Financial Reporting · Financial Instruments: Scope and Definitions

Scope of Ind AS 109 and Scope Exclusions

Updated 5 October 2026

Ind AS 109 applies to all financial instruments, except those specifically excluded because another standard deals with them, such as subsidiaries, associates, joint ventures, leases, employee benefits, insurance contracts and share-based payments. To solve a question, identify the item, check the exclusion list, then check for exceptions that bring it back into Ind AS 109, and conclude.

Understand Scope of Ind AS 109 and Scope Exclusions

Ind AS 109 sets the rules for recognising, classifying, measuring, impairing and derecognising financial instruments, and for hedge accounting. Before you apply any of those rules, you must ask a first question: is this item inside the standard at all?

The default is wide. Ind AS 109 applies to all types of financial instruments. Then the standard removes items that are better dealt with elsewhere. The exclusion list exists to avoid two standards governing the same item.

The main exclusions to remember are: interests in subsidiaries, associates and joint ventures that are accounted for under Ind AS 110, Ind AS 27 or Ind AS 28 (with some exceptions); rights and obligations under leases under Ind AS 116; employers' rights and obligations under employee benefit plans under Ind AS 19; insurance contracts under Ind AS 117; financial instruments that are equity of the entity under Ind AS 32; and share-based payment transactions under Ind AS 102.

On group interests, keep consolidated and separate statements apart. In consolidated statements, subsidiaries fall under Ind AS 110 and associates and joint ventures under Ind AS 28. In separate financial statements, Ind AS 27 requires investments in subsidiaries, associates and joint ventures to be carried at cost or in accordance with Ind AS 109. The choice decides the scope. If the entity carries the investment at cost, it stays under Ind AS 27 and outside Ind AS 109. If the entity elects Ind AS 109, the investment is within Ind AS 109, so the exclusion does not apply to it. The equity method is not permitted in separate financial statements under Ind AS 27.

Many exclusions come with exceptions, and the exam tests those. For example, lease receivables and lease payables remain subject to the derecognition and impairment rules of Ind AS 109. A financial guarantee contract is generally within Ind AS 109 for the issuer. The exception is where the issuer has earlier asserted explicitly that it regards such contracts as insurance contracts and has used insurance accounting. Even when both limbs are met, the exclusion is not automatic: the issuer may elect, contract by contract, to apply Ind AS 109 or Ind AS 117. The election is open only to the issuer. This paragraph does not cover the holder of a financial guarantee contract, so you cannot use it to decide the holder's accounting.

Loan commitments need a careful split. Commitments designated at fair value through profit or loss, commitments that can be settled net, and commitments to provide a loan at a below-market interest rate are within the scope of Ind AS 109. All other loan commitments are outside it, except that its expected credit loss impairment requirements apply to them (unless they are measured at FVTPL). A lender with a past practice of selling the loans resulting from its commitments shortly after origination must apply Ind AS 109 to the commitments in the same class. A commitment to provide a loan at a below-market interest rate that is not designated at FVTPL is measured after initial recognition at the higher of the expected credit loss allowance and the amount initially recognised less, where appropriate, the cumulative income recognised.

A final group of items is contracts to buy or sell a non-financial item. They are within Ind AS 109 if they can be settled net in cash or in another financial instrument, unless they were entered into for the entity's expected purchase, sale or usage requirements (the own use exemption). Treat scope as a short checklist, not a memory dump.

Key rules to remember

Default rule: Ind AS 109 applies to all financial instruments unless specifically excluded; Start with inclusion, then test each exclusion.
Excluded: group interests: Subsidiaries, associates, joint ventures → Ind AS 110 / 27 / 28; Consolidated statements: subsidiaries under Ind AS 110; associates and joint ventures under Ind AS 28. Separate financial statements: Ind AS 27 requires cost or Ind AS 109 for subsidiaries, associates and joint ventures. The cost option keeps the holding under Ind AS 27, outside Ind AS 109. If the entity elects Ind AS 109, the holding is within Ind AS 109 and is not excluded. The equity method is not permitted there. Ind AS 109 also applies to derivatives on such interests unless they are equity instruments of the entity under Ind AS 32.
Excluded: leases: Leases → Ind AS 116; Exception: lease receivables are subject to Ind AS 109 derecognition and impairment; lease liabilities are subject to its derecognition rules; embedded derivatives in leases are within Ind AS 109.
Excluded: employee benefits: Employee benefit plans → Ind AS 19; Employers' rights and obligations only.
Excluded: insurance contracts: Insurance contracts → Ind AS 117; Exception: financial guarantee contracts are generally within Ind AS 109 for the issuer. If the issuer has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts, it may elect, contract by contract, to apply Ind AS 109 or Ind AS 117. The election is irrevocable for each contract and is open only to the issuer. This paragraph does not cover the holder of a financial guarantee contract.
Excluded: share-based payments: Share-based payment transactions → Ind AS 102; Share-based payment transactions within Ind AS 102 are excluded, except contracts within the scope of paras 2.4-2.7 of Ind AS 109, to which Ind AS 109 applies.
Loan commitments: Within Ind AS 109: designated FVTPL; net-settled; below-market-rate commitments. All others: outside, except ECL impairment; All other loan commitments are outside Ind AS 109, except that its ECL impairment requirements apply to them unless they are measured at FVTPL. A lender with a past practice of selling loans shortly after origination applies Ind AS 109 to commitments in the same class. A below-market-rate commitment not designated at FVTPL is measured after initial recognition at the higher of the ECL allowance and the initial amount less, where appropriate, the cumulative income recognised.
Commodity contracts: In scope if net-settlement is possible, unless own-use exemption applies; Own use means entered into and held to receive or deliver a non-financial item per expected purchase, sale or usage requirements.

How to solve Scope of Ind AS 109 and Scope Exclusions questions

Use the same sequence for every scope question. Write the conclusion in provision, facts, conclusion form.

1Identify the item and its nature: is it a financial asset, financial liability, equity instrument, derivative or a contract on a non-financial item?
2Check whether it appears on the exclusion list (group interests, leases, employee benefits, insurance, equity of the entity, share-based payments, and so on).
3If excluded, name the standard that governs it, for example Ind AS 116 for leases.
4Look for the exception that pulls part of the item back into Ind AS 109, such as lease receivables, financial guarantees or embedded derivatives.
5For loan commitments and commodity contracts, apply the specific tests: FVTPL designation, net settlement, below-market rate and own use.
6State the conclusion clearly: fully in scope, partly in scope or fully out of scope, and which standard applies.

Quickest way: Three-question scope screen

When to use it: Use it for MCQs and for short-answer parts where you must decide quickly.

Q1: Is another standard named for this item? If yes, it is likely excluded.
Q2: Is there a known exception (impairment, derecognition, embedded derivative, financial guarantee)? If yes, the part named stays in Ind AS 109.
Q3: Is it a contract on a non-financial item or a loan commitment? If yes, apply the net-settlement, own-use or designation tests.
Write the answer with the standard name and the reason in one line.

Common mistakes in Scope of Ind AS 109 and Scope Exclusions

Treating a lease as wholly outside Ind AS 109.
Students remember the exclusion but forget the exceptions.
Fix: Remember that lease receivables stay within Ind AS 109 for impairment and derecognition, and lease liabilities for derecognition.
Excluding every financial guarantee contract as insurance.
The word guarantee sounds like insurance.
Fix: Treat a financial guarantee as in scope of Ind AS 109 for the issuer. The insurance election is open only to the issuer, and only if it has previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting applicable to insurance contracts. Both limbs must be met, and even then the issuer may elect, contract by contract, between Ind AS 109 and Ind AS 117. The paragraph does not cover the holder of the guarantee.
Saying all loan commitments are within Ind AS 109.
Loans are financial instruments, so students assume commitments are too.
Fix: Commitments designated FVTPL, net-settled or at a below-market rate are within the scope of Ind AS 109. All other loan commitments are outside it, except that the ECL impairment requirements apply to them (unless FVTPL). A lender with a past practice of selling loans soon after origination must apply the standard to commitments in the same class.
Applying Ind AS 109 to all investments in subsidiaries and associates.
Investments are financial assets in everyday language.
Fix: In consolidated accounts, subsidiaries fall under Ind AS 110, and associates and joint ventures under Ind AS 28 (joint operations under Ind AS 111). In separate financial statements, Ind AS 27 requires cost or Ind AS 109 for subsidiaries, associates and joint ventures. At cost, the holding stays under Ind AS 27 and outside Ind AS 109. If the entity elects Ind AS 109, the holding is within Ind AS 109. The equity method is not permitted there.
Ignoring the own-use exemption for commodity contracts.
Students see a derivative-like contract and apply Ind AS 109 straight away.
Fix: Check whether the contract is held for expected purchase, sale or usage needs and has not been settled net in practice.

Worked examples

Example 1

Alpha Ltd, an Ind AS company, has the following: (a) a 60% holding in Beta Ltd, (b) a lease receivable from a lessee under a finance lease, (c) a trade receivable of ₹5,00,000 from a customer. Which of these is within the scope of Ind AS 109?

Show the solution

(a) In consolidated financial statements, an interest in a subsidiary is accounted for under Ind AS 110, so it is excluded from Ind AS 109. In Alpha's separate financial statements, Ind AS 27 permits cost or Ind AS 109 for the holding. If Alpha chooses cost, the holding stays under Ind AS 27 and outside Ind AS 109. If Alpha elects Ind AS 109, the holding is within Ind AS 109. The equity method is not permitted in separate financial statements under Ind AS 27.
(b) Leases are governed by Ind AS 116, but lease receivables are subject to the derecognition and impairment requirements of Ind AS 109. So this item is partly in scope.
(c) A trade receivable is a financial asset. It is within Ind AS 109, including expected credit loss impairment.

Answer: In consolidated statements the subsidiary holding is outside Ind AS 109. In separate statements it is outside Ind AS 109 if Alpha carries it at cost under Ind AS 27, and within Ind AS 109 if Alpha elects that option. The lease receivable is within Ind AS 109 for derecognition and impairment only. The trade receivable is fully within it.

Example 2

Gamma Ltd, a steel manufacturer, enters into a contract to buy 1,000 tonnes of iron ore from a supplier for its own production in the next quarter. The contract can be settled net in cash. Gamma has always taken physical delivery of such ore and has never settled net. Separately, Gamma has given a financial guarantee on a subsidiary's bank loan and has never asserted that it treats such guarantees as insurance contracts. Advise on the scope of Ind AS 109.

Show the solution

The iron ore contract is a contract to buy a non-financial item that can be settled net, so it is potentially within Ind AS 109.
Gamma entered into it, and holds it, to receive the ore for expected usage, and it has a history of taking delivery. The own-use exemption applies.
Therefore the ore contract is outside Ind AS 109 and is treated as an ordinary executory purchase contract.
The insurance election needs both limbs: a prior explicit assertion that Gamma regards such contracts as insurance contracts, and use of accounting applicable to insurance contracts. Gamma has made no such assertion, so the guarantee is not treated as insurance. It is within Ind AS 109 for the issuer.

Answer: The iron ore contract is outside Ind AS 109 under the own-use exemption. The financial guarantee contract is within Ind AS 109.

Exam tips

Write the governing standard against every excluded item, for example Ind AS 116, Ind AS 19, Ind AS 117 and Ind AS 102. Marks follow the naming.
Always state the exception after the exclusion. A one-line answer that says only excluded is usually incomplete.
In case-scenario MCQs, look for phrases such as net settlement, own use, below-market rate and designated at FVTPL. They decide the answer.
Answer in provision, facts, conclusion form and keep the conclusion to one clear line.

Practice questions from Financial Instruments: Scope and Definitions

Scope of Ind AS 109 and Scope Exclusions: frequently asked questions

What is excluded from the scope of Ind AS 109?

Main exclusions include interests in subsidiaries, associates and joint ventures, leases, employers' rights and obligations under employee benefit plans, insurance contracts, the entity's own equity instruments and share-based payments. Each is governed by another standard. Several have exceptions that bring part of the item back into Ind AS 109.

Are loan commitments within the scope of Ind AS 109?

Only some. Commitments designated at fair value through profit or loss, commitments that can be settled net, and commitments to provide a loan at a below-market interest rate are within the scope of Ind AS 109. All other loan commitments are outside it, except that its ECL impairment requirements apply to them unless they are measured at FVTPL. A lender with a past practice of selling loans soon after origination must apply the standard to commitments in the same class. A below-market-rate commitment not designated at FVTPL is measured at the higher of the ECL allowance and the initial amount less, where appropriate, the cumulative income recognised.

Are financial guarantee contracts within Ind AS 109?

For the issuer, generally yes. The exception is where the issuer has previously stated explicitly that it regards such contracts as insurance contracts and has used insurance contract accounting. Then it may elect, contract by contract, to apply Ind AS 109 or Ind AS 117, and the election is irrevocable for each contract. The election is open only to the issuer. This paragraph does not cover the holder of a financial guarantee contract.

When is a contract to buy a commodity within Ind AS 109?

When it can be settled net in cash or another financial instrument, and it does not qualify for the own-use exemption. If it was entered into to receive or deliver the commodity for expected purchase, sale or usage requirements, it is outside the standard.