4/17/2023

Financial
Instruments
Presentation
Philippine Accounting Standards (PAS) 32

Learning Objectives

• State the definition of a financial instrument.

• Gove examples of financial assets and financial liabilities
• Differentiate between a financial liability and equity instrument
• State the requirements for offsetting financial assets and
financial liabilities

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Objective

PAS 32 prescribes the principles for presenting financial

instruments as liabilities or equity and for offsetting
financial assets and liabilities.

Scope

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

FVPL and contracts for the future purchase or delivery of a
commodity or other nonfinancial items that can be settled net. 5
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Financial Instruments

Financial instrument – is “any contract that gives

rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.” (PAS 32.11)

Financial Assets

is any asset that is:

a. Cash;
b. An equity instrument of another entity;
c. A contractual right to receive cash or another financial asset from
another entity;
d. A contractual right to exchange financial instruments with another
entity under conditions that are potentially favorable; or
e. 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.
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Examples of Financial Assets

• Cash and cash equivalents (e.g., cash on hand, in banks,

short-term money placements, and cash funds)
• Receivables such as accounts, notes, loans, and finance lease
receivables.
• Investments in equity or debt instruments of other
entities such as held for trading securities, investments in
subsidiaries, associates, joint ventures, investments in bonds,
and derivative assets
• Sinking fund and other long-term funds composed of cash
and other financial assets. 8

NOT Financial Assets

• Physical assets, such as inventories, biological assets, PPE and

investment property
• Intangible assets
• Prepaid expenses and advances to suppliers
• The entity’s own equity instrument (e.g., treasury shares)

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Financial Liabilities

is any liability that is:

a. A contractual obligation to deliver cash or another financial
asset to another entity;
b. A contractual obligation to exchange financial assets or
financial liabilities with another entity under conditions
that are potentially unfavorable to the entity; or
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.
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Examples of Financial
Liabilities
• Payables such as accounts, notes, loans and bonds
payable.
• Lease liabilities
• Held for trading liabilities and derivative liabilities
• Redeemable preference shares issued.
• Security deposits and other returnable deposits

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NOT Financial Liabilities

• Unearned revenues and warranty obligations that are to

be settled by future delivery of goods or provision of
services.
• Taxes, SSS, Philhealth, and Pag-IBIG payables
• Constructive obligations

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Equity Instrument

Equity instrument – is “any contract that evidences a

residual interest in the assets of an entity after deducting
all of its liabilities.” (PAS 32.11)

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Presentation

The issuer classifies a financial instrument, its

component parts, as a financial asset, a financial liability
or an equity instrument in accordance with the
substance of the contract and the definitions of a
financial asset, a financial liability and an
equity instrument.

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Financial Liability vs Equity

Instrument
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 contractual
obligation to pay cash or another
financial asset or to exchange
financial instruments under
potentially unfavorable condition.

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Contracts settled through equity

instruments
Financial Liability Equity Instrument
 The contract requires the delivery of  The contract requires the delivery
(a) a variable number of the (receipt) of a fixed number of the
entity’s own equity instruments in entity’s own equity instruments in
exchange for a fixed amount of cash or exchange for a fixed amount of cash
another financial asset or (b) a fixed or another financial asset.
number of the entity’s own equity
instruments in exchange for a
variable amount of cash or another
financial asset.

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Redeemable vs. Callable

Preference shares
Redeemable Preference Shares
• Are preferred stocks which the
holder has the right to redeem at a
set date
Callable Preference Shares
• Are preferred stocks which the issuer
has the right to call at a set date

• Are classified as financial liability • Are classified as equity instrument

because when the holder exercises its because the right to call is at the
right to redeem, the issuer is discretion of the issuer and therefore
mandatorily obligated to pay for has no obligation to pay unless it
the redemption price. chooses to call on the shares.

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Puttable Instrument

A puttable instrument is 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.

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Compound Financial
Instruments
A compound financial instrument is a financial
instrument that, from the issuer’s perspective, contains
both a liability and an equity component. These
components are classified and accounted for
separately, as follows:
a. The value assigned to the liability component is its fair
value without the equity feature.
b. The value assigned to the equity component is the
residual amount after deducting the value assigned to the
liability component from the total fair value of the
compound instrument. 19

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Valuation of Compound
Financial Instruments

Assets Cash proceeds from issuance of 1,000,000

compound instrument
- less -
Liabilities Fair Value of debt component 600,000
without he equity feature
= equals =
Equity Equity Component 400,000

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Valuation of Compound Financial

Instruments - Illustration

Maybunga Corp issues convertible bonds with a face amount of

Php1,000,000 for php1,050,000. Each Php1,000 bond is
convertible into 8shares with par value of Php100 per share. On
the issuance date, the bonds are selling at 98 without the
conversion option.
Required: How much is the issue price allocated to the equity
component?c
Issue Price 1,050,000
FV of debt instrument (1M x 98%) (980,000)
Equity Component 70,000 21

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Treasury shares

Treasury shares are an entity’s own shares that were

previously issued but were subsequently reacquired but
not retired.
Treasury shares are treated as deduction from
equity.
Treasury share transactions are recognized directly in
equity. Therefore, they do not result to gains or losses.

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Interest, Dividends, Losses and

Gains
Interest, Dividends, Losses and Gains that relate to:
Financial Liability Equity Instrument
 Are recognized as income or  Are recognized as directly in
expenses in profit or loss. equity

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Transaction Costs

Transaction costs that relate to:

Financial Liability Equity Instrument
 Are included in the carrying  Are accounted for as an
amount of the financial liability deduction from equity
and subsequently amortized to
profit or loss.
(except liabilities measured at
FVPL)

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Offsetting of financial assets &

financial liabilities
A financial asset and a financial 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 and
b. an intention to settle the amounts on a net basis or
simultaneously

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Offsetting - Illustration

Mabango Corp has an accounts receivable of Php200,000 from

Maamoy Inc. In addition, Mabango Corp also has an account
payable of Php160,000 to Maamoy Inc. The accounts receivable
is due in 30days while the accounts payable is due in 90days.
Mabango Corp intends to settle first the accounts receivable.
Required: If Mabango Corp has a legal right to setoff, how much
accounts receivable will be shown in its statement of financial
position?
Accounts Receivable – Php200,000
Offsetting is not permitted because Mabango Corp does not
intend to settle the financial instruments on a net basis. 26

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Disclosures

Financial instruments disclosures are in PFRS 7 -

Financial Instruments: Disclosures

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