IAS 32 Financial Instruments: Presentations

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Desmond 27
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IAS 32 Financial Instruments: Presentations

Post by Desmond 27 »

Under the definition of financial assets there is a paragraph like below

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 receive a variable a 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.

I could not relate to any example and I am confused with it because since it is a financial asset why the entity will need to settle it with its own equity instruments? This exact wordings also appears in the definition of financial liability.

Can anyone explain and give me some example on it so that I can relate to this. Much appreciated and thank you. :D :D
JRSB
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Re: IAS 32 Financial Instruments: Presentations

Post by JRSB »

I think it's getting at the distinction between equity and debt. eg:

For example, where a contract requires the entity to deliver as many of the entity’s own equity instruments as are equal in value to a certain amount, the holder of the contract would be indifferent whether it received cash or shares to the value of that amount. Thus, this contract would be treated as debt.

I agree that the wording is very inaccessible.
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Marek Muc
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Re: IAS 32 Financial Instruments: Presentations

Post by Marek Muc »

this is part of the definition of a financial asset as well,
derivatives on own equity instruments may become financial assets (i.e. their fair value is positive) depending on the spot price movements after the contract inception
see Examples 1-6 to IAS 32
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exIFRS
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Re: IAS 32 Financial Instruments: Presentations

Post by exIFRS »

These (d) paragraphs (referring to an entity's own shares) were late additions to the standard to deal with more complex financial transactions that were starting to appear in certain industries. The BC (para 5) states (in part):
The original IAS 32 dealt with aspects of this issue piecemeal and it was not clear how various transactions (eg net share settled contracts and contracts with settlement options) should be treated under the Standard. The Board concluded that it needed to clarify the accounting treatment for such transactions.
Effectively the standard is saying when an entity has an obligation to purchase its own shares for cash (such as under a forward contract to purchase its own shares), there is a financial liability for the amount of cash that the entity has an obligation to pay. Also when an entity uses its own equity instruments ‘as currency’ in a contract to receive or deliver a variable number of shares whose value equals a fixed amount or an amount based on changes in an underlying variable (eg a commodity price), the contract is not an equity instrument, but is a financial asset or a financial liability.
JRSB
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Re: IAS 32 Financial Instruments: Presentations

Post by JRSB »

Effectively the standard is saying when an entity has an obligation to purchase its own shares for cash (such as under a forward contract to purchase its own shares), there is a financial liability for the amount of cash that the entity has an obligation to pay.

Why is that put within the definition of a financial asset?
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Marek Muc
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Re: IAS 32 Financial Instruments: Presentations

Post by Marek Muc »

because this is a derivative that can equally become a financial asset if the underlying prices moves in your favour
pub_acco
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Re: IAS 32 Financial Instruments: Presentations

Post by pub_acco »

Several years ago, I heard of an arrangement where an entity issued convertible bonds at the public market and at the same time purchased options that allowed the issuer to buy back all the newly issued shares at maturity. This combination effectively worked like straight bonds but could be advantageous to the issuer under some market conditions when the sum of convertible bond coupons and option premium was less than straight bond coupons.

In the specific case I heard of, both the warrant portion of the convertible bonds and the purchased options met the fixed-to-fixed criteria, so it isn't directly relevant to the discussion in this thread. But if the warrants and options included a variable factor (e.g. if denominated in a foreign currency), then the option would meet the definition of financial assets (d)(ii).

I'm not fully sure, but I think the "collar" mentioned in the following article is a similar transaction to the above: https://www.iasplus.com/en/meeting-note ... nd-options
Desmond 27
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Re: IAS 32 Financial Instruments: Presentations

Post by Desmond 27 »

After I read the illustrative example of IAS 32 I have a better picture now, but I still blur on some example below:

In Example 1: Forward to buy Shares

For the part of cash for shares Example 1 (c), it recognized a liability for the obligation to deliver cash at CU100,000 which is the market price of the share instead of its fair value (which is different in example 3).

In Example 3: Purchased Call Options

For the part of cash for shares Example 3 (c), it directly recognized the cash payment of CU5,000 and did not recognized the liability for obligation to pay.


I am confused with both of this example, both of them looks alike but have a different treatment. Please refer to the example from the link attached. Its hard to express what issues I encountered as English is not my native language...

The link for the illustrative example is here: http://www.masb.org.my/pdf.php?pdf=MFRS ... h=pdf_file

Please help me...thank you....
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exIFRS
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Re: IAS 32 Financial Instruments: Presentations

Post by exIFRS »

My understanding is that the difference boils down to paragraph 16, in Example 1 the entity has an obligation under the forward to deliver cash, therefore a liability. In example 3 a call gives the entity to ability to avoid payment if it doesn't make the call.
Desmond 27
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Re: IAS 32 Financial Instruments: Presentations

Post by Desmond 27 »

exIFRS wrote: 28 Dec 2020, 17:17 My understanding is that the difference boils down to paragraph 16, in Example 1 the entity has an obligation under the forward to deliver cash, therefore a liability. In example 3 a call gives the entity to ability to avoid payment if it doesn't make the call.
Thank you for your point of view...it make sense for me. Will figure it out further on whether or not to avoid the obligations. Thanks.
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