STANDARDS: IAS 32
STANDARDS: IAS 32 | |
|FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION |
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|HISTORY OF IAS 32 |
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|September 1991 |
|Exposure Draft E40, Financial Instruments |
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|January 1994 |
|E40 was modified and re-exposed as Exposure Draft E48, Financial Instruments |
| |
|June 1995 |
|The disclosure and presentation portion of E48 was adopted as IAS 32, Financial Instruments: Disclosure |
|and Presentation. Work on recognition and measurement continued. |
| |
|1 January 1996 |
|Effective Date of IAS 32 (1995) |
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|December 1998 |
|IAS 32 was revised by IAS 39, effective 1 January 2001. |
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|RELATED INTERPRETATIONS |
| |
|· SIC 5, Classification of Financial Instruments - Contingent Settlement Provisions |
|· SIC 16, Share Capital - Reacquired Own Equity Instruments (Treasury Shares) |
|· SIC 17, Equity - Costs of an Equity Transaction |
| |
|AMENDMENTS UNDER CONSIDERATION BY IASB |
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|· Amendments to IAS 32 and IAS 39 |
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|SUMMARY OF IAS 32 |
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|Objective of IAS 32 |
|The stated objective of IAS 32 is to enhance users' understanding of the significance of on-balance sheet|
|and off-balance sheet financial instruments to an enterprise's financial position, performance, and cash |
|flows. |
|IAS 32 addresses this in essentially three ways: |
|Clarifying the classification of a financial instrument issued by an enterprise as a liability or as |
|equity. |
|Prescribing strict conditions under which assets and liabilities may be offset in the balance sheet. |
|Requiring a broad range of disclosures about financial instruments, including information as to their |
|fair values. |
|Scope |
|IAS 32 applies in presenting and disclosing information about all types of financial instruments, whether|
|recognised in the balance sheet or not, with the following exceptions: [IAS 32.1] |
|investments in subsidiaries [see IAS 27], investments in equity method associates [see IAS 28], and |
|investments in joint ventures [see IAS 31]; |
|obligations for post-employment benefits [see IAS 19 and IAS 26]; |
|employers' obligations under employee stock option and stock purchase plans [see IAS 19]; and |
|obligations arising under insurance contracts [this is the subject of a current IASB agenda project]. |
|Key Definitions |
|The definition of financial instrument used in IAS 32 is the same as that in IAS 39. [IAS 32.5] |
|Classification as liability or equity |
|The fundamental principle of IAS 32 is that an instrument should be classified as either a liability or |
|an equity instrument according to its substance, not its legal form. The enterprise must make the |
|decision at the time the instrument is initially recognised. The classification is not subsequently |
|changed based on changed circumstances. The key distinguishing feature is that a financial liability |
|involves a contractual obligation either to deliver cash or another financial asset, or to issue another |
|financial instrument, under terms that are potentially unfavourable to the issuer. An instrument that |
|does not give rise to such a contractual obligation is an equity instrument. [IAS 32.18] |
|To illustrate, if an enterprise issues preference (preferred) shares that pay a fixed rate of dividend |
|and that have a mandatory redemption feature at a future date, the substance is that they are a |
|contractual obligation and, therefore, should be recognised as a liability. In contrast, normal |
|preference shares do not have a fixed maturity, and the issuer does not have a contractual obligation to |
|make any payment. Therefore, they are equity. |
|Some financial instruments - sometimes called compound instruments -have both a liability and an equity |
|element. In that case, IAS 32 requires that the component parts be split, with each part accounted for |
|and presented separately according to its substance. To illustrate, a convertible bond contains two |
|components. One is a financial liability, namely the issuer's contractual obligation to pay cash, and the|
|other is an equity instrument, namely the holder's option to convert into common shares. This split is |
|made at the time the instrument is issued and is not subsequently revised as a result of a change in |
|interest rates, share price, or other event that changes the likelihood that the conversion option will |
|be exercised. [IAS 32.23] |
|Interest, dividends, gains, and losses relating to an instrument classified as a liability should be |
|reported in the income statement. This means that dividend payments on preferred shares classified as |
|liabilities are treated as expenses. On the other hand, distributions to holders of a financial |
|instrument classified as equity should be charged directly against equity, not against earnings. [IAS |
|32.30] |
|SIC 5 provides further guidance on liability-equity classification. Where the rights and obligations |
|regarding the manner of settlement of a financial instrument depend on the occurrence or non-occurrence |
|of uncertain future events, or on the outcome of uncertain circumstances that are beyond the control of |
|both the issuer and the holder, the financial instrument should be classified as a liability unless the |
|possibility of the issuer being required to settle in cash or another financial asset is remote at the |
|time of issuance, in which case the instrument should be classified as equity. |
|Offsetting |
|IAS 32 also prescribes rules for the offsetting of financial assets and financial liabilities. It |
|specifies that a financial asset and a financial liability should be offset and the net amount reported |
|when, and only when, an enterprise: [IAS 32.53] |
|has a legally enforceable right to set off the amounts; and |
|intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.|
| |
|Treasury Shares |
|SIC 16 interprets IAS 32 with respect to treasury shares - equity shares repurchased and held by the |
|issuing enterprise or its subsidiaries. Where an enterprise holds treasury shares, those shares should be|
|presented in the balance sheet as a deduction from equity. No gain or loss should be recognised in the |
|income statement on the sale, issuance, or cancellation of treasury shares. Consideration received should|
|be presented in the financial statements as a change in equity. |
|Equity Issuance or Reacquisition Costs |
|SIC 17 provides that the transaction costs of issuing or acquiring an enterprise's own equity shares |
|should be accounted for as a deduction from equity, net of any related income tax benefit. |
|Disclosures specified |
|An enterprise should describe its financial risk management objectives and policies, including hedging |
|policies. [IAS 32.43A] |
|For each class of financial asset, financial liability, and equity, both recognised and unrecognised, IAS|
|32 requires disclosure of: |
|the extent and nature of the financial instruments, including significant terms and conditions (including|
|principal amount, maturity, early settlement or conversion options, amount and timing of cash flows, |
|stated interest or dividend rates, collateral held or pledged, denomination in a foreign currency, and |
|restrictive conditions and covenants); [IAS 32.47] |
|accounting policies and methods adopted, including recognition criteria and measurement principles; [IAS |
|32.47] |
|specified information about exposure to interest rate risk (including repricing dates and effective |
|interest rates); [IAS 32.56] |
|specified information about exposure to credit risk (including amounts and significant concentrations); |
|[IAS 32.66] |
|specified information about the fair value of the financial instrument, or a statement that it is not |
|practicable to provide such information; [IAS 32.77] and |
|special information if a financial asset is carried in excess of its fair value (the impairment |
|provisions of IAS 39 would generally prohibit this). [IAS 32.88] |
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