Financial Instruments Accounting Policy disclosed by Bharat Dynamics Limited
Ind AS 1 was amended with effect from 1 April 2023 to replace the requirement to disclose significant accounting policy with disclosure of material accounting policy information. The amendment also provided the principles for assessing whether an accounting policy is material accounting policy. This post compares the accounting policy on financial instruments disclosed by Bharat Dynamics Limited in the financial statements before and after the amendement.
FINANCIAL INSTRUMENTS
8.1 Financial Assets:
All financial assets are recognised on trade date when the purchase of a financial asset is under a contract whose term requires delivery of the financial asset within the timeframe established by the market concerned. Financial assets are initially measured at fair value, plus transaction costs, except for those financial assets which are classified as at fair value through profit or loss (FVTPL) at inception. All recognised financial assets are subsequently measured in their entirety at either amortized cost or fair value.
i) Classification of financial assets:
The Company classifies its financial assets in the following measurement categories:
o those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss), and
o those measured at amortised cost.
The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows.
For assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. For investments in equity instruments, this will depend on whether the Company has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income. The Company reclassifies debt investments when and only when its business model for managing those assets changes.
ii) Measurement:
At initial recognition, the Company measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.
Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
a) Debt instruments
Subsequent measurement of debt instruments depends on the Company’s business model for managing the asset and the cash flow characteristics of the asset. The Company classifies its debt instruments as:
(a)(i) Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A gain or loss on a debt investment that is subsequently measured at amortised cost and is not part of a hedging relationship is recognised in profit or loss when the asset is derecognised or impaired. Interest income from these financial assets is included in finance income using the effective interest rate method.
(a)(ii) Fair value through other comprehensive income (FVOCI): Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income (FVOCI). Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognised in profit and loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gains/(losses). Interest income from these financial assets is included in other income using the effective interest rate method.
(a)(iii) Fair value through profit or loss: Assets that do not meet the criteria for amortised cost or FVOCI are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss and presented net in the statement of profit and loss within other gains/(losses) in the period in which it arises. Interest income from these financial assets is included in other income.
b) Equity instruments
(b)(i) The Company subsequently measures all equity investments at fair value. Where the Company’s management has elected to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss. Dividends from such investments are recognised in profit or loss as other income when the Company’s right to receive payments is established.
(b)(ii) Changes in the fair value of financial assets at fair value through profit or loss are recognised in other gain/(losses) in the statement of profit and loss. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.
(iii) Impairment of financial assets:
The Company assesses on a forward looking basis the expected credit losses associated with its assets carried at amortised cost and FVOCI debt instruments. The impairment methodology applied depends on whether there has been a significant increase in credit risk.
For trade receivables the Company applies the simplified approach permitted by Ind AS 109 Financial Instruments, which requires expected lifetime losses to be recognised from initial recognition of the receivables.
Time barred dues from the government / government departments / government companies are generally not considered as increase in credit risk of such financial asset.
(iv) Derecognition of financial assets
A financial asset is derecognized only when
- The Company has transferred the rights to receive cash flow from the financial asset or
- retains the contractual rights to receive the cash flows of the financial assets, but assumes a contractual obligation to pay cash flows to one or more recipients
Where the company has transferred an asset, the Company evaluates whether it has transferred substantially all risks and rewards of ownership of the financial asset. In such cases, the financial asset is derecognized.
Where the company has neither transferred a financial asset nor retains substantially all risks and rewards of ownership of the financial asset, the financial asset is derecognised if the Company has not retained control of the financial asset. Where the Company retains control of the financial asset, the asset is continued to be recognised to the extent of continuing involvement in the financial asset.
v) Trade receivables:
Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. If collection is expected to be collected within a period of 12 months or less from the reporting date (or in the normal operating cycle of the business if longer), they are classified as current assets otherwise as non-current assets.
Trade receivables are measured at their transaction price unless it contains a significant financing component in accordance with Ind AS 18 (or when the entity applies the practical expedient) or pricing adjustments embedded in the contract.
Loss allowance for expected lifetime credit loss is recognised on initial recognition.
8.2 Financial liabilities and equity instruments issued by the Company.
Classification
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
i) Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognised at the proceeds received, net of direct issue costs.
ii) Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs.
Financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognised on an effective yield basis.
The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.
iii) Trade and other payables
These amounts represent liabilities for goods and services provided to the Company. Trade and other payables are presented as current liabilities if payment is due within 12 months after the reporting period otherwise as non-current. They are recognized initially at their fair value and subsequently measured at amortized cost using the effective interest method.
iv) Derivatives
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value at the end of each reporting period. The derivatives that are not designated as hedges are accounted for at fair value through profit and loss and are included in other gains/ (losses).
a) Embedded derivatives
Derivatives embedded in a host contract that is an asset within the scope of Ind AS 109 are not separated. Financial Assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
Derivatives embedded in all other host contract are separated only if economic characteristics and risks of the embedded derivatives are not closely related to the economic characteristics and risks of the host contract and are measured at fair value through profit and loss. Embedded derivatives closely related to the host contract are not separated.
b) Embedded foreign currency derivatives
Embedded foreign currency derivatives are not separated from the host contract if they are closely related. Such embedded derivatives are closely related to the host contract, if the host contract is not leveraged, does not contain any option feature and requires payments in one of the following currencies:
- The functional currency of any substantial party to that contract,
- The currency in which the price of the related good or service that is acquired or delivered is routinely denominated in commercial transactions around the world,
- A currency that is commonly used in contracts to purchase or sell non-financial items in the economic environment in which the transaction takes place (i.e. relatively liquid and stable currency)
Foreign currency embedded derivatives which do not meet the above criteria are separated and the derivative is accounted for at fair value through profit and loss.
8.3 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Company or the counterparty.
(Bharat Dynamics Limited Financial year ended 31 March 2023)
Analysis for Material Accounting Policy Information:
Primary condition – Accounting policy relates to material transaction, other event or condition:
Paragraph 21 of Ind AS 107, Financial Instruments: Disclosures, states as follows:
“In accordance with paragraph 117 of Ind AS 1, Presentation of Financial Statements, an entity discloses material accounting policy information. Information about the measurement basis (or bases) for financial instruments used in preparing the financial statements is expected to be material accounting policy information.”
Accordingly, the accounting policy on measurement of financial instruments meets primary condition.
Secondary conditions – Any one of these need to be met:
The company changed its accounting policy during the reporting period and this change resulted in a material change to the information in the financial statements – No. The company has not changed its policy on financial instruments.
The company chose the accounting policy from one or more options permitted by Ind AS – Yes. Ind AS 109 various choices for recognition and measurement of financial instruments
Accounting policy was developed in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors – No. Ind AS 32 and Ind AS 109 specifically applies to financial instruments. Therefore, in accordance with paragraph 7 of Ind AS 8, the company shall apply the requirements of Ind AS 32 and Ind AS 109.
The accounting policy relates to an area for which an entity is required to make significant judgements or assumptions in applying an accounting policy, and the company discloses those judgements or assumptions in accordance with paragraph 122 and 125 of Ind AS 1. – Yes. The company has disclosed significant judgement with respect to embedded derivatives.
The accounting is complex such that the company applies more than one Ind AS to a class of material transactions – Yes. Financial Instruments requires the application of Ind AS 32, Ind AS 109 and Ind AS 107.
The disclosure of accounting policy is required by a standard. – Yes. Paragraph 21 of Ind AS 107 requires a company to disclose accounting policy on measurement of financial instruments.
Conclusion:
As both the primary condition and secondary conditions are met, the company shall disclose the policy on financial instruments.
The company has disclosed quite a lengthy accounting policy on financial instruments spanning 4 pages. Financial Instruments is an area which will always meet both the conditions. Therefore, the analysis of policies related to financial instruments must be on meeting the material accounting policy information in spirit and not in letter. In letter, policies related to financial instruments always meet material accounting policy information and therefore, no change is required. However, in spirit there could be instances where the policy is only reproducing standardised information which may be deleted to make the policy more company specific and understandable to users. For this purpose, the accounting policy on financial instruments disclosed by the company can be dissected into the following and each may be analysed for meeting both the primary condition and secondary conditions:
Recognition of regular way purchase or sales of financial assets at trade date
Initial measurement of financial assets
Classification of financial assets
Initial measurement of financial assets
Consideration of financial assets with embedded derivatives for classification in their entirety
Debt instrument at amortised cost
Debt instruments at fair value through other comprehensive income
Debt instruments at fair value through profit or loss
Equity investments at fair value through other comprehensive income and through profit or loss
Impairment of financial assets
Derecognition of financial assets
Classification of Trade Receivables as current and non-current
Measurement of Trade Receivables
Timing of recognition of ECL on Trade Receivables
Classification of debt and equity
Definition of equity instrument
Measurement of financial liabilities
Meaning of Trade and Other Payables
Classification of Trade and Other Payables into current and non-current
Measurement of Trade Payables
Measurement of undesignated derivatives
Line item where the gain/loss on undesignated derivatives is recognised
Separation of Embedded derivatives from financial assets
Separation of Embedded derivatives from other than financial assets
Separation of embedded foreign currency derivatives
Offsetting Financial Instruments
The Company may remove the following as they are only duplicating standardised information and are not accounting policy on measurement basis for financial instruments:
Duplicated initial measurement of financial assets
Consideration of financial assets with embedded derivatives for classification in their entirety
Derecognition of financial assets
Classification of Trade Receivables as current and non-current
Timing of recognition of ECL on Trade Receivables
Classification of debt and equity
Definition of equity instrument
Meaning of Trade and Other Payables
Classification of Trade and Other Payables into current and non-current
Separation of Embedded derivatives from financial assets
Separation of Embedded derivatives from other than financial assets
Separation of embedded foreign currency derivatives
Offsetting Financial Instruments
The company has disclosed initial measurement of financial assets twice which the company may reduce to once. The policy on initial measurement of financial assets is in conflict with the initial measurement of trade receivables. In fact, the policy on initial measurement of financial assets is not in accordance with paragraph 5.1.1 of Ind AS 109 which is substantiated by circular issued by National Financial Reporting Authority (NFRA) of India dated 29 March 2023.
Policy disclosed by the Company in its financial statements for the year ended 31 March 2025:
The company has disclosed accounting policy on financial instruments spanning 4 pages. Therefore, there is no point in reproducing the same here. This will only increase the length of this post without any value addition. Thus, the company has not made any changes to its financial instruments accounting policy disclosure pursuant to the requirement of disclosure of material accounting information becoming effective.