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Chapter
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Financial Instruments: Presentation (lAS 32)
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• 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
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
Applicable Standard
lAS 27.
Consolidated and Separate Financial Statements
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