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 |

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|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. |

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|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 |

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|· 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 |

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|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.|

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|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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