‘ARG CLASSES CAFINAL PAPER 4 LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS Note: If the events are interdependent then fixed to fixed test is not passed. —{_Exampies —————— -—{_ Number of Shares will change it Bonus is declared = -—{_ Number of Shares will change if Company goes share splitting — {Number of Shares will change if Company goes share Consolidation ;{_Number of Shares will change due to passage of time. i —_ aemwahive WASIAQ, Scope ‘Donan ac i GRETA all of the ftlowing tree characteristics: i Value changes due to an underlying iil, Future settlement. itis settled at a future date. Note: Derivatives may exist as standalone financial instruments or may be ED Derivative contra Fu 179 |/Page CA AJITH ROHITH G FCA B.COMOO ‘ARG CLASSES LECTURE SUPPORT MODULE CAFINAL PAPER 4 FINANCIAL REPORTING NEW SYLLABUS Ifthe prices go DOWN 1 Ifthe prices go UP 1 Ifthe prices go DOWN Lose rei | Lose (Sad win reer | | abt Feeling) a CA AJITH ROHITH G FCA B.COM F-Uao 180 |Page1 ‘ARG CLASSES CAFWMALPAPER1 | LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS Forward contract is a(Gontract for future purchase or sale of an underlying at a agreed price today. It could be either a) F*— Forward buy — Bullish Strategy b) F” —+ Forward sell + Bearish Strategy (Difference between agreed price and spot Price on maturity will be settled in cash.) (Actual buy and sell takes place at | from the view paint of halder) Call Option ~ Cash flow on maturit Writer - short call Holder- long call ie | 181 Page‘ARG CLASSES CAFINAL PAPER 4 LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS Halder - long Put 6. it would be strange a5 to why does a persn becomes option wnter Atte beginning the holder will Exam Focus + (Premium options /Opbonvaleispai a! begins + (Cesiiwon aunty IsHroW a aya (othe extend of erence comin (Ate Money Outre woney (Tm) (ATM) (oTM) t 4 t Call Option Call Option Call Option Put Option Put Option Put Option 68 Ge See Pay off V/s Profit 192 (Page CA AJITH ROHITH G FCA B.COM1 i ‘ARG CLASSES CAFWMALPAPER1 | LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS | i > | | Pay off refers to Cashflow on maturity | | | Compare pay off with initial premium - The net amount is your profit or i loss. I i | EEE | Option Holder loves Volatility. Option Writer hates Volatility. # Example: € Consider a 3 monthifallJOptioh) on a stock at strike price Rs.600. It is presently trading at Rs.72. Spot price of stock = 605. G Comment on moneyness? hax > 60Si= Answer: Be as(Ga} “Psee- co So>E 1. Ini 540 Mane ES Puk So? G7. ak og mony | #Example2: Helder’ (@eyyouwentiongyonjtne abovercaNjes Calculate payott and profit after 3 months it | Stock price happens ta be: | () 840° (i) 600 (ii) 610 (700 | i Also calculate as it you were an Option Writer? s Answer: C4 ak = OO UPLIAR CL ELa- adovet’ ‘ | Sper & Heike Camiun. Pil | Sto GOD one. om cn) | bo bm “PKR- o a 9 . ay CA AJITH ROHITH G FCA B.COM] ARG Cl CAFWWALPAPER1 =| LEC IRE SUPPORY MODULE FINANCIAL REPORTING NEW SYLLABUS C10 6a ree AOE ay 2, ba exer tia CD +28" “(0 +7 GL asin: OO i | Pave eur > AAONS\AS | [ Fo= 65) E = 240 ,t= 1 month 2H > ODSRDF RUCESS, EVo & Compute Payott and prof, 9 a4 og) ced . 2 Pt | ) 3) 210 | 4) 150 Had (ii) If you are a Writer ( Spot price same as above) £5 b ouput . a You 8 Vv ev Wn, > N“ was a yabse wdkuek >) Westy 3° af i Feo PambAD ((o0)/ PE ———— oe of ope Cpe & es | ney Sxey‘ARG CLASSES CAFINAL PAPER 4 LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS # FS 1: Conversion ratio changes in response to passage of time. On 1 January 20X1, NKT Ltd. subscribes to convertible preference shares of VT Ltd. The conversion ratio varies as below Conversion upto 31 March 20X 1 - 1:1 Conversion upto 30 June 20X1- 1.51 Conversion upto 31 December 20X1- 2:1 Examine whether the financial instrument will be classified as equity. (Study Material) Answer: The convertible preference shares can be classified as "equity instrument” in the books of the issuer, VT Ltd. The conversion ratio doesn't change corresponding ta any underlying variable, it only varies in response to passage of time which is a certain event and hence fixed # FS 2: Conversion ratio changes under independent scenarios On 1 January 201, STAL Ltd. subscribes to convertible preference shares of ATAL Ltd. The preference shares are convertible as below: © Convertible 1:1. - if another strategic investor invests in the issuer within 1 year * Convertible 1.5:1 - it an IPO is successfully completed within 2 years * Convertible 2:1 - if a binding agreement for sale of majority stake by equity shareholders is entered into within 3 years * Convertible 3:1 - if none of these events occur in 3 years' time Examine whether the financial instrument will be classified as equity. (Study Material) Answer: In this case the four events can be viewed as discrete because the achievement of each ane of these can occur independently of the other (as they relate to different periods). The arrangement can therefore be considered to be economically equivalent to four separate contracts. The price per share and the amount of shares to be issued is fixed in each of these discrete periods, with each event relating to a different year and therefore a separate risk. The "fixed for fixed” test is therefore met The instrument is therefore classified as "equity instrument” # FS 3: Conversion ratio changes under inter-dependent scenarios On 4 January 20X1, RHT Ltd. subscribes to convertible preference shares of RDT Ltd. The preference shares are convertible as below. Convertible 1:1 if another strategic investor invests at an enterprise valuation (EV) of USD 100 milion * Convertible 1.5:1: if another strategic investor invests at EV of USD 150 million * Convertible 2:1: if another strategic investor invests at EV of USD 200 million + Convertible 3:1: if no strategic investment is made within a period of 3 years Examine the nature of the financial instrument. 195 [Page CA AJITH ROHITH G FCA B.COM‘ARG CLASSES CAFINAL PAPER 4 LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS Answer: The four events are interdependent because the second event cannot be met. without also meeting the first event, and the third event cannot be met unless the first two are met. Therefore, this contract should be treated as a single instrument when applying the exchanged for cash are variable Qut of Scope fixed for fixed” test. The test is then failed because the number of shares to be The following contracts which are receivable/ Payable in cash, but are still outside the scope of Financial Instruments Indemnification Asset - Ind AS 37 a] Obligations under emplayee agreement - Ind AS 19 | = za} Share Based Payment Awards - IndAS 102 = al Investment in Subsidiary, Associate and JV - Ind AS 27 = al Lease Receivable / Payable at inception-IndAS 116 L = zai} Insurance Contracts - Ind AS 104 r= ql Executory Contracts on Non Financial Items - Forward Agreements = pas] 186 |Page CA AJITH ROHITH G FCA B.COMRelisna -' 8! dere" ‘ARG CLASSES CAFINAL PAPER 4 LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS ; Wey . Contracts to Buy or Sell Non-Financial Items — Executory Contract Fl undering whet" be Settled net in 187 |Page CA AJITH ROHITH G FCA B.COMerie rvren ‘ARG CLASSES CAFINAL PAPER 4 LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS non-fin instruments’ , 2 See aa sistency (sometimes or by exchanging financial was not entered into forthe pufpose of) in accordance with entity's expected oe A contract to buy or sell a non-financial item that can be settled net incash | can be irrevocably designated as measured at fair value through profit or loss. This designation is available only at inception of the contract and only if it eliminates or significantly reduces a recognition inconsistency 188 |Page CA AJITH ROHITH G FCA B.COM‘ARG CLASSES CAFINAL PAPER 4 LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS | answersif Treatedas Derivative) EVT PL > FA oy EL | Case A) S Favamro 1 January 2021 i 4 1 i Derivative Asset Dr No. any To Cash 5,000 . ( Being Forward Contract Recognised ) - | 199 |Page CA AJITH ROHITH G FCA B.COM AN Case b) Contract is “inn ee scape of Ind AS 109 —Executory Contact, un garaurdle | | | | | | | | LARG CLASSES CAFINAL PAPER LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS a | DeAVAN He AGA SO | 31 March 2021 Ye geo No Journal Entry ~ Since already asset is appearing at Rs 5,000. 30 June 2021 Derivative Asset. Dr_-—7.500 (Being can Recognised ) reno OA ILS cash Dr 12,600 To Derivative Asset 12,500 ( Being Contract Settled ) Case B) 1 January 2021 Derivative Asset Dr 5,000 To Cash 5,000 ( Being Forward Contract Recognised ) 31 March 2021 ( Being Forwar 30 June 2021 sao Oana oom Contract Recognised ) i ontract Settie CA AJITH ROHITH G FCA B.COM 190 [Page‘ARG CLASSES LECTURE SUPPORT MODULE Iftreated as Executory Contract Case A) 1 January 2021 Advance forPurchase Dr 5,000 To Cash 5,000 ( Being Forward Contract Recognised ) 31 March 2021 No Journal Entry 30 June 2021 Purchase A/C Dr 50,000 To Cash 45,000 To Advance for Purchase 5,000 ( Being Stock Purchased ) Case B) 1 January 2021 Advance forPurchase Dr 5,000 To Cash 5,000 ( Being Forward Contract Recognised ) 31 March 2021 No Journal Entry N 30 June 2021 Purchase A/C Dr 50,000 To Cash To Advance for Purchase ( Being Stock Purchased ) CA AJITH ROHITH G FCA B.COM FINANCIAL REPORTING NEW SYLLABUS CAFINAL PAPER 4 bS24 “qresos® > Gy os" he ——- P&Z anaks= should recognis€/@ PrOvision for) vets 8.