Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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