1. IAS 32 : PRESENTATION OF FINANCIAL INSTRUMENTS
Rajesh Kevin Sanjay

2. Overview Definition of Financial Instruments History of IAS 32
Objective and Scope of IAS 32
Categorizing Financial Instruments
IAS 32 Liabilities and Equity
Disclosures
Fair Value Option
Puttable Instruments
Classification of Puttable Instruments
Offsetting
Amendments

3. Definition of Financial Instruments
A financial instrument is a contract that gives rise to
a financial asset of one entity and
a financial liability or equity instrument of another entity
Financial asset
Financial liability
Equity instrument
Cash
Equity instrument of another entity
Contractual right to receive cash or another financial asset or to exchange financial assets or liabilities under potentially favourable conditions
Certain contracts settled in the entity’s own equity
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
Contract evidencing a residual interest in the assets of an entity after deducting all of its liabilities
IAS 32/39 - 3

4. Financial Instruments
Majority of the items on the balance sheet are financial instrument with the exception of;
Inventories
Prepaid
Plant and properties

5. History of IAS 32 September 1991
Exposure Draft E40 Financial Instruments
January 1994
E40 was modified and re-exposed as Exposure Draft E48 Financial Instruments
June 1995
The disclosure and presentation portion of E48 was adopted as IAS 32Financial Instruments: Disclosure and Presentation
1 January 1996
Effective date of IAS 32 (1995)
December 1998
IAS 32 was revised by IAS 39, effective 1 January 2001
17 December 2003
Revised version of IAS 32 issued by the IASB
1 January 2005
Effective date of IAS 32 (2003)
18 August 2005
Disclosure provisions of IAS 32 are replaced by IFRS 7 Financial Instruments: Disclosures effective 1 January Title of IAS 32 changed to Financial Instruments: Presentation

6. IAS 32 History Cont’d 22 June 2006
Exposure Draft of proposed amendments relating to Puttable Instruments and Obligations Arising on Liquidation
14 February 2008
IAS 32 amended for Puttable Instruments and Obligations Arising on Liquidation
1 January 2009
Effective date of amendments for puttable instruments and obligations arising on liquidation
6 August 2009
Exposure Draft Classification of Rights Issues proposing to amend IAS 32
8 October 2009
Amendment to IAS 32 about Classification of Rights Issues
1 February 2010
Effective date of the October 2009 amendment
16 December 2011
Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) issued
17 May 2012
Amendments resulting from Annual Improvements Cycle (tax effect of equity distributions).
1 January 2013
Effective date of May 2012 amendments (Annual Improvements Cycle)
1 January 2014
Effective date of December 2011 amendments

7. Objective of IAS 32
IAS 32: deals with presentation from the perspective of the issuer. It also provide guidance on the classification of related interest, dividends and gains/losses, and when financial assets and financial liabilities can be offset.
IAS 32 addresses such cases in the following number of ways
Clarifying the classification of a financial instrument issued by an entity as a liability or equity
Prescribing the accounting for treasury shares
Prescribing strict conditions under which assets and liabilities may be offset in the balance sheet

8. Scope of IAS 32
IAS 32 involves the presenting and disclosure of information about all types of financial instruments with the exception of;
Interest in subsidiaries, associates and joint venture that are accounted for under IAS 27, IAS 28 and IAS 31
Employers’ rights and obligations under IAS 19
Insurance contracts, but its IAS 32 applies to derivatives that are integrated in insurance contracts
Financial instruments with IFRS 4
Contracts and obligations under IFRS 2

9. Categorizing Financial Instruments
Financial instruments are categorized into 4 categories which are;
Financial asset or liability at fair value through profit or loss
Held-to-maturity investments
Loans and receivables
Available-for-sale financial assets

10. Categorization of Financial Assets
Category
Definition
Financial assets at fair value through profit or loss
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-derivatives financial assets with fixed or determinable payments that are not quoted in an active market
Held-to-maturity
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 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

11. Categorization of Financial Liabilities
Category
Definition
Financial liabilities at fair value through profit or loss
Financial liabilities held for trading
Financial liability designated as at fair value through profit of loss on initial recognition
Other financial liabilities- at amortised cost
All financial liabilities that are not classified at fair value through profit or loss

12. IAS 32 – Liability and Equity
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.
If a financial instrument contains both a liability and an equity element, the instrument’s component parts should be classified separately.
Debt Securities with an embedded conversion option, such as a convertible bond, should be separated into the liability component and the equity component on the balance sheet.

13. IAS 32 – Liability and Equity
Contractual obligation to deliver cash or another financial asset.
Mandatory redeemable preference shares.
A “puttable instrument” by the holder.
Liability if the obligation is conditional.
Conditional upon approval by regulatory authority.
Conditional upon the counter-party exercising its right to redeem.

14. IAS 32 – Liability and Equity
Settlement in the entity’s own equity instrument.
Not an equity instrument solely because settlement is through delivery or receipt of the entity’s own equity.
Liability if the contractual obligation is a fixed amount so that the value of the equity instrument equals the amount of contractual obligation.
Settlement options
When a derivative financial instrument gives one party a choice over how it is settled (e.g. 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 settlement alternatives would result in it being an equity instrument.

15. IAS 32 – Liability and Equity
Contingent settlement provision
Liability if the obligation to deliver cash or another financial instrument arises only on the occurrence or non-occurrence of uncertain future events that are beyond the control of both the issuer and holder, unless
The contingent event is restricted only in the event of liquidation of the issuer; or
The contingent event that trigger the obligation is considered to be not genuine.

16. IAS 32 – Liability and Equity
Treasury Shares
Acquisition of own equity instruments (treasury shares) should be deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments.
However, an obligation to purchase own equity instruments for cash or another financial asset gives rise to a financial liability for the present value of the redemption amount.

17. IAS 32 – Liability and Equity
Compound Instrument
An financial instrument that contains both liability and equity components should be classified and presented separately.
Example: A bond that is convertible, either mandatory or at the option of the holder into equity shares of the issuer.
Method of separating the liability and equity component
The liability component is fair valued first, and this provides the initial carrying amount of the liability component.
The fair value of the liability component is then deducted from the fair value of the instrument with the residual amount representing the equity component.
Transaction costs are usually allocated to the liability and equity components based on proportion of fair value.

18. IAS 32 – Liability and Equity
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 recognized as income or expense in profit and loss.
Distributions to holders of an equity instrument shall be debited by the entity directly to equity.

19. Disclosure of IAS 32
An enterprise should describe its financial risk management objectives and policies, including hedging policies.
For each class of financial asset, financial liability, and equity, both recognised and unrecognised, IAS 32 requires disclosure of:
The extent and nature of the financial instruments, including significant terms and conditions (including principal amount, maturity, early settlement or conversion options, amount and timing of cash flows, stated interest or dividend rates, collateral held or pledged, denomination in a foreign currency, and restrictive conditions and covenants)
Accounting policies and methods adopted, including recognition criteria and measurement principles
Specified information about exposure to interest rate risk (including re- pricing dates and effective interest rates);

20. Disclosure of IAS 32 cont’d
Specified information about exposure to credit risk (including amounts and significant concentrations);
Specified information about the fair value of the financial instrument, or a statement that it is not practicable to provide such information;
Special information if a financial asset is carried in excess of its fair value (the impairment provisions of IAS 39 would generally prohibit this).

21. Fair Value Option
Fair Value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
Designation of financial instruments as at fair value through profit or loss is permitted, when
The designation eliminates or significantly reduces “accounting mismatches”
A group of financial assets and/or liabilities is managed on a fair value basis
An embedded derivative that meets particular conditions
Only available at initial recognition
Designation is irrevocable
No requirement for consistency, meaning that an entity can choose which, if any, of its financial instruments are to be designated

22. Puttable Instrument
 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 occurrence of an uncertain future event or the death or retirement of the instrument holder.

23. Classification of Puttable Instruments
Puttable instruments are 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 in IAS 32. Two exceptions from this principle are certain puttable instruments meeting specific criteria and certain obligations arising on liquidation 

24. Offsetting
IAS 32 also prescribes rules for the offsetting of financial assets and financial liabilities. It specifies that a financial asset and a financial liability should be offset and the net amount reported when, and only when, an entity
has a legally enforceable right to set off the amounts; and
intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

25. Amendment
The IASB decided to amend IAS 32 to clarify certain aspects because of diversity in application that was identified during the IASB constituent outreach.
The project to amend IAS 32 focused on four main areas:
The meaning of 'currently has a legally enforceable right of set-off'
The application of simultaneous realisation and settlement
The offsetting of collateral amounts
The unit of account for applying the offsetting requirements.

26. THE END QUESTIONS?