IAS 32 – Financial Instruments: Presentation
What is a financial instrument? (2)
What is a financial asset? (4)
What is a financial liability? (2)
What is an equity instrument? (1)
IAS 32 – Financial Instruments: Presentation
What is a financial instrument?
- A contract that gives rise to a financial asset of one entity
- And a financial liability or equity instrument of another entity
What is a financial asset?
- Cash
- An equity instrument of another entity
- A contractual right:
- To receive cash or another financial asset from another entity
- To exchange financial assets or liabilities under favourable conditions
What is a financial liability?
- A contractual obligation:
- To deliver cash or another financial asset to another entity
- To exchange financial assets or liabilities under unfavourable conditions
What is an equity instrument?
- A contract evidencing residual interest in the assets of an entity after deducting liabilities
Presentation of Liabilities and Equity – IAS 32
When must a financial instrument be classified? (2)
How are redeemable and irredeemable preference shares classified? (3)
Can classification be changed after issue? (1)
Presentation of Liabilities and Equity – IAS 32
When must a financial instrument be classified?
- At initial recognition
- Based on its substance, not legal form
How are redeemable and irredeemable preference shares classified?
- Redeemable preference shares: classified as liabilities
- Irredeemable preference shares: classified as equity
- If there is a mandatory obligation to pay dividends, irredeemable shares are classified as liabilities
Can classification be changed after issue?
- No, classification is fixed at the date of issue
Interest, Dividends, Losses and Gains – IAS 32
How is the accounting treatment of interest, dividends, losses and gains determined? (1)
How are redeemable preference share dividends treated? (1)
How are irredeemable preference share dividends treated? (2)
Interest, Dividends, Losses and Gains – IAS 32
How is the accounting treatment of interest, dividends, losses and gains determined?
- It follows the classification of the financial instrument itself
How are redeemable preference share dividends treated?
- As finance costs in the Statement of Profit or Loss (SPL)
How are irredeemable preference share dividends treated?
- Taken through retained earnings in the Statement of Changes in Equity (SOCIE)
- If there is a mandatory obligation to pay dividends, treated as finance costs in SPL
IFRS 9 – Recognition
When are financial assets and liabilities initially recognised? (1)
How are transaction costs treated for financial assets? (1)
How are transaction costs treated for financial liabilities? (1)
What is fair value? (1)
IFRS 9 – Recognition
When are financial assets and liabilities initially recognised?
- At fair value (typically the amount paid or received)
How are transaction costs treated for financial assets?
- Added to the asset unless it is measured at fair value through profit or loss
How are transaction costs treated for financial liabilities?
- Deducted from the liability
What is fair value?
- The price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
Subsequent Treatment – Financial Liabilities (IFRS 9)
How are financial liabilities calculated in exams? (4)
What does the amortised cost table include? (4)
What is the effective interest rate? (3)
What is the coupon rate? (2)
Subsequent Treatment – Financial Liabilities (IFRS 9)
How are financial liabilities treated in exams?
- Held at amortised cost which is:
- Initial amount recognised
- Less any repayments of principal
- Plus any amortisation
What does the amortised cost table include?
- BF: Fair value (adjust for transaction costs)
- Amortisation (interest): BF amount × effective interest rate
- Minus Cash: Nominal value × coupon rate
- CF: Amortised cost
What is the effective interest rate?
- The rate that exactly discounts estimated future cash flows over the instrument’s life
- Charged to the Statement of Profit or Loss (SPL)
- Will be given in the exam
What is the coupon rate?
- The amount of interest paid
- Given as a percentage of nominal value (e.g. 6% redeemable preference shares)
Financial Assets – Equity Instruments
How are equity instruments classified for measurement? (2)
How are equity instruments treated under FVPL? (4)
How are equity instruments treated under FVOCI? (7)
Financial Assets – Equity Instruments
How are equity instruments classified for measurement?
- Fair value through profit or loss (FVPL)
- Fair value through other comprehensive income (FVOCI)
How are equity instruments treated under FVPL?
- Default category for equity instruments
- Transaction costs are expensed to profit or loss
- Investments revalued to fair value at year end
- Gains or losses shown in the statement of profit or loss
How are equity instruments treated under FVOCI?
- Designation must be made on acquisition
- Only allowed for long-term investments
- Cannot be changed to FVPL later
- Transaction costs are capitalised
- Investments revalued to fair value at year end
- Gains or losses shown in other comprehensive income
- Taken to an investment reserve in equity (can be negative)
_Financial Assets - Debt Instruments – Classification and Subsequent Treatment (IFRS 9)_
How are debt instruments classified for measurement? (3)
What determines classification into amortised cost or FVOCI? (3)
How are debt instruments classified for measurement?
- Fair value through profit or loss (FVPL) - default category
- Amortised cost
- Fair value through other comprehensive income (FVOCI)
Financial Assets - Debt Instruments – Amortised Cost and FVOCI Treatment
When can a financial asset be measured at amortised cost? (2)
How is amortised cost calculated? (4)
When can a financial asset be measured at FVOCI? (2)
What happens when a debt instrument is held at FVOCI?(4)
Amortised Cost – Key Points
When can a financial asset be measured at amortised cost?
- When it meets the business model test:
- The entity intends to hold the investment to maturity
- When it meets the contractual cash flow characteristics test (SPPI):
- Cash flows consist only of principal and interest
How is amortised cost calculated?
- Initial balance brought forward (fair value + transaction costs)
- Add interest income using effective interest rate
- Deduct payment received
- Closing balance carried forward
FVOCI Treatment
When can a financial asset be measured at FVOCI?
- When it meets the business model test:
- The entity intends to hold the investment to maturity but may sell the asset to buy another with a higher return
- When it meets the contractual cash flow characteristics test (SPPI):
- The contractual terms give rise to cash flows that are solely payments of principal and interest
What happens when a debt instrument is held at FVOCI?
- The asset is initially recognised at fair value plus transaction costs
- Interest income is calculated using the effective interest rate (same as amortised cost)
- At the reporting date, the asset is revalued to fair value with the gain or loss recognised in other comprehensive income
- The gain or loss in other comprehensive income is reclassified to profit or loss on disposal of the asset
Compound Instruments
When is a financial instrument a compound instrument? (2)
How is a convertible bond initially recorded? (3)
What is the liability component of a convertible bond? (1)
How is the liability component measured? (1)
What is the equity component of a convertible bond? (1)
How is the equity component measured? (1)
How are the components treated after initial recognition? (3)
Compound Financial Instruments – IAS 32
Compound Instruments – Key Points
When is a financial instrument a compound instrument?
- When it has characteristics of both equity and a liability
- Example: a convertible bond
How is a convertible bond initially recorded?
- Dr Cash
- Cr Liability (for the liability component)
- Obligation to pay annual interest and capital
- Measure by:
- Calculate PV of future cash flows using interest rate of equivalent bond with no conversion option as the discount rate.
- Cr Equity (for the equity component)
- The option to convert the bond into shares
- Measure by:
- Total value of the bond MINUS the liability element
How are the components treated after initial recognition?
- Liability and equity elements are shown separately in the statement of financial position
- Liability element is held at amortised cost
- Equity element stays the same
Treasury Shares – IAS 32
Part 1: Definition and Treatment
What are treasury shares? (2)
How are treasury shares accounted for? (3)
Treasury Shares – IAS 32
Part 1: Definition and Treatment
Treasury Shares – IAS 32
Part 2: Disclosure and Example
What are treasury shares? (2)
How are treasury shares accounted for? (3)
How can treasury shares be disclosed? (2)
How is a share buyback recorded in equity? (3)
What are treasury shares?
- Shares reacquired by a company
- Used as an alternative to dividends or returning excess capital to shareholders
How are treasury shares accounted for?
- Deducted from equity (shown as negative equity)
- No gain or loss recognised on purchase
- Consideration paid or received is recognised directly in equity
How can treasury shares be disclosed?
- On the face of the Statement of Financial Position (SFP)
- In the notes
How is a share buyback recorded in equity?
- Debit treasury shares for total consideration paid
- Credit cash for the same amount
- Original share capital and share premium remain unchanged
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Revision Pack39
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Revenue11
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Seminar 11
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IAS 21 The Effects of changes in Foreign Exchange Rates7
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IAS 33 Earnings per share8
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IAS 12 Deferred Tax12
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Seminar 25
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Accounting for Leases19
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Financial Instruments11
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Seminar 35
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Group Basics and Consolidated Statement of Financial Position23
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Earnings Management21
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Ethics15
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Seminar 44
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Corporate Governance13
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Narrative Reporting11
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Seminar 53
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Sustainability11
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Seminar 64
