A Ltd. purchases ₹ 10 lakh, 10%, five-year government bonds on 1 April 20X5, with semi-annual interest payable on 30 September and 31 March, for ₹…

Since the repurchase price is fixed at the outset, A Ltd. is precluded from de-recognising the bond. The transferee will be entitled to receive the interest due on 1 April 20X7 and 1 October 20X7 (i.e., ₹ 1 lakh), together with the difference between the repurchase price and sale price of ₹ 6,000. This represents a lender's return of 10.081% per annum on the sale price. Therefore, A Ltd. will continue to recognise the bond and the interest on it, as if it still holds the bonds. A Ltd. will also record a liability of ₹ 10.50 lakh for the proceeds received. This liability accretes to the amount payable on repurchase of ₹ 10.56 lakh at 1 October 20X7, using the effective interest rate method. A Ltd. will continue to recognise a notional interest income in the periods to 1 April 20X7 and 1 October 20X7, and it will also account for an equal amount of notional interest paid to the third party. On 1 October 20X7 following repurchase of the bond by A Ltd., the liability of ₹ 10.56 lakh will be eliminated, as shown below: Liability carrying value Particulars ₹ Liability at 1 October 20X6 10,50,000 Interest payable for the half year to 31 March 20X7 @ 10.081% 52,926 Notional cash paid to third party on 31 March 20X7* (50,000) Balance at 31 March 20X7 10,52,926 Interest payable for the half year to 30 September 20X7 @ 10.081% 53,074 Notional cash paid to third party on 30 September 20X7* (50,000) Balance at 30 September 20X7 10,56,000 Liability repaid on 1 October 20X7 at repurchase price (10,56,000) Nil * Third party will receive interest directly from the bond as legal owner. The transferee might be able to pledge or sell the bond during its period of ownership. In that situation, the transferor should reclassify the bond on its balance sheet as a loaned asset or repurchase receivable. Sale and repurchase transaction (net settled in cash) On 1 October 20X6, A Ltd. sells a bond at its fair value of ₹ 10.50 lakh to a third party, with an agreement to repurchase the bond on 1 October 20X7 for ₹ 10.56 lakh. The amortised cost of the bond at the sale date is ₹ 10,44,544. The repurchase contract is to be settled net in cash (i.e. A Ltd. will not physically receive the bond back at the settlement date). The fair value of the asset at the settlement date amounts to ₹ 10.60 lakh. This means that A Ltd. will receive an additional ₹ 4,000 from the third party. The fact that the forward repurchase agreement requires net settlement does not automatically lead to de-recognition. A Ltd. continues to recognise the asset. Since, A Ltd. will not physically receive the bond back, the bond will be de-recognised following receipt of the additional consideration of ₹ 4,000 at the settlement date. It would not be appropriate to continue to classify the bond as HTM at amortised cost. Instead, A Ltd. would need to reclassify the bond at FVTPL at the sale date of 1 October 20X6. The entries are shown below: Particulars ₹ Fair value of bond at 1 October 20X6 10,50,000 Amortised cost of bond at 1 October 20X6 (10,44,544) Gain 5,456 Therefore, A Ltd. will record the bond at its fair value of ₹ 10.50 lakh and a corresponding liability of ₹ 10.50 lakh. The liability accretes to the repurchase price of ₹ 10.56 lakh, using the effective interest rate method. At the settlement date of 1 October 20X7, immediately before de-recognition the bond will be fair valued to ₹ 10.60 lakh and a further gain of ₹ 10,000 will be recorded in P&L. Since the contract will be net settled in cash, the bond is then de-recognised. A Ltd. will record the following entries, from inception to settlement: Particulars Dr. ₹ Cr. ₹ Bank Dr. 10,50,000 To Liability 10,50,000 Bond at fair value Dr. 10,50,000 To Bond at HTM 10,44,544 To Gain on disposal (P&L) 5,456 Interest expense Dr. 6,000 To Liability 6,000 Bond at fair value (increase) Dr. 10,000 To P&L gain 10,000 Liability Dr. 10,56,000 Bank Dr. 4,000 To Bond at fair value 10,60,000 Although a forward repurchase agreement that requires net settlement in cash is economically equivalent to a deferred sale, A Ltd. cannot de-recognise the asset, because the risks and rewards of ownership have been retained until settlement.