IAS 32 | Financial Instruments: Presentation

2

Objective

The objective of this standard is to 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.

3

Complementary Principles

The principles in this 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.

4

Scope

This standard shall be applied by all entities to all types of financial instruments except: those interests in subsidiaries, associates or joint ventures accounted for under IFRS 10, IAS 27 or IAS 28; employers' rights and obligations under employee benefit plans (IAS 19); insurance contracts defined in IFRS 17 (with specific exceptions); and financial instruments, contracts and obligations under share-based payment transactions (IFRS 2), although treasury share rules still apply.

8

Contracts for Non-Financial Items

This standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected purchase, sale or usage requirements.

9

Net Settlement Methods

There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include: when the terms permit net settlement; when there is a practice of settling similar contracts net; when there is a practice of taking delivery and selling shortly after to profit from price fluctuations; or when the non-financial item is readily convertible to cash.

10

Written Options

A written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, is within the scope of this standard. Such a contract cannot be entered into for the purpose of the receipt or delivery of the non-financial item in accordance with the entity's expected purchase, sale or usage requirements.

11

Definitions

The following terms are used in this standard with the meanings specified:

• A 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.
• A financial asset is any asset that is: (a) cash; (b) an equity instrument of another entity; (c) a contractual right: (i) to receive cash or another financial asset from another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or (d) a contract that will or may be settled in the entity's own equity instruments.
• A financial liability is any liability that is: (a) a contractual obligation: (i) to deliver cash or another financial asset to another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or (b) a contract that will or may be settled in the entity's own equity instruments.
• An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
• A puttable instrument is a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder.

12

Other Defined Terms

The following terms are defined in Appendix A of IFRS 9 or paragraph 9 of IAS 39 and are used in this standard with the meaning specified in IAS 39 and IFRS 9: amortised cost of a financial asset or financial liability; derecognition; derivative; effective interest method; financial guarantee contract; financial liability at fair value through profit or loss; firm commitment; forecast transaction; hedge effectiveness; hedged item; hedging instrument; held for trading; regular way purchase or sale; and transaction costs.

13

Contract Definition

In this standard, 'contract' and 'contractual' refer to an agreement between two or more parties that has clear economic consequences that the parties have little, if any, discretion to avoid, usually because the agreement is enforceable by law.

14

Entity Definition

In this standard, 'entity' includes individuals, partnerships, incorporated bodies, trusts and government agencies.

15

Presentation Principle

The issuer of a financial instrument shall 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.

16

Equity Classification

When an issuer applies the definitions in paragraph 11 to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument is an equity instrument if, and only if, both conditions are met: (a) the instrument includes no contractual obligation to deliver cash or another financial asset or to exchange financial assets/liabilities under unfavourable conditions; and (b) if the instrument will or may be settled in the issuer's own equity instruments.

16A

Puttable Instrument Exception

As an exception to the definition of a financial liability, an instrument that includes a contractual obligation for the issuer to repurchase or redeem that instrument for cash or another financial asset on exercise of the put is classified as an equity instrument if it has all the features described in the standard.

16B

Puttable Criteria

For an instrument to be classified as an equity instrument under the exception, in addition to having all the features in paragraph 16A, the issuer must have no other financial instrument or contract that has total cash flows based substantially on the profit or loss or net assets of the entity and the effect of substantially restricting or fixing the residual return to the puttable instrument holders.

16C

Liquidation Obligation

Some financial instruments include a contractual obligation for the issuing entity to deliver to another entity a pro rata share of its net assets only on liquidation. As an exception to the definition of a financial liability, such an instrument is classified as an equity instrument if it has all the required features.

16D

Liquidation Criteria

For an instrument to be classified as an equity instrument under the liquidation exception, in addition to having all the features in paragraph 16C, the issuer must have no other financial instrument or contract that has total cash flows based substantially on the profit or loss or net assets of the entity.

16E

Reclassification

An entity shall classify a financial instrument as an equity instrument in accordance with the exceptions from the date when the instrument has all the features and meets the conditions. An entity shall reclassify a financial instrument from the date when the instrument ceases to have all the features or meet all the conditions.

16F

Accounting for Reclassification

On reclassification from equity to liability, the financial liability is measured at fair value at the date of reclassification, and any difference is recognised in equity. On reclassification from liability to equity, the equity instrument is measured at the carrying value of the financial liability at the date of reclassification.

17

Critical Feature

A critical feature in differentiating a financial liability from an equity instrument is the existence of a contractual obligation of one party to the financial instrument (the issuer) either to deliver cash or another financial asset to the other party (the holder) or to exchange financial assets or financial liabilities with the holder under conditions that are potentially unfavourable to the issuer.

18

Substance vs Form

The substance of a financial instrument, rather than its legal form, governs its classification in the entity's statement of financial position. Substance and legal form are commonly consistent, but not always. Some financial instruments take the legal form of equity but are liabilities in substance.

19

Lack of Unconditional Right

If an entity does not have an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the obligation meets the definition of a financial liability, except for those instruments classified as equity instruments in accordance with the specific exceptions for puttable instruments.

20

Indirect Obligations

A financial instrument that does not explicitly establish a contractual obligation to deliver cash or another financial asset may establish an obligation indirectly through its terms and conditions.

21

Variable Share Settlement

A contract is not an equity instrument solely because it may result in the receipt or delivery of the entity's own equity instruments. If the number of shares varies, such a contract is a financial liability.

22

Fixed-for-Fixed Principle

Except as stated in paragraph 22A, a contract that will be settled by the entity (receiving or) delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash or another financial asset is an equity instrument.

23

Obligation to Purchase Own Shares

A contract that contains an obligation for an entity to purchase its own equity instruments for cash or another financial asset gives rise to a financial liability for the present value of the redemption amount (e.g., a written put option). This is the case even if the contract itself is an equity instrument.

28

Compound Instruments

The issuer of a non-derivative financial instrument shall 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.

33

Treasury Shares

If an entity reacquires its own equity instruments, those instruments ('treasury shares') shall be deducted from equity. No gain or loss shall be recognised in profit or loss on the purchase, sale, issue or cancellation of an entity's own equity instruments.

35

Interest, Dividends, Losses and Gains

Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be recognised as income or expense in profit or loss. Distributions to holders of an equity instrument shall be recognised by the entity directly in equity.

42

Offsetting Criteria

A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity: (a) currently has a legally enforceable right to set off the recognised amounts; and (b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

96

Effective Date

An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is permitted.