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IAS 32: FINANCIAL INSTRUMENTS: PRESENTATION - Coggle Diagram
IAS 32: FINANCIAL INSTRUMENTS: PRESENTATION
Definitions
Financial Liability
A contract that will or may be settled in an entity's own equity instruments
A contractual obligation:
:check: to deliver cash or another financial asset to another entity
:check: to exchange financial assets or financial liabilities with another entity (potentially unfavourable to the entity)
Equity Instrument
Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities
Financial Asset
An equity instrument of another entity
A contractual right:
:check: to receive cash or another financial asset from another entity
:check: to exchange financial assets or financial liabilities with another entity (potentially favourable to the entity)
A contract that will or may be settled in an entity's own equity instruments.
Cash
Derivative
Requires no initial investment or an initial net investment that is smaller than would be required for other types of contracts
It is settled at a future date
Its value changes in response to an underlying variable (eg: share price, commodity price, forex, interest rate)
Financial Instrument
Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity
Classification as liability vs equity
Step 1:
Go through the definition of a financial liability
Step 2:
:check: If it meets the definition, that instrument is financial liability
:green_cross: If it does not meet, then that instrument is equity instrument
:!!: Critical feature of a financial liability is the
contractual obligation
to deliver cash/another financial asset.
Compound instruments
A financial instrument which contains some characteristics of equity and some of financial liability (eg: convertible debt)
:!!: this needs to be classified separately
Method for separating the components
Step 1: Determine the carrying amount of liability component:
Present value of principal payable
(par value x discount factor)
(+)
Present value of interest annuity payable
(par value x coupon rate x annuity factor)
:warning: use
rate without conversion
Step 2: Assign the residual amount (total amount - total liability component) to the equity component