Module 9

PAS 32 – Financial Instruments

Introduction

Philippine Accounting Standards 32 prescribes the principles for presenting financial instruments
as liabilities or equity and for offsetting financial assets and financial liabilities.

PAS 32 complements PFRS 9 Financial Instruments, which prescribes the recognition and
measurement of financial assets and financial liabilities, and PFRS 7 Financial Instruments
Disclosures, which prescribes the disclosures for financial instruments.

PAS 32 applies to all types of financial instruments except the following for which other Standards
apply.

Learning outcomes:
1. State the definition of a financial instrument.
2. Give examples of financial assets and financial liabilities.
3. Differentiate between a financial liability and an equity instrument.
4. State the requirements for offsetting financial assets and financial liabilities.

Objective of PAS 32

The stated objective of PAS 32 is to establish principles for presenting financial instruments as
liabilities or equity and for offsetting financial assets and liabilities.

PAS 32 addresses this in a number of ways:

 clarifying the classification of a financial instrument issued by an entity as a liability or as
equity
 prescribing the accounting for treasury shares (an entity's own repurchased shares)
 prescribing strict conditions under which assets and liabilities may be offset in the balance
sheet

PAS 32 is a companion to PAS 39 Financial Instruments: Recognition and Measurement and PFRS
9 Financial Instruments. PAS 39 and PFRS 9 deal with initial recognition of financial assets and
liabilities, measurement subsequent to initial recognition, impairment, derecognition, and hedge
accounting. IAS 39 was progressively replaced by IFRS 9 as the IASB completed the various
phases of its financial instruments project.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
1
 Financial Instruments
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.”

Financial assets
Financial asset – is any asset that is:
a. Cash;
b. An equity instrument of another entity;
c. A contractual right to receive cash or another financial asset from another entity;
d. A contractual right to exchange financial instruments with another entity under conditions
that are potentially favorable; or
e. A contract that will or may be settled in the entity’s own equity instruments and is not
classified as the entity’s own equity instrument.

Financial liabilities
Financial liability – is any liability that is:
a. A contractual obligation to deliver cash or another financial asset to another entity;
b. A contractual obligation to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity’s own equity instruments and is not
classified as the entity’s own equity instrument.

Equity Instruments
Equity instrument – is “any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.”

Examples of financial assets

1. Cash and cash equivalents (e.g., cash on hand, in banks, short-term money placements,
and cash funds)
2. Receivables such as accounts, notes, loans, and finance lease receivables.
3. Investments in equity or debt instruments of other entities such as held for trading
securities, investments in subsidiaries, associates, joint ventures, investments in bonds,
and derivative assets
4. Sinking fund and other long-term funds composed of cash and other financial assets.

The following are not financial assets:

1. Physical assets, such as inventories, biological assets, PPE and investment property
2. Intangible assets
3. Prepaid expenses and advances to suppliers
4. The entity’s own equity instrument (e.g., treasury shares)

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
2
 Presentation

Contracts settled through equity instruments

Financial liability Equ ity instru m ent

 The contract requires the delivery of  The contract requires the delivery
(a) a variable nu m ber of the (receipt) of a fixed nu m ber of the
entity’s own equity instruments in entity’s own equity instruments in
exchange for a fixed amount of cash exchange for a fixed am ou nt of
or another financial asset or (b) a cash or another financial asset.
fixed number of the entity’s own
equity instruments in exchange for a
variable am ou nt of cash or
another financial asset.

Redeemable vs. Callable Preference shares

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
3
 Compound financial instruments
A compound financial instrument is a financial instrument that, from the issuer’s perspective,
contains both a liability and an equity component. These components are classified and
accounted for separately, as follows:
a. The value assigned to the liability component is its fair value without the equity feature.
b. The value assigned to the equity component is the residual amount after deducting the value
assigned to the liability component from the total fair value of the compound instrument.

Treasury shares
 Treasury shares are an entity’s own shares that were previously issued but were
subsequently reacquired but not retired.
 Treasury shares are treated as deduction from equity.
 Treasury share transactions are recognized directly in equity. Therefore, they do not result
to gains or losses.

Interest, Dividends, Losses and Gains

Offsetting of financial assets & financial liabilities

A financial asset and a financial liability are offset and only the net amount is presented in the
statement of financial position when the entity has both:
a. a legal right of setoff and
b. an intention to settle the amounts on a net basis or simultaneously

References:

Millan, Z. V. (2018). PAS 32 Financial Instruments Presentation. In Conceptual Framework and

Accounting Standards (2018 Edition, pp. 326-336). Bandolin Enterprise.

IAS 32- Financial Instruments Presentation

(2020).http://www.iasplus.com/.https://www.iasplus.com.en/standards/oas/ais32

Activity:
Answer Problems 1 (No. 1 to 5) and Problem 2 (No. 1, 2, and 4), PAS 32 Financial Instruments
Presentation (pp.337-340) in your textbook.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
4
THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
5