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CA Final · Financial Reporting · Classification and Measurement of Financial Assets and Financial Liabilities

Varuna Textiles Ltd is preparing its first Ind AS financial statements and is reviewing how to classify its investment in a portfolio of corporate bonds. Under Ind AS 109, on which basis must a financial asset be classified as measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss (unless the fair value option applies)?

A financial asset is classified as amortised cost, FVOCI or FVTPL on the basis of both the entity's business model for managing the asset and the asset's contractual cash flow characteristics. Features such as maturity, rating, legal form or currency are not the classification basis under Ind AS 109.

  1. AThe entity's business model for managing the asset and the contractual cash flow characteristics of the assetCorrect
  2. BThe maturity of the asset and the credit rating of the issuer
  3. CThe intention of the board at each reporting date and the market price of the asset
  4. DThe legal form of the instrument and the currency in which it is denominated

Explanation

Paragraph 4.1.1 of Ind AS 109 requires classification on the basis of both the entity's business model for managing the financial assets and the contractual cash flow characteristics of the asset. Maturity, credit rating, legal form or currency are not the classification criteria. Board intention at each date is also not the test, since the business model is the basis.

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