IAS 32 : PRESENTATION OF FINANCIAL INSTRUMENTS

Rajesh Kevin Sanjay

2Overview Definition of Financial Instruments

History of IAS 32

Objective and Scope of IAS 32

Categorizing Financial Instruments

IAS 32 Liabilities and Equity

Disclosures

Fair Value Option

Puttable Instruments

Classification of Puttable Instruments

Offsetting

Amendments

3Definition of Financial Instruments

IAS 32/39 - 3

Financialasset

• Cash• Equity instrument of

another entity• Contractual right to

receive cash or another financial asset or to exchange financial assets or liabilities under potentially favourable conditions

• Certain contracts settled in the entity’s own equity

Financialliability

Equity instrument

• Contractual obligation to deliver cash or another financial asset or to ex-change financial asset or liabilities under potentially unfavourable conditions

• Certain contracts settled in the entity’s own equity

• Contract evidencing a residual interest in the assets of an entity after deducting all of its liabilities

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity

4Financial Instruments

Majority of the items on the balance sheet are financial instrument with the exception of;

Inventories

Prepaid

Plant and properties

5History of IAS 32September 1991 Exposure Draft E40 Financial Instruments

January 1994 E40 was modified and re-exposed as Exposure Draft E48 Financial Instruments

June 1995 The disclosure and presentation portion of E48 was adopted as IAS 32Financial Instruments: Disclosure and Presentation

1 January 1996 Effective date of IAS 32 (1995)

December 1998 IAS 32 was revised by IAS 39, effective 1 January 2001

17 December 2003 Revised version of IAS 32 issued by the IASB

1 January 2005 Effective date of IAS 32 (2003)

18 August 2005 Disclosure provisions of IAS 32 are replaced by IFRS 7 Financial Instruments: Disclosures effective 1 January 2007. Title of IAS 32 changed to Financial Instruments: Presentation

6IAS 32 History Cont’d

22 June 2006 Exposure Draft of proposed amendments relating to Puttable Instruments and Obligations Arising on Liquidation

14 February 2008 IAS 32 amended for Puttable Instruments and Obligations Arising on Liquidation

1 January 2009 Effective date of amendments for puttable instruments and obligations arising on liquidation

6 August 2009 Exposure Draft Classification of Rights Issues proposing to amend IAS 32

8 October 2009 Amendment to IAS 32 about Classification of Rights Issues

1 February 2010 Effective date of the October 2009 amendment

16 December 2011 Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) issued

17 May 2012 Amendments resulting from Annual Improvements 2009-2011 Cycle (tax effect of equity distributions).

1 January 2013 Effective date of May 2012 amendments (Annual Improvements 2009-2011 Cycle)

1 January 2014 Effective date of December 2011 amendments

7Objective of IAS 32

IAS 32: deals with presentation from the perspective of the issuer. It also provide guidance on the classification of related interest, dividends and gains/losses, and when financial assets and financial liabilities can be offset.

IAS 32 addresses such cases in the following number of ways Clarifying the classification of a financial instrument issued by an

entity as a liability or equity

Prescribing the accounting for treasury shares

Prescribing strict conditions under which assets and liabilities may be offset in the balance sheet

8Scope of IAS 32

IAS 32 involves the presenting and disclosure of information about all types of financial instruments with the exception of; Interest in subsidiaries, associates and joint venture that are

accounted for under IAS 27, IAS 28 and IAS 31

Employers’ rights and obligations under IAS 19

Insurance contracts, but its IAS 32 applies to derivatives that are integrated in insurance contracts

Financial instruments with IFRS 4

Contracts and obligations under IFRS 2

9Categorizing Financial Instruments

Financial instruments are categorized into 4 categories which are; Financial asset or liability at fair value through profit or loss

Held-to-maturity investments

Loans and receivables

Available-for-sale financial assets

10Categorization of Financial Assets

Category Definition

Financial assets at fair value through profit or loss

• Financial assets held for trading• Derivatives, unless accounted for as hedges• Financial asset designated to this category

under the fair value option

Loans and receivables Non-derivatives financial assets with fixed or determinable payments that are not quoted in an active market

Held-to-maturity Non-derivative financial assets with fixed or determinable payments and fixed maturity that the entity has the positive intent and ability to hold to maturity

Available-for-sale financial assets

• All financial assets that are not classified in another category are classified as available-for-sale

• Any financial asset designated to this category on initial recognition

11Categorization of Financial Liabilities

Category Definition

Financial liabilities at fair value through profit or loss

• Financial liabilities held for trading• Financial liability designated as at

fair value through profit of loss on initial recognition

Other financial liabilities- at amortised cost

All financial liabilities that are not classified at fair value through profit or loss

12IAS 32 – Liability and Equity

•Classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.

•If a financial instrument contains both a liability and an equity element, the instrument’s component parts should be classified separately.

•Debt Securities with an embedded conversion option, such as a convertible bond, should be separated into the liability component and the equity component on the balance sheet.

13IAS 32 – Liability and Equity

Liability Contractual obligation to deliver cash or

another financial asset.– Mandatory redeemable preference shares.– A “puttable instrument” by the holder.

Liability if the obligation is conditional.– Conditional upon approval by regulatory authority.– Conditional upon the counter-party exercising its

right to redeem.

14IAS 32 – Liability and Equity

Settlement in the entity’s own equity instrument.

Not an equity instrument solely because settlement is through delivery or receipt of the entity’s own equity.

Liability if the contractual obligation is a fixed amount so that the value of the equity instrument equals the amount of contractual obligation.

Settlement options

When a derivative financial instrument gives one party a choice over how it is settled (e.g. the issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial liability unless all settlement alternatives would result in it being an equity instrument.

15IAS 32 – Liability and Equity

Contingent settlement provision Liability if the obligation to deliver cash or another financial instrument

arises only on the occurrence or non-occurrence of uncertain future events that are beyond the control of both the issuer and holder, unless

The contingent event is restricted only in the event of liquidation of the issuer; or

The contingent event that trigger the obligation is considered to be not genuine.

16IAS 32 – Liability and Equity

Treasury Shares Acquisition of own equity instruments (treasury shares) should be

deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments.

However, an obligation to purchase own equity instruments for cash or another financial asset gives rise to a financial liability for the present value of the redemption amount.

17IAS 32 – Liability and Equity

Compound Instrument An financial instrument that contains both liability and equity components

should be classified and presented separately.

Example: A bond that is convertible, either mandatory or at the option of the holder into equity shares of the issuer.

Method of separating the liability and equity component The liability component is fair valued first, and this provides the initial

carrying amount of the liability component.

The fair value of the liability component is then deducted from the fair value of the instrument with the residual amount representing the equity component.

Transaction costs are usually allocated to the liability and equity components based on proportion of fair value.

18IAS 32 – Liability and Equity

Interest, Dividends, Losses and Gains Interest, dividends, losses and gains relating to a financial instrument

or a component that is a financial liability shall be recognized as income or expense in profit and loss.

Distributions to holders of an equity instrument shall be debited by the entity directly to equity.

19Disclosure of IAS 32

An enterprise should describe its financial risk management objectives and policies, including hedging policies.

For each class of financial asset, financial liability, and equity, both recognised and unrecognised, IAS 32 requires disclosure of: The extent and nature of the financial instruments, including significant

terms and conditions (including principal amount, maturity, early settlement or conversion options, amount and timing of cash flows, stated interest or dividend rates, collateral held or pledged, denomination in a foreign currency, and restrictive conditions and covenants)

Accounting policies and methods adopted, including recognition criteria and measurement principles

Specified information about exposure to interest rate risk (including re-pricing dates and effective interest rates);

20Disclosure of IAS 32 cont’d

Specified information about exposure to credit risk (including amounts and significant concentrations);

Specified information about the fair value of the financial instrument, or a statement that it is not practicable to provide such information;

Special information if a financial asset is carried in excess of its fair value (the impairment provisions of IAS 39 would generally prohibit this).

21Fair Value Option

Fair Value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

Designation of financial instruments as at fair value through profit or loss is permitted, when

The designation eliminates or significantly reduces “accounting mismatches”

A group of financial assets and/or liabilities is managed on a fair value basis

An embedded derivative that meets particular conditions

Only available at initial recognition

Designation is irrevocable

No requirement for consistency, meaning that an entity can choose which, if any, of its financial instruments are to be designated

22Puttable Instrument

 A financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on occurrence of an uncertain future event or the death or retirement of the instrument holder.

23Classification of Puttable Instruments

Puttable instruments are classified as either a financial liability or an equity instrument according to the substance of the contract, not its legal form, and the definitions of financial liability and equity instrument in IAS 32. Two exceptions from this principle are certain puttable instruments meeting specific criteria and certain obligations arising on liquidation 

24Offsetting

IAS 32 also prescribes rules for the offsetting of financial assets and financial liabilities. It specifies that a financial asset and a financial liability should be offset and the net amount reported when, and only when, an entity

has a legally enforceable right to set off the amounts; and

intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

25Amendment

The IASB decided to amend IAS 32 to clarify certain aspects because of diversity in application that was identified during the IASB constituent outreach.

The project to amend IAS 32 focused on four main areas: The meaning of 'currently has a legally enforceable right of set-off'

The application of simultaneous realisation and settlement

The offsetting of collateral amounts

The unit of account for applying the offsetting requirements.

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QUESTIONS?