IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 24 / Financial Instruments: Presentation (lAS 32)

• Intangible assets (e.g., patents and trademarks). Control of intangib le assets creates an opportunity to generat e a cash inflow but does not give rise to a present right to recei ve cash or another financial asset. • Prepaid expenses. Such assets are associated with the receipt of goods or services. The y do not give rise to a present right to receive cash or another financi al ass et. • Def erred revenue. Such liabilities are assoc iated with the future deliv ery of goods or services. They do not give rise to a contractual obligation to pay cash or another finan cial as– set. • Warranty obligations. Such liabilities are assoc iated with the future delivery of goods or ser– vices . They do not give rise to a contractual obligation to pay cash or another financial asset. • Income tax liabilities (or assets). Such liabilities (or assets) are not contractual but are im– posed by statutory requirements. • Constructive obligations. Such obligations do not arise from contracts. (A constructive obligation is defined by lAS 37 as an obligation that deri ves from an entity 's acti ons where: (a) by an established pattern of past practice, published policies, or a sufficiently specific cur– rent statement, the entity has indicated to other parties that it will accept cert ain responsibili– ties; and (b) as a result , the entit y has created a valid expectation on the part of those other partie s that it will discharge those respon sibilities.) 2.7 Apart from items that meet the definition of financial instruments, lAS 32, lAS 39, and IFRS 7 also apply to some contracts that do not meet the definition of a financial instrument but have characteristics similar to derivative financial instruments. Thi s expands the scope of lAS 32, lAS 39, and IFRS 7 to contracts to purchase or sell nonfinancial items (e.g., gold , electricity, or gas) at a futur e date when, and only when, a contrac t has both of these two characteristics : (a) it can be settled net in cash or some other financial instrument , and (b) it is not for receipt or deli very of the nonfinancial item in acco rdance with the entity's expec ted purch ase, sale, or usage requ ire– ment s. Chapter 26 on lAS 39 provides a more det ailed discussion. 2.8 lAS 32 has scope exceptions for some items that meet the definition of a financial instrument, because they are accounted for under other IFRS. Such scope exceptions are listed in the table. Scope Excention Applicable Standard lAS 27. Consolidated and Separate Financial Statements

Interests in subsidiaries Interests in associates Interests in joint ventures Employee benefit plans Share-based payment transactions Contracts for contingent consideration in business combinations In surance contracts

lAS 28. Investments in Associates lAS 31. Interests in Joint Ventures lAS 19. Employee Benefi ts IFRS 2. Share-Based Payment

(FRS 3. Business Combinations IFRS 4. Insurance Contracts 2.9 Unlike lAS 39, lAS 32 has no scope exception for an entity's issued equity instruments that are classified in the equity section of the balance sheet (e.g., an entity's share capital ).

Case Study 1

This case illustrates how to apply the defin ition ofa fi nancial instrument and the scope oflAS 32. Facts Company A is evaluating whether each of these items is a financial instrument and whether it should be accounted for under lAS 32: (a) Cash deposited in banks (b) Gold bullion deposited in banks (c) Trade accounts receivable (d) Investments in debt instruments (e) Investments in equity instruments, where Company A does not have significant influence over the investee (f) Investments in equity instruments, where Company A has significant influence over the inves– tee (g) Prepaid expenses (h) Finance lease receivables or payabies