IAS 32
Financial instruments:
Disclosure and Presentation
Presented by
CPA Peter Njuguna
1
Case for financial instruments
 Dynamics of the international financial markets
creates a wide range of financial instruments
 Financial instruments comprise a mixture of on
and off financial statements
 Financial instruments can significantly contribute
to risks that an enterprise faces.
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Objectives
 Highlights to users of financial statements the range of
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financial instruments used by an enterprise and how they
affect the financial position, performance and cash flows
Emphasises on classification of instruments as liabilities or
equity.
Shift focus from legal form to substance form
Example is issue of redeemable preference shares which
legally they may be equity but in substance they are debt.
This has the impact of increasing the gearing and reduce
the net assets
3
The standard
 establish principles for presenting financial
instruments as liabilities or equity and for offsetting
financial assets and financial liabilities.
 It applies to the classification of financial instruments,
from the perspective of the issuer, into financial assets,
financial liabilities and equity instruments;
 the classification of related interest, dividends, losses
and gains; and
 the circumstances in which financial assets and
financial liabilities should be offset.
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The standard
 Complement the principles for recognising and
measuring financial assets and financial liabilities in
IFRS 9 Financial Instruments, and for disclosing
information about them in IFRS 7 Financial
Instruments: Disclosures.
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Scope
 Excluded
 Share based payments as defined
 Interests in subsidiaries
 Interests in associates
 Interest in joint arrangements
 Employers rights and obligations under employee
benefits plant
 Rights and obligation arising under insurance contracts
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Initial classification
 The issuer of a financial instrument should classify the
instrument, or its component parts, on initial
recognition as
 a financial liability,
 a financial asset or
 an equity instrument
 in accordance with the substance of the contractual
arrangement and the definitions of a financial liability, a
financial asset and an equity instrument.
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Just a thought
 Member contribution to a SACCO or welfare schemes
 Equity or liabilities ???
 Refer to IFRIC 2 for clarifications
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Compound financial instrument
 The issuer of a non-derivative financial instrument
should evaluate the terms of the financial instrument
to determine whether it contains both a liability and
an equity component.
 Such components shall be classified separately as
financial liabilities, financial assets or equity
instruments.
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Financial instruments
A contract that gives rise to
a financial asset of one entity, and
a financial liability or equity instrument
of another entity.
 Basic financial instruments are payables, receivables, cash,
loans and commitments to make or receive loans.
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Financial assets
 any asset that is:
 cash;
 an equity instrument of another entity;
 a contractual right:
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to receive cash or another financial asset from another entity;
or
to exchange financial assets or financial liabilities with
another entity under conditions that are potentially
favourable to the entity; or
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Financial assets
 a contract that will or may be settled in the entity’s
own equity instruments and is:
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a non-derivative for which the entity is or may be obliged to
receive a variable number of the entity’s own equity
instruments; or
a derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial asset
for a fixed number of the entity’s own equity instruments.
For this purpose the entity’s own equity instruments do not
include puttable financial instruments classified as equity
instruments.
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Financial liabilities
 any liability that is:
 a contractual obligation:
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to deliver cash or another financial asset to another entity; or
to exchange financial assets or financial liabilities with
another entity under conditions that are potentially
unfavourable to the entity; or
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Financial liabilities
 a contract that will or may be settled in the entity’s
own equity instruments and is:
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a non-derivative for which the entity is or may be obliged to
deliver a variable number of the entity’s own equity
instruments; or
a derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial asset
for a fixed number of the entity’s own equity instruments.
For this purpose the entity’s own equity instruments do not
include puttable financial instruments that are classified as
equity instruments
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Equity instrument
 Any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities.
 Puttable instrument that impose an obligation to
deliver a pro-rata of the net assets of the entity only on
liquidation
 When a derivative financial instrument gives one party
a choice over how it is settled but all of the settlement
alternatives would result in it being an equity
instrument.
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Basic financial instruments
Financial
Asset
 Cash
 Contractual right to
receive cash or another
financial asset or
 to exchange financial
assets or liabilities
under potentially
favourable conditions
 Equity instrument of
another entity
Financial
liability
 Contractual obligation
to deliver cash or
another financial asset
or
 to ex-change financial
asset or liabilities under
potentially unfavourable
conditions
 Certain contracts
settled in the entity’s
own equity
Equity
instrument
Contract
evidencing
a residual interest
in the assets of an
entity after
deducting all of its
liabilities
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Exclusion
 A commodity contract that are expected to be settled
by delivery are not classified as financial instruments
 Except where a commodity future contract has the
option to settle in cash or another financial instrument
it is classified as financial instrument
 A contract to deliver a variable number of equity
shares, or another financial assets, that depends on the
fair value of a certain obligation is also classified as
financial instruments
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Example
 Farmer is contracted by Unga group to cultivate wheat on
200 acre land and deliver the produce on harvest. Unga
Ltd will pay Ksh 4,000 for every bag delivered.
 Explain whether the contract can be classified as financial
instrument
 If the farmer have the option of closing out the contract
(pay cash or trade the contract) with the accounting
treatment be the same.
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Compound instruments
 Have the characteristics of both debt and equity
 A convertible loan gives the holder the option to convert
into equity shares at some future date.
 Require use of split accounting approach
 The proceeds is analysed between the debt component and
the equity component.
 The debt is measured first and the equity component is the
residual
 The debt is the presented value of mandatory payments
discounted at market rate of interest for similar debts
without conversion option
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Insight
 LOGISTICs Ltd has the following entry
 Issued and fully paid 8% cumulative, convertible,
redeemable preference shares (nominal) sh
60 m
 Explain the accounting classification !!!!
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Compound instrument
 Vision Ltd issued 100 million 5% convertible bonds at
par on 1st January 2013. the debentures can either be
converted into 50 ordinary shares of sh 2 each for every
sh 100 of bond, or redeemed at par any time from 1st
January 2020. the iterest rate of similar bonds without
conversion option is 6%
 Explain how to use split accounting approach
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sol
 Present value of redemption payment
 Present value of coupon payment
 Value of debt
74,726
21,062
95,788
 Value of equity (residual)
 Proceed on issue
 Less value of debt component
 Equity (share premium)
100,000
95,788
4,212
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Perpetual debt
 Irredeemable debt accounted for as financial liability
and not equity
 Due to the obligation to pay interest to perpetuity
 Value of debt equal to present value of future interest
payment
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Finance costs
 The total payment to be incurred over the lifespan of
the debt less the initial carrying value.
 Allocated to profit or loss over the lifetime of the debt
at a constant rate of interest based on the outstanding
carrying value per period (effective rate)
 If a debt is settled before maturity, any profit or loss
should be treated in p&l
 Nb finance cost for qualifying assets capitalised
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Finance cost
 Interest, dividends, losses and gains relating to a
financial instrument or a component that is a financial
liability shall be recognised as finance income or
expense in profit or loss.
 Distributions to holders of an equity instrument shall
be debited by the entity directly to equity, net of any
related income tax benefit.
 Transaction costs of an equity transaction shall be
accounted for as a deduction from equity, net of any
related income tax benefit.
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Initial recognition;
 When the entity becomes a party to the contractual
provisions of the instrument.
 Initial recognition at transaction price
 except a financing transaction which includes
Example is sale of goods or services if payment is deferred
beyond normal terms.
 recognised at discounted amount at a market rate of interest
for a similar debt instrument.

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Classification of Financial liabilities
Category
Financial
liabilities at fair
value through
Definition
• Financial liabilities held for trading
• Financial liability designated as at fair
value through profit or loss on initial
recognition
profit or loss
Other financial
liabilities – at
All financial liabilities that are not
classified at fair value through profit
or loss
amortised cost
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Classification of Financial assets
Category
Financial assets at fair
value through profit or
loss
Definition
Financial assets held for trading
Derivatives, unless accounted for as hedges
Financial asset designated to this category under the fair value
option
Loans and receivables
Non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market
Held-to-maturity nonderivative investments
Non-derivative financial assets with fixed or determinable
payments and fixed maturity that the entity has the positive intent
and ability to hold to maturity
Available-for-sale
financial assets
• All non-derivative financial assets that are not classified in
another category are classified as available-for-sale
• Any financial asset designated to this category on initial
recognition
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Classification decision
Is the asset held for trading or
derivatives
Yes
Financial assets at
fair value through
profit or loss
No
Will the asset be designated as
at fair value through profit or
loss?
Yes
No
Available-for-sale
Yes
Will the asset be designated as
available-for-sale?
No
No
Does the asset meet the
definition of loans and
receivables?
Yes
Loans and
receivables
No
Does the entity have the
positive intent and ability to
hold the asset to maturity
Yes
Held-to-maturity
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Derivatives Financial Instruments
Derivatives are contracts with the following
characteristics:
Changes in value in response to changes
in a specified underlying item
Requires little or no initial net investment
Settled at a future date
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Types of Derivatives
 Forwards/ Futures
A (standardized) contract which forms an obligation for one
party to buy, and the other to sell, a specific asset, currency
or interest rate for a fixed price at a future date.
 Options
 A contract between two parties, which gives the buying
party the right but not the obligation to buy or sell an asset,
currency or interest rate for a specified price.
 Swaps
 An agreement made by two parties to exchange a series of
cash flows (for example, fixed interest rate payments for
floating-rate payments) in the future.

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Embedded Derivative
A component of a hybrid contract that also
includes a non-derivative host
 An embedded derivative is the derivative component
of a financial instrument that includes both a
derivative and a host contract.

An entity is required by IAS 39 to separate an
embedded derivative from its host contract but if unable
to separately measure the embedded derivative, it
should treat the entire combined contract as a financial
instrument held for trading.
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Derivative instrument with option
 When a derivative financial instrument gives one party
a choice over how it is settled (eg the issuer or the
holder can choose settlement net in cash or by
exchanging shares for cash), it is a financial asset or a
financial liability unless all of the settlement
alternatives would result in it being an equity
instrument.
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Re-classification out of fair value through P&L
Is the instrument derivative ?
no
was the instrument designated
at fair value on initial
recognition
No
Is there a change of intention or
purpose from held for trading
Yes
Would the instrument have
qualified as loans and
receivable on initial recognition
Yes
Classify as loans
and receivables
Re-Classification into fair value
through p& L prohibited
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Re-classifications out of held-to-maturity
Sales before maturity
reclassify ALL instruments
Change of intent or
ability
reclassify ALL instruments
Classify as Available For Sale financial assets
measurement at fair value
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Treasury shares
 If an entity reacquires its own equity instruments,
those instruments (‘treasury shares’) shall be deducted
from equity.
 No gain or loss can be recognised in profit or loss on
the purchase, sale, issue or cancellation of an entity’s
own equity instruments.
 Such treasury shares may be acquired and held by the
entity or by other members of the consolidated group.
 Consideration paid or received should be recognised
directly in equity.
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Puttable instruments
 A contractual obligation for an issuer to repurchase or
reedem that instrument for cash or another financial
asset on the exercise of the put by the holder.
 Puttable instrument classified as financial liability
unless
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Holder entitled to pro-rata share of net assets on liquidation
It is subordinated to all other class of instrument
Have identical features to other subordinated instruments
Cashflow due to the instrument only based on profit or loss
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Example
 A company issues equity share to senior executive of
the company on condition that the company will buy
back the share on resignation or any exit before
retirement.
 The repurchase price will be 90% of the market price
prevailing at that time
 Explain the accounting treatment of the issue
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Puttable financial instruments
 Puttable financial instruments classified as equity
instruments in accordance with paragraphs 16A and
16B, instruments that impose on the entity an
obligation to deliver to another party a pro rata share
of the net assets of the entity only on liquidation and
are classified as equity instruments in accordance with
paragraphs 16C and 16D, or instruments that are
contracts for the future receipt or delivery of the
entity’s own equity instruments.
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Puttable financial instruments
 As an exception, an instrument that meets the definition of a financial
liability is classified as an equity instrument if it has all the features and
meets the conditions in paragraphs 16A and 16B or paragraphs 16C and
16D.
 An equity instrument is any contract that evidences a residual interest
in the assets of an entity after deducting all of its liabilities.
 A financial instrument may require the entity to deliver cash or another
financial asset, or otherwise to settle it in such a way that it would be a
financial liability, in the event of 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 of the instrument, such as a change in a stock market index,
consumer price index, interest rate or taxation requirements, or the
issuer’s future revenues, net income or debt-to-equity ratio.
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Puttable instruments cnd’
 The issuer of such an instrument does not have the
unconditional right to avoid delivering cash or another financial
asset (or otherwise to settle it in such a way that it would be a
financial liability).
 Therefore, it is a financial liability of the issuer unless:
 the part of the contingent settlement provision that could require
settlement in cash or another financial asset (or otherwise in such a
way that it would be a financial liability) is not genuine;
 the issuer can be required to settle the obligation in cash or another
financial asset (or otherwise to settle it in such a way that it would
be a financial liability) only in the event of liquidation of the issuer;
or
 The instrument has all the features and meets the conditions in
paragraphs 16A and 16B.
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Off setting financial instruments
 Offset and present on net basis if
 The entity has a legally enforceable right to set off the
recognised amounts
 The entity intends either to settle on a net basis, or to
realise the asset and settle the liabilities
simultaneously
 Example is payable and receivable to the same counter
party where the risk associated with the financial asset
and liability are identical
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No offsetting if
 Several financial instrument are used to emulate the
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features of a single financial instrument
Financial assets and liabilities having the same primary risk
exposure but involve different counter parties
Financial assets pledged as collateral for non-recourse
financial liabilities
Assets set aside in trust by a debtor for the purpose of
discharging an obligation without those assets having been
accepted by the creditor in settlement of the obligation
Obligation incurred which is recoverable from a third party
by virtual of a claim made under an insurance policy
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 Interactive session
 Questions and answers
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