Computing for Financial Assets under the New International Financial Reporting Standards

Posted by Reading Time: < 1 minute

Mar. 10 – When India adopts the International Financial Reporting Standards (IFRS) in 2011, many changes will need to be made including ensuring that company staff are properly trained to apply the new rules.

Financial assets defined as a financial asset of one entity and a financial liability or equity instrument of another entity including cash, equity shares and a contractual right to receive cash or another financial asset will be computed for differently under the new IFRS.

Following the new system, financial assets will be initially recognized at fair value. Loans, advances and investments that a company plans to hold on to until maturity will be computed at amortized cost using the effective interest method with other financial assets also computed at fair value.

The IFRS will also change how companies compute for revenue and receivables.  An extended company credit offer for clients will lead to lower fair value compared to the nominal amount. Receivables and revenue will then be considered at fair value and will not be based on the  invoice amount given to the client.

Fair value is defined as the present value of the amount receivable from the client discounted at the interest rate by which a client could borrow from the market using the same terms and conditions. It is determined by market perception.

Moreover, the fair value of a loan given to an employee, vendor or entity at an interest rate better than market rate will be lower than the nominal amount. This will in turn lead to the difference between the nominal amount and the fair value rate to be filed under the profit and loss account as an expense.

For more help in adopting the new IFRS email