IAS 32: FINANCIAL INSTRUMENTS: PRESENTATION
IAS 32
IAS 32 - Presentation and classification of Financial Instruments
IFRS 9 - (Old ISA 39) – Recognition and measurement principles of financial instruments
IFRS 7 – Disclosure (Hons)
What is a Financial Instrument? (def para 13):
❖ [1] Must be a contract
❖ With 2 parties:
o [2] Issuer:
▪ Party who acquires the money and has an obligation to pay back the money.
▪ [4] Recognises a FINANCIAL LIABILITY, EQUITY or a COMPOUND
INSTRUMENT (Has two components: both a financial liability (loan) and an equity
component) (ct).
o [3] Holder:
▪ Provides the money to the Issuer
▪ Makes the investment.
▪ [4] RECOGNISES A FINANCIAL ASSET (dt)
• Loan receivable
• Investment
OBJECTIVE (Par .02)
− Presentation of financial instruments (FI) as liabilities or equity (THUS FROM THE ISSUER’S
PERSPECTIVE).
− Offsetting is possible (certain rules)
− BIG QUESTION: when is something EQUITY? (purpose)
− Classification of interest (P/L or OCI), dividends and transaction costs (Capitalize/not – IFRS 9).
SCOPE (Par .04)
DEFINITIONS (Par .11 - .14)
− Financial instrument:
o [1] Must be contract between parties (Not necessarily written)
o [2] Gives rise to a financial asset for the holder
o [3] Gives rise to a financial liability/equity instrument for the issuer
o E.g. investment in shares issued by Naspers (as they require capital)
▪ Naspers: Dt Bank (SFP); Ct Equity (SFP)
▪ Investor: Dt: Financial asset (SFP); Ct Bank (SFP)
▪ Thus a financial instrument in terms of IAS 32,
− Equity instrument:
o (i.e. your own shares).
o Normally share capital
o Refer to definition in Para 16
o Equity = Assets – Liabilities
− Financial Asset:
o (a) Cash = bank, petty cash, etc.
o (b) Equity instrument of another entity = investment in shares
o (c)(i) Receive cash (debtor/loan receivable)/another fin asset (debtor settles debt by issuing
shares)
o (c)(ii) E.g. FEC on which you make profit → FEC asset
− Financial Liability:
o (a)(i) (creditor/loan payable)
o (a)(ii) E.g. FEC contract on which you have made a loss
− Fair value:
o orderly transaction (ie. not forced).
o market participants (independent, knowledgeable, willing, able).
o under current market conditions, in other words, an exit price.
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, EXAMPLES (FI or NOT?) AG3-AH29
AG3 Cash, deposits, etc. Yes Financial Asset
AG4 Trade debtors/creditors Yes Financial Asset
Financial Liability
AG4 Loans payable/receivable Yes Financial Liability
Financial Asset
Accrued expenses/income Yes, contractual obligation to Financial Liability
deliver cash, contractual right Financial Asset
to receive cash.
AG6 Debentures Yes Financial Asset
Financial Liability
AG8 Contingent right/obligation Yes Financial Asset
Financial Liability
AG9 Finance lease Yes Financial Liability
Financial Asset
Operating lease received/paid No Normal asset/liability.
in advance
Dt Lease expense (P/L) AND
Ct Bank (SFP) AND Dt Lease
paid in advance (SFP)
Operating lease pmts due and Yes, obligation to pay Financial Liability
payable (accrued expenses) expenditure in cash. Financial Asset
AG10 Inventory, PPE, intangible No Normal asset
assets
AG11 Prepaid expenses/ income No Normal asset and liability.
received in advance
Dt Prepaid exp. (SPF)
Ct Bank (SFP)
Dt Bank (SFP)
Ct Income received in
advance (SFP)
AG12 Income tax (SARS); D/T No, Statutory obligation. Normal asset and liability.
Refund from SARS
Allowance for credit losses No, not contract and no
obligation to deliver/receive
cash.
Non-controlling interest Yes/No
But not in terms of this
standard (excluded in scope)
Investment in shares (equities) Yes
PRESENTATION (Par .15-.95)
Liabilities and equity:
− .15: Substance over form: not merely look at the definitions
− .16: Detailed definition of “Equity”
o (a): Basically not a Financial Liability
o (b): If represents a fixed amount/number of shares = equity for FA379 purposes
▪ Assume → convertible into fixed number of ordinary shares = equity.
o Conclusion: Equity → no obligation for settlement other than own shares.
− Issuer: Financial Liability or Equity Instrument?
o Consider terms of FI during & @ end of lifetime
▪ During? Concerns the Cash flows and obligation of issuer in terms of FI.
• Interest or dividends payments?
▪ End?
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IAS 32
IAS 32 - Presentation and classification of Financial Instruments
IFRS 9 - (Old ISA 39) – Recognition and measurement principles of financial instruments
IFRS 7 – Disclosure (Hons)
What is a Financial Instrument? (def para 13):
❖ [1] Must be a contract
❖ With 2 parties:
o [2] Issuer:
▪ Party who acquires the money and has an obligation to pay back the money.
▪ [4] Recognises a FINANCIAL LIABILITY, EQUITY or a COMPOUND
INSTRUMENT (Has two components: both a financial liability (loan) and an equity
component) (ct).
o [3] Holder:
▪ Provides the money to the Issuer
▪ Makes the investment.
▪ [4] RECOGNISES A FINANCIAL ASSET (dt)
• Loan receivable
• Investment
OBJECTIVE (Par .02)
− Presentation of financial instruments (FI) as liabilities or equity (THUS FROM THE ISSUER’S
PERSPECTIVE).
− Offsetting is possible (certain rules)
− BIG QUESTION: when is something EQUITY? (purpose)
− Classification of interest (P/L or OCI), dividends and transaction costs (Capitalize/not – IFRS 9).
SCOPE (Par .04)
DEFINITIONS (Par .11 - .14)
− Financial instrument:
o [1] Must be contract between parties (Not necessarily written)
o [2] Gives rise to a financial asset for the holder
o [3] Gives rise to a financial liability/equity instrument for the issuer
o E.g. investment in shares issued by Naspers (as they require capital)
▪ Naspers: Dt Bank (SFP); Ct Equity (SFP)
▪ Investor: Dt: Financial asset (SFP); Ct Bank (SFP)
▪ Thus a financial instrument in terms of IAS 32,
− Equity instrument:
o (i.e. your own shares).
o Normally share capital
o Refer to definition in Para 16
o Equity = Assets – Liabilities
− Financial Asset:
o (a) Cash = bank, petty cash, etc.
o (b) Equity instrument of another entity = investment in shares
o (c)(i) Receive cash (debtor/loan receivable)/another fin asset (debtor settles debt by issuing
shares)
o (c)(ii) E.g. FEC on which you make profit → FEC asset
− Financial Liability:
o (a)(i) (creditor/loan payable)
o (a)(ii) E.g. FEC contract on which you have made a loss
− Fair value:
o orderly transaction (ie. not forced).
o market participants (independent, knowledgeable, willing, able).
o under current market conditions, in other words, an exit price.
1
, EXAMPLES (FI or NOT?) AG3-AH29
AG3 Cash, deposits, etc. Yes Financial Asset
AG4 Trade debtors/creditors Yes Financial Asset
Financial Liability
AG4 Loans payable/receivable Yes Financial Liability
Financial Asset
Accrued expenses/income Yes, contractual obligation to Financial Liability
deliver cash, contractual right Financial Asset
to receive cash.
AG6 Debentures Yes Financial Asset
Financial Liability
AG8 Contingent right/obligation Yes Financial Asset
Financial Liability
AG9 Finance lease Yes Financial Liability
Financial Asset
Operating lease received/paid No Normal asset/liability.
in advance
Dt Lease expense (P/L) AND
Ct Bank (SFP) AND Dt Lease
paid in advance (SFP)
Operating lease pmts due and Yes, obligation to pay Financial Liability
payable (accrued expenses) expenditure in cash. Financial Asset
AG10 Inventory, PPE, intangible No Normal asset
assets
AG11 Prepaid expenses/ income No Normal asset and liability.
received in advance
Dt Prepaid exp. (SPF)
Ct Bank (SFP)
Dt Bank (SFP)
Ct Income received in
advance (SFP)
AG12 Income tax (SARS); D/T No, Statutory obligation. Normal asset and liability.
Refund from SARS
Allowance for credit losses No, not contract and no
obligation to deliver/receive
cash.
Non-controlling interest Yes/No
But not in terms of this
standard (excluded in scope)
Investment in shares (equities) Yes
PRESENTATION (Par .15-.95)
Liabilities and equity:
− .15: Substance over form: not merely look at the definitions
− .16: Detailed definition of “Equity”
o (a): Basically not a Financial Liability
o (b): If represents a fixed amount/number of shares = equity for FA379 purposes
▪ Assume → convertible into fixed number of ordinary shares = equity.
o Conclusion: Equity → no obligation for settlement other than own shares.
− Issuer: Financial Liability or Equity Instrument?
o Consider terms of FI during & @ end of lifetime
▪ During? Concerns the Cash flows and obligation of issuer in terms of FI.
• Interest or dividends payments?
▪ End?
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