IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 24 / Financial Instruments: Presentation (lAS 32)

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4. PRESENTATION OF INTEREST, DIVIDENDS, LOSSES, AND GAINS

The classifica tion of an issued financia l instrument as either a fina nci al liability or an equity in– strument determin es whether interest, divi dends, ga ins, and losses relati ng to that instrument are recognized in profit or loss or directly in equity. o Dividends to holders of outstandi ng shares that are classified as equi ty are debited by the en– tity directly to equity. o Dividend s to holde rs of outstanding shares that are classified as financial liabilities are recog– nized in the same way as interest expense on a bond. o Gains and losses associated with redemptions of financial liabilities are recogn ized in profit or loss. o Redemptions and refinancings of equity instruments of the entity are recogn ized as cha nges in equity. o Changes in the fair value of equity instruments of the entity are not recognized in the finan– cia l statements. o Generally, costs incurred in issuing or acquiring own equity instrument s are not expensed but acco unted for as a deducti on from equity. Such cos ts include regulato ry fees, legal fees, ad– visory fees, and other tran sacti on cos ts that are directly attributable to the equity transaction and tha t otherwise would have been avoided. 4.1 Offsetting of a Financial Asset and a Financial Liability 4.1.1 Generally, it is inappropriate to net financial assets and financial liabiliti es and present only the net amount in the balance sheet. Example Entity A has $120,000 offi nancial asset that are held fo r trading and $30.000 of fil/{lIlcial liabilities that are held fo r trading. It would be inappropriate f or Entity A to present only the net amount of $90.000 as a fina ncial asset. Instead it should present a fin ancial asset of $120.000 and a finan cial liability of$30.000. 4.1.2 lAS 32 requires a fina ncia l asset and a financial liabil ity to be offset with the net amount presented as an asset or liab ility in the balance sheet when, and onl y when, these t lVO conditions are met: (I ) A right of set-off. The entity currently has a legally enforceable right to se t off the recog– nized amounts . Thi s means that the entity has an unconditi onal legal right, supported by contract or otherwise, to settle or otherwise eliminate all or a portion of an amou nt due to another party by applyi ng an amount due from that other party. (2) Int ent ion to settle net or simultaneous ly. The entity intends eit her to settle on a net basis or to realize the asset and settle the liabilit y simultaneously. 4.1.3 These two conditions reflect the view that when an entity has the right to receive or pay a sing le amount and intends to do so, it has, in effec t, only a si ngle financ ial asset or financial liabi l– ity. When both conditions are met, net presentation reflects more appropriately the entity's ex– pected future cash flows from settling the asset and the liability. When either or both of the two conditions are not met, financial asse ts and financial liabilities are present ed separate ly. In those cases, separate presentation better reflects the entity's expe cted future cas h flows and associ ated risk s. This case illustrates the application of the conditions for offsetting offi nancial assets and financia l li– abilities. Facts Entity A has a legal right to set off cash flows due to Entity B (i.e., payables of Entity A) against amounts due from Entity B (i.e., receivables of Entity A ). Entity A has these payables to Entity B: $1,000,000 on March 31, $3,000,000 on June 30, and $2,500,000 on October 31. Entity A has these re– ceivables from Entity B: $500.000 on January 15, $4,000,000 on June 30, and $1,000,000 on December 15. Case Study 5