ots As | PAS 32 Financial Instran, SS _ Presentation nts; Learning Objectives : 1. State the definition of a financial instrument. 2. Give examples of financial assets and finan - 3. Differentiate between a financial liability ange instrument. an “iy 4. State the requirements for offsetting financial financial liabilities. ASsety Cial liab; Introduction : PAS 32 provides guidance in presenting fina liabilities or equity, in offsetting financial liabilities, and in classifying financial ins: perspective of the issuer, into financial asset and equity instruments. PAS 32 complements PFRS 9 Financial Instruments, which Prescribes the recognition and measurement Of financial asset and financial © liabilities, and PFRS 7 Financial Instruments: Disclosures, which prescribes the disclosures for finandd instruments. PAS 32 applies to all types of financial instruments and t commodity contracts that are not financial instruments but canbe settled net, except the following for which other Standards apply: a. investments in subsidiaries, associates and joint ventures; a b. employer's tights and obligations under employee ber Plans and share-based payments; and ¢. insurance contracts Ncial instrument, assets and finan, truments, from the S, financial liabilities Financial Instruments financl Financial instrument — ig “any contract that gives rise toa” : fe men asset of one entity and a financial liability or equity inst™ another entity.” (pas 32.11) id; i instrument of another entity; ; a tual right to receive cash or another financial asset A noite entity; : : frome actual right to exchange financial instruments with i - ie entity under conditions that are potentially favorable; 11 or may be settled in the entity’s own contract that wi : 7 ety j struments and is not classified as the entity's own a ty instrument ’ : 4 qncial liability - iS any liability that is: a contractual obligation to deliver cash or another financial . asset to another entity; A contractual obligation to exchange financial Ss "financial liabilities with another entity undet conditions that are potentially unfavorable to the entity; or 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 instrument — is “any contract that evidences a residual interest in the assets of an entity after deducting eo liabilities.” (PAS 32.11) This definition reflects the basic accounting equation “Assets — Liabilities = Equity.” Example: - deposit is a financial instrument. It is @ contract that gives de © both a financial asset (i.€., Cash in bank) on the part of the mer and a financial liability (ie Deposit liability) on the witha i bank. The depositor has @ contractual right to deliv, ‘aw his cash, while the bank has a contractual obligation to T cash when the depositor withdraws. ~S eelwie Cash is the most basic financial instrume, nt b the medium of exchange and the basis of Measure, we iti * financial statement elements. ENE og Ei ial instru sen al The term “nana! instrument” ehcomp, financial asset and financial liability but no¢ thie entity. bos, equity instrument. Examples of an entity’s a ro a instruments include: ordinary shares, non-redeem, “quity tency able - shares, and stock options and warrants. Pref Examples of financial assets oo a. Cash and cash equivalents (e.g., cash on hand, in bank term money placements, and cash funds) S, shor, b. ‘Receivables such as accounts, notes, loans, and finance : receivables. ase c. Investments in equity or debt instruments of 0 + as held for trading securities, investmen| associates, joint ventures, investments derivative assets d. Sinking fund and other long: other financial assets. ther entities Ar 'S in subsidiaris in bonds, and “term funds composed of Cash and The following are not financial assets: a. Physical assets, such as inventories, biological assets, PPE and investment property . Intangible assets Prepaid expenses and advances to suppliers The entity's own equity instrument (e.g., treasury shares) as Examples of financial liabilities Payables such as accounts, Lease liabilities : Held for trading liabilities and derivative liabilities Redeemable Preference shares issued. Security deposits and other retumnable deposits notes, loans and bonds payable. ‘P pBaepgot financial liabilities: ion venues and warranty obligations that are to be fe eas fatare delivery of goods or provision of services. a le a tive obligations d bY philhealth, and Pag-IBIG payables and (c) are not financial liabilities because these Items t arise from contracts. F sentato” sities a financial instrument, or its component parts, re issuer a financial liability or an equity instrument in ncial asset, 8 on ce with the st a and the definiti form, ity instrument. and an eq! + francial Tiabili consideration is w! financial liability. uubstance of the contract (rather than its legal ons of a financial asset, a financial liability . When determining whether a financial instrument is a ity or an equity instrument, the overriding hether the instrument meets the definition of a Financial liability Equity instrument obligation to pay cash or > The entity has a contractual > The entity has no obligation to pay cash or another |. another financial asset or to financial asset or to | exchange financial exchange financial instruments under instruments under potentially unfavorable potentially unfavorable condition. condition. A contract is not an equity instrument merely because it is lobe settled in the enti! bu SYS own equity in | | i Be tttl) id ty’s own equity instruments. The following ance applie : e plies when a contract requires settlement in the struments:Financial liabilii > The contract requires the delivery* of (a) a variable number of the entity's own equity instruments in exchange for a fixed amount of cash or another financial asset or (b) a fixed number of the entity’s own equity instruments in exchange for a variable amount of cash or another financial asset. > Examples: a) Variable number for a fixed amcunt: - acontract to deliver as many shares as are equal to the value of a fixed amount of cash, say ®100,000; or a fixed number of units of a commodity, say 50 grams of gold. b) Fixed number for a variable amount: - acontract to deliver 1,000 own equity instruments in exchange for an amount of cash equal to the value of 10 grams of gold. & Notes: Financial asset/Financial liability | > Variable number for a fixed iB amount. >» Fixed number for a variable * . A contract to receive (rather than to deliver) is a financial asset. > Fixed number fora fixed amount. en number of the a Sireg equity instru, exchange for a fix, amount Of cash | financial assep. "ther Example: a share ony: that gives the holder a : qi to buy a fixed number Issuer's shares for afi “ price. 7 So ments in ~ Equity instrument aje ial feature of an equity instrument is the absence anes obligation to pay cash or another financial asset. contract if the holder of the instrument is entitled to pro ‘, ig rve vvidends or of the net assets of the entity in case of eit : : : 0 NG form is also irrelevant when determining if. a ie Legal ment is @ financial liability or an equity. instrument. ancl ins ents are iN the form of shares of stocks but the issuer ot ins ee financial liabilities if they meet the definition of jfieS ae jiability- ence shares 7 rocks which are preferred stocks which + are has the right to the issuer has the right to call an at a set date. at a set date. — classified as financial - are classified as equity ; liability because when the instrument because the right holder exercises its right to to call is at the discretion of redeem, the issuer is the issuer and therefore has mandatorily obligated to pay no obligation to pay unless it for the redemption price. chooses to call on the shares. IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments addresses the classification of members’ shares in cooperatives. IFRIC 2 uses the same principles as those of PAS 32. ; Members’ shares in cooperative entities and similar instruments are equity if: a The entity has an unconditional right to refuse redemption of the members’ shares, or b, er Redemption is unconditionally prohibited by law or relevant Tegulation, Com Pound financial instruments Compo aye , Pound financial instrument is a financial instrument that, from Ags , Suer’s Perspective, contains both a liability and an equity Ssp j : : AS3, \ component. These components are classifie, d and a separately. : “County : An example of a compound instrument con. n Convertible bonds are bonds that can be converteg ing eb i ity i Og . stocks of the issuer. When an entity issues convertible r U8 effect, it is issuing two instruments ~ (1) a debt ins! Ns; bonds payable, and (2) an equity instrument en ent for, conversion feature. These two components are “tity separately in the statement of financial POsition, Preseni Equity is defined as a residual amount. The separate the debt and equity components of a ce instrument, the entity simply deducts Mp from the fair val whole instrument the fair value of the debt component Witho t the equity feature; the remaining amount Tepresents the eq); component. This procedure follows the basic a ly ‘Ue of a . Ccounting quation “Assets — Liabilities = Equity.” Analyze the formula below: Assets : Liabilities = ‘Equi Cash proceeds Fair value of from issuance debt component L Equi of compound . without the equars ‘quity component instrument equity feature The sum of the carrying amounts allocated to the liability and equity components is always equal to the fair value of the whole instrument. No gain or loss is recognized on the initial recognition of the components. The separate classifications of the components are ia revised for subsequent changes in the likelihood that tt conversion option will be exercised. Illustration: 000 Entity A issues convertible bonds with face amount of ane ‘for 1,050,000. Each ®1,000 bond is convertible into 8 en - par value of #100 per share. On issuance date, the bo selling at 98 without the conversion option.: es : ry ' Sotatis - itll ; rice is allocated to the liability and equity ‘ ove : ’ gre ponents as follows : com 1,050,000 - peice gett astrument without equity feature (IMx98%) (980,000) ° ) e of del 70,000 fii np? nett —— tl ans the fair value is 98% of the face amount. Thus, the fair value of i : ‘aie ee the equity feature is computed as (1M face amount x 98%) or ponds 3 ai ury Shares i ha reas! ares (treasury stocks) are an entity’s own shares that rreasuty § d but were subsequently reacquired but not were Pre’ retired. viously issue’ “Treasury shares are presented separately either in the tatement of financial position or in the notes as deduction from sl ; : . a No gain or loss arises from the purchase, sale, issue or cancellation of the entity’s own equity instruments. The consideration paid or received from such transactions is recognized directly in equity. ~ Interest, Dividends, Losses and Gains The classification of a financial instrument as a financial liability or an equity instrument determines the accounting for the related interest, dividends, losses and gains. Interest, dividends, losses and gains that relate to: ——Financial liability —__| Equity instrument = Tecognized as income or |- are recognized directly in Penses in profit or loss. equity. Tana Piel es dividends on redeemable preference shares pense ability) are recognized as expense (eg., interest 'N profit or loss, while dividends on callable preference CLPas aM shares and other equity instruments are recogn; as a deduction from retained earnings, nized directly i Premium or discount on financial liabilities a _ the carrying. amount of the financial ‘liability and suk ey amortized to profit or loss, while premium or discoy, ey instruments are recognized directly in equity. Nt on Ny Gains and losses on redemptions CF tela, financial liabilities are recognized in Profit op Bs ji redemptions or refinancings of equity instruments a _ Whit as changes in equity. CORR zg Changes in the fair value of a fin: generally not recognized unless the financial ] at fair value through profit or loss. Changes equity instrument are not recognized. ancial liabijj liability ig ™easy in the fair Value of a Transaction costs Transaction costs on issuing equity instruments (e.g., stock issuane costs, such as legal fees, registration costs and stock Certificate printing costs), to the extent that they are avoidable costs, ar accounted for as a deduction from equity, while transaction costs én issuing financial liabilities (except liabilities measured at fair valu ~ through profit or loss) are included in the carrying amount of the financial liability and subsequently amortized to profit or loss. Because of the varying treatments, transaction costs 0 issuing compound financial instruments are allocated to the dt and equity components based on their assigned values. Likewise, transaction costs that relate jointly to acai One transaction are allocated to those transactions using a rata basis of allocation. tion 3 The costs of an abandoned equity transa' recognized as expense. Offsetting a financial asset and a financial liability yy then A financial asset and a financial liability are offset and a whe amount is presented in the statement of financial po the entity has both: a4 ju | ; setoff and seg! right 7 7 the amounts a ion : on a net basis or poth of the conditions above must be met before offsetting 6 presenting financial assets and financial when doing so reflects an entity’s expected settling two or more separate financial entity has both the legal right to net sem ag 32 require basis ties 0! anet ia flows from fate! , When the | asrument ‘ ; . : | i te ment and the intention to do s0, it has, in effect, only a single fin ancial asset OF financial liability. / Neither a legal right alone nor an intention alone warrants itsetting. ; / : > Amere intention to settle net without the right to do so is not ‘sufficient to justify offsetting because the rights and | obligations associated with the individual financial asset and financial liability remain unaltered. / » Conversely, 2 legal right to settle net without the intention to do so is also not sufficient to justify offsetting because this does not reflect the entity's expected future cash flows from settling two or more separate financial instruments. Offsetting is inappropriate for (a) financial or other assets that are pledged as collateral for non-recourse financial liabilities and (b) sinking fund and the related financial liability.Summary: ¢ Financial instrument is any contract that Bives ni asset of one entity and a financial liability op : Stok of another entity. quity ing Financial asset is cash, equity instrument ot ang | contractual right to receive’ cash or to change | | instrument under favorable condition, e ' Financial liability is contractual obligation : i . exchange financial instrument under unfavorah, i ly ch e An instrument is classified as a financial liabit i ition, | has a contractual obligation to pay cash or anothe ent asset or to exchange financial instruments un, Su _ J unfavorable condition. The instrument is classifieg . tah instrument if the entity does not have such a oa obligation. ctu ¢ Offsetting of a financial asset and a financial permitted if the entity has both the legal right of s intention to settle the amounts on a net basis. I liability etoff and th | —| PROBLEMS PROBLEM 1: MULTIPLE CHOICE 1. Are there any circumstances when a contract that is note financial instrument would be accounted for as a finandd instrument under PAS 32 and PFRS 9? a. No. Only financial instruments are accounted for * financial instruments. tat b. Yes. Gold, silver, and other precious metals ttt readily convertible to cash are accounted for as finan instruments. . scopy ob? c. Yes. A contract for the future purchase or ane , commodity or other nonfiriancial item (¢8" ° electricity, or gas) generally is accounted for 45 4 instrument if the contract can be settled net-