Download Ind AS 32 - Financial Instruments : Presentation Speaker

IND AS:32 – Financial Instruments : Presentation
 Objective and Scope





Definition
Liabilities vs. Equity
Compounding instruments
Treasury Shares
Off setting
 First time Adoption
1
OBJECTIVE AND SCOPE
2
Objectives
• To establish principles for presenting financial instruments as
liability or equity and for offsetting financial assets and liabilities
3
Scope – Exclusion
• Those interests in subsidiaries, associates or joint ventures that
are accounted for in accordance with Ind AS 110, Consolidated
Financial Statements, Ind AS 27, Separate Financial Statements,
or Ind AS 28,Investments in Associates and joint ventures.
• Employers’ rights and obligations under employee benefit plans,
to which Ind AS 19, Employee Benefits, applies.
• Insurance contracts and Financial instruments that are within the
scope of Ind AS 104
• Financial instruments, contracts and obligations under sharebased payment transactions to which Ind AS 102, Share-based
Payment
4
DEFINATIONS
5
Definitions – Financial Instrument
• Financial Instruments :
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.
6
Definitions –Financials Asset
Financial Asset :
• cash;
• an equity instrument of another entity;
• a contractual right
 to receive cash or another financial asset from another entity; or
 to exchange financial assets or financial liabilities with another entity
under conditions that are potentially favourable to the entity;
• a contract that will or may be settled in the entity’s own equity
instruments
 A non-derivative for which the entity is or may be obliged to receive a
variable number of the entity’s own equity instruments; or
 A derivative that will or may be settled other than by the exchange of a
fixed amount of cash or another financial asset for a fixed number of
the entity’s own equity instruments.
7
Definition – Financial Liability
Any Liability that is:
• A contractual obligation
 To deliver cash or another financial asset to another entity.
 To exchange financial assets/ liabilities with another entity
under potentially unfavorable conditions
OR
• A contract that will or may be settled in the entity’s own equity
instruments and is
 A non – derivative for which the entity is or may be obliged to
deliver a variable number of the entity’s own equity instruments;
or
 A derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial asset
for a fixed numbers of the entity’s own equity instruments
Definition – Financial Liability
Carve Out from IFRS :
• the equity conversion option embedded in a convertible
bond denominated in foreign currency to acquire a fixed
number of the entity’s own equity instruments is an equity
instrument if the exercise price is fixed in any currency.
9
Definition – Equity Instruments
• Any contract that evidences a residual interest in the assets of
an entity after deducting all of its liabilities.
• An instrument is an equity instrument if, and only if, Both of
the conditions below are met:
a. Instrument includes no Contractual Obligation(for the
Issuer).
 To deliver cash or another financial assets to another
entity;
 To exchange financial assets/ Liabilities with another
equity under potentially unfavorable conditions.
10
Definition – Equity Instruments
b. If the instrument will or may be settled in the issuer’s own
equity instrument it is:
 A non- derivative that include no contractual obligation
for the issuer to deliver a variable number of its own
equity instrument
or
 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.
11
Exercise : Identification of FI & Components
Statutory Dues/ Tax Liability
Not a FI
USD – INR Option held by the entity (Buyer of the Option)
Yes, FI , FA
Advance given for purchase of Goods
Not a FI
Liability for damages under Lawsuit
Not a FI
12
Exercise : Identification of FI & Components
Trade Receivable
Yes, FA
CENVAT Credit Receivable
Not a FI
Gold Bullion
Not a FI, (No Contractual right)
13
LIABILITY Vs EQUITY
14
Liability vs. Equity – Classification criteria
• An issuer of a financial instrument must classify the instrument or
its component parts:
 On Initial recognition as financial asset/financial liability/equity
 In accordance with the substance of the contractual
arrangement;
 Based on Definitions of financial asset/financial liability/equity
• The classification of an instrument as equity or a financial liability
would not be impacted by, For example:
 A history of making distributions
 An intention to make distribution in the future
 A possible negative impact on price of the issuer’s ordinary
shares if distributions are not made
 The amount of the issuer’s reserves
 An issuer’s expectations of a profit or loss for a period
15
Liability vs. Equity – key differentiators
• Critical feature differentiating a financial liability from equity:
 Existence of a contractual obligation
 To deliver cash/another financial asset or
 To exchange financial asset/ financial liabilities under conditions
that are potentially unfavorable to the issuer.
• An issuer of an equity instrument does not have a contractual
obligation to make distributions because it cannot be required to
deliver cash or another financial asset to the holder.
• Substance of financial instrument rather than its legal form,
governs its classification
• Substance and legal form commonly consistent, but not always
16
Liability vs. Equity
Contract settled in
entity’s own shares
Monetary value
of consideration
Number of
equity shares
Classification
Scenario 1
Fixed
Variable
Financial Liability
Scenario 2
Variable
Fixed
Financial Liability
Scenario 3
Fixed
Fixed
Equity Instrument
• Interest, Dividend, Losses and gains :
Classification of the FI as FL/Equity determine the related booking
of Dividend / interest as income or Expenses in P & L Statement.
Interest, dividends, losses and gains relating to a financial
instrument or a component that is a financial liability shall be
recognized as income or expenses in profit or loss.
Distributions to holders of an equity instrument shall be
recognized by the entity directly in equity.
Transaction costs of an equity transaction shall be accounted for
17 as a deduction from equity.
COMPOUNDING INSTRUMENTS
18
Compound Instrument
• The issuer of a non-derivative financial instrument shall
evaluate the terms of the financial instrument to determine
whether it contains both liability and an equity instrument.
• Such components shall be classified separately as financial
liabilities or equity instruments
• Example:
Instrument
Convertible bonds
19
Liability component
Equity component
Principal redemption and Convertibility option to
interest payment liability the holder
Separation
The Liability components is determined by fair value of
expected cash flows(for future interest payments and for
principal payments)
The residual value is allocated to the equity component.
20
Presentation: Compound Instrument
•
•
IStaR Ltd. issues 1000 bonds convertible into
its own shares in 3 years. The bonds are
issued at par with a face value of INR 100/per bond. Interest is payable annually at
nominal interest at 6% p.a. Each bond is
convertible at anytime up to maturity in 125
equity shares. When bonds are issued the
prevailing market interest rate for similar debt
without conversion options is 9% p.a.
Solution:
Under this approach, the liability element is
valued first, and the difference between the
proceeds of the bond issue and the fair value
of the liability is assigned to the equity
component. The present value of the liability
component is calculated using a discount rate
of 9%, the market rate for similar bonds with
no conversion rights.
•
PV of the principal 100,000/payable at the end of 3 yrs
PV of the interest 6,000/payable annually for
3 years
Total Liability Component
•
Proceeds of the Bond
•
Equity component (bal. fig)
•
Discounting factor @ 9%
1 year 0.917
2 year 0.842
3 year 0.772
(77,200)
(15,186)
-----------(92,386)
100,000
-----------7,614
=======
21
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Conversion
• On conversion of a compound instrument at maturity, the
entity should de-recognize the liability component and
recognize it as equity.
• Equity issued on conversion is measured at the carrying
amount of the liability component at the date of conversion.
• There is no gain or loss on conversion at maturity.
• The equity component of the instrument recognized initially
is transferred to share capital. Other component of equity
are recognized depending on the legal requirement.
22
Separation- Subsequent measurement
• The liability component is subsequently measured as per
IND AS 9 either at amortized cost or at fair value.
• The equity component is carried at the amount initially
measured. It is not subsequently re-measured.
• Any premium or discount on redemption of compound
instrument is factored in working out the liability component
on initial recognition.
• In subsequent measurement premium on redemption.
23
TREASURY SHARES
24
Treasury Shares
• Treasury shares are shares issued by an entity that are held
by the entity.
• The circumstances in which an entity is permitted to hold
treasury shares are a matter for legislation in the jurisdiction
concerned. Holding of treasure shares may arise in a
number of ways for Example:
25
The entity holds the shares as the result of a direct
transaction, such as a market purchase, or buy back of
shares from shareholders as a whole, or a particular
group of shareholders.
The entity is in the financial services sector with a marketmaking operation that buys and sells its own shares along
with those of other listed entities in the normal course of
business, or holds them in order to ‘hedge’ issued
derivatives.
Treasury Shares
In consolidated financial statements, the shares were
purchase by another entity which subsequently became a
subsidiary of the reporting entity, either through acquisition
or changes in financial reporting requirements.
26
Treasury Shares
Are own equity instrument
acquired?
Y
E
S
Debit amount paid directly
to equity?
Are own equity instrument
Sold?
Y
E
S
Credit amount paid directly
to equity?
No gains/ losses recognized in profit or loss on:
Any purchase, sale, issue or cancellation of own equity
instrument or
In respect of any changes in the value of treasury shares.
27
OFFSETTING
28
OFFSETTING
• Offsetting a financial assets and a financial liability :
A FA and FL shall be offset and net amount presented in
the statement of financial position when, and only when,
an entity :
- legally enforceable right
and
- Intention to settle or realize on net basis
In accounting for transfer of a FA that does not qualify for
derecognition, the entity shall not offset the transferred
assets and the associated liability.
29
First time Adoption
• Compound Financials Instrument are split at the inception into
separate liability and equity components.
• The “split-accounting” provision of IND AS 32 need not be applied
where the liability component of a compound financials instrument
is no longer outstanding at the transaction date.
30
THANK YOU
FOR YOUR ATTETION
31