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Wiley lFRS: Practicallmplementation Guide and Workbook
(i) Deferred revenue
(j)
Statutory tax liabilities
(k) Provision for estimated litigation losses
(I)
An electricity purchase contract that can be net settled in cash
(m) Issued debt instruments
(n) Issued equity instruments
Required
Help Company A to determine ( I) which of the above items meet the definition of a financial instrument
and (2) which of the above items fall within the scope of lAS 32.
Solution
(a) Yes, cash deposited in a bank is a financial instrument. If an entity deposits cash in a bank, it is
a financial asset of the entity and a financial liability of the bank, because the bank has a con–
tractual obligation to repay the cash to the entity.
It
falls within the scope of lAS 32.
(b) No, gold is not a financial instrument. It is a commodity.
It
is outside the scope of lAS 32.
(c) Yes, a trade accounts receivable is a financial instrument. Trade accounts receivable is a finan–
cial asset because the holder has a contractual right to receive cash.
It
falls within the scope of
lAS 32.
(d) Yes, an investment in a debt instrument is a financial instrument. Investments in debt instru–
ments are financial assets because the investor has a contractual right to receive cash.
It
falls
within the scope of lAS 32.
(e) Yes, an investment in an equity instrument is a financial instrument. Investments in equity
instruments are financial assets because the investor holds an equity instrument issued by an–
other entity.
It
falls within the scope of lAS 32.
(f)
While an investment in an equity instrument is a financial instrument (a financial asset), if the
investor has significant influence, jo int control, or control over the investee, the investment gen–
erally is scoped out of lAS 32 and instead accounted for as an investment in an associate, jo int
venture, or subsidiary.
(g) No, prepaid expenses are not financial instruments because they will not result in the delivery
or exchange of cash or other financial instruments. They are outside the scope of lAS 32.
(h) Yes, finance lease receivables or payables are financial instruments. They are within the scope
of lAS 32. (However, they are scoped out of lAS 39 except for recognition and measurement of
impairment of finance lease receivables.)
(i) No, deferred revenue does not meet the definition of a financial instrument. Deferred revenue is
outside the scope of lAS 32.
(j)
No, deferred taxes do not meet the definit ion of a financial instrument, because they do not
arise from contractual rights or obligations, but from statutory requirements. They are outside
the scope of lAS 32.
(k) No, provisions do not meet the definition of a financial instrument, because they do not arise as
a result of contractual rights or obligations. They are outside the scope of lAS 32.
(I)
Even though an electricity purchase contract does not meet the defin ition of a financial instru–
ment, it is included in the scope of lAS 32 (and lAS 39) if it can be settled net in cash unless it
will be settled by delivery to meet the entity' s normal purchase, sale, or usage requirements.
(m) Yes, an issued debt instrument meets the definition of a financial liability.
It
is within the scope
of lAS 32.
(n) Yes, an issued equity instrument is a financial instrument that falls within the scope of lAS 32.
However, although an issued equity instrument meets the definition of a financial instrument,
there is a specific scope exception for issued equity instruments in lAS 39.
3. PRESENTATION OF LIABILITIES AND EQUITY
3.1 Classification as Liabilities or Equity
3.1.1 A key issue addresse d by lAS 32 is how an iss uer of a financial instru me nt determ ines
whethe r the instrument shou ld be cl assified as an equity instrume nt or a fi nancial liability (o r, in a
few cases , a fin ancial asset). lAS 32 provides th is principle:
• The issuer of a fin an ci al instrument sha ll classify the instrume nt, or its co mpo ne nt part s, on
initial recognition as a fi nanci al liability, a fin ancial asse t, or an equity instrument in acco r–
dance with the subs ta nce of the co ntractua l arrangeme nt and the definitions of a financial li–
ability, a fin an ci al asse t, and an equity instrumen t.