross exposure |
| Stage 1 Exposure (12-month ECL) | ~93% of loan book | Performing; PD × LGD × EAD over 12 months |
| Stage 2 Exposure (Lifetime ECL) | ~4.5% of loan book | Significant credit deterioration |
| Stage 3 Exposure (Credit-Impaired) | ~1.5% of loan book | Default; lifetime ECL; individual assessment |
a large private-sector bank's ECL model uses PD (Probability of Default), LGD (Loss Given Default), and EAD (Exposure at Default) calibrated separately for each portfolio segment. The staging criteria: 30+ DPD (Days Past Due) triggers Stage 2; 90+ DPD triggers Stage 3. Macro-economic overlay adjusts for GDP growth and unemployment scenarios.
Case Study: A leading NBFC lender — Liquidity Risk Disclosures
💰 a leading NBFC lender: Asset-Liability Management Under Ind AS 107
a leading NBFC lender (India's largest NBFC by market cap) has a unique liquidity risk profile — primarily lending at 3–5 year tenures while borrowing at 1–3 year tenures (ALM mismatch). Ind AS 107 liquidity disclosures are critical for its stakeholders.
a leading NBFC lender's maturity analysis under Ind AS 107 shows significant short-term contractual outflows (NCDs maturing, CP repayments) which it manages through: (1) diverse lender base — 70+ banking relationships, (2) undrawn revolving credit facilities, (3) securitisation capacity, (4) liquidity coverage ratio maintained above regulatory minimum. The ALM disclosure helps investors understand refinancing risk — a key risk for any NBFC.
Case Study: A diversified industrial conglomerate — FX Risk & Hedging Disclosures
🏭 a diversified industrial conglomerate: Currency Risk Management
RIL has significant foreign currency exposure — USD-denominated borrowings (~$20+ billion), USD-denominated revenues (exports, O2C business), and capital expenditure in USD (Jio 5G equipment, refinery upgrades). Ind AS 107 requires comprehensive FX risk disclosures.
| FX Exposure | Nature | Hedging Treatment (Ind AS 109) | Ind AS 107 Disclosure |
|---|---|---|---|
| USD-denominated bonds (issued abroad) | Cash outflow risk — USD appreciation increases INR repayment | Cash flow hedge — forward contracts / cross-currency swaps | Sensitivity: 5% USD appreciation = ~₹8,000 crore impact (partially offset by hedges) |
| USD export revenue (O2C) | Natural hedge against USD borrowings | Natural hedge — partially reduces hedging need | Disclosed as natural hedge offset |
| Net unhedged USD exposure | Residual FX risk | Unhedged — absorbed by balance sheet | Sensitivity: 5% USD movement = ₹X crore P&L impact |
Comparison: Ind AS 32/107 vs Old IGAAP
- Redeemable preference shares classified as equity (legal form)
- Convertible debentures not bifurcated — all shown as liability
- No comprehensive risk disclosure standard equivalent to Ind AS 107
- Limited ECL disclosures; mostly incurred-loss provisioning
- Sensitivity analysis disclosures were minimal or voluntary
- CRPS classified as financial liability (economic substance)
- Compound instruments bifurcated; equity component in Other Equity
- Comprehensive mandatory risk disclosure — credit, liquidity, market
- ECL disclosures by stage; reconciliation of loss allowance
- Quantitative sensitivity analysis mandatory for all material risk types
- Stage-wise ECL breakdown and provision coverage (for banks/NBFCs)
- Maturity ladder — short-term refinancing concentrations
- Undrawn credit facilities as liquidity buffer
- FX sensitivity — unhedged exposure quantum
- Interest rate sensitivity — impact of 50bp rate change
- Whether CRPS / preference shares are classified as debt or equity
- Convertible instrument bifurcation — debt and equity components