AASB 132 Financial Instruments: Presentation July 2004 (Cth)
| Compiled AASB Standard | AASB 132 |
Financial Instruments: Presentation
This compiled Standard applies to annual reporting periods beginning on or after 1 January 2018. Early application is permitted for annual reporting periods beginning on or after 24 July 2014 but before 1 January 2018. It incorporates relevant amendments made up to and including 17 December 2014.
Prepared on 12 March 2015 by the staff of the Australian Accounting Standards Board.
Obtaining Copies of Accounting Standards
Compiled versions of Standards, original Standards and amending Standards (see Compilation Details) are available on the AASB website: copies of original Standards and amending Standards are available for purchase by contacting:
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COPYRIGHT
© 2015 Commonwealth of Australia
This compiled AASB Standard contains IFRS Foundation copyright material. Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source. Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to The Director of Finance and Administration, Australian Accounting Standards Board, PO Box 204, Collins Street West, Victoria 8007.
All existing rights in this material are reserved outside Australia.
Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only. Further information and requests for authorisation to reproduce for commercial purposes outside Australia should be addressed to the IFRS Foundation at align="center">CONTENTS
COMPILATION DETAILS
COMPARISON WITH IAS 32
ACCOUNTING STANDARD
AASB 132 FINANCIAL INSTRUMENTS: PRESENTATION
Paragraphs
Objective 2 – 3
Application Aus3.1 – Aus3.8
Scope 4 – 10
Definitions 11 – 14
Presentation
Liabilities and Equity 15 – 16
Puttable Instruments 16A – 16B
Instruments, or Components of Instruments, that Impose on the Entity an Obligation to
Deliver to Another Party a Pro Rata Share of the Net Assets of the Entity Only on Liquidation 16C – 16DReclassification of Puttable Instruments and Instruments that Impose on the Entity an
Obligation to Deliver to Another Party a Pro Rata Share of the Net Assets of the Entity Only on Liquidation 16E – 16FNo Contractual Obligation to Deliver Cash or Another Financial Asset 17 – 20
Settlement in the Entity’s Own Equity Instruments 21 – 24
Contingent Settlement Provisions 25
Settlement Options 26 – 27
Compound Financial Instruments 28 – 32
Treasury Shares 33 – 34
Interest, Dividends, Losses and Gains 35 – 41
Offsetting a Financial Asset and a Financial Liability 42 – 50
Effective Date and Transition 96B – 97R
Appendix: Application Guidance AG1 – AG2
Definitions
Financial Assets and Financial Liabilities AG3 – AG12
Equity Instruments AG13 – AG14
The Class of Instruments that is Subordinate to All Other Classes AG14A – AG14D
Total Expected Cash Flows Attributable to the Instrument over
the Life of the Instrument AG14ETransactions Entered into by an Instrument Holder Other than as
Owner of the Entity AG14F – AG14INo Other Financial Instrument or Contract with Total Cash Flows that
Substantially Fixes or Restricts the Residual Return to the Instrument Holder AG14J
Derivative Financial Instruments AG15 – AG19
Contracts to Buy or Sell Non-Financial Items AG20 – AG23
Presentation
Liabilities and Equity
No Contractual Obligation to Deliver Cash or Another Financial Asset AG25 – AG26
Settlement in the Entity’s Own Equity Instruments AG27
Contingent Settlement Provisions AG28
Treatment in Consolidated Financial Statements AG29 – AG29A
Compound Financial Instruments AG30 – AG35
Treasury Shares AG36
Interest, Dividends, Losses and Gains AG37
Offsetting a Financial Asset and a Financial Liability
Criterion that an entity ‘currently has a legally enforceable right to set off the recognised amounts’ AG38A – AG38D
Criterion that an entity ‘intends either to settle on a net basis, or to realise
the asset and settle the liability simultaneously’ AG38E – AG39
ILLUSTRATIVE EXAMPLES Page 32
DELETED IAS 32 TEXT Page 52
BASIS FOR CONCLUSIONS ON IAS 32
(available on the AASB website)
Australian Accounting Standard AASB 132 Financial Instruments: Presentation (as amended) is set out in paragraphs 2 – 97R and the Appendix. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in this Standard are in italics the first time they appear in the Standard. AASB 132 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations. In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.
COMPILATION DETAILS
Accounting Standard AASB 132 Financial Instruments: Presentation as amended
This compiled Standard applies to annual reporting periods beginning on or after 1 January 2018. It takes into account amendments made up to and including 17 December 2014 and was prepared on 12 March 2015 by the staff of the Australian Accounting Standards Board (AASB).
This compilation is not a separate Accounting Standard made by the AASB. Instead, it is a representation of AASB 132 (July 2004) as amended by other Accounting Standards, which are listed in the Table below.
Table of Standards
| Standard | Date made | Application date | Application, saving or transitional provisions | |
| AASB 132 | 15 Jul 2004 | (beginning) 1 Jan 2005 | ||
| AASB 2005-4 | 9 Jun 2005 | (beginning) 1 Jan 2006 | see (a) below | |
| AASB 2005-9 | 6 Sep 2005 | (beginning) 1 Jan 2006 | see (b) below | |
| AASB 2005-10 | 5 Sep 2005 | (beginning) 1 Jan 2007 | see (c) below | |
| AASB 2005-11 | 8 Sep 2005 | (ending) 31 Dec 2005 | see (d) below | |
| Erratum | 24 Feb 2006 | (ending) 24 Feb 2006 | see (e) below | |
| AASB 2007-4 | 30 Apr 2007 | (beginning) 1 Jul 2007 | see (f) below | |
| AASB 2007-8 | 24 Sep 2007 | (beginning) 1 Jan 2009 | see (g) below | |
| AASB 2008-2 | 5 Mar 2008 | (beginning) 1 Jan 2009 | see (h) below | |
| AASB 2008-3 | 6 Mar 2008 | (beginning) 1 Jul 2009 | see (i) below | |
| AASB 2008-5 | 24 Jul 2008 | (beginning) 1 Jan 2009 | see (j) below | |
| AASB 2009-6 | 25 Jun 2009 | (beginning) 1 Jan 2009 and (ending) 30 Jun 2009 | see (k) below | |
| AASB 2009-10 | 20 Oct 2009 | (beginning) 1 Feb 2010 | see (l) below | |
| AASB 2009-11 | 7 Dec 2009 | (beginning) 1 Jan 2018 | see (m) below | |
| AASB 2010-3 | 23 Jun 2010 | (beginning) 1 Jul 2010 | see (n) below | |
| AASB 2010-5 | 27 Oct 2010 | (beginning) 1 Jan 2011 | see (o) below | |
| AASB 2010-7 | 6 Dec 2010 | (beginning) 1 Jan 2018 | see (p) below | |
| AASB 2011-1 | 11 May 2011 | (beginning) 1 Jul 2011 | see (q) below | |
| AASB 2011-7 | 29 Aug 2011 | (beginning) 1 Jan 2013 | see (r) below | |
| AASB 2011-8 | 2 Sep 2011 | (beginning) 1 Jan 2013 | see (s) below | |
| AASB 2011-9 | 5 Sep 2011 | (beginning) 1 Jul 2012 | see (t) below | |
| AASB 2012-2 | 29 Jun 2012 | (beginning) 1 Jan 2013 | see (u) below | |
| AASB 2012-3 | 29 Jun 2012 | (beginning) 1 Jan 2014 | see (v) below | |
| AASB 2012-5 | 29 Jun 2012 | (beginning) 1 Jan 2013 | see (w) below | |
| AASB 2012-10 | 18 Dec 2012 | (beginning) 1 Jan 2013 | see (x) below | |
| AASB 2013-5 | 14 Aug 2013 | (beginning) 1 Jan 2014 | see (y) below | |
| AASB 2013-9 | 20 Dec 2013 | Pt B (beginning) 1 Jan 2014 | see (z) below | |
| AASB 2014-1 | 4 Jun 2014 | Pt E (beginning) 1 Jan 2018 | see (aa) below | |
| AASB 2014-5 | 12 Dec 2014 | (beginning) 1 Jan 2017 | see (ab) below | |
| AASB 2014-7 | 17 Dec 2014 | (beginning) 1 Jan 2018 | see (ac) below | |
(a) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2006. Entities that elect to apply the amendments in AASB 2005-4 in respect of AASB 139 Financial Instruments: Recognition and Measurement to such periods must also apply the amendments made to AASB 132 by AASB 2005-4.
(b) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2006.
(c) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2007.
(d) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 that end before 31 December 2005.
(e) Entities may elect to apply this Erratum to annual reporting periods beginning on or after 1 January 2005 that end before 24 February 2006.
(f) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 July 2007.
(g) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009, provided that AASB 101 Presentation of Financial Statements (September 2007) is also applied to such periods.
(h) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009.
(i) Entities may elect to apply this Standard to annual reporting periods beginning on or after 30 June 2007 but before 1 July 2009, provided that AASB 3 Business Combinations (March 2008) and AASB 127 Consolidated and Separate Financial Statements (March 2008) are also applied to such periods.
(j) Entities may elect to apply this Standard, or its amendments to individual Standards, to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009.
(k) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009, provided that AASB 101 Presentation of Financial Statements (September 2007) is also applied to such periods, and to annual reporting periods beginning on or after 1 January 2009 that end before 30 June 2009.
(l) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 February 2010.
(m) AASB 2009-11 has been amended by AASB 2010-10 (made 31 December 2010) and AASB 2012-6 (made 10 September 2012). Part E of AASB 2014-1 (made 4 June 2014) updated the application date of the amendments in this Standard to 1 January 2018.
Entities may elect to apply the amendments in this Standard to annual reporting periods ending on or after 31 December 2009 that begin before 1 January 2018, provided that AASB 9 (2009) Financial Instruments is also applied to such periods.
(n) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 July 2010.
(o) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2011.
(p) AASB 2010-7 has been amended by AASB 2010-10 (made 31 December 2010) and AASB 2012-6 (made 10 September 2012). Part E of AASB 2014-1 (made 4 June 2014) updated the application date of the amendments in this Standard to 1 January 2018.
Entities may elect to apply the amendments in this Standard as set out in paragraph 6 of AASB 2010-7.
(q) Entities may elect to apply this Standard, or its amendments to individual pronouncements, to annual reporting periods beginning on or after 1 January 2005 but before 1 July 2011, provided that AASB 1054 Australian Additional Disclosures is, or its relevant individual disclosure requirements are, also applied to such periods.
(r) AASB 2011-7 has been amended by AASB 2012-6 (made 10 September 2012) and AASB 2012-10 (made 18 December 2012).
For-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013. The Standard applies for not-for-profit entities to annual reporting periods beginning on or after 1 January 2014. Not-for-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2014. If an entity elects to apply this Standard to such annual reporting periods, it shall apply AASB 10 Consolidated Financial Statements and associated Standards to such periods.
(s) AASB 2011-8 has been amended by AASB 2011-10 (made 5 September 2011) and AASB 2012-6 (made 10 September 2012).
Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013, provided that AASB 13 Fair Value Measurement is also applied to such periods.
(t) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 July 2012.
(u) This Standard also applies explicitly to interim periods within annual reporting periods beginning on or after 1 January 2013.
(v) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2014, provided that AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities is also applied to such periods.
(w) Entities may elect to apply this Standard, or its amendments to individual pronouncements, to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013.
(x) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013.
(y) For-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2014. Not-for-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2014. If an entity elects to apply this Standard to such annual reporting periods, it shall also apply AASB 10 Consolidated Financial Statements and associated Standards to such periods.
(z) Early application of Part B of this Standard is not permitted.
(aa) Entities may elect to apply Part E of this Standard to annual reporting periods ending on or after 31 December 2009 that begin before 1 January 2018, provided that AASB 9 Financial Instruments (2009) or AASB 9 Financial Instruments (2010) is also applied to such periods.
(ab) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2017, provided that AASB 15 Revenue from Contracts with Customers is also applied to such periods.
(ac) Entities may elect to apply this Standard to annual reporting periods beginning on or after 24 July 2014 but before 1 January 2018, provided that AASB 9 Financial Instruments (2014) is also applied to such periods.
Table of Amendments to Standard
| Paragraph affected | How affected | By … [paragraph] |
| Title | amended | AASB 2005-10 [6] |
| 1 | deleted | AASB 2005-10 [7] |
| 2 | amended amended | AASB 2005-10 [7] AASB 2007-4 [89] |
| 3 | amended amended amended | AASB 2005-10 [7] AASB 2009-11 [33] AASB 2010-7 [7, 34] |
| Aus3.1 | amended | AASB 2007-8 [7, 8] |
| Aus3.4 | amended deleted | AASB 2007-8 [8] AASB 2013-9B [37, 38] |
| Aus3.5 | deleted | AASB 2005-10 [8] |
| 4 | amended amended amended amended amended amended amended amended amended amended | AASB 2005-9 [23] AASB 2005-10 [9] Erratum, Feb 2006 AASB 2008-5 [52] AASB 2008-3 [55] AASB 2010-7 [34] AASB 2011-7 [45] AASB 2013-5 [45] AASB 2013-9B [54] AASB 2014-7 [44] |
| 5 | deleted | AASB 2005-10 [10] |
| 7 | deleted | AASB 2005-10 [10] |
| 8 | amended amended | AASB 2014-1E [90] AASB 2014-7 [44] |
| 11 (preceding heading) | amended | AASB 2007-4 [89] |
| 11 | amended amended amended amended | AASB 2008-2 [13-15] AASB 2009-10 [6] AASB 2010-5 [40] AASB 2011-8 [13] |
| 12 | amended amended amended amended | AASB 2005-9 [24] AASB 2009-11 [33] AASB 2010-7 [7, 34] AASB 2014-1E [90] |
| 15 (preceding heading) | amended | AASB 2008-2 [16] |
| 16 | amended amended | AASB 2008-2 [17] AASB 2009-10 [6] |
| 16A (and preceding heading) | added amended | AASB 2008-2 [18] AASB 2009-6 [65] |
| 16B | added | AASB 2008-2 [18] |
| 16C (and preceding heading) | added amended | AASB 2008-2 [18] AASB 2009-6 [65] |
| 16D | added | AASB 2008-2 [18] |
| 16E (and preceding heading) | added amended | AASB 2008-2 [18] AASB 2009-6 [66] |
| 16F | added amended | AASB 2008-2 [18] AASB 2009-6 [66] |
| 17 | amended | AASB 2008-2 [19] |
| 18 | amended amended | AASB 2007-8 [93] AASB 2008-2 [19] |
| 19 | amended | AASB 2008-2 [19] |
| 22 | amended | AASB 2008-2 [20] |
| 22A | added amended | AASB 2008-2 [21] AASB 2009-6 [66] |
| 23 | amended amended amended | AASB 2008-2 [22] AASB 2010-7 [34] AASB 2011-8 [57] |
| 25 | amended amended | AASB 2008-2 [23] AASB 2009-6 [66] |
| 29 | amended | AASB 2007-8 [94] |
| 31 | amended amended | AASB 2009-11 [33] AASB 2010-7 [7, 34] |
| 33 (preceding heading) | amended | AASB 2011-1 [19] |
| 34 | amended | AASB 2007-8 [6] |
| 35 | amended amended | AASB 2005-11 [10] AASB 2012-5 [13] |
| 35A | added | AASB 2012-5 [13] |
| 37 | amended | AASB 2012-5 [13] |
| 39 | amended | AASB 2012-5 [13] |
| 40 | amended amended amended | AASB 2005-10 [11] AASB 2007-8 [95] AASB 2011-9 [21] |
| 41 | amended | AASB 2007-8 [6] |
| 42 (preceding heading) | amended | AASB 2013-9B [55] |
| 42 | amended amended | AASB 2007-8 [6] AASB 2010-7 [34] |
| 43 | amended | AASB 2012-2 [8] |
| 44 | amended | AASB 2007-8 [6] |
| 47 | amended | AASB 2005-10 [12] |
| 50 | amended | AASB 2005-10 [13] |
| 51-95 | deleted | AASB 2005-10 [14] |
| 66 | amended | AASB 2005-4 [15] |
| 94 | amended amended | AASB 2005-4 [16] Erratum, Feb 2006 |
| 96 (preceding heading) | amended | AASB 2008-2 [24] |
| 96A | note added | AASB 2008-2 [25] |
| 96B | added | AASB 2008-2 [26] |
| 96C | added amended amended | AASB 2008-2 [26] AASB 2010-5 [41] AASB 2010-7 [34] |
| 97A | note added | AASB 2007-8 [96] |
| 97B | note added paragraph added | AASB 2008-3 [56] AASB 2010-3 [12] |
| 97C | added | AASB 2008-2 [27] |
| 97D | added | AASB 2008-5 [54] |
| 97E | added | AASB 2009-10 [6] |
| 97F | added deleted | AASB 2009-11 [33] AASB 2010-7 [7, 34] |
| 97G | added | AASB 2010-3 [12] |
| 97H | added deleted | AASB 2010-7 [34] AASB 2014-1E [90] |
| 97I | added | AASB 2011-7 [45] |
| 97J | added | AASB 2011-8 [58] |
| 97K | added | AASB 2011-9 [21] |
| 97L | added | AASB 2012-3 [5] |
| 97M | added renumbered as 97N added | AASB 2012-5 [13] AASB 2012-10 [57] AASB 2012-10 [57] |
| 97O | added | AASB 2013-5 [46] |
| 97P | added deleted | AASB 2014-1E [90] AASB 2014-7 [44] |
| 97Q | added | AASB 2014-5 [30] |
| 97R | added | AASB 2014-7 [44] |
| AG2 | amended amended amended | AASB 2007-4 [89] AASB 2009-11 [34] AASB 2010-7 [7, 35] |
| AG8 | amended | AASB 2005-11 [11] |
| AG12 | amended | AASB 2007-4 [89] |
| AG13-AG14 | amended | AASB 2008-2 [28] |
| AG14A-AG14E (and preceding headings) | added | AASB 2008-2 [29] |
| AG14F (and preceding heading) | added amended | AASB 2008-2 [29] AASB 2009-6 [67] |
| AG14G-AG14I | added | AASB 2008-2 [29] |
| AG14J (and preceding heading) | added | AASB 2008-2 [29] |
| AG21 | amended | AASB 2014-5 [31] |
| AG24 | deleted | AASB 2005-10 [15] |
| AG27 | amended | AASB 2008-2 [30] |
| AG29 | amended amended amended | AASB 2007-4 [89] AASB 2008-3 [8] AASB 2011-7 [46] |
| AG29A | added | AASB 2008-2 [31] |
| AG30 | amended amended amended | AASB 2009-11 [34] AASB 2010-7 [7, 35] AASB 2013-9B [56] |
| AG31 | amended amended | AASB 2007-8 [97] AASB 2011-8 [59] |
| AG36 | amended | AASB 2007-8 [6] |
| AG38 | deleted | AASB 2012-3 [6] |
| AG38A-AG38F (and preceding headings) | added | AASB 2012-3 [7] |
| AG39 | amended amended | AASB 2005-10 [15] AASB 2007-8 [98] |
| AG40 | amended amended deleted | AASB 2005-4 [17] AASB 2005-11 [12] AASB 2005-10 [15] |
Table of Amendments to Illustrative Examples
| Paragraph affected | How affected | By … [paragraph] |
| IE1 | amended amended | AASB 2008-2 [32] AASB 2010-7 [36] |
| IE5 | amended | AASB 2010-7 [37] |
| IE10 | amended | AASB 2009-6 [68] |
| IE32 | amended amended | AASB 2007-8 [6] AASB 2009-6 [69] |
| IE33 | amended amended amended | AASB 2007-8 [6] AASB 2008-2 [33] AASB 2009-6 [70] |
| IE45 | amended amended | AASB 2007-8 [6] AASB 2009-6 [71] |
| IE49 | amended | AASB 2012-10 [58] |
COMPARISON WITH IAS 32
AASB 132 and IAS 32
AASB 132 Financial Instruments: Presentation as amended incorporates IAS 32 Financial Instruments: Presentation as issued and amended by the International Accounting Standards Board (IASB). Paragraphs that have been added to this Standard (and do not appear in the text of IAS 32) are identified with the prefix “Aus”, followed by the number of the preceding IASB paragraph and decimal numbering.
Compliance with IAS 32
Entities that comply with AASB 132 as amended will simultaneously be in compliance with IAS 32 as amended.
ACCOUNTING STANDARD AASB 132
The Australian Accounting Standards Board made Accounting Standard AASB 132 Financial Instruments: Disclosure and Presentation under section 334 of the Corporations Act 2001 on 15 July 2004.
This compiled version of AASB 132 applies to annual reporting periods beginning on or after 1 January 2018. It incorporates relevant amendments contained in other AASB Standards made by the AASB and other decisions of the AASB up to and including 17 December 2014 (see Compilation Details).
ACCOUNTING STANDARD AASB 132
FINANCIAL INSTRUMENTS: PRESENTATION
Objective
1 [Deleted by the IASB]
2 The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset.
3 The principles in this Standard complement the principles for recognising and measuring financial assets and financial liabilities in AASB 9 Financial Instruments, and for disclosing information about them in AASB 7 Financial Instruments: Disclosures.
Application
Aus3.1 This Standard applies to:
(a) each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b) general purpose financial statements of each other reporting entity; and
(c) financial statements that are, or are held out to be, general purpose financial statements.
Aus3.2 This Standard applies to annual reporting periods beginning on or after 1 January 2005.
[Note: For application dates of paragraphs changed or added by an amending Standard, see Compilation Details.]Aus3.3 This Standard shall not be applied to annual reporting periods beginning before 1 January 2005.
Aus3.4 [Deleted by the AASB]
Aus3.5 [Deleted by the AASB]
Aus3.6 When applicable, this Standard supersedes:
(a) AASB 1033 Presentation and Disclosure of Financial Instruments as notified in the Commonwealth of Australia Gazette No S 516, 29 October 1999; and
(b) AAS 33 Presentation and Disclosure of Financial Instruments as issued in October 1999.
Aus3.7 Both AASB 1033 and AAS 33 remain applicable until superseded by this Standard.
Aus3.8 Notice of this Standard was published in the Commonwealth of Australia Gazette No S 294, 22 July 2004.
Scope
4 This Standard shall be applied by all entities to all types of financial instruments except:
(a) those interests in subsidiaries, associates or joint ventures that are accounted for in accordance with AASB 10 Consolidated Financial Statements, AASB 127 Separate Financial Statements or AASB 128 Investments in Associates and Joint Ventures. However, in some cases, AASB 10, AASB 127 or AASB 128 require or permit an entity to account for an interest in a subsidiary, associate or joint venture using AASB 9; in those cases, entities shall apply the requirements of this Standard. Entities shall also apply this Standard to all derivatives linked to interests in subsidiaries, associates or joint ventures;
(b) employers’ rights and obligations under employee benefit plans, to which AASB 119 Employee Benefits applies;
(c) [deleted by the IASB]
(d) insurance contracts as defined in AASB 4 Insurance Contracts. However, this Standard applies to derivatives that are embedded in insurance contracts if AASB 9 requires the entity to account for them separately. Moreover, an issuer shall apply this Standard to financial guarantee contracts if the issuer applies AASB 9 in recognising and measuring the contracts, but shall apply AASB 4 if the issuer elects, in accordance with paragraph 4(d) of AASB 4, to apply AASB 4 in recognising and measuring them;
(e) financial instruments that are within the scope of AASB 4 because they contain a discretionary participation feature. The issuer of these instruments is exempt from applying to these features paragraphs 15-32 and AG25-AG35 of this Standard regarding the distinction between financial liabilities and equity instruments. However, these instruments are subject to all other requirements of this Standard. Furthermore, this Standard applies to derivatives that are embedded in these instruments (see AASB 9); and
(f) financial instruments, contracts and obligations under share-based payment transactions to which AASB 2 Share-based Payment applies, except for:
(i) contracts within the scope of paragraphs 8-10 of this Standard, to which this Standard applies; or
(ii) paragraphs 33 and 34 of this Standard, which shall be applied to treasury shares purchased, sold, issued or cancelled in connection with employee share option plans, employee share purchase plans, and all other share-based payment arrangements.
5 [Deleted by the IASB]
6 [Deleted by the IASB]
7 [Deleted by the IASB]
8 This Standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements. However, this Standard shall be applied to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 2.5 of AASB 9 Financial Instruments.
9 There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include:
(a) when the terms of the contract permit either party to settle it net in cash or another financial instrument or by exchanging financial instruments;
(b) when the ability to settle net in cash or another financial instrument, or by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or another financial instrument, or by exchanging financial instruments (whether with the counterparty, by entering into offsetting contracts or by selling the contract before its exercise or lapse);
(c) when, for similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin; and
(d) when the non-financial item that is the subject of the contract is readily convertible to cash.
A contract to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements, and, accordingly, is within the scope of this Standard. Other contracts to which paragraph 8 applies are evaluated to determine whether they were entered into and continue to be held for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirement, and, accordingly, whether they are within the scope of this Standard.
10 A written option to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, in accordance with paragraph 9(a) or (d) is within the scope of this Standard. Such a contract cannot be entered into for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements.
Definitions (see also paragraphs AG3-AG23)
11 The following terms are used in this Standard with the meanings specified.
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
A financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
(ii) 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 entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include puttable financial instruments classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.
A financial liability is any liability that is:
(a) a contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
(ii) 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 entity’s own equity instruments. For this purpose, rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. Also, for these purposes the entity’s own equity instruments do not include puttable financial instruments that are classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.
As an exception, an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the features and meets the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See AASB 13 Fair Value Measurement.)
A puttable instrument is a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder.
12 The following terms are defined in Appendix A of AASB 9 or paragraph 9 of AASB 139 Financial Instruments: Recognition and Measurement and are used in this Standard with the meaning specified in AASB 139 and AASB 9.
(a) amortised cost of a financial asset or financial liability;
(b) derecognition;
(c) derivative;
(d) effective interest method;
(e) financial guarantee contract;
(f) financial liability at fair value through profit or loss;
(g) firm commitment;
(h) forecast transaction;
(i) hedge effectiveness;
(j) hedged item;
(k) hedging instrument;
(l) held for trading;
(m) regular way purchase or sale; and
(n) transaction costs.
13 In this Standard, ‘contract’ and ‘contractual’ refer to an agreement between two or more parties that has clear economic consequences that the parties have little, if any, discretion to avoid, usually because the agreement is enforceable by law. Contracts, and thus financial instruments, may take a variety of forms and need not be in writing.
14 In this Standard, ‘entity’ includes individuals, partnerships, incorporated bodies, trusts and government agencies.
Presentation
Liabilities and Equity (see also paragraphs AG13-AG14J and AG25-AG29A)
15 The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.
16 When an issuer applies the definitions in paragraph 11 to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument is an equity instrument if, and only if, both conditions (a) and (b) below are met.
(a) The instrument includes no contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer.
(b) If the instrument will or may be settled in the issuer’s own equity instruments, it is:
(i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. For this purpose, rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. Also for these purposes the issuer’s own equity instruments do not include instruments that have all the features and meet the conditions described in paragraphs 16A and 16B or paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the issuer’s own equity instruments.
A contractual obligation, including one arising from a derivative financial instrument, that will or may result in the future receipt or delivery of the issuer’s own equity instruments, but does not meet conditions (a) and (b) above, is not an equity instrument. As an exception, an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the features and meets the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D.
Puttable Instruments
16A A puttable financial instrument includes a contractual obligation for the issuer to repurchase or redeem that instrument for cash or another financial asset on exercise of the put. As an exception to the definition of a financial liability, an instrument that includes such an obligation is classified as an equity instrument if it has all the following features:
(a) It entitles the holder to a pro rata share of the entity’s net assets in the event of the entity’s liquidation. The entity’s net assets are those assets that remain after deducting all other claims on its assets. A pro rata share is determined by:
(i) dividing the entity’s net assets on liquidation into units of equal amount; and
(ii) multiplying that amount by the number of the units held by the financial instrument holder.
(b) The instrument is in the class of instruments that is subordinate to all other classes of instruments. To be in such a class the instrument:
(i) has no priority over other claims to the assets of the entity on liquidation; and
(ii) does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of instruments.
(c) All financial instruments in the class of instruments that is subordinate to all other classes of instruments have identical features. For example, they must all be puttable, and the formula or other method used to calculate the repurchase or redemption price is the same for all instruments in that class.
(d) Apart from the contractual obligation for the issuer to repurchase or redeem the instrument for cash or another financial asset, the instrument does not include any contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity, and it is not a contract that will or may be settled in the entity’s own equity instruments as set out in subparagraph (b) of the definition of a financial liability.
(e) The total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity over the life of the instrument (excluding any effects of the instrument).
16B For an instrument to be classified as an equity instrument, in addition to the instrument having all the above features, the issuer must have no other financial instrument or contract that has:
(a) total cash flows based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity (excluding any effects of such instrument or contract); and
(b) the effect of substantially restricting or fixing the residual return to the puttable instrument holders.
For the purposes of applying this condition, the entity shall not consider non-financial contracts with a holder of an instrument described in paragraph 16A that have contractual terms and conditions that are similar to the contractual terms and conditions of an equivalent contract that might occur between a non-instrument holder and the issuing entity. If the entity cannot determine that this condition is met, it shall not classify the puttable instrument as an equity instrument.
Instruments, or Components of Instruments, that Impose on the Entity an Obligation to Deliver to Another Party a Pro Rata Share of the Net Assets of the Entity Only on Liquidation
16C Some financial instruments include a contractual obligation for the issuing entity to deliver to another entity a pro rata share of its net assets only on liquidation. The obligation arises because liquidation either is certain to occur and outside the control of the entity (for example, a limited life entity) or is uncertain to occur but is at the option of the instrument holder. As an exception to the definition of a financial liability, an instrument that includes such an obligation is classified as an equity instrument if it has all the following features:
(a) It entitles the holder to a pro rata share of the entity’s net assets in the event of the entity’s liquidation. The entity’s net assets are those assets that remain after deducting all other claims on its assets. A pro rata share is determined by:
(i) dividing the net assets of the entity on liquidation into units of equal amount; and
(ii) multiplying that amount by the number of the units held by the financial instrument holder.
(b) The instrument is in the class of instruments that is subordinate to all other classes of instruments. To be in such a class the instrument:
(i) has no priority over other claims to the assets of the entity on liquidation; and
(ii) does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of instruments.
(c) All financial instruments in the class of instruments that is subordinate to all other classes of instruments must have an identical contractual obligation for the issuing entity to deliver a pro rata share of its net assets on liquidation.
16D For an instrument to be classified as an equity instrument, in addition to the instrument having all the above features, the issuer must have no other financial instrument or contract that has:
(a) total cash flows based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity (excluding any effects of such instrument or contract); and
(b) the effect of substantially restricting or fixing the residual return to the instrument holders.
For the purposes of applying this condition, the entity shall not consider non-financial contracts with a holder of an instrument described in paragraph 16C that have contractual terms and conditions that are similar to the contractual terms and conditions of an equivalent contract that might occur between a non-instrument holder and the issuing entity. If the entity cannot determine that this condition is met, it shall not classify the instrument as an equity instrument.
Reclassification of Puttable Instruments and Instruments that Impose on the Entity an Obligation to Deliver to Another Party a Pro Rata Share of the Net Assets of the Entity Only on Liquidation
16E An entity shall classify a financial instrument as an equity instrument in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D from the date when the instrument has all the features and meets the conditions set out in those paragraphs. An entity shall reclassify a financial instrument from the date when the instrument ceases to have all the features or meet all the conditions set out in those paragraphs. For example, if an entity redeems all its issued non-puttable instruments and any puttable instruments that remain outstanding have all the features and meet all the conditions in paragraphs 16A and 16B, the entity shall reclassify the puttable instruments as equity instruments from the date when it redeems the non-puttable instruments.
16F An entity shall account as follows for the reclassification of an instrument in accordance with paragraph 16E:
(a) It shall reclassify an equity instrument as a financial liability from the date when the instrument ceases to have all the features or meet the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D. The financial liability shall be measured at the instrument’s fair value at the date of reclassification. The entity shall recognise in equity any difference between the carrying value of the equity instrument and the fair value of the financial liability at the date of reclassification.
(b) It shall reclassify a financial liability as equity from the date when the instrument has all the features and meets the conditions set out in paragraphs 16A and 16B or paragraphs 16C and 16D. An equity instrument shall be measured at the carrying value of the financial liability at the date of reclassification.
No Contractual Obligation to Deliver Cash or Another Financial Asset (paragraph 16(a))
17 With the exception of the circumstances described in paragraphs 16A and 16B or paragraphs 16C and 16D, a critical feature in differentiating a financial liability from an equity instrument is the existence of a contractual obligation of one party to the financial instrument (the issuer) either to deliver cash or another financial asset to the other party (the holder) or to exchange financial assets or financial liabilities with the holder under conditions that are potentially unfavourable to the issuer. Although the holder of an equity instrument may be entitled to receive a pro rata share of any dividends or other distributions of equity, the issuer does not have a contractual obligation to make such distributions because it cannot be required to deliver cash or another financial asset to another party.
18 The substance of a financial instrument, rather than its legal form, governs its classification in the entity’s statement of financial position. Substance and legal form are commonly consistent, but not always. Some financial instruments take the legal form of equity but are liabilities in substance and others may combine features associated with equity instruments and features associated with financial liabilities. For example:
(a) a preference share that provides for mandatory redemption by the issuer for a fixed or determinable amount at a fixed or determinable future date, or gives the holder the right to require the issuer to redeem the instrument at or after a particular date for a fixed or determinable amount, is a financial liability; and
(b) a financial instrument that gives the holder the right to put it back to the issuer for cash or another financial asset (a ‘puttable instrument’) is a financial liability, except for those instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. The financial instrument is a financial liability even when the amount of cash or other financial assets is determined on the basis of an index or other item that has the potential to increase or decrease. The existence of an option for the holder to put the instrument back to the issuer for cash or another financial asset means that the puttable instrument meets the definition of a financial liability, except for those instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. For example, open-ended mutual funds, unit trusts, partnerships and some co‑operative entities may provide their unitholders or members with a right to redeem their interests in the issuer at any time for cash, which results in the unitholders’ or members’ interests being classified as financial liabilities, except for those instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. However, classification as a financial liability does not preclude the use of descriptors such as ‘net asset value attributable to unitholders’ and ‘change in net asset value attributable to unitholders’ in the financial statements of an entity that has no contributed equity (such as some mutual funds and unit trusts, see Illustrative Example 7) or the use of additional disclosure to show that total members’ interests comprise items such as reserves that meet the definition of equity and puttable instruments that do not (see Illustrative Example 8).
19 If an entity does not have an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the obligation meets the definition of a financial liability, except for those instruments classified as equity instruments in accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. For example:
(a) a restriction on the ability of an entity to satisfy a contractual obligation, such as lack of access to foreign currency or the need to obtain approval for payment from a regulatory authority, does not negate the entity’s contractual obligation or the holder’s contractual right under the instrument; and
(b) a contractual obligation that is conditional on a counterparty exercising its right to redeem is a financial liability because the entity does not have the unconditional right to avoid delivering cash or another financial asset.
20 A financial instrument that does not explicitly establish a contractual obligation to deliver cash or another financial asset may establish an obligation indirectly through its terms and conditions. For example:
(a) a financial instrument may contain a non-financial obligation that must be settled if, and only if, the entity fails to make distributions or to redeem the instrument. If the entity can avoid a transfer of cash or another financial asset only by settling the non-financial obligation, the financial instrument is a financial liability; and
(b) a financial instrument is a financial liability if it provides that on settlement the entity will deliver either:
(i) cash or another financial asset; or
(ii) its own shares whose value is determined to exceed substantially the value of the cash or other financial asset.
Although the entity does not have an explicit contractual obligation to deliver cash or another financial asset, the value of the share settlement alternative is such that the entity will settle in cash. In any event, the holder has in substance been guaranteed receipt of an amount that is at least equal to the cash settlement option (see paragraph 21).
Settlement in the Entity’s Own Equity Instruments (paragraph 16(b))
21 A contract is not an equity instrument solely because it may result in the receipt or delivery of the entity’s own equity instruments. An entity may have a contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so that the fair value of the entity’s own equity instruments to be received or delivered equals the amount of the contractual right or obligation. Such a contractual right or obligation may be for a fixed amount or an amount that fluctuates in part or in full in response to changes in a variable other than the market price of the entity’s own equity instruments (e.g. an interest rate, a commodity price or a financial instrument price). Two examples are (a) a contract to deliver as many of the entity’s own equity instruments as are equal in value to CU100,[1] and (b) a contract to deliver as many of the entity’s own equity instruments as are equal in value to the value of 100 ounces of gold. Such a contract is a financial liability of the entity even though the entity must or can settle it by delivering its own equity instruments. It is not an equity instrument because the entity uses a variable number of its own equity instruments as a means to settle the contract. Accordingly, the contract does not evidence a residual interest in the entity’s assets after deducting all of its liabilities.
[1] In this Standard, monetary amounts are denominated in ‘currency units’ (CU).
22 Except as stated in paragraph 22A, a contract that will be settled by the entity (receiving or) delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash or another financial asset is an equity instrument. For example, an issued share option that gives the counterparty a right to buy a fixed number of the entity’s shares for a fixed price or for a fixed stated principal amount of a bond is an equity instrument. Changes in the fair value of a contract arising from variations in market interest rates that do not affect the amount of cash or other financial assets to be paid or received, or the number of equity instruments to be received or delivered, on settlement of the contract do not preclude the contract from being an equity instrument. Any consideration received (such as the premium received for a written option or warrant on the entity’s own shares) is added directly to equity. Any consideration paid (such as the premium paid for a purchased option) is deducted directly from equity. Changes in the fair value of an equity instrument are not recognised in the financial statements.
22A If the entity’s own equity instruments to be received, or delivered, by the entity upon settlement of a contract are puttable financial instruments with all the features and meeting the conditions described in paragraphs 16A and 16B, or instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation with all the features and meeting the conditions described in paragraphs 16C and 16D, the contract is a financial asset or a financial liability. This includes a contract that will be settled by the entity receiving or delivering a fixed number of such instruments in exchange for a fixed amount of cash or another financial asset.
23 With the exception of the circumstances described in paragraphs 16A and 16B or paragraphs 16C and 16D, a contract that contains an obligation for an entity to purchase its own equity instruments for cash or another financial asset gives rise to a financial liability for the present value of the redemption amount (for example, for the present value of the forward repurchase price, option exercise price or other redemption amount). This is the case even if the contract itself is an equity instrument. One example is an entity’s obligation under a forward contract to purchase its own equity instruments for cash. The financial liability is recognised initially at the present value of the redemption amount, and is reclassified from equity. Subsequently, the financial liability is measured in accordance with AASB 9. If the contract expires without delivery, the carrying amount of the financial liability is reclassified to equity. An entity’s contractual obligation to purchase its own equity instruments gives rise to a financial liability for the present value of the redemption amount even if the obligation to purchase is conditional on the counterparty exercising a right to redeem (eg a written put option that gives the counterparty the right to sell an entity’s own equity instruments to the entity for a fixed price).
24 A contract that will be settled by the entity delivering or receiving a fixed number of its own equity instruments in exchange for a variable amount of cash or another financial asset is a financial asset or financial liability. An example is a contract for the entity to deliver 100 of its own equity instruments in return for an amount of cash calculated to equal the value of 100 ounces of gold.
Contingent Settlement Provisions
25 A financial instrument may require the entity to deliver cash or another financial asset, or otherwise to settle it in such a way that it would be a financial liability, in the event of the occurrence or non-occurrence of uncertain future events (or on the outcome of uncertain circumstances) that are beyond the control of both the issuer and the holder of the instrument, such as a change in a stock market index, consumer price index, interest rate or taxation requirements, or the issuer’s future revenues, net income or debt-to-equity ratio. The issuer of such an instrument does not have the unconditional right to avoid delivering cash or another financial asset (or otherwise to settle it in such a way that it would be a financial liability). Therefore, it is a financial liability of the issuer unless:
(a) the part of the contingent settlement provision that could require settlement in cash or another financial asset (or otherwise in such a way that it would be a financial liability) is not genuine;
(b) the issuer can be required to settle the obligation in cash or another financial asset (or otherwise to settle it in such a way that it would be a financial liability) only in the event of liquidation of the issuer; or
(c) the instrument has all the features and meets the conditions in paragraphs 16A and 16B.
Settlement Options
26 When a derivative financial instrument gives one party a choice over how it is settled (e.g. the issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial liability unless all of the settlement alternatives would result in it being an equity instrument.
27 An example of a derivative financial instrument with a settlement option that is a financial liability is a share option that the issuer can decide to settle net in cash or by exchanging its own shares for cash. Similarly, some contracts to buy or sell a non-financial item in exchange for the entity’s own equity instruments are within the scope of this Standard because they can be settled either by delivery of the non-financial item or net in cash or another financial instrument (see paragraphs 8-10). Such contracts are financial assets or financial liabilities and not equity instruments.
Compound Financial Instruments (see also paragraphs AG30-AG35 and Illustrative Examples 9-12)
28 The issuer of a non-derivative financial instrument shall evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity component. Such components shall be classified separately as financial liabilities, financial assets or equity instruments in accordance with paragraph 15.
29 An entity recognises separately the components of a financial instrument that (a) creates a financial liability of the entity and (b) grants an option to the holder of the instrument to convert it into an equity instrument of the entity. For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is a compound financial instrument. From the perspective of the entity, such an instrument comprises two components: a financial liability (a contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity). The economic effect of issuing such an instrument is substantially the same as issuing simultaneously a debt instrument with an early settlement provision and warrants to purchase ordinary shares, or issuing a debt instrument with detachable share purchase warrants. Accordingly, in all cases, the entity presents the liability and equity components separately in its statement of financial position.
30 Classification of the liability and equity components of a convertible instrument is not revised as a result of a change in the likelihood that a conversion option will be exercised, even when exercise of the option may appear to have become economically advantageous to some holders. Holders may not always act in the way that might be expected because, for example, the tax consequences resulting from conversion may differ among holders. Furthermore, the likelihood of conversion will change from time to time. The entity’s contractual obligation to make future payments remains outstanding until it is extinguished through conversion, maturity of the instrument, or some other transaction.
31 AASB 9 deals with the measurement of financial assets and financial liabilities. Equity instruments are instruments that evidence a residual interest in the assets of an entity after deducting all of its liabilities. Therefore, when the initial carrying amount of a compound financial instrument is allocated to its equity and liability components, the equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. The value of any derivative features (such as a call option) embedded in the compound financial instrument other than the equity component (such as an equity conversion option) is included in the liability component. The sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the fair value that would be ascribed to the instrument as a whole. No gain or loss arises from initially recognising the components of the instrument separately.
32 Under the approach described in paragraph 31, the issuer of a bond convertible into ordinary shares first determines the carrying amount of the liability component by measuring the fair value of a similar liability (including any embedded non-equity derivative features) that does not have an associated equity component. The carrying amount of the equity instrument represented by the option to convert the instrument into ordinary shares is then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole.
Treasury Shares (see also paragraph AG36)
33 If an entity reacquires its own equity instruments, those instruments (‘treasury shares’) shall be deducted from equity. No gain or loss shall be recognised in the profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. Such treasury shares may be acquired and held by the entity or by other members of the consolidated group. Consideration paid or received shall be recognised directly in equity.
34 The amount of treasury shares held is disclosed separately either in the statement of financial position or in the notes, in accordance with AASB 101 Presentation of Financial Statements. An entity provides disclosure in accordance with AASB 124 Related Party Disclosures if the entity reacquires its own equity instruments from related parties.
Interest, Dividends, Losses and Gains (see also paragraph AG37)
35 Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be recognised as income or expense in profit or loss. Distributions to holders of an equity instrument shall be recognised by the entity directly in equity. Transaction costs of an equity transaction shall be accounted for as a deduction from equity.
35A Income tax relating to distributions to holders of an equity instrument and to transaction costs of an equity transaction shall be accounted for in accordance with AASB 112 Income Taxes.
36 The classification of a financial instrument as a financial liability or an equity instrument determines whether interest, dividends, losses and gains relating to that instrument are recognised as income or expense in profit or loss. Thus, dividend payments on shares wholly recognised as liabilities are recognised as expenses in the same way as interest on a bond. Similarly, gains and losses associated with redemptions or refinancings of financial liabilities are recognised in profit or loss, whereas redemptions or refinancings of equity instruments are recognised as changes in equity. Changes in the fair value of an equity instrument are not recognised in the financial statements.
37 An entity typically incurs various costs in issuing or acquiring its own equity instruments. Those costs might include registration and other regulatory fees, amounts paid to legal, accounting and other professional advisers, printing costs and stamp duties. The transaction costs of an equity transaction are accounted for as a deduction from equity to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. The costs of an equity transaction that is abandoned are recognised as an expense.
38 Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds. Transaction costs that relate jointly to more than one transaction (e.g. costs of a concurrent offering of some shares and a stock exchange listing of other shares) are allocated to those transactions using a basis of allocation that is rational and consistent with similar transactions.
39 The amount of transaction costs accounted for as a deduction from equity in the period is disclosed separately in accordance with AASB 101.
40 Dividends classified as an expense may be presented in the statement(s) of profit or loss and other comprehensive income either with interest on other liabilities or as a separate item. In addition to the requirements of this Standard, disclosure of interest and dividends is subject to the requirements of AASB 101 and AASB 7. In some circumstances, because of the differences between interest and dividends with respect to matters such as tax deductibility, it is desirable to disclose them separately in the statement(s) of profit or loss and other comprehensive income. Disclosures of the tax effects are made in accordance with AASB 112.
41 Gains and losses related to changes in the carrying amount of a financial liability are recognised as income or expense in profit or loss even when they relate to an instrument that includes a right to the residual interest in the assets of the entity in exchange for cash or another financial asset (see paragraph 18(b)). Under AASB 101 the entity presents any gain or loss arising from remeasurement of such an instrument separately in the statement of comprehensive income when it is relevant in explaining the entity’s performance.
Offsetting a Financial Asset and a Financial Liability (see also paragraphs AG38A-AG38F and AG39)
42 A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognised amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity shall not offset the transferred asset and the associated liability (see AASB 9, paragraph 3.2.22).
43 This Standard requires the presentation of financial assets and financial liabilities on a net basis when doing so reflects an entity’s expected future cash flows from settling two or more separate financial instruments. When an entity has the right to receive or pay a single net amount and intends to do so, it has, in effect, only a single financial asset or financial liability. In other circumstances, financial assets and financial liabilities are presented separately from each other consistently with their characteristics as resources or obligations of the entity. An entity shall disclose the information required in paragraphs 13B-13E of AASB 7 for recognised financial instruments that are within the scope of paragraph 13A of AASB 7.
44 Offsetting a recognised financial asset and a recognised financial liability and presenting the net amount differs from the derecognition of a financial asset or a financial liability. Although offsetting does not give rise to recognition of a gain or loss, the derecognition of a financial instrument not only results in the removal of the previously recognised item from the statement of financial position but also may result in recognition of a gain or loss.
45 A right of set-off is a debtor’s legal right, by contract or otherwise, to settle or otherwise eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor. In unusual circumstances, a debtor may have a legal right to apply an amount due from a third party against the amount due to a creditor provided that there is an agreement between the three parties that clearly establishes the debtor’s right of set-off. Because the right of set-off is a legal right, the conditions supporting the right may vary from one legal jurisdiction to another and the laws applicable to the relationships between the parties need to be considered.
46 The existence of an enforceable right to set off a financial asset and a financial liability affects the rights and obligations associated with a financial asset and a financial liability and may affect an entity’s exposure to credit and liquidity risk. However, the existence of the right, by itself, is not a sufficient basis for offsetting. In the absence of an intention to exercise the right or to settle simultaneously, the amount and timing of an entity’s future cash flows are not affected. When an entity intends to exercise the right or to settle simultaneously, presentation of the asset and liability on a net basis reflects more appropriately the amounts and timing of the expected future cash flows, as well as the risks to which those cash flows are exposed. An intention by one or both parties to settle on a net basis without the legal right to do so is not sufficient to justify offsetting because the rights and obligations associated with the individual financial asset and financial liability remain unaltered.
47 An entity’s intentions with respect to settlement of particular assets and liabilities may be influenced by its normal business practices, the requirements of the financial markets and other circumstances that may limit the ability to settle net or to settle simultaneously. When an entity has a right of set-off, but does not intend to settle net or to realise the asset and settle the liability simultaneously, the effect of the right on the entity’s credit risk exposure is disclosed in accordance with paragraph 36 of AASB 7.
48 Simultaneous settlement of two financial instruments may occur through, for example, the operation of a clearing house in an organised financial market or a face-to-face exchange. In these circumstances the cash flows are, in effect, equivalent to a single net amount and there is no exposure to credit or liquidity risk. In other circumstances, an entity may settle two instruments by receiving and paying separate amounts, becoming exposed to credit risk for the full amount of the asset or liquidity risk for the full amount of the liability. Such risk exposures may be significant even though relatively brief. Accordingly, realisation of a financial asset and settlement of a financial liability are treated as simultaneous only when the transactions occur at the same moment.
49 The conditions set out in paragraph 42 are generally not satisfied and offsetting is usually inappropriate when:
(a) several different financial instruments are used to emulate the features of a single financial instrument (a ‘synthetic instrument’);
(b) financial assets and financial liabilities arise from financial instruments having the same primary risk exposure (e.g. assets and liabilities within a portfolio of forward contracts or other derivative instruments) but involve different counterparties;
(c) financial or other assets are pledged as collateral for non-recourse financial liabilities;
(d) financial assets are set aside in trust by a debtor for the purpose of discharging an obligation without those assets having been accepted by the creditor in settlement of the obligation (e.g. a sinking fund arrangement); or
(e) obligations incurred as a result of events giving rise to losses are expected to be recovered from a third party by virtue of a claim made under an insurance contract.
50 An entity that undertakes a number of financial instrument transactions with a single counterparty may enter into a ‘master netting arrangement’ with that counterparty. Such an agreement provides for a single net settlement of all financial instruments covered by the agreement in the event of default on, or termination of, any one contract. These arrangements are commonly used by financial institutions to provide protection against loss in the event of bankruptcy or other circumstances that result in a counterparty being unable to meet its obligations. A master netting arrangement commonly creates a right of set-off that becomes enforceable and affects the realisation or settlement of individual financial assets and financial liabilities only following a specified event of default or in other circumstances not expected to arise in the normal course of business. A master netting arrangement does not provide a basis for offsetting unless both of the criteria in paragraph 42 are satisfied. When financial assets and financial liabilities subject to a master netting arrangement are not offset, the effect of the arrangement on an entity’s exposure to credit risk is disclosed in accordance with paragraph 36 of AASB 7.
Disclosure
51-95 [Deleted by the IASB]
Effective Date and Transition
96 [Deleted by the AASB]
96A [Deleted by the AASB]
96B AASB 2008-2 Amendments to Australian Accounting Standards – Puttable Financial Instruments and Obligations arising on Liquidation introduced a limited scope exception; therefore, an entity shall not apply the exception by analogy.
96C The classification of instruments under this exception shall be restricted to the accounting for such an instrument under AASB 101, AASB 132, AASB 139, AASB 7 and AASB 9. The instrument shall not be considered an equity instrument under other guidance, for example AASB 2.
97 [Deleted by the AASB]
97A [Deleted by the AASB]
97B AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 deleted paragraph 4(c). An entity shall apply that amendment for annual reporting periods beginning on or after 1 July 2009. If an entity applies AASB 3 (revised 2008) for an earlier period, the amendment shall also be applied for that earlier period. However, the amendment does not apply to contingent consideration that arose from a business combination for which the acquisition date preceded the application of AASB 3 (revised 2008). Instead, an entity shall account for such consideration in accordance with paragraphs 65A-65E of AASB 3 (as amended in 2010).
97C When applying the amendments made in AASB 2008-2, an entity is required to split a compound financial instrument with an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation into separate liability and equity components. If the liability component is no longer outstanding, a retrospective application of those amendments to AASB 132 would involve separating two components of equity. The first component would be in retained earnings and represent the cumulative interest accreted on the liability component. The other component would represent the original equity component. Therefore, an entity need not separate these two components if the liability component is no longer outstanding at the date of application of the amendments.
97D Paragraph 4 was amended by AASB 2008-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project issued in July 2008. An entity shall apply that amendment for annual reporting periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the amendment for an earlier period it shall disclose that fact and apply for that earlier period the amendments to paragraph 3 of AASB 7, paragraph 1 of AASB 128 and paragraph 1 of AASB 131 issued in July 2008. An entity is permitted to apply the amendment prospectively.
97E Paragraphs 11 and 16 were amended by AASB 2009-10 Amendments to Australian Accounting Standards – Classification of Rights Issues issued in October 2009. An entity shall apply that amendment for annual reporting periods beginning on or after 1 February 2010. Earlier application is permitted. If an entity applies the amendment for an earlier period, it shall disclose that fact.
97F [Deleted by the IASB]
97G Paragraph 97B was added by AASB 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Project issued in June 2010. An entity shall apply the last two sentences of paragraph 97B for annual reporting periods beginning on or after 1 July 2010. Earlier application is permitted.
97H [Deleted by the IASB]
97I AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards, issued in August 2011, amended paragraphs 4(a) and AG29. An entity shall apply those amendments when it applies AASB 10 and AASB 11 Joint Arrangements.
97J AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13, issued in September 2011, amended the definition of fair value in paragraph 11 and amended paragraphs 23 and AG31. An entity shall apply those amendments when it applies AASB 13.
97K AASB 2011-9 Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income, issued in September 2011, amended paragraph 40. An entity shall apply that amendment when it applies AASB 101 as amended in September 2011.
97L AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities, issued in June 2012, deleted paragraph AG38 and added paragraphs AG38A-AG38F. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2014. An entity shall apply those amendments retrospectively. Earlier application is permitted. If an entity applies those amendments from an earlier date, it shall disclose that fact and shall also make the disclosures required by AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities issued in June 2012.
97M AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities, issued in June 2012, amended paragraph 43 by requiring an entity to disclose the information required in paragraphs 13B-13E of AASB 7 for recognised financial assets that are within the scope of paragraph 13A of AASB 7. An entity shall apply that amendment for annual reporting periods beginning on or after 1 January 2013 and interim periods within those annual reporting periods. An entity shall provide the disclosures required by this amendment retrospectively.
97N AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009–2011 Cycle, issued in June 2012, amended paragraphs 35, 37 and 39 and added paragraph 35A. An entity shall apply that amendment retrospectively in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors for annual reporting periods beginning on or after 1 January 2013. Earlier application is permitted. If an entity applies that amendment for an earlier period it shall disclose that fact.
97O AASB 2013-5 Amendments to Australian Accounting Standards – Investment Entities, issued in August 2013, amended paragraph 4. An entity shall apply that amendment for annual reporting periods beginning on or after 1 January 2014. Earlier application of AASB 2013-5 is permitted. If an entity applies that amendment earlier it shall also apply all amendments included in AASB 2013-5 at the same time.
(b) Shares for shares (‘net share settlement’)
IE14 Assume the same facts as in (a) except that settlement will be made net in shares instead of net in cash. Entity A’s journal entries are the same as those shown in (a) except for recording the settlement of the option contract as follows:
| 31 January 2003 | |||
| Entity A exercises the call option and the contract is settled net in shares. Entity B has an obligation to deliver CU104,000 (CU104 × 1,000) worth of Entity A’s shares to Entity A in exchange for CU102,000 (CU102 × 1,000) worth of Entity A’s shares. Thus, Entity B delivers the net amount of CU2,000 worth of shares to Entity A, that is, 19.2 shares (CU2,000 ÷ CU104). | |||
| Dr | Equity | CU2,000 | |
| Cr | Call option asset | CU2,000 | |
| To record the settlement of the option contract. The settlement is accounted for as a treasury share transaction (i.e. no gain or loss). | |||
(c) Cash for shares (‘gross physical settlement’)
IE15 Assume the same facts as in (a) except that settlement will be made by receiving a fixed number of shares and paying a fixed amount of cash, if Entity A exercises the option. Similarly to (a) and (b) above, the exercise price per share is fixed at CU102. Accordingly, Entity A has a right to receive 1,000 of Entity A’s own outstanding shares in exchange for CU102,000 (CU102 × 1,000) in cash, if Entity A exercises its option. Entity A records the following journal entries.
| 1 February 2002 | |||
| Dr | Equity | CU5,000 | |
| Cr | Cash | CU5,000 | |
| To record the cash paid in exchange for the right to receive Entity A’s own shares in one year for a fixed price. The premium paid is recognised in equity. | |||
| 31 December 2002 | |||
| No entry is made on 31 December because no cash is paid or received and a contract that gives a right to receive a fixed number of Entity A’s own shares in exchange for a fixed amount of cash meets the definition of an equity instrument of the entity. | |||
| 31 January 2003 | |||
| Entity A exercises the call option and the contract is settled gross. Entity B has an obligation to deliver 1,000 of Entity A’s shares in exchange for CU102,000 in cash. | |||
| Dr | Equity | CU102,000 | |
| Cr | Cash | CU102,000 | |
| To record the settlement of the option contract. | |||
(d) Settlement options
IE16 The existence of settlement options (such as net in cash, net in shares or by an exchange of cash and shares) has the result that the call option is a financial asset. It does not meet the definition of an equity instrument because it can be settled otherwise than by Entity A repurchasing a fixed number of its own shares in exchange for paying a fixed amount of cash or another financial asset. Entity A recognises a derivative asset, as illustrated in (a) and (b) above. The accounting entry to be made on settlement depends on how the contract is actually settled.
Example 4: Written call option on shares
IE17 This example illustrates the journal entries for a written call option obligation on the entity’s own shares that will be settled (a) net in cash, (b) net in shares or (c) by delivering cash in exchange for shares. It also discusses the effect of settlement options (see (d) below).
Assumptions: | ||
| Contract date | 1 February 2002 | |
| Exercise date | 31 January 2003 (European terms, i.e. it can be exercised only at maturity) | |
| Exercise right holder | Counterparty (Entity B) | |
| Market price per share on 1 February 2002 | CU100 | |
| Market price per share on 31 December 2002 | CU104 | |
| Market price per share on 31 January 2003 | CU104 | |
| Fixed exercise price to be received on 31 January 2003 | CU102 | |
| Number of shares under option contract | 1,000 | |
| Fair value of option on 1 February 2002 | CU5,000 | |
| Fair value of option on 31 December 2002 | CU3,000 | |
| Fair value of option on 31 January 2003 | CU2,000 | |
(a) Cash for cash (‘net cash settlement’)
IE18 Assume the same facts as in Example 3(a) above except that Entity A has written a call option on its own shares instead of having purchased a call option on them. Accordingly, on 1 February 2002 Entity A enters into a contract with Entity B that gives Entity B the right to receive and Entity A the obligation to pay the fair value of 1,000 of Entity A’s own ordinary shares as of 31 January 2003 in exchange for CU102,000 in cash (i.e. CU102 per share) on 31 January 2003, if Entity B exercises that right. The contract will be settled net in cash. If Entity B does not exercise its right, no payment will be made. Entity A records the following journal entries.
1 February 2002
| Dr | Cash | CU5,000 | |
| Cr | Call option obligation | CU5,000 | |
| To recognise the written call option. | |||
| 31 December 2002 | |||
| Dr | Call option obligation | CU2,000 | |
| Cr | Gain | CU2,000 | |
| To record the decrease in the fair value of the call option. | |||
31 January 2003
| Dr | Call option obligation | CU1,000 | |
| Cr | Gain | CU1,000 | |
| To record the decrease in the fair value of the option. | |||
| On the same day, Entity B exercises the call option and the contract is settled net in cash. Entity A has an obligation to deliver CU104,000 (CU104 × 1,000) to Entity B in exchange for CU102,000 (CU102 × 1,000) from Entity B, so Entity A pays a net amount of CU2,000. | |||
| Dr | Call option obligation | CU2,000 | |
| Cr | Cash | CU2,000 | |
| To record the settlement of the option contract. | |||
(b) Shares for shares (‘net share settlement’)
IE19 Assume the same facts as in (a) except that settlement will be made net in shares instead of net in cash. Entity A’s journal entries are the same as those shown in (a), except for recording the settlement of the option contract, as follows:
31 January 2003
| Entity B exercises the call option and the contract is settled net in shares. Entity A has an obligation to deliver CU104,000 (CU104 × 1,000) worth of Entity A’s shares to Entity B in exchange for CU102,000 (CU102 × 1,000) worth of Entity A’s shares. Thus, Entity A delivers the net amount of CU2,000 worth of shares to Entity B, that is, 19.2 shares (CU2,000 ÷ CU104). | |||
| Dr | Call option obligation | CU2,000 | |
| Cr | Equity | CU2,000 | |
| To record the settlement of the option contract. The settlement is accounted for as an equity transaction. | |||
(c) Cash for shares (‘gross physical settlement’)
IE20 Assume the same facts as in (a) except that settlement will be made by delivering a fixed number of shares and receiving a fixed amount of cash, if Entity B exercises the option. Similarly to (a) and (b) above, the exercise price per share is fixed at CU102. Accordingly, Entity B has a right to receive 1,000 of Entity A’s own outstanding shares in exchange for CU102,000 (CU102 × 1,000) in cash, if Entity B exercises its option. Entity A records the following journal entries.
| 1 February 2002 | |||
| Dr | Cash | CU5,000 | |
| Cr | Equity | CU5,000 | |
| To record the cash received in exchange for the obligation to deliver a fixed number of Entity A’s own shares in one year for a fixed price. The premium received is recognised in equity. Upon exercise, the call would result in the issue of a fixed number of shares in exchange for a fixed amount of cash. | |||
| 31 December 2002 | |||
| No entry is made on 31 December because no cash is paid or received and a contract to deliver a fixed number of Entity A’s own shares in exchange for a fixed amount of cash meets the definition of an equity instrument of the entity. | |||
| 31 January 2003 | |||
| Entity B exercises the call option and the contract is settled gross. Entity A has an obligation to deliver 1,000 shares in exchange for CU102,000 in cash. | |||
| Dr | Cash | CU102,000 | |
| Cr | Equity | CU102,000 | |
| To record the settlement of the option contract. | |||
(d) Settlement options
IE21 The existence of settlement options (such as net in cash, net in shares or by an exchange of cash and shares) has the result that the call option is a financial liability. It does not meet the definition of an equity instrument because it can be settled otherwise than by Entity A issuing a fixed number of its own shares in exchange for receiving a fixed amount of cash or another financial asset. Entity A recognises a derivative liability, as illustrated in (a) and (b) above. The accounting entry to be made on settlement depends on how the contract is actually settled.
Example 5: Purchased put option on shares
IE22 This example illustrates the journal entries for a purchased put option on the entity’s own shares that will be settled (a) net in cash, (b) net in shares or (c) by delivering cash in exchange for shares. It also discusses the effect of settlement options (see (d) below).
Assumptions: | ||
| Contract date | 1 February 2002 | |
| Exercise date | 31 January 2003 (European terms, i.e. it can be exercised only at maturity) | |
| Exercise right holder | Reporting entity (Entity A) | |
| Market price per share on 1 February 2002 | CU100 | |
| Market price per share on 31 December 2002 | CU95 | |
| Market price per share on 31 January 2003 | CU95 | |
| Fixed exercise price to be received on 31 January 2003 | CU98 | |
| Number of shares under option contract | 1,000 | |
| Fair value of option on 1 February 2002 | CU5,000 | |
| Fair value of option on 31 December 2002 | CU4,000 | |
| Fair value of option on 31 January 2003 | CU3,000 | |
(a) Cash for cash (‘net cash settlement’)
IE23 On 1 February 2002, Entity A enters into a contract with Entity B that gives Entity A the right to sell, and Entity B the obligation to buy the fair value of 1,000 of Entity A’s own outstanding ordinary shares as of 31 January 2003 at a strike price of CU98,000 (i.e. CU98 per share) on 31 January 2003, if Entity A exercises that right. The contract will be settled net in cash. If Entity A does not exercise its right, no payment will be made. Entity A records the following journal entries.
1 February 2002
The price per share when the contract is agreed on 1 February 2002 is CU100. The initial fair value of the option contract on 1 February 2002 is CU5,000, which Entity A pays to Entity B in cash on that date. On that date, the option has no intrinsic value, only time value, because the exercise price of CU98 is less than the market price per share of CU100. Therefore it would not be economic for Entity A to exercise the option. In other words, the put option is out of the money.
| Dr | Put option asset | CU5,000 | |
| Cr | Cash | CU5,000 | |
| To recognise the purchased put option. | |||
31 December 2002
| On 31 December 2002 the market price per share has decreased to CU95. The fair value of the put option has decreased to CU4,000, of which CU3,000 is intrinsic value ([CU98 – CU95] × 1,000) and CU1,000 is the remaining time value. | |||
| Dr | Loss | CU1,000 | |
| Cr | Put option asset | CU1,000 | |
| To record the decrease in the fair value of the put option. | |||
| 31 January 2003 | |||
| On 31 January 2003 the market price per share is still CU95. The fair value of the put option has decreased to CU3,000, which is all intrinsic value ([CU98 – CU95] × 1,000) because no time value remains. | |||
| Dr | Loss | CU1,000 | |
| Cr | Put option asset | CU1,000 | |
| To record the decrease in the fair value of the option. | |||
| On the same day, Entity A exercises the put option and the contract is settled net in cash. Entity B has an obligation to deliver CU98,000 to Entity A and Entity A has an obligation to deliver CU95,000 (CU95 × 1,000) to Entity B, so Entity B pays the net amount of CU3,000 to Entity A. | |||
| Dr | Cash | CU3,000 | |
| Cr | Put option asset | CU3,000 | |
| To record the settlement of the option contract. | |||
(b) Shares for shares (‘net share settlement’)
IE24 Assume the same facts as in (a) except that settlement will be made net in shares instead of net in cash. Entity A’s journal entries are the same as shown in (a), except:
31 January 2003
| Entity A exercises the put option and the contract is settled net in shares. In effect, Entity B has an obligation to deliver CU98,000 worth of Entity A’s shares to Entity A, and Entity A has an obligation to deliver CU95,000 worth of Entity A’s shares (CU95 × 1,000) to Entity B, so Entity B delivers the net amount of CU3,000 worth of shares to Entity A, that is, 31.6 shares (CU3,000 ÷ CU95). | |||
| Dr | Equity | CU3,000 | |
| Cr | Put option asset | CU3,000 | |
| To record the settlement of the option contract. | |||
(c) Cash for shares (‘gross physical settlement’)
IE25 Assume the same facts as in (a) except that settlement will be made by receiving a fixed amount of cash and delivering a fixed number of Entity A’s shares, if Entity A exercises the option. Similarly to (a) and (b) above, the exercise price per share is fixed at CU98. Accordingly, Entity B has an obligation to pay CU98,000 in cash to Entity A (CU98 × 1,000) in exchange for 1,000 of Entity A’s outstanding shares, if Entity A exercises its option. Entity A records the following journal entries.
| 1 February 2002 | |||
| Dr | Equity | CU5,000 | |
| Cr | Cash | CU5,000 | |
| To record the cash received in exchange for the right to deliver Entity A’s own shares in one year for a fixed price. The premium paid is recognised directly in equity. Upon exercise, it results in the issue of a fixed number of shares in exchange for a fixed price. | |||
| 31 December 2002 | |||
| No entry is made on 31 December because no cash is paid or received and a contract to deliver a fixed number of Entity A’s own shares in exchange for a fixed amount of cash meets the definition of an equity instrument of Entity A. | |||
31 January 2003
| Entity A exercises the put option and the contract is settled gross. Entity B has an obligation to deliver CU98,000 in cash to Entity A in exchange for 1,000 shares. | |||
| Dr | Cash | CU98,000 | |
| Cr | Equity | CU98,000 | |
| To record the settlement of the option contract. | |||
(d) Settlement options
IE26 The existence of settlement options (such as net in cash, net in shares or by an exchange of cash and shares) has the result that the put option is a financial asset. It does not meet the definition of an equity instrument because it can be settled otherwise than by Entity A issuing a fixed number of its own shares in exchange for receiving a fixed amount of cash or another financial asset. Entity A recognises a derivative asset, as illustrated in (a) and (b) above. The accounting entry to be made on settlement depends on how the contract is actually settled.
Example 6: Written put option on shares
IE27 This example illustrates the journal entries for a written put option on the entity’s own shares that will be settled (a) net in cash, (b) net in shares or (c) by delivering cash in exchange for shares. It also discusses the effect of settlement options (see (d) below).
Assumptions: | ||
| Contract date | 1 February 2002 | |
| Exercise date | 31 January 2003 (European terms, i.e. it can be exercised only at maturity) | |
| Exercise right holder | Counterparty (Entity B) | |
| Market price per share on 1 February 2002 | CU100 | |
| Market price per share on 31 December 2002 | CU95 | |
| Market price per share on 31 January 2003 | CU95 | |
| Fixed exercise price to be paid on 31 January 2003 | CU98 | |
| Present value of exercise price on 1 February 2002 | CU95 | |
| Number of shares under option contract | 1,000 | |
| Fair value of option on 1 February 2002 | CU5,000 | |
| Fair value of option on 31 December 2002 | CU4,000 | |
| Fair value of option on 31 January 2003 | CU3,000 | |
(a) Cash for cash (‘net cash settlement’)
IE28 Assume the same facts as in Example 5(a) above, except that Entity A has written a put option on its own shares instead of having purchased a put option on its own shares. Accordingly, on 1 February 2002, Entity A enters into a contract with Entity B that gives Entity B the right to receive and Entity A the obligation to pay the fair value of 1,000 of Entity A’s outstanding ordinary shares as of 31 January 2003 in exchange for CU98,000 in cash (i.e. CU98 per share) on 31 January 2003, if Entity B exercises that right. The contract will be settled net in cash. If Entity B does not exercise its right, no payment will be made. Entity A records the following journal entries.
1 February 2002
| Dr | Cash | CU5,000 | |
| Cr | Put option liability | CU5,000 | |
| To recognise the written put option. | |||
| 31 December 2002 | |||
| Dr | Put option liability | CU1,000 | |
| Cr | Gain | CU1,000 | |
| To record the decrease in the fair value of the put option. | |||
| 31 January 2003 | |||
| Dr | Put option liability | CU1,000 | |
| Cr | Gain | CU1,000 | |
| To record the decrease in the fair value of the put option. | |||
| On the same day, Entity B exercises the put option and the contract is settled net in cash. Entity A has an obligation to deliver CU98,000 to Entity B, and Entity B has an obligation to deliver CU95,000 (CU95 × 1,000) to Entity A. Thus, Entity A pays the net amount of CU3,000 to Entity B. | |||
| Dr | Put option liability | CU3,000 | |
| Cr | Cash | CU3,000 | |
| To record the settlement of the option contract. | |||
(b) Shares for shares (‘net share settlement’)
IE29 Assume the same facts as in (a) except that settlement will be made net in shares instead of net in cash. Entity A’s journal entries are the same as those in (a), except for the following:
| 31 January 2003 | |||
| Entity B exercises the put option and the contract is settled net in shares. In effect, Entity A has an obligation to deliver CU98,000 worth of shares to Entity B, and Entity B has an obligation to deliver CU95,000 worth of Entity A’s shares (CU95 x 1,000) to Entity A. Thus, Entity A delivers the net amount of CU3,000 worth of Entity A’s shares to Entity B, that is, 31.6 shares (3,000 ÷ 95). | |||
| Dr | Put option liability | CU3,000 | |
| Cr | Equity | CU3,000 | |
| To record the settlement of the option contract. The issue of Entity A’s own shares is accounted for as an equity transaction. | |||
(c) Cash for shares (‘gross physical settlement’)
IE30 Assume the same facts as in (a) except that settlement will be made by delivering a fixed amount of cash and receiving a fixed number of shares, if Entity B exercises the option. Similarly to (a) and (b) above, the exercise price per share is fixed at CU98. Accordingly, Entity A has an obligation to pay CU98,000 in cash to Entity B (CU98 × 1,000) in exchange for 1,000 of Entity A’s outstanding shares, if Entity B exercises its option. Entity A records the following journal entries.
| 1 February 2002 | |||
| Dr | Cash | CU5,000 | |
| Cr | Equity | CU5,000 | |
| To recognise the option premium received of CU5,000 in equity. | |||
| Dr | Equity | CU95,000 | |
| Cr | Liability | CU95,000 | |
| To recognise the present value of the obligation to deliver CU98,000 in one year, that is, CU95,000, as a liability. | |||
| 31 December 2002 | |||
| Dr | Interest expense | CU2,750 | |
| Cr | Liability | CU2,750 | |
| To accrue interest in accordance with the effective interest method on the liability for the share redemption amount. | |||
| 31 January 2003 | |||
| Dr | Interest expense | CU250 | |
| Cr | Liability | CU250 | |
| To accrue interest in accordance with the effective interest method on the liability for the share redemption amount. | |||
| On the same day, Entity B exercises the put option and the contract is settled gross. Entity A has an obligation to deliver CU98,000 in cash to Entity B in exchange for CU95,000 worth of shares (CU95 × 1,000). | |||
| Dr | Liability | CU98,000 | |
| Cr | Cash | CU98,000 | |
| To record the settlement of the option contract. | |||
(d) Settlement options
IE31 The existence of settlement options (such as net in cash, net in shares or by an exchange of cash and shares) has the result that the written put option is a financial liability. If one of the settlement alternatives is to exchange cash for shares ((c) above), Entity A recognises a liability for the obligation to deliver cash, as illustrated in (c) above. Otherwise, Entity A accounts for the put option as a derivative liability.
Entities such as Mutual Funds and Co-operatives whose Share Capital is not Equity as Defined in AASB 132
Example 7: Entities with no equity
IE32 The following example illustrates a format of a statement of comprehensive income and statement of financial position that may be used by entities such as mutual funds that do not have equity as defined in AASB 132. Other formats are possible.
Statement of comprehensive income for the year ended 31 December 20x1
| 20x1 | 20x0 | ||||
| CU | CU | ||||
| Revenue | 2,956 | 1,718 | |||
| Expenses (classified by nature or function) | (644) | (614) | |||
| Profit from operating activities | 2,312 | 1,104 | |||
| Finance costs | – other finance costs | (47) | (47) | ||
| – distributions to unitholders | (50) | (50) | |||
| Change in net assets attributable to unitholders | 2,215 | 1,007 | |||
Statement of financial position at 31 December 20x1
| 20x1 | 20x0 | ||
| CU | CU | CU | CU |
| ASSETS | |||
| Non-current assets (classified in accordance with AASB 101 Presentation of Financial Statements) | 91,374 | 78,484 | |
| Total non-current assets | 91,374 | 78,484 | |
| Current assets (classified in accordance with AASB 101) | 1,422 | 1,769 | |
| Total current assets | 1,422 | 1,769 | |
| Total assets | 92,796 | 80,253 | |
| LIABILITIES | |||
| Current liabilities (classified in accordance with AASB 101) | 647 | 66 | |
| Total current liabilities | (647) | (66) | |
| Non-current liabilities excluding net assets attributable to unitholders (classified in accordance with AASB 101) | 280 | 136 | |
| (280) | (136) | ||
| Net assets attributable to unitholders | 91,869 | 80,051 |
Example 8: Entities with some equity
IE33 The following example illustrates a format of a statement of comprehensive income and statement of financial position that may be used by entities whose share capital is not equity as defined in AASB 132 because the entity has an obligation to repay the share capital on demand but does not have all the features or meet the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D. Other formats are possible.
Statement of comprehensive income for the year ended 31 December 20x1
| 20x1 | 20x0 | ||
| CU | CU | ||
| Revenue | 472 | 498 | |
| Expenses (classified by nature or function) | (367) | (396) | |
| Profit from operating activities | 105 | 102 | |
| Finance costs | – other finance costs | (4) | (4) |
| – distributions to members | (50) | (50) | |
| Change in net assets attributable to members | 51 | 48 | |
Statement of financial position at 31 December 20x1
| 20x1 | 20x0 | ||||
| CU | CU | CU | CU | ||
| ASSETS | |||||
| Non-current assets (classified in accordance with AASB 101) | 908 | 830 | |||
| Total non-current assets | 908 | 830 | |||
| Current assets (classified in accordance with AASB 101) | 383 | 350 | |||
| Total current assets | 383 | 350 | |||
| Total assets | 1,291 | 1,180 | |||
| LIABILITIES | |||||
| Current liabilities (classified in accordance with AASB 101) | 372 | 338 | |||
| Share capital repayable on demand | 202 | 161 | |||
| Total current liabilities | (574) | (499) | |||
| Total assets less current liabilities | 717 | 681 | |||
| Non-current liabilities (classified in accordance with AASB 101) | 187 | 196 | |||
| 187 | 196 | ||||
| OTHER COMPONENTS OF EQUITY2 | |||||
| Reserves for example, revaluation surplus, retained earnings etc | 530 | 485 | |||
| 530 | 485 | ||||
| 717 | 681 | ||||
| MEMORANDUM NOTE – Total Members’ Interests | |||||
| 20x1 | 20x0 | ||||
| CU | CU | CU | CU | ||
| Share capital repayable on demand | 202 | 161 | |||
| Reserves | 530 | 485 | |||
| 732 | 646 | ||||
2 In this example, the entity has no obligation to deliver a share of its reserves to its members.
Accounting for Compound Financial Instruments
Example 9: Separation of a compound financial instrument on initial recognition
IE34 Paragraph 28 describes how the components of a compound financial instrument are separated by the entity on initial recognition. The following example illustrates how such a separation is made.
IE35 An entity issues 2,000 convertible bonds at the start of year 1. The bonds have a three-year term, and are issued at par with a face value of CU1,000 per bond, giving total proceeds of CU2,000,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9 per cent.
IE36 The liability component is measured first, and the difference between the proceeds of the bond issue and the fair value of the liability is assigned to the equity component. The present value of the liability component is calculated using a discount rate of 9 per cent, the market interest rate for similar bonds having no conversion rights, as shown below.
| CU | |
| Present value of the principal – CU2,000,000 payable at the end of three years | 1,544,367 |
| Present value of the interest – CU120,000 payable annually in arrears for three years | 303,755 |
| Total liability component | 1,848,122 |
| Equity component (by deduction) | 151,878 |
| Proceeds of the bond issue | 2,000,000 |
Example 10: Separation of a compound financial instrument with multiple embedded derivative features
IE37 The following example illustrates the application of paragraph 31 to the separation of the liability and equity components of a compound financial instrument with multiple embedded derivative features.
IE38 Assume that the proceeds received on the issue of a callable convertible bond are CU60. The value of a similar bond without a call or equity conversion option is CU57. Based on an option pricing model, it is determined that the value to the entity of the embedded call feature in a similar bond without an equity conversion option is CU2. In this case, the value allocated to the liability component under paragraph 31 is CU55 (CU57 – CU2) and the value allocated to the equity component is CU5 (CU60 – CU55).
Example 11: Repurchase of a convertible instrument
IE39 The following example illustrates how an entity accounts for a repurchase of a convertible instrument. For simplicity, at inception, the face amount of the instrument is assumed to be equal to the aggregate carrying amount of its liability and equity components in the financial statements, that is, no original issue premium or discount exists. Also, for simplicity, tax considerations have been omitted from the example.
IE40 On 1 January 1999, Entity A issued a 10 per cent convertible debenture with a face value of CU1,000 maturing on 31 December 2008. The debenture is convertible into ordinary shares of Entity A at a conversion price of CU25 per share. Interest is payable half-yearly in cash. At the date of issue, Entity A could have issued nonconvertible debt with a ten-year term bearing a coupon interest rate of 11 per cent.
IE41 In the financial statements of Entity A the carrying amount of the debenture was allocated on issue as follows:
| CU | |
| Liability component | |
| Present value of 20 half-yearly interest payments of CU50, discounted at 11% | 597 |
| Present value of CU1,000 due in 10 years, discounted at 11%, compounded half-yearly | 343 |
| 940 | |
| Equity component | |
| (difference between CU1,000 total proceeds and CU940 allocated above) | 60 |
| Total proceeds | 1,000 |
IE42 On 1 January 2004, the convertible debenture has a fair value of CU1,700.
IE43 Entity A makes a tender offer to the holder of the debenture to repurchase the debenture for CU1,700, which the holder accepts. At the date of repurchase, Entity A could have issued non-convertible debt with a five-year term bearing a coupon interest rate of 8 per cent.
IE44 The repurchase price is allocated as follows:
| Carrying Value | Fair Value | Difference | |
| Liability component: | CU | CU | CU |
| Present value of 10 remaining half-yearly interest payments of CU50, discounted at 11% and 8%, respectively | 377 | 405 | |
| Present value of CU1,000 due in 5 years, discounted at 11% and 8%, compounded half-yearly, respectively | 585 | 676 | |
| 962 | 1,081 | (119) | |
| Equity component | 60 | 6193 | (559) |
| Total | 1,022 | 1,700 | (678) |
3 This amount represents the differences between the fair value amount allocated to the liability component and the repurchase price of CU1,700.
IE45 Entity A recognises the repurchase of the debenture as follows:
| Dr | Liability component | CU962 | |
| Dr | Debt settlement expense (profit or loss) | CU119 | |
| Cr | Cash | CU1,081 | |
| To recognise the repurchase of the liability component. | |||
| Dr | Equity | CU619 | |
| Cr | Cash | CU619 | |
| To recognise the cash paid for the equity component. | |||
IE46 The equity component remains as equity, but may be transferred from one line item within equity to another.
Example 12: Amendment of the terms of a convertible instrument to induce early conversion
IE47 The following example illustrates how an entity accounts for the additional consideration paid when the terms of a convertible instrument are amended to induce early conversion.
IE48 On 1 January 1999, Entity A issued a 10 per cent convertible debenture with a face value of CU1,000 with the same terms as described in Example 11. On 1 January 2000, to induce the holder to convert the convertible debenture promptly, Entity A reduces the conversion price to CU20 if the debenture is converted before 1 March 2000 (i.e. within 60 days).
IE49 Assume the market price of Entity A’s ordinary shares on the date the terms are amended is CU40 per share. The fair value of the incremental consideration paid by Entity A is calculated as follows:
| Number of ordinary shares to be issued to debenture holders under amended conversion terms: | ||
| Face amount | CU1,000 | |
| New conversion price | /CU20 | per share |
| Number of ordinary shares to be issued on conversion | 50 | shares |
| Number of ordinary shares to be issued to debenture holders under original conversion terms: | ||
| Face amount | CU1,000 | |
| Original conversion price | /CU25 | per share |
| Number of ordinary shares to be issued on conversion | 40 | shares |
| Number of incremental ordinary shares issued upon conversion | 10 | shares |
| Value of incremental ordinary shares issued upon conversion | ||
| CU40 per share × 10 incremental shares | CU400 | |
IE50 The incremental consideration of CU400 is recognised as a loss in profit or loss.
DELETED IAS 32 TEXT
Deleted IAS 32 text is not part of AASB 132.
Paragraph 96
An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is permitted. An entity shall not apply this Standard for annual periods beginning before 1 January 2005 unless it also applies IAS 39 (issued December 2003), including the amendments issued in March 2004. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact.
Paragraph 96A
Puttable Financial Instruments and Obligations Arising on Liquidation (Amendments to IAS 32 and IAS 1), issued in February 2008, required financial instruments that contain all the features and meet the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D to be classified as an equity instrument, amended paragraphs 11, 16, 17-19, 22, 23, 25, AG13, AG14 and AG27, and inserted paragraphs 16A-16F, 22A, 96B, 96C, 97C, AG14A-AG14J and AG29A. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the changes for an earlier period, it shall disclose that fact and apply the related amendments to IAS 1, IAS 39, IFRS 7 and IFRIC 2 at the same time.
Paragraph 97
This Standard shall be applied retrospectively.
Paragraph 97A
IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In addition it amended paragraph 40. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for that earlier period.
Paragraph 98
This Standard supersedes IAS 32 Financial Instruments: Disclosure and Presentation revised in 20004.
4 In August 2005 the IASB relocated all disclosures relating to financial instruments to IFRS 7 Financial Instruments: Disclosures.
Paragraph 99
This Standard supersedes the following Interpretations:
(a) SIC-5 Classification of Financial Instruments – Contingent Settlement Provisions;
(b) SIC-16 Share Capital – Reacquired Own Equity Instruments (Treasury Shares); and
(c) SIC-17 Equity – Costs of an Equity Transaction.
Paragraph 100
This Standard withdraws draft SIC Interpretation D34 Financial Instruments – Instruments or Rights Redeemable by the Holder.
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