Ind AS 109 — Financial Instruments

Imagine you lend your toy car to a friend. Ind AS 109 is a rule book that tells grown-ups how to write down on paper what happens to that car — is it still yours? Will you get it back? That's what banks and companies do with real money! 🚗

When you lend money, two big questions matter. First: do you plan to keep the loan until it's paid back, or sell it to someone else? Second: will the borrower only pay back exactly what they owe, with interest? Like your lemonade stand — if someone promises "I'll pay you 50 cents plus 5 cents interest, no tricks," that's simple and safe. If they say "maybe I'll pay you less, or extra," it's tricky. These tests help accountants decide how to record the money in books.

Here's a story. Sarah's mum lends £100 to Aunt Kate and expects to get it back in five years with interest. Sarah's mum writes down "loan = £100" and each year marks down the interest she earned. But one day, Aunt Kate loses her job. Sarah's mum thinks, "Oh no, Aunt Kate might not pay me back!" So she writes down, "I might lose £20." This guessing game about money that might not come back — that's called Expected Credit Loss. It has three stages: healthy loan (watch for 12 months), worried loan (watch forever), and broken loan (already broken, watch forever and write it down). 💔

The big-kid trick: accountants choose how to show the loan based on plans and promises. Hold it forever and it's safe? Show it at "amortised cost" (real value that shrinks as interest is paid). Plan to sell it soon? Show it at "fair value" (today's market price). This matters because it changes profits on the page — and that's how grown-ups know if a bank is strong or weak!