PAS 32 - Financial Instruments; Presentation

• PAS 32 provides guidance in presenting financial instruments as liabilities or equity, in offsetting financial assets and financial liabilities, and in classifying financial instruments from the perspective of the issuer, into financial assets , financial liabilities and equity instruments
• PAS 32 applies to all types of financial instruments and to commodity contracts that are not financial instruments but can be settled net, except the following for which other standards apply;

  1. investment in subsidiaries, associates and joint ventures
  2. employer's rights and obligations under employee benefit plans and share-based payments; and
  3. insurance contracts
• A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.
• Financial asset - is any asset that is:

  1. Cash
  2. an equity instrument of another entity
  3. A contractual right to exchange financial instruments with another entity under potentially favourable conditions or
  4. A contract that will or may be settled in the entity's own equity instrument and is not classified as the entity's own equity instrument
• Financial liability - is any liability that is;

  1. a contractual obligation to deliver cash or another financial asset to another entity
  2. a contractual obligation to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
  3. a contract that will or may be settled in the entity's own equity instrument and is not classified as the entity's own equity instrument
• equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities
• The term "financial instrument" encompasses both financial assets and financial liabilities but not the entity's own equity instrument
• Examples of financial assets

  1. cash and cash equivalent such as cash on hand, in bank, short term money placements, and cash funds
  2. Receivables such as accounts, notes, loans, and finance lease receivables
  3. Investments on equity or debt instruments of other entities such as held for trading securities, investments
  4. Sinking fund and other long term funds composed of cash and other financial assets
• The following are not Financial Asset;

  1. physical assets
  2. Intangible assets
  3. Prepaid expenses and advances to suppliers
  4. the entity's own equity instrument
• example of financial liabilities;

  1. payables
  2. Lease liabilities
  3. Held for trading liabilities and derivative liabilities
  4. redeemable preference shares issued
  5. security deposits and other returnable deposits
• the issuer classifies a financial instrument or its components parts as a financial asset, a financial liability, or an equity instrument in accordance with the substance of the contract rather than its legal form and the definitions of a financial asset, a financial liability and an equity instrument.
• When determining whether a financial instrument is an asset, liability or an equity instrument, the overriding consideration is whether the instrument meets the definition of a financial liability
• Difference between financial liability and equity instrument

  A) obligation to pay cash

  B) no obligation

  
• financial liability and equity instrument

  A) delivery

  B) variable

  C) equity instrument

  D) fixed amount

  E) fixed number

  F) variable amount

  G) receive

  H) delivery (receipt)

  I) fixed

  J) fixed

  
• an essential feature of an equity instrument is the absence of a contractual obligation
• redeemable preference shares and callable preference shares

  A) redeemable

  B) holder

  C) redeem

  D) financial

  E) liabiliti

  F) issuer

  G) call

  H) equity

  I) instrument

  J) no obligation

  
• member's shares in a cooperative entities and similar instruments are equity if:

  1. the entity has an unconditional right to refuse redemption of the member's shares; or
  2. Redemption is unconditionally prohibited by law or relevant regulation
• a compound financial instrument is a financial instrument, that from the issuer's perspective, contains both liability and an equity component. These components are classified and accounted for separately.
• treasury shares are an entity's own shares that were previously issued but were subsequently reacquired by the entity but not retired.
• Treasury shares are presented separately either in the SoFP or in the notes as deduction from equity.
• interest, dividends, losses and gains that relate to financial liability are recognized as income or expenses in profit or loss
• interest, dividends, losses and gains that relate to equity instrument are recognized directly to equity
• premium or discount on financial liability is included in the carrying amount of the financial liability and subsequently amortized to profit or loss. On the other hand, premium or discount on equity instruments are recognized as changes in equity.
• Gains and losses on redemptions or refinancings of financial liabilities are recognized in P and L , while redemptions or refinancing of equity instrument are recognized as changes in equity
• Changes in FV of a financial liability are generally not recognized unless it is measured at FV through profit or loss. Changes in FV of an equity instrument are not recognized.
• transaction cost on issuing equity instrument to the extent that they are avoidable costs are accounted for as deductions from equity while transaction costs on issuing financial liabilities are included in the CA of the liability and subsequently amortized to P and L
• The transaction cost on issuing a compound financial instrument and to those more than one transaction are allocated based on their values and rational basis of allocation
• the cost of an abandoned equity transaction are recognized as expense
• a financial asset and a liability are offset and only the net amount is presented in the SoFP when the entity has both;

  1. legal right of setoff; and
  2. an intention to settle the amounts on a net basis or simultaneously
• offsetting is inappropriate for;

  1. financial or other assets that are pledged as a collateral for non-recourse financial liabilities; and
  2. sinking fund and the related financial liability