IAS 32:Financial Instrument: Presentation

IAS 32: Financial Instruments: Presentation

(The recognition and measurement and disclosure is discussed the earlier post)

Application

• Classification of financial instruments between:
• Financial assets;
• Financial liabilities; and
• Equity instruments.
• Presentation and effect of financial instruments and the related interest, dividends, losses and gains.
• Disclosure of:
• Factors affecting the amount, timing and certainty of cash flows;
• The use of financial instruments and the business purpose they serve; and
• The associated risks and management’s policies for controlling those risks.

Scope

• This standard should be applied in presenting and disclosing information about all types of financial instrument, both recognized and unrecognized, except for financial instrument that are dealt with by other standards, i.e.
• Interest in subsidiaries, associates, and joint ventures accounted for under IAS 21, IAS 28 and IAS 31 respectively;
• Contracts for contingent consideration in a business combination under IFRS 3 (only applies to the acquirer );
• Employers’ rights and obligations under employee benefit plans, to which IAS 18 applies;
• Certain insurance contracts accounted for under IFRS 4; and
• Financial instruments, contracts and obligations under share-based payment transactions to which IFRS 2 applies (unless relating to treasury shares).

Definitions

1. A financial asset is any asset that is:
1. Cash;
2. A contractual right to receive cash or another financial asset from another entity;
3. A contractual right to exchange financial instrument with another entity under conditions that are potentially favorable;
4. An equity instrument of another entity; or
5. Certain contracts that will (or may) be settled in the entity’s own equity instruments.
2. A financial liability is any liability that is a contractual obligation:
1. To deliver cash or another financial asset to another entity;
2. To exchange financial instrument with another entity under conditions that are potentially unfavorable; or
3. Certain contracts that will (or may) be settled in the entity’s own equity instruments.
3. An equity instrument is any contract that evidences a residual interest in the asset of an entity after deducting all of its liabilities.
4. Fair Value is the amount for which an asst could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Presentation

Liability and equity

• On issue, financial instruments should be classified as liability or equity in accordance with the substances of the contractual arrangement on initial recognition.
• Some financial instruments may take the legal form of equity, but are in substance liabilities.
• An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

Settlement in own equity instruments

• A contract is not an equity instrument solely because it may result in the receipt or delivery of the entity’s own equity instruments.
• A financial liability will arise when:
• There is a contractual obligation to deliver cash or another financial asset, to exchange financial assets or financial liabilities under conditions that are potentially unfavorable to the issuer:
• There is a non derivative contract to deliver or to be required to deliver, a variable number of own equity instruments,
• There is a derivative that will or may be settled other then by issuing a fixed number of on equity instruments.
• An equity instrument will arise when:
• There is a non derivative contract to deliver, or be required to deliver a fixed number of own equity instruments.
• There is a derivative that will or may be settled other than by issuing a fixed number of own equity instruments.

Offset

• Financial assets or liabilities must be offset where the entity:
• Has a legal right offset; and
• Intends to settle on a net basis or to realize the asset and settle the liability simultaneously.

Interest, dividends, losses and gains

• Interest, dividends, losses and gains relating to financial instrument (or a component) that is classified as a liability, shall be recognized in the profit or loss as income or expense.
• Dividend on preference shares classified as financial liability are accounted foe as an expenses rather than as distributions of profit.
• Distribution to holder of equity instrument should be debited directly to equity.
• Gains or losses on refinancing or redemption of a financial instrument are classified as income/expense or equity according to the classification of the instrument.
• Transaction cost relating to the issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds.

Compound instruments

Presentation

• Financial instrument that contain both a liability and an equity element are classified into separate component parts.
• As an example convertible bonds are primary financial liabilities of the issuer which grant an option to the holder to convert them into equity instruments in the future. Such bonds consist of:
• The obligation to repay the bonds, which should be presented as a liability: and
• The option to convert, which should be presented in equity.

Carrying amounts

• The equity component I the residual amount after deduction of the more easily measurable debt component from the value of the instrument as a whole.

Contingent settlement provisions

• An entity may issue a financial instrument where the rights and obligations regarding the manner of settlement depend on the outcome of uncertain future events that are beyond the control of both the issuer and the holder of the instrument.
• As the issuer of the instrument does not have the unconditional right to avoid delivering cash or another financial asset, the instrument shall be classified as financial liability.

Treasury shares

• If an entity acquires its own equity instrument, those instruments (‘’treasury shares’’) are deducted form equity.
• No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments.
• Such treasury shares may be acquired and held by the entity or by other members of the consolidated group.
• Consideration paid or received is recognized directly in equity.
• The amount of treasury shares held is disclosed separately either on the face of the balance sheet or in the notes, in accordance with IAS 1.