Flashcards IAS 32

Question 1

What distinguishes financial liability from equity ?

Answer 1

1-Contractual obligation to transfer economic benefits => Liability

if not => equity

2-Assesset on initial recognition

3-Redemption at entity’s option = equity

4-Redemption at counterparty’s option = liability unless deeply out of money

5-Dividends in a fixed amount or %tage = liability

6-fixed nbr of own shares (no cash option by holder) against a fixed amount = equity

Question 2

What is a compound financial instrument ?

Answer 2

Financial liability that contains an equity instrument

Question 3

How are non-redeemable preference shares paying x% dividend accounted for ?

Answer 3

‘=liability as dividend is not at discretion of the issuer (AG 26)

Non-redeemable instr depends on characteristics of other rights/obl associated - like the dividens/interest

Question 4

When must assets + liabilities be offset ?

Answer 4

1) legally enforceable right to offset
2) Intention to settle net or simultaneously
3) Unconditional right -> Does NOT apply if offset right is limited to bankrupty

Question 5

What are treasury shares

Answer 5

Own share held by the entity -> reduction in equity no gain/loss for operations

Exception : own shares held in an investment fund on behalf of third parties

or in an insurance fund per IFRS 17

Question 6

Definition of a financial instrument ?

Answer 6

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.

Question 7

Under what conditions are non-financial contracts a financial asset/liab ?

Answer 7

1) contract has cash settlement feature OR
2) practice to settle net in cash OR
3) practice to take delivery + selling shortly after for profit taking OR
4) non-financial assets readily convertible to cash

Question 8

When are puttable fin instruments classified as equity by issuer ?

Answer 8

1) entitle holder to a pro-rata share in the net asset upon liquidation
2) class subordinated to all other classes of instruments (same level as lowest class)
3) subord class have identical features
4) except redemption, no other obligation pot resulting in eco outflow
5) expected cash flows substantially based on profit/loss, change in net assets recognised + unrecognised.
6) No other fin instrument with such features (5)
7) No other fin instr restricting/fixing resid return
8) in Conso FS : only if holder is the parent (no NCI)

OR if contractual obl is to pro-rata share of net assets upon liquidation only provided :
1,2,6 + 7

Question 9

How are transaction cost related to equity instruments accounted for ?

Answer 9

Deduction from equity

Incremental cost that would not have been incurred if subject instrument had not been issued

Include

• registration fees
• regulatory fees
• legal, accounting & other professional advisors
• printing cost
• stamp duties