PAS 32 - These are notes based on CFAS 2020 edition by Zeus Vernon B. Millan PDF

Preview

Summary

These are notes based on CFAS 2020 edition by Zeus Vernon B. Millan...

Description

d. Entity’s own equity instruments

PAS 32 FINANCIAL INSTRUMENTS REPRESENTATION 







Prescribes the principles for: o Presenting financial instruments as liabilities or equity o Offsetting financial assets and financial liabilities Applies to all financial instruments EXCEPT: a. Investment in subsidiaries, associate, and joint ventures b. Employer’s rights and obligations under employee benefit plans and share-based payments c. Insurance contracts Applies to instruments designated to be measured at fair value through profit or loss Applies to contracts for the purchase or delivery of a commodity or other nonfinancial items that can be settled net

Financial Instruments -

Financial Liability a. A contractual obligation to deliver cash or other financial asset to another entity b. A contractual right to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity 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 EXAMPLES: a. Payables (accounts, notes, loans, bonds) b. Lease liabilities c. Held for trading liabilities and derivative liabilities d. Redeemable preference shares issued e. Security deposits and other returnable deposits NOT FINANCIAL LIABILITIES a. Unearned revenues and warranty obligations that are to be settled by future delivery of goods or provisions of services b. Taxes, SSS, PhilHealth, and PAG-IBIG payables c. Constructive obligations

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 a. b. c.

Cash An equity instrument of another entity A contractual right to receive cash or other financial asset from another entity d. A contractual right to exchange financial instruments with another entity under conditions that are potentially favorable e. A contract that will or may be settled with the entity’s equity instruments and is NOT classified as the entity’s equity instruments EXAMPLES: a. b. c.

Cash and cash equivalents Receivables Investments in equity or debt instruments of other entities d. Sinking fund NON FINANCIAL ASSETS: a. Physical assets b. Intangible assets c. Prepaid expenses and advances to suppliers

Equity Instrument -

Is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities

 CASH is the most basic financial instrument because it is the medium of exchange and the basis of measurement of all financial statement elements  FINANCIAL INSTRUMENT encompasses both financial asset and financial liability but NOT the entity’s own equity instrument  Examples: ordinary shares, non-redeemable preference shares, stock options and warrants 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, financial liability and an equity instrument

Financial liability Equity Instrument  The entity has no  The entity has a contractual obligation to pay cash or another obligation to pay financial asset or cash or another to exchange financial asset or financial to exchange instruments financial under potentially instruments under unfavorable potentially condition unfavorable condition 

Contract is not an equity instrument merely because it is to be settled in the entity's own equity instruments

Financial asset/Liability  Variable number for a fixed amount  Fixed number for a variable amount 

Equity Instrument

Members’ shares in cooperative entities and similar instruments are equity if: 1. The entity has an unconditional right to refuse redemption of the members’ shares 2. Redemption is unconditionally prohibited by law or relevant regulation Puttable Instrument 

  

 Fixed number for a fixed amount

Essential feature of an equity instrument is the absence of a contractual obligation to pay cash or another financial asset o True even if the holder of the instrument is entitled to pro rata share in dividends or of the net assets of the entity in case of liquidation

Redeemable Callable preference preference shares shares - Are preferred - Are preferred stocks which the stocks which the issuer has the holder has the right to call at a right to redeem at a set date set date - Are classified as - Are classified as financial liability equity instrument because when the holder exercises its because the right right to redeem, to call is at the the issuer is discretion of the mandatorily issuer and obligated to pay therefore has no for the obligation to pay redemption price unless it chooses to call on the shares



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 such as death of a holder Includes a contractual obligation of the issuer to redeem or repurchase the instrument So it is classified as a financial liability EXCEPT when the instrument represents a residual interest in the net assets of the issuing entity in which case the instrument is classified as an equity instrument SO it will be classified as an equity instrument if it has the features of an equity instrument o Entitlement to pro rata share in case of liquidation o non priority over other instruments o total cash flows based substantially on profit or loss and changes in net assets

Compound Financial Instruments 

 

Is a financial instrument that, from the issuers perspective contains both a liability and an equity component These components are classified and accounted for separately an example of a compound instrument is convertible bonds o are bonds that can be converted into shares of stocks of the issuer o when an entity issues convertible bonds, in effect, it is issuing two instruments  (1) a debt instrument for the bonds payable  (2) an equity instrument for the equity conversion feature  These two components are presented separately in the  statement of financial position o (SLIDE)

Treasury Shares 





 

Are an entity's own shares that were previously issued but were subsequently reacquired but not retired Are presented separately either in the statement of financial position or in the notes as deduction from equity No gain or loss arises from the purchase, cell, issue or cancellation of the entity’s own equity instruments The consideration paid or received from such transaction is recognized directly in equity If there are gains or losses on the purchase or issue one says of the Treasury shares, they will not be recorded as gains or losses o but instead they will be recorded in the equity section

Interest, Dividends, Losses and Gains Financial Liability Are recognized as income or expenses in Profit or Loss 









Equity Instrument Are recognized directly in equity

Dividends on redeemable preference shares o Financial liability o Expense o Profit or loss Dividends on callable preference shares and other equity instruments o Equity instruments o Retained earnings (deduction) o Recognized directly in equity Premium or discount on financial liabilities o Included in the carrying amount of the financial liability o subsequently amortized to profit or loss premium or discount in equity instruments o recognized directly in equity gains and losses on redemptions or refinancings of financial liabilities o profit or loss

redemptions or refinancings of equity instruments o recognized as changes in equity changes in fair value of a financial liability o not recognized unless the financial liability is measured at fair value through profit or loss  changes in the fair value of equity instruments o not recognized 

Transaction Costs  On equity instruments o Deduction from equity  On financial liabilities (except liabilities measured at fair value through profit or loss) o Included in the carrying amount in the financial liability and subsequently amortized to profit or loss  On compound financial instruments o Allocated to the debt and equity components based on their assigned values  Transaction costs that relate jointly to more than one transaction o Allocated to those transactions using a rational basis of allocation  Costs of abandoned equity transaction o Recognized as expense Offsetting a Financial asset and Financial Liability 



A financial asset and 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 b. An intention to settle the amounts on a net basis or simultaneously Offsetting is inappropriate for a. Financial or other assets that are pledged as collateral for non-recourse financial liabilities b. Sinking fund and the related financial liability for which the fund was established...