International Financial Reporting Standards_guide.pdf

364 Chapter 33 Financial Instruments: Presentation (IAS 32)
result is the entity transferring a fixed number of equity instruments for a fixed amount of
cash. As soon as either the number of equity instruments or the amount of cash is variable
the contract does not evidence a residual interest in the entity’s net assets and is accordingly
classified as a financial liability.
33.4.6 A financial instrument may require an entity to deliver cash or other financial asset
in the event of the occurrence or nonoccurrence of uncertain future events that are beyond
the control of the issuer and the holder of the instruments. Because the entity does not have
an unconditional right to avoid the delivery of cash or another financial asset, the instrument
is a financial liability unless the contingent settlement provisions are not genuine or settlement
would only occur on the liquidation of the entity.
33.4.7 The issuer of a compound financial instrument that contains both a liability and
equity component (for example, convertible bonds) should classify the instrument’s component
parts separately. The equity component is the difference between the consideration
received and the fair value of the liability component. The fair value of the liability component
is determined as the present value of the contractual cash flows discounted at the market
rate of interest for a similar instrument but without the conversion option. Once a financial
instrument has been classified the classification is not changed, even if economic circumstances
change. No gain or loss arises from recognizing and presenting the parts separately.
33.4.8 Interest, dividends, losses, and gains relating to a financial liability should be
reported in the Statement of Comprehensive Income as expense or income. Distributions to
holders of equity instruments should be debited directly to equity. The classification of the
financial instrument therefore determines its accounting treatment in the Statement of
Comprehensive Income:
■ Dividends on shares classified as liabilities would thus be classified as an expense in
the same way that interest payments on a loan are classified as an expense.
■ Gains and losses (premiums and discounts) on redemption or refinancing of instruments
classified as liabilities are reported in the Statement of Comprehensive Income.
33.4.9 A financial asset and a financial liability should be offset only when:
■ a currently enforceable legal right to set off exists, and
■ an intention exists to either settle on a net basis or to realize the asset and settle the
related liability simultaneously.
33.4.10 Treasury shares are equity instruments that an entity or other members of the consolidated
group hold in itself. Treasury shares should be deducted from equity and no gain
or loss on such transactions may be recognized. The amount of treasury shares should be
disclosed.
33.5 DISCLOSURE
33.5.1 See chapter 34 (IFRS 7) for information about disclosure requirements.
33.6 COMMENTARY
33.6.1 If an instrument is classified as a financial liability it is because the entity is obligated
to make certain cash payments in respect of the balance. If an instrument is classified as equity,
cash flows in respect of that instrument are entirely at the discretion of the entity. The
debt equity classification therefore illustrates what cash flows the entity is obligated to make