IAS 32

Question 1

what are financial instruments

Answer 1

Financial instruments are things like shares, bonds, loans, and other contracts that involve money. They are used by companies to raise funds, manage risks, and make investments.

Question 2

what is the purpose of ias 32?

Answer 2

IAS 32 focuses on how companies classify financial instruments as either liabilities or equity .
it provides a CRITERIA whether something is debt or equity.
it ensures that company is not calling everything equity to look better on paper.

Question 3

what are compound instruments?

Answer 3

Some financial instruments have both liability and equity parts, like convertible loan.

-option to trade for shares
-number of shares are fixed at inception of loan
-interest rate is lower than non convertible loans

Question 4

what disclosures are required for financial instruments?

Answer 4

IAS requires companies to provide detailed information in their financial statements about
-the nature and risks faced by company
-carrying amounts of each instrument, must be recorded on face of FS or in notes
-items of income, expense, gain loss of each financial instrument either in PnLnOCI or notes of FS.

Question 5

what is the criteria for debt?

Answer 5

There Is a Fixed Obligation to

1) transfer cash or another financial asset to the holder

2)exchange financial assets or liabilities with the holder, under unfavorable conditions

3) obligation will be settled with entity’s own equity

eg. trade payable, debenture loans, redeemable preference shares

Question 6

criteria for financial asset? and measurement?

Answer 6

1) cash
2) contractual right to recieve cash or another asset
3) equity instrument of another entity
4) right to exchange financial asset or liability in favorable conditions

eg. trade recievables, options, equity shares

measurement:
initially measured at fair value aka purchase costs

Question 7

how is measurement done of financial liabilities?

Answer 7

initially at fair value (net proceeds less costs of issue)

subsequently:
initial value + interest - interest paid

Question 8

what is the treatment of preference shares?

Answer 8

irredeemable/ no obligation to pay capital or dividend: equity

redeemable/ fixed dividend: they are financial liability

Question 9

accounting treatment of interest and dividends?

Answer 9

equity dividends are reported directly in equity
liability dividends/interest are treated as finance cost in income statement

Question 10

how is accounting done for compound instruments (convertible loan)?

Answer 10

split accounting is used. both their equity and liability components are recognised.

initial measurement:
-liability measured at fair value (PV of future cash flows: interest and capital)
rate of interest used is market rate for non convertibles.

-equity is loan proceeds less the calculated liability measurement.

subsequent measurement:
-liability measured at amortised cost (initial value + market rate interest - interest paid)
-equity stays the same till date of redemption

Question 11

what are equity instruments? how are they measured?

Answer 11

purchases of shares in other entities.
measured at either:
-fair value through PnL
*transaction costs are expensed
*gain or loss on investments is shown in PnL
-fair value through Other comprehensive income
*only use if long term investment
*transaction costs r capitalised
*gain or loss shown in OCI, and taken to investment reserve in equity
*investment reserve can be negative unlike revaluation of PPE.
*if investment is sold, investment reserve can be transferred to retained earnings or left in equity.

Question 12

what are debt instruments and how are they measured?

Answer 12

debt instruments are bonds, redeemable pref shares etc.
they are measured in either:
-FV through PnL (default if held for trading) transaction costs are expensed and not included in FV. changes in fv are taken to PnL.
-FV through OCI (must pass 2 tests)
-amortised cost (must pass 2 tests)

Question 13

what two tests must be passed for an instrument to be carried at amortised cost?

Answer 13

1) business model test: entity must intend to hold the investment to maturity
2) contractual cash flow characteristics test: contractual terms must give rise to cash flows that are solely of principal and interest

Question 14

what is the accounting treatment if a debt instrument is held at amortised cost?

Answer 14

-interest income each yr is taken to PnL.
-year end asset value is calculated similarly as liabilities: balance b/f +interest income -interest received

Question 15

what two tests must be passed for debt instrument to be carried at OCI?

Answer 15

-business model: intention to hold investment till maturity, but may sell if possibility of buying asset with higher return arises.
-contractual cash flow characteristics test: cash flows only of principal and interest.

Question 16

accounting treatment if debt instrument is carried in SOCI?

Answer 16

1- asset is initially recognised at FV+ tranaction costs
2- interest income calculated using effective rate
3- gain or loss is shown in OCI. reclassify to gain or loss on disposal??

Question 17

when should financial instruments be derecognised?

Answer 17

when the contract expires or cancelled.

treatment:
the difference between carrying value and amount paid initially (gain or loss) is shown in PnL.

Question 18

what is receivables factoring?

Answer 18

when a company sells its unpaid receivables to another company for quick cash.
The second company manages and collects them. they keep a fee.
It helps the first company get money faster, even though they don’t get the full amount.

Question 19

how is accounting done of receivables factoring?

Answer 19

-if it’s with recourse - bad debt risk lies with company. this is treated as a secure loan against receivables, rather than a sale.
-if it’s without recourse, in which bad debt risk lies with factor,this is treated as a sale, and receivables are removed from FS.