IAS rules & Regulations for presenting financial instruments (Summary)

1. IAS 32 Presentation of Financial Instruments

2. PRESENTATION
AGENDA
OVERVIEW
OBJECTIVE OF IAS 32
DEFINITIONS
DISTINCTION BWTWEEN EQUITY & LIABILITIES
COMPOUND FINANCIAL INSTRUMENTS
TREASURY SHARES
IAS 32 PRESENTATION OF
FINANCIAL INSTRUMENTS
OFFSETTING

3. OVERVIEW
INTERNATIONAL FINANCIAL REPORTING STANDARDS
(IFRS) & INTERNATIONAL ACCOUNTING STANDARS (IAS)
Three IFRS covering the area of the most complex
IFRS topic – Financial Instruments
IAS 32 Presentation of Financial Instruments
IFRS 7 Financial Instruments: Disclosures
IFRS 9 Financial Instruments
Basic definitions and rules for
presenting of financial
instruments
List of all necessary
information that you need to
include in the notes
All the rules about the
recognition, de-recognition,
measurement of financial
instruments
IAS 32
IFRS 7
IFRS 9

4. OBJECTIVES
IAS 32: PRESENTATION OF
FINANCIAL INSTRUMENTS
“
“
“
Establishes PRINCIPLES
for presenting the
financial instruments
Providing DEFINITIONS of financial instruments
Showing how to distinguish EQUITY from LIABILITIES
Containing the guidance for COMPOUND FINANCIAL
INSTRUMENTS
Prescribing the rules for presenting the TREASURY
SHARES
Stating conditions when one can OFFSET A FINANCIAL
ASSET AND A FINANCIAL LIABILITY in statement of
financial position

5. DEFINITIONS
IAS 32: PRESENTATION OF
FINANCIAL INSTRUMENTS
Financial Instrument
Contract
Financial Asset
Financial Liability
Equity Instruments
01
02
03
04
05
“
“
International Accounting
Standards 32 (IAS 32) provides
DEFINITIONS of financial
instruments and terms associated
with it to clarify the whole
presentation of the financial
instruments

6. DEFINITIONS
IAS 32: PRESENTATION OF
FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENT
Contract
Financial Asset
Financial Liability
Equity Instruments
01
02
03
04
05
A financial instrument is any
CONTRACT that gives rise to a
financial asset of one entity and a
financial liability or equity
instrument of another entity.
(IAS 32.11)
FINANCIAL INSTRUMENT
“
“

7. DEFINITIONS
IAS 32: PRESENTATION OF
FINANCIAL INSTRUMENTS
Financial Instrument
CONTRACT
Financial Asset
Financial Liability
Equity Instruments
01
02
03
04
05
CONTRACT
“
“
The main difference
between the financial
instruments and other
assets and liabilities: a
Contract

8. DEFINITIONS
IAS 32: PRESENTATION OF
FINANCIAL INSTRUMENTS
Financial Instrument
Contract
FINANCIAL ASSET
Financial Liability
Equity Instruments
01
02
03
04
05
FINANCIAL ASSET
“
“
In line with IAS 32.11, a financial asset is any
asset that is:
Cash
An Equity Instrument Of Another Entity
A Contractual Right to:
A Contract that will or may be settled in the
entity’s own equity instruments and is:
Receive cash or another financial asset from another
entity.
Exchange financial assets or financial liabilities with another
entity under conditions that are potentially favorable to the
entity.
A non-derivative obliged to receive a variable number of
the entity’s own equity instruments
A derivative settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed
number of the entity’s own equity instruments

9. DEFINITIONS
IAS 32: PRESENTATION OF
FINANCIAL INSTRUMENTS
Financial Instrument
Contract
FINANCIAL ASSET
Financial Liability
Equity Instruments
01
02
03
04
05
SUMMARY
FINANCIAL ASSET
CASH
EQUITY INSTRUMENT
of another entity
CONTRACTS settled in
own equity instruments
CONTRACTUAL
RIGHT to:
 Receive cash/ another
financial asset
 Exchange FI with
another entity

10. DEFINITIONS
IAS 32: PRESENTATION OF
FINANCIAL INSTRUMENTS
Financial Instrument
Contract
Financial Asset
FINANCIAL LIABILITY
Equity Instruments
01
02
03
04
05
FINANCIAL LIABILITY
“ In line with IAS 32.11, a financial liability is:
A Contractual Obligation to:
A Contract that will or may be settled in the
entity’s own equity instruments and is:
Deliver cash or another financial asset from another
entity
Exchange financial assets or financial liabilities with
another entity under conditions that are potentially
unfavorable to the entity
a non-derivative for which the entity is or may be obliged
to deliver a variable a number of the entity’s own equity
instruments, or
a derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial
asset for a fixed number of the entity’s own equity
instruments
“

11. DEFINITIONS
IAS 32: PRESENTATION OF
FINANCIAL INSTRUMENTS
Financial Instrument
Contract
Financial Asset
FINANCIAL LIABILITY
Equity Instruments
01
02
03
04
05
SUMMARY
FINANCIAL LIABILITY
CONTRACTUAL
OBLIGATION to:
 Deliver cash/ another
financial asset
 Exchange FI with another
entity (Unfavourable
conditions)
CONTRACTS settled in
the entity’s own equity
instruments
There are few exceptions when the instrument meets the definition of a financial
liability, but it is still classified as an equity instrument, for example puttable
instruments or obligations on liquidation.
N.B.

12. DEFINITIONS
IAS 32: PRESENTATION OF
FINANCIAL INSTRUMENTS
Financial Instrument
Contract
Financial Asset
Financial Liability
EQUITY INSTRUMENTS
01
02
03
04
05
EQUITY INSTRUMENT
“
“
In line with IAS 32.11, an equity
instrument is any contract
that Evidences A Residual
Interest in the assets of an entity
after deducting all of its liabilities.

13. HOW TO PRESENT
FINANCIAL INSTRUMENTS
The fundamental rule in IAS 32.15 is to Classify The Financial Instruments On Initial
Recognition as a financial liability, a financial asset or an equity instrument in accordance
with:
The Substance Of The Contract
The definitions of a financial asset, financial liability and an equity
instrument
It not such a big deal to classify financial assets, but sometimes there are challenges to distinguish between
financial liabilities and equity instruments.N.B.

14. DISTINCTION
EQUITY vs. LIABILITY
The main question to respond when
classifying an instrument as either a
financial liability or an equity instrument is:
Is There A Contractual Obligation To
Deliver Cash Or Another Financial Asset
To Another Entity?
Or alternatively, to exchange financial assets
or financial liabilities under potentially
unfavorable conditions?
PRESENTATION OF FINANCIAL
INSTRUMENTS
EQUITY or LIABILITY ?
Is there a contractual obligation to deliver
cash/financial asset?
LIABILITY EQUITY
Preference shares Ordinary shares
If YES, then the instrument of Financial Liability.
If NO, then the instrument is Equity Instrument.

15. QUESTION
HYPOTHETICAL
What if there is an
OBLIGATION TO DELIVER
OWN EQUITY INSTRUMENTS
and not cash or another
financial asset?
The solution lies in the difficult part of
definitions –
“TRANSACTIONS IN OWN EQUITY”

16. TRANSACTIONS
IN OWN EQUITY
According to the definition of Equity
Instrument from IAS 32.16, the two most
important things to watch out are:
Are equity instruments own or
issued by somebody else?
Is the amount to deliver or
exchange FIXED or VARIABLE?
ILLUSTRATUIONS:
You sell an option to deliver 100 shares of
Apple to your friend.
This is a financial liability, because the shares are
NOT YOUR OWN shares. They are shares of
somebody else (Apple in this case).
You sell an option to deliver your own shares in total value of CU
100 to your friend.
This is a financial liability, too, because although the shares are
yours, their number is variable. Why?
Because, The Exact Number Of Shares Will Depend On The Current
Price Of The Share At The Delivery.
You sell an option to deliver 100 pieces of your own shares to your
friend.
This is an equity instrument, because the shares are yours and their
amount is FIXED – 100.

17. COMPOUND
FINANCIAL INSTRUMENT
Some financial instruments have both liability and
equity component.
E.g. A convertible bond where an issuer issues a bond to a holder
and the holder has an option to get the bond repaid by some
number of the ordinary shares of issuer instead of taking cash.
There are two components:
 A FINANCIAL LIABILITY: A loan, because the issuer has a
liability to settle the loan with transfer of cash; and
 AN EQUITY INSTRUMENT: A call option written to the
holder to deliver some number of ordinary shares.
CONVERTIBLE BOND
LIABILITY EQUITY
CONVENTIONAL
LOAN
CALL OPTION
TO SHARES
In this case, an issuer needs to classify and present these two elements
separately:
The loan element is presented as a financial liability, and
The call option element is presented as an equity instrument.

18. TREASURY
SHARES
Treasury shares are the term used by
IAS 32 for own shares.
If someone acquires own shares:
 One needs to deduct them from
equity and
 NOT recognize them as financial
assets

19. OFFSETTING
A FINANCIAL ASSET & A FINANCIAL LIABILITY
OFFSETTING means presenting a financial
asset and a financial liability AS ONE SINGLE
NET AMOUNT in the statement of financial
position.
IAS 32.42 sets the following rules when you
must offset a financial asset with a financial
liability:
 When an entity has a LEGALLY
ENFORCEABLE RIGHT TO SET OFF the
recognized amounts, and
 When one INTENDS TO SETTLE ON A
NET BASIS, or REALIZE THE ASSET AND
THE LIABILITY SIMULTANEOUSLY
OFFSETTING
A FINANCIAL ASSET & A FINANCIAL LIABILITY
LIABILITY ASSETPresenting &
as one single NET AMOUNT
Sells good
Bills listing fees
Receivable
from
Payable
to
Receivable
from
Payable
to
Seller Buyer

20. OFFSETTING
A FINANCIAL ASSET & A FINANCIAL LIABILITY:
SMALL ILLUSTRATION
Imagine you run a supermarket and you buy goods from a local
producer.
You purchased some goods and you have a liability of CU 1000.
But, you charged promotion fees amounting to CU 50 to your
supplier, because you issue a leaflet and include his products there.
So, at the same time, you have a receivable of CU 50.
You can present these two items as a NET FINANCIAL LIABILITY
OF CU 950, if there are no legal restrictions to do so and if you
agreed with the supplier somewhere in the contract that you would
make net payments.
Net
amount
$950
Fee $50
Liability
$1000 Or,

21. THANK
YOU