PAS 32 Summary - This document summarizes PAS 32 of Conceptual Framework and Accounting Standard. PDF

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This document summarizes PAS 32 of Conceptual Framework and Accounting Standard....

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PAS 32 FINANCIAL INSTRUMENTS PRESENTATION I.

NATURE PAS 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: a. Investments in subsidiaries, associates and joint ventures; b. Employer’s rights and obligations under employee benefit plans and share-based payments; and c. Insurance contracts

PAS 32 applies to instruments designated to be measured at fair value through profit or loss and contracts for the future purchase or delivery of a commodity or other nonfinancial items that can be settled net.

II.

PRESENTATION The issuer classifies a financial instrument, or its component parts, as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contract (rather than its legal form) and the definitions of a financial asset, a financial liability and an equity instrument. When determining whether a financial instrument is a financial liability or an equity instrument, the overriding consideration is whether the instrument meets the definition of a financial liability.

FINANCIAL LIABILITY The entity has a contractual obligation to pay cash or another financial asset or to exchange financial instruments under potentially unfavorable condition.

EQUITY INSTRUMENT The entity has no obligation to pay cash or another financial asset or to exchange financial instruments under potentially unfavorable condition

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FINANCIAL LIABILITY The contract requires the delivery of (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 fixed amount: - A contract 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: - A contract to deliver 1,000 own equity instruments in exchange for an amount of cash equal to the value of 10 grams of gold.

FINANCIAL INSTRUMENT The contract requires the delivery (receipt) of a fixed number of the entity’s own equity instruments in exchange for a fixed amount of cash or other financial asset. Example: a share option that gives the holder a right to buy a fixed number of the issuer’s shares for a fixed price.

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III.

FINANCIAL ASSET/ LIABILITY Variable number for a fixed amount. Fixed number for a variable amount.

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EQUITY INSTRUMENTS Fixed number for a fixed amount

TRANSACTION Entity A issues convertible bonds with face amount of 1,000,000 for 1,050,000. Each 1,000 bond is convertible into 8 shares with par value of 100 per share. On issuance date, the bonds are selling at 98 without the conversion option. The issue price is allocated to the liability and equity components as follows: Issue price Fair value of debt instrument without equity feature

1,050,000 980,000

Equity Component

70,000...