IAS 32

Definition : What is a Financial Instrument?

A contract that gives rise to:

in one enterprise

and

of another enterprise
PAS 32. paragraph 11
Examples of Financial Instruments
Cash in the form of notes and coins
Cash in the form of check
Cash in bank
Trade accounts
Notes and Loans
Debt securities
Equity securities
 Definition of Financial Asset
Any asset that is:
cash;
a contractual right to receive cash or another financial asset from
another entity;
a contractual right to exchange financial instruments with another
enterprise under conditions that are potentially favourable;
an equity instrument of another entity;
a contract that will or may be settled in the entitys own equity
instruments and is:
A non-derivative for which the entity is or may be obliged to receive a variable
number of the entitys own equity instruments;
A derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entitys own
equity instruments.
Financial Liability
Any liability that is a contractual obligation:
to deliver cash or another financial asset to another enterprise; or
to exchange financial instruments with another enterprise under
conditions that are potentially unfavourable
a contract that will or may be settled in the entitys own equity
instrument and is:
A non-derivative for which the entity is or may be obliged to deliver a variable
number of the entitys own equity instruments;
A derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entitys
own equity instruments.

EXAMPLES: Trade Accounts Payable, Notes

Payable, Loans Payable, Bonds Payable
Equity Instrument
Any contract that evidences a residual interest
in the assets of an enterprise after deducting
all of its liabilities
EXAMPLES: Ordinary Share Capital, Preference
Share Capital
Warrants or Written call options
Compound Financial Instrument
IAS 32, paragraph 28, defines a compound
financial instrument as a financial instrument
that contains both a liability and an equity
element from the perspective of the issuer.
IAS 32
Mandates that such components shall be
accounted for separately.

Example: Convertible Bonds

Step 1- Determine the FV of Convertible debt/bond
as a whole
Step 2- Determine the FV of the debt w/o Call
option
Step 3- Determine the Carrying amount of Equity
Component
 Chap Inc. decided to raise cash by issuing 5000
convertible bonds in the beginning of 2014. The
bonds have a 5 year term, are issued at par with
a face value of 1000 per bond. The bonds carry
the coupon rate of 4% per year and coupon
payments are payable annually on December 31
each year. Each bond is convertible to 300
common shares.

At the Time of issuing the bonds:

- The average market interest rate for similar
debts w/o the call option to convert into share is
7%.
STEP 1: Determine the Fair Value of the
Convertible debt as a whole

Face Value per bond P 1,000

# of bonds 5,000
Fair Value (Proceeds) P 5,000,000
 Step 2: Determine the FV of similar debt w/o call option

Year Coupon Principal Total Discount Present

Cash Factor Value
Flow
1 200 000 200 000 0.935 186 916

2 200 000 200 000 0.873 174 688

3 200 000 200 000 0.816 163 260

4 200 000 200 000 0.763 152 579

5 200 000 5 000 000 5 200 000 0.713 3 707 528

TOTAL 4 384 970

STEP 3: Determine the carrying amount of
equity component

FV of Compound FI P 5 000 000

less: FV of Liability component 4 384 970
P 615 030
Journal Entry

Cash 5 000 000

Liability 4 384 970
Equity 615 030