International Financial Reporting Standards_guide.pdf

Chapter 33 Financial Instruments: Presentation (IAS 32) 363
Liabilities imposed by statutory requirements (for example, income taxes) are not financial
liabilities because they are not contractual.
33.3.4 An equity instrument is any contract that evidences a residual interest in the assets
of an entity after deducting all of its liabilities. An obligation to issue an equity instrument is
not a financial liability because it results in an increase in equity and cannot result in a loss
to the entity.
33.3.5 Fair value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s-length transaction.
33.4 PRESENTATION
33.4.1 The issuer of a financial instrument should classify the instrument, or its component
parts, on initial recognition as a financial liability, a financial asset, or an equity instrument
in accordance with the substance of the contractual arrangement and the definitions of a financial
liability, a financial asset, and an equity instrument.
33.4.2 In order for an instrument to be classified as an equity instrument the instrument
should not include any contractual obligation to pay cash or another financial asset or
exchange financial assets and financial liabilities under potentially unfavorable conditions. If
this instrument will or may be settled in the issuer’s own equity, then the contract must result
in the issue of a fixed number of shares for a fixed amount of cash. If either the number of
shares or the amount of cash is variable, then the instrument is a financial liability and not
an equity instrument.
33.4.3 A financial instrument that is puttable by the holder is classified as an equity instrument
if it has all of the following features:
■ It entitles the holder to a pro rata share of the entity’s net assets in the event of liquidation
of the entity, where the entity’s net assets are those that remain after deducting all
other claims on its assets.
■ The instrument is in the class of instruments that is subordinate to all other classes of
instruments.
■ All financial instruments in the class of instruments that is subordinate to all other
classes of instruments have identical features.
■ Apart from the contractual obligation of the issuer to repurchase or redeem the instrument
for cash or another financial asset, the instrument does not include any contractual
obligation to deliver cash or another financial asset or exchange financial assets
under conditions that potentially are unfavorable.
■ The total expected cash flows attributable to the instruments over the life of the instrument
are based substantially on the profit or loss, the change in recognized net assets,
or the change in fair value of the recognized and unrecognized net assets of the entity
over the life of the instrument.
33.4.4 The classification of instruments as financial liabilities or equities requires judgment
and is based on the substance of a financial instrument and not its legal form. There is an
exception for instruments described in 33.4.5 below.
33.4.5 An instrument is not necessarily equity just because it may be settled by the delivery
of an entity’s own equity instruments. Such instruments are only classified as equity if the