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.” (PAS 32.11)

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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.

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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.

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Standards (by: Zeus Vernon B. Millan)
Equity instrument

• Equity instrument – is “any contract that evidences a residual

interest in the assets of an entity after deducting all of its liabilities.”
(PAS 32.11)

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Examples of financial assets

a. Cash and cash equivalents (e.g., cash on hand, in banks, short-term

money placements, and cash funds)
b. Receivables such as accounts, notes, loans, and finance lease
receivables.
c. 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
d. Sinking fund and other long-term funds composed of cash and other
financial assets.

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• The following are not financial assets:
a. Physical assets, such as inventories, biological assets, PPE and
investment property
b. Intangible assets
c. Prepaid expenses and advances to suppliers
d. The entity’s own equity instrument (e.g., treasury shares)

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Standards (by: Zeus Vernon B. Millan)
Examples of financial liabilities

a. Payables such as accounts, notes, loans and bonds payable.

b. Lease liabilities
c. Held for trading liabilities and derivative liabilities
d. Redeemable preference shares issued.
e. Security deposits and other returnable deposits

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Standards (by: Zeus Vernon B. Millan)
• The following are not financial liabilities:
a. Unearned revenues and warranty obligations that are to be settled
by future delivery of goods or provision of services.
b. Taxes, SSS, Philhealth, and Pag-IBIG payables
c. Constructive obligations

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Presentation

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Contracts settled through equity instruments

Financial liability Equity instrument

 The contract requires the delivery of  The contract requires the delivery
(a) a variable number of the (receipt) of a fixed number 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 amount 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 amount of cash or
another financial asset.

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Standards (by: Zeus Vernon B. Millan)
Redeemable vs. Callable Preference shares

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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.

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Standards (by: Zeus Vernon B. Millan)
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.

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Standards (by: Zeus Vernon B. Millan)
Interest, Dividends, Losses and Gains

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Standards (by: Zeus Vernon B. Millan)
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

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 APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

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 QUESTIONS????
 REACTIONS!!!!!

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 END
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