PAS 32 FINANCIAL

INSTRUMENTS:
PRESENTATION
PAS 32 shall be applied to all types
of financial instruments except:
 Investment in subsidiaries,
associates and joint ventures
 Employer’s rights and obligations
under employee benefit plans and
share-based payments
 Insurance contracts
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 asset - is any asset that is:

 Cash
 An equity instrument of another entity
 A contractual right to receive cash or other financial
asset
 A contractual right to exchange financial instruments
 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
Examples of financial assets
Cash and cash equivalents
Receivables
Investment in equity or debt
instruments of other entities
Sinking fund
Financial liability – is any liability that is:

A contractual obligation to deliver cash or another

financial asset
 A contractual obligation to exchange financial
assets or liabilities
 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
Examples of financial liabilities
Payables
Lease liabilities
Held for trading and derivative
liabilities
Redeemable preference shares
issued
Security and other returnable
deposits
Equity instrument - is “any contract that
evidences as residual interest in the assets of
any entity after deducting all of its liabilities”

“Assets-Liabilities= Equity”
Presentation
 The issuer shall classifies a financial
instrument, or its component parts, as
financial asset, financial liability or an
equity instrument in accordance with
the substance of the contract and the
definitions of such.
 Financial liability Equity instrument

 The entity has a  The entity has no

contractual obligation obligation to pay cash
to pay cash or another or another financial asset
financial asset or to or to exchange financial
exchange financial instruments under
instruments under potentially unfavorable
potentially unfavorable condition.
condition.  Callable preference
 Redeemable preference share is classified as
share is classified as equity instrument
financial liability
 Financial liability Equity instrument

 Variable number for a fixed  Fixed number for a fixed

amount
Example:
- a contract to deliver* as
many shares as are equal to the
value of a fixed amount of cash
worth P150,000
amount
Example:
- a share option that
gives holder a right to buy a
fixed number of the issuer’s
shares for a fixed price

 Fixed number for a variable

amount
Example:
- a contract to deliver* 2,000
own equity instruments in
exchange for an amount of cash
equal to the value of 20 grams
of gold
*A contract to receive (rather than to deliver) is a financial asset.
Puttable instrument
 One that gives the holder the right to
return (put back) the instrument to
the issuer in exchange for cash or
another financial asset or is
automatically put back to the issuer
upon the occurrence of a specified
future event.
 PUTTABLE INSTRUMENTS
AND
INSTRUMENTS WITH OBLIGATIONS
ARISING ON LIQUIDATION.
A puttable instrument and obligations arising on liquidation are classified as
an equity instrument if it has all the following features:

PUTTABLE INSTRUMENT INSTRUMENTS WITH OBLIGATIONS

ARISING ON LIQUIDATION
• It entitles the holder to a pro rata share of the entity’s net assets in the event of the
entity’s liquidation.
The instrument is in the class of instruments that is subordinate to all other classes of
instruments. To be in such a class the instrument:
A. has no priority over other claims to the assets
B. does not need to be converted into another instrument
• The instruments must have an Identical The instruments must have an identical
contractual features. contractual obligation.
• Total cash flow based substantially on
profit or loss and changes in net assets.
In addition, the issuer must have no other financial Instrument or contract that has:
A. total cash flows based substantially on the profit or loss;
B. the effect of substantially restricting or fixing the residual return
to the instrument holders.
Reclassification
• Shall classify a financial instrument as an equity instrument
when it meets all the features and the conditions.
• Shall reclassify when ceases to have all the features or meet
all the conditions.

An entity shall account as follows at the date of reclassification

of an instrument.
a) Equity instrument to financial liability, measured at the
fair value of the instrument.
b) Financial liability to equity instrument, measured at the
carrying value of the financial liability.
Financial instruments that have the legal form of an equity
instrument but in substance meet the definition of a financial
liability.

Example:
A. A preference share that provides for mandatory
redemption by the issuer for a fixed or
determinable amount at a fixed or determinable
future date is a financial liability.

B. A preference share that provides for mandatory

redemption by the issuer for a fixed or
determinable amount at a fixed or determinable
future date is a financial liability.
Settlement in the entity’s own equity instruments
• The contract is an equity:
 if it will be settled by the issuance of a fixed number of shares
in exchange for a fixed amount of cash.

• The contract is a financial liability when:

 It is settled by the issuance of a variable number of shares in
exchange for a fixed amount of cash.
 It is settled by the issuance of a fixed number of shares in
exchange for a variable amount of cash.

Note: Variability, the contract is a financial liability

Compound Instrument
• Compound Instrument is a financial
instrument that contains both a liability
and an equity component from the
issuer's perspective.

• These components are to be classified

and accounted for separately.
Example: Convertible Bonds
• Convertible Bonds are bonds that can be
converted into shares of stock of the issuer.
• Two instruments:
Bonds payable and conversion privilege

• The bonds are assigned an amount equal to the

market value of the bonds without the conversion
privilege.
• The residual amount shall be allocated to
conversion privilege or equity component.
Formula

Asset - Liability = Equity

Issue price of bonds Residual amount

Total issue price - without conversion
privilege
= allocated to
conversion privilege
Illustration:
Entity A issues convertible bonds with face amount of
P1,000,000 for P1,050,000. Each P1000 bond is
convertible into 8 shares with par value of P100 per
share. On issuance date, the bonds are selling at 98
without the conversion option.
• Allocation of issue price:
 TREASURY SHARES
The treatment of these treasury shares is that:
◦ No gain or loss should be recognised in profit or
loss on their purchase, sale, issue or cancellation
◦ Consideration paid or received should be
recognized directly in equity
◦ They should be deducted from equity

PRESENTED SEPARATELY
 TREASURY SHARES
The treatment of these treasury shares is that:
◦ No gain or loss should be recognised in profit or
loss on their purchase, sale, issue or cancellation
◦ Consideration paid or received should be
recognized directly in equity
◦ They should be deducted from equity

PRESENTED SEPARATELY
 TREASURY SHARES
The treatment of these treasury shares is that:
◦ No gain or loss should be recognised in profit or
loss on their purchase, sale, issue or cancellation
◦ Consideration paid or received should be
recognized directly in equity
◦ They should be deducted from equity

Statement of Financial Position

PRESENTED SEPARATELY
Notes
 Interest, Dividends, Losses and Gains
FINANCIAL LIABILITY EQUITY INSTRUMENT
- Recognized as income or - Are recognized directly in
expenses in profit or loss equity

Exercise: Dividends
Dejavu has declared the following dividends during the year:

1. An ordinary dividend of P4 million

2. A P3 million dividend on preference shares redeemable in

2019.
 Interest, Dividends, Losses and Gains
FINANCIAL LIABILITY EQUITY INSTRUMENT
- Recognized as income or - Are recognized directly in
expenses in profit or loss equity

Exercise: Dividends
Dejavu has declared the following dividends during the year:

1. An ordinary dividend of P4 million Equity Instrument

2. A P3 million dividend on preference shares redeemable in

2019.
Financial Liability
Transaction cost
 Accounted for as a deduction from equity

Cost of issuing own Equity

Instrument:
•Registration and other regulatory fees
•Legal fees
•Accounting and other professional advisers
•Printing cost and stamp duties
Transaction cost (Abandoned)
 Accounted for as an expense

Cost of issuing own Equity

Instrument:
•Registration and other regulatory fees
•Legal fees
•Accounting and other professional advisers
•Printing cost and stamp duties
Transaction cost
Cost on issuing financial liabilities (except
liability measured at FVPL)

 included in carrying amount of the financial liability

and subsequently amortized through profit or loss
 Transaction cost
Cost on issuing financial liabilities (except
liability measured at FVPL)

 included in carrying amount of the financial liability

and subsequently amortized through profit or loss

Allocated to
Cost on issuing compound
financial instruments Debt and Equity components
Based on assign values
 Transaction cost
Cost on issuing financial liabilities (except
liability measured at FVPL)

 included in carrying amount of the financial liability

and subsequently amortized through profit or loss

Allocated to
Cost on issuing compound
financial instruments Debt and Equity components
Based on assign values

Cost relate jointly to Allocated to

more than one Those transaction
transaction Using a rational basis of allocation
Offsetting a financial asset and a financial
liability
 A right of set-off is a legal right, by contract or otherwise, to
settle or otherwise eliminate all or a proportion of an amount due
to a creditor by applying against that amount an amount due from
the creditor.

Offsetting is usually inappropriate when:

(a) Several different financial instruments are used to emulate
the features of a single financial instrument (a ‘synthetic
instrument’);
(b) Financial assets and financial liabilities arise from financial
instruments having the same primary risk exposure (for
example, assets and liabilities within a portfolio of forward
contracts or other derivative instruments) but involve
different counterparties;
(c) financial or other assets are pledged as collateral for non-
recourse financial liabilities;
Offsetting is usually inappropriate when:

(d) financial assets are set aside in trust by a

debtor for the purpose of discharging an
obligation without those assets having been
accepted by the creditor in settlement of the
obligation (for example, a sinking fund
arrangement); or

(e) obligations incurred as a result of events giving

rise to losses are expected to be recovered
from a third party by virtue of a claim made
under an insurance contract.