CFAS

1.
PAS 32 Overview & Objective

OVERVIEW - PAS 32 Financial Instruments: Presentation outlines the accounting requirements for
the presentation of financial instruments, particularly the classification of such instruments into
financial assets, financial liabilities, and equity instruments. This standard determines the initial
recognition of financial instruments. It also provides guidance on the classification of related
interest, dividends, gains/losses, and when financial assets and financial liabilities can be offset.
OBJECTIVE - PAS 32 establishes principles of presenting the financial instruments: (1) to provide
definitions of financial instruments, (2) to show how to distinguish equity from liabilities, (3) to
provide guidance for compound financial instruments, (4) to prescribe the rules for presenting
the treasury shares, and (5) to set forth conditions on when to offset a financial asset and a
financial liability in the statement of financial position.
2. PAS 32 Definition of Financial Instrument
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. In a contract involving financial instruments, the
reporting entity enters into an agreement with another entity (or entities), giving rise to a
financial asset, a financial liability, an equity instrument, or the combinations thereof. The entity
must enter into a contract to recognize a financial instrument. A financial instrument is
essentially a promise by the issuer of the instrument creates a claim on the part of the holder.
Thus, if the entity is the issuer of the financial instrument, it either has a financial liability or an
equity instrument. Conversely, if the entity is the holder of an instrument, it has a financial asset.
3. PFRS 9 Characteristics of Derivatives
A derivative is within the scope of PAS 32 and PFRS 9 if it has all three of the following
characteristics: (1) the contract is based on an underlying variable called the "underlying" (e.g.,
specified interest rate, financial instrument price, commodity price, foreign exchange rate, index
of prices or rates, credit rating or credit index, or other variables); (2) it requires no initial net
investment or an initial net investment that is smaller than would be required for other types of
contracts that would be expected to have a similar response to changes in market factors; and (3)
it is settled at a future date.
4. PAS 32.16 Transactions in Equity’s Own Equity/Equity Instruments
An equity instrument is: (1) a non-derivative that includes no contractual obligation to deliver a
variable number of the entity's own equity instruments or (2) a derivative that will be settled only
by the issuer exchanging a fixed amount of cash or another financial asset for a fixed amount of
its own equity instruments (PAS 32.16)
5. PAS 32.18 Preference of Shares
A preference share that provides for mandatory redemption by the issuer for a fixed or
determinable amount at a fixed or determinable future date, or gives the holder the right to
require the issuer to redeem the instrument at or after a particular date for a fixed or
determinable amount, isa financial liability (PAS 32.18(a)).
6. PFRS 9 Recognition and Derecognition
The reporting entity recognizes financial asset or a financial liability in the statement of financial
position when the entity becomes a party to the contractual provisions of the instrument (PFRS
9 paragraph a 3.1.1). PFRS 9 has strict requirements to prevent companies from hiding toxic
assets out of their statement of financial position. Before deciding to derecognize or not, the
entity needs to determine what it is dealing with (PFRS 9 paragraph 3.2.2): (1) a financial asset (or
a group of similar financial assets) in its entirety or (2) a part of a financial asset (or a part of a
group of similar financial assets) meeting specified conditions. After determining what to
derecognize, the entity then needs to derecognize the asset when (PFRS 9 paragraph 3.2.3): (1)
the contractual rights to the cash flows from the financial asset expire or (2) an entity transfers
the financial asset and the transfer qualifies for the derecognition.
7. PFRS 7 Disclosure
PFRS 7 Instruments: Disclosures requires disclosure of information about the significance of
financial instruments to an entity and the nature and extent of risks arising from those financial
instruments, both in qualitative and quantitative terms. Specific disclosures are required in
relation to transferred financial assets and a number of other matters. Because financial
instruments are essentially promises of receiving and paying money in the future, they are
subjected to risks or chances of losses due to entity, counterparties, and economic factors.
These situations may affect the prospects for future net cash inflows to the entity.
PFRS 7 puts all of those financial instrument disclosures together in new standard disclosures for
financial instruments. PFRS 7 prescribes the disclosure requirements for all entities that have
financial instruments in their books. This applies to all entities reporting under PFRS. Even a
trading or a manufacturing company that has some loans and plenty of trade receivables should
be familiar with PFRS 7 to know what to include in its notes to the financial statements.
PFRS 7 requires certain disclosures to be presented by category of instrument based on the PFRS
9 measurement categories. Certain other disclosures are required by class of financial
instrument. For those disclosures, an entity Must group its financial instruments into classes of
similar instruments as appropriate to the nature of the information presented (PFRS 7.6). PFRS 7
requires certain disclosures in two main areas: (1) significance of financial instruments and (2)
nature and extent of risks from financial instruments and how they are managed by the entity.

CFAS

Uploaded by

Copyright:

Available Formats

CFAS

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CFAS

Uploaded by

Copyright:

Available Formats

1.

PAS 32 Overview & Objective

You might also like