(Summary) Ind AS 32
Financial Instruments: Presentation
Is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.
This Standard shall be applied by all entities to all types of financial instruments except:
- Those interests in subsidiaries, associates or JV.
- Employers’ rights and obligations under employee benefit plans.
- Insurance contracts.
- Financial instruments within the scope of Ind AS 104.
- Financial instruments, contracts and obligations under share-based payment transactions, except for:
Contracts within the scope of para 8–10 of this Standard, to which this Standard applies, Para 33 and 34 of this Standard.
- Financial instrument
- Financial liability
- Financial asset
- Fair value
- Equity instrument
- Puttable instrument
Financial Instrument: Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity
Equity Instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
A financial instrument should be classified as either a financial liability or an equity instrument according to the substance of the contract, not its legal form, and the definitions of financial liability and equity instrument.
The classification is not subsequently changed based on changed circumstances.
A financial instrument is an equity instrument only if
- the instrument includes no contractual obligation to deliver cash or another financial asset to another entity and
- if the instrument will or may be settled in the issuer’s own equity instruments, it is either:
A non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments;
A derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.
If an entity 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 to deliver cash and, therefore, should be recognised as a liability.
In contrast, preference shares that do not have a fixed maturity, and where the issuer does not have a contractual obligation to make any payment are equity.
In this example even though both instruments are legally termed preference shares they have different contractual terms and one is a financial liability while the other is equity.
A financial instrument may require entity to deliver cash/ another financial asset/ settle such that it is financial liability upon Contingent event.
- 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 in accordance with para 15.
- 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.
- Such treasury shares may be acquired and held by the entity or by other members of the consolidated group.
- Consideration paid or received shall be recognised directly in equity.
A financial asset and a financial liability shall be offset and the net amount presented in the BS when, and only when, an entity:
- Currently has a legally enforceable right to set off the recognised amounts; and
- Intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity shall not offset the transferred asset and the associated liability (Ind AS 109).