IAS 32 – FINANCIAL INSTRUMENTS: PRESENTATION

(Issuer perspective only)

DEFINITIONS

Financial instrument = Financial asset + Financial liability/Equity instrument

Financial asset = Cash + Investment in shares + Contractual right to receive cash / favorable derivative /
variable number of entity’s own equity instruments

Financial liability = Contractual obligation to deliver cash / unfavorable derivative / variable number of
entity’s own equity instruments

Equity instrument = Assets – Liabilities

Puttable instrument = Right to sell

PRESENTATION

Liabilities and equity

Issuer’s classification of financial instrument as liability/equity based on definition and substance.

For example: Redeemable preference share is a puttable instrument which gives holder the right to sell it
back to issuer. Preference shares are legally equity instruments but due to redemption option the
substance is that it gives rise to an obligation to deliver cash of issuer, therefore, classified as financial
liability.

Exception = If a puttable instrument has all the features of an ordinary share. It shall be classified as an
equity instrument.

Reclassification from equity instrument to financial liability or vice versa is allowed when criteria met.

Contingent settlement provisions

Obligation to deliver cash dependent on future uncertain event liability = Classify as financial liability

Settlement options

Choice over how it is settled = Classify as financial liability unless other alternatives would result in
equity instrument.

Compound financial instrument (IE 9)

Convertible bond = Liability component + Equity component

Step 1: Liability component = PV of interest payments + PV of principal (Using effective/market rate)

Step 2: Equity component = Proceeds of bond – Liability component

Compound Financial Instruments with multiple embedded derivative features (IE 10)

Callable convertible bond = Liability component + Equity component

Step 1: Liability component = PV of interest payments + PV of principal (Using effective/market rate)

Step 2: Call option value = Using option pricing model

Step 3: Adjusted liability component = Liability component – Call option value

Step 4: Equity component = Proceeds of bond – Adjusted liability component

Scenarios of Compound Financial Instruments

1. Conversion
 At maturity = Dr. Financial liability Cr. Share capital + Share premium
 Before maturity = Dr. Financial liability Cr. Share capital + Share premium
2. Repurchase
 At maturity = Dr. Financial liability Cr. Cash
 Before maturity: (IE 11)
a. Determine fair value of liability component at current market rate
b. Determine equity component value = Current FV – Current FV of liability
component
c. Settlement loss = Amortized cost of liability component – Current FV of liability
Dr. Financial liability
Dr. Loss on settlement
Dr. Equity
Cr. Cash
3. Induced conversion (IE 12)
Dr. Financial liability
Dr. Conversion expense (P&L)
Cr. Share capital + Share premium
Cr. Cash

Treasury shares
Dr. Equity Cr. Cash

Interest, dividend, losses and gains

Financial liability = P&L Equity instrument = equity

Transaction cost of compound financial instrument = Allocate between financial liability + Equity in
proportion to the allocation of proceeds (In case of effective interest rate, no allocation required)

Offsetting a financial asset and a financial liability

1. Legally enforceable right

2. Intends to settle on net basis or simultaneously