Ind AS 109 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Ind AS 109 sets out how entities recognise, classify and measure financial assets and liabilities, impair them using a forward-looking expected credit loss model, and apply hedge accounting. It replaced Ind AS 39 and its incurred-loss approach with a principles-based framework.
Overview
Ind AS 109, Financial Instruments, notified under the Companies (Indian Accounting Standards) Rules, 2015, is the cornerstone standard for financial assets, financial liabilities and derivatives. It works alongside Ind AS 32 (presentation) and Ind AS 107 (disclosures). Its three pillars are classification and measurement, the expected credit loss (ECL) impairment model, and hedge accounting. The move from the older incurred-loss thinking to a forward-looking model was the single biggest change for banks, NBFCs and corporates alike.
Scope and Applicability
Ind AS 109 applies to all financial instruments except those specifically scoped out, such as interests in subsidiaries, associates and joint ventures (Ind AS 110/111/28), leases (Ind AS 116, though lease receivables attract ECL), and insurance contracts. It is applicable to companies covered by the Ind AS roadmap and is especially critical for lending institutions where impairment provisions materially affect capital.
Classification and Measurement
A financial asset is classified on the basis of two tests: the entity's business model for managing the asset, and whether the contractual cash flows are solely payments of principal and interest (SPPI). The outcomes are:
| Category | Business model | Cash flow test |
|---|---|---|
| Amortised cost | Hold to collect | SPPI met |
| FVOCI | Hold to collect and sell | SPPI met |
| FVTPL | Other / trading | SPPI failed or default |
Financial liabilities are generally measured at amortised cost, except those held for trading or designated at FVTPL. For liabilities designated at FVTPL, the change in fair value due to own credit risk is presented in OCI.
Expected Credit Loss Impairment
The ECL model requires a loss allowance to be recognised from day one, before any default. It uses three stages: Stage 1 carries a 12-month ECL, while Stages 2 and 3 carry lifetime ECL once credit risk has increased significantly or the asset is credit-impaired. Trade receivables and lease receivables typically use the simplified approach — lifetime ECL via a provision matrix.
Worked Example
An NBFC holds a ₹1,00,000 loan measured at amortised cost. At origination, the 12-month probability of default (PD) is 2%, loss given default (LGD) is 40%. The Stage 1 ECL = ₹1,00,000 × 2% × 40% = ₹800, recognised immediately. If the borrower's credit risk rises significantly, the loan moves to Stage 2 and lifetime PD (say 15%) applies: ECL = ₹1,00,000 × 15% × 40% = ₹6,000. The incremental ₹5,200 hits the profit and loss as an impairment charge.
Hedge Accounting
Hedge accounting is optional but, where elected, aligns accounting with risk management. Ind AS 109 recognises fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation. It requires formal documentation, an economic relationship between the hedged item and hedging instrument, and that the hedge ratio reflect actual quantities used. The rigid 80–125% effectiveness test of Ind AS 39 was removed in favour of an objectives-based assessment.
Key Differences from Ind AS 39
Ind AS 109 replaced the four rule-based categories of Ind AS 39 with three principles-based ones, shifted impairment from incurred to expected losses (advancing provisions), and made hedge accounting more accessible. Own-credit-risk gains on FVTPL liabilities now go to OCI, addressing the counter-intuitive result under the old standard.