Ind AS 32 & 107: Financial Instruments — Presentation & Disclosures

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.

For the connected rule, example or next step, see Ind AS 109: Financial Instruments — Recognition & Measurement.

The test:

1. Does the instrument include a contractual obligation to deliver cash or another financial asset? → If yes: Financial Liability
2. 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)
3. 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).

For the connected rule, example or next step, see Ind AS 109: Financial Instruments — Detailed Guide (Classification & Measurement).

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:

1. The entity has a legally enforceable right to set off the amounts, AND
2. 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:

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:

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

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