IAS 32 Notes PDF

Preview

Summary

1. Introduction Deals with classification of financial instruments From perspective of issuer Focus on substance rather than legal form 2 parties to any financial instrument: o financial asset of one entity o financial instrument of another entity Most important elements of a financial o Must be a c...

Description

1. Introduction    



Deals with classification of financial instruments From perspective of issuer Focus on substance rather than legal form 2 parties to any financial instrument: o financial asset of one entity o financial liability/equity instrument of another entity Most important elements of a financial asset/liability: o Must be a contract o Must be cash flows in accordance with contract

2. Definitions 

Financial instrument: any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity



Financial asset: any asset that is: o cash o equity instrument of another entity o a contractual right:  to receive cash or another financial asset from another entity; or  to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity



Financial liability: any liability that is: o a contractual obligation:  to deliver cash or another financial asset to another entity; or  to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity

1

3. Equity Instrument vs. Financial Liability Refer to Conceptual Framework definitions of liability and equity. a. Equity  

Does not meet criteria in definition of a financial liability No contractual obligation to deliver cash/financial asset

b. Financial Liability  

No unconditional right to avoid delivery of cash/financial asset Unconditional right = able to avoid delivery of cash/financial asset at all times

4. Preference Shares: Equity vs Liability 



2 types: o Redeemable  Compulsory/ at option of the holder (assume worst case i.e. pmt): issuer HAS TO repurchase  At option of issuer: issuer has option to repurchase or not o Non-redeemable  Dividends compulsory: obligation to pay  Dividends discretionary: no obligation until dividend declared Evaluate CFs (Capital & Dividends) to determine whether Preference Shares classified as equity or liability:

Capital Pmts

Dividend Pmts

Classification

Automatically/compulsorily redeemable

No discretion

Financial Liability

Redeemable at option of holder (assume worst case i.e. holders opt to be paid out in cash)

No discretion

Financial Liability

Redeemable at option of issuer

At discretion of entity

Equity Instrument

Non-redeemable

At discretion of entity

Equity Instrument

2

Non-redeemable

No discretion

Perpetual Debt Instrument

* If question doesn’t specify whether the entity has discretion ito dividends – assume the entity always has discretion! 

Preference Shares : o Equity → produces a dividend o Financial Liability → produces an interest expense (finance cost)

5. Off-set of Financial Assets & Financial Liabilities: 



Can only be off-set if: o present (available at all times) legally enforceable right (depends on contract) and o intention to settle on a net basis or realise asset & settle liability simultaneously (same time) Result: single net amt on SFP

6. Compound Financial Instruments: →Convertible Debenture FRK 300: Must be able to answer theory & application questions on convertible debentures. Only theory questions will be asked on convertible preference shares.  

Financial instrument that has different components – components must be classified separately Types: o Option to convert → issuer has an interest & capital payment obligation (interest pmt is split between interest expense & increase in the financial liability – use AMORT function)  At option of issuer  At option of holder o Automatically convertible → issuer only has an interest payment obligation (interest pmt is split between interest expense & a capital reduction of the financial liability – use AMORT function) → future value = 0

a. Steps 1. Calculate fair value of WHOLE instrument: a. Given; or b. Calculate using rate for similar compound instrument 2. Calculate fair value of liability component using rate for similar compound instrument without a conversion option

3

3. Calculate equity component – balancing amt i.e. [FairV of whole instrument] less [FairV of liability component] 4. Can recognize a day 1 gain or loss if proceeds are not the same as the fairV when instrument is issued :. issue at nominal amt but fairV is > than nominal Dr Bank (Nominal) Dr Loss Cr Debenture Liability (Fair Value)

b. Journals Automatically Convertible:

Dr

Initial recog:

Bank (SFP) Debenture Liability (SFP) Equity component of convertible debentures (equity) → column in SCE

Cr

xxx xx x

Money received for issuing debentures.

Payment:

Debenture Liability (SFP) → AMRT 1 Prin Interest expense (P/L) → AMRT 1 Int Bank (SFP) → cash pmt

xx x xxx

Interest paid to holders – int exp & decrease liab.

Issue ordinary shares at end:

Equity component of convertible debentures (equity) Ordinary Share Capital (equity)

xx xx

Debentures converted into shares.

Convertible at option:

Dr

Initial recog:

Bank (SFP) Debenture Liability (SFP) Equity component of convertible 4

Cr

xxx xx x

debentures (equity) → column in SCE Money received for issuing debentures.

Payment:

Interest expense (P/L) → AMRT 1 Int Debenture Liability (SFP) → AMRT 1 Prin Bank (SFP) → cash pmt

xxx xx x

Interest paid to holders – int exp & increase liab. Convert all: Debenture Liability (SFP) Equity component of conv. deb (equity) Ordinary Share Capital (equity)

x y x+y

Convert certain % e.g. 60%:

Conversion options:

Debenture Liability (SFP) Equity component of conv. deb (equity) Ordinary Share Capital (equity) Bank (SFP) Retained Earnings (equity)

x y 60%(x+y) 40%(x) 40%(y)

Convert none: Debenture Liability (SFP) Equity component of conv. deb (equity) Bank (SFP) Retained Earnings (equity)

x y

c. Transaction Costs to Separate Components

x y

↓es CA of debenture liab.

x Liab. Component Total Fair Value

= liability portion

You have to now calc. a new i

x Equity Component Total Fair Value

= equity portion

↓es equity component

Transaction Cost

5...