IAS 32, or International Accounting Standard 32, “Financial Instruments: Presentation,” is an accounting standard issued by the International Accounting Standards Board (IASB) that provides guidance on the presentation of financial instruments in the financial statements of an entity.
Financial instruments are defined in IAS 32 as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. IAS 32 classifies financial instruments into three main categories:
- Financial Assets: Financial assets are classified into various categories, including financial assets at fair value through profit or loss (FVTPL), held-to-maturity (HTM) investments, loans and receivables, and available-for-sale (AFS) financial assets. The classification depends on the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.
- Financial Liabilities: Financial liabilities are initially recognized at fair value and subsequently measured at amortized cost, with certain exceptions. Examples of financial liabilities include accounts payable, loans, and bonds payable.
- Equity Instruments: Equity instruments represent ownership interests in an entity and include ordinary shares, preference shares, and other equity instruments. Equity instruments are not recognized as financial liabilities and are presented separately in the equity section of the financial statements.
IAS 32 provides guidance on how financial instruments should be presented in the financial statements, including their classification, measurement, and disclosure requirements. Some key aspects of IAS 32 related to the presentation of financial instruments include:
- Classification: IAS 32 requires entities to appropriately classify financial instruments as financial assets, financial liabilities, or equity instruments based on their contractual terms and the entity’s business model for managing the financial instruments.
- Presentation: IAS 32 provides guidance on how financial instruments should be presented in the financial statements, including their classification as current or non-current, the offsetting of financial assets and financial liabilities, and the disclosure requirements for different types of financial instruments.
- Disclosure: IAS 32 requires entities to provide extensive disclosures about their financial instruments, including information about the nature, risks, and terms of the financial instruments, as well as the fair value, carrying amount, and changes in fair value of financial instruments.
It’s important for entities to carefully consider the requirements of IAS 32 and any relevant local regulations when presenting financial instruments in their financial statements to ensure compliance with the applicable accounting standards. Professional judgment and expertise may be required to properly apply the guidance in IAS 32 to the specific circumstances of an entity’s financial instruments.
Here are some examples of how financial instruments may be presented in the financial statements in accordance with IAS 32:
- Classification of Financial Assets:
a) Financial assets at fair value through profit or loss (FVTPL): XYZ Ltd holds certain listed equity shares for trading purposes. These shares are classified as financial assets at FVTPL and are presented as a separate line item in the balance sheet at fair value, with changes in fair value recognized in profit or loss.
b) Held-to-maturity (HTM) investments: ABC Corp holds certain bonds that it intends to hold until maturity and that meet the criteria for HTM classification. These bonds are presented as a separate line item in the balance sheet at amortized cost, with interest income recognized using the effective interest method.
c) Loans and receivables: PQR Inc has granted loans to its customers as part of its regular business operations. These loans are classified as loans and receivables and are presented as a separate line item in the balance sheet at amortized cost, with interest income recognized using the effective interest method.
- Presentation of Financial Liabilities:
a) Accounts payable: LMN Co has outstanding payables to its suppliers. These payables are presented as a separate line item in the balance sheet as current financial liabilities, with the amount owed disclosed.
b) Bonds payable: DEF Corp has issued bonds to raise long-term debt capital. These bonds are presented as a separate line item in the balance sheet as non-current financial liabilities, with the amount of the bond and related disclosures, such as interest rates and maturity dates, provided.
- Presentation of Equity Instruments:
a) Ordinary shares: GHI Inc has issued ordinary shares as part of its equity capital. These ordinary shares are presented as a separate line item in the equity section of the balance sheet, with details of the number of shares, their par value, and any additional paid-in capital disclosed.
b) Preference shares: JKL Ltd has issued preference shares with different rights and preferences compared to ordinary shares. These preference shares are presented as a separate line item in the equity section of the balance sheet, with details of the rights and preferences disclosed.
- Disclosure of Financial Instruments:
a) Disclosures related to fair value: MNO Corp discloses the fair value of its financial assets and financial liabilities, along with the inputs used in determining fair value, such as market prices or valuation techniques.
b) Disclosures related to risks: UVW Co provides disclosures related to the risks associated with its financial instruments, such as credit risk, interest rate risk, and liquidity risk, including quantitative and qualitative information.
These are just some examples of how financial instruments may be presented and disclosed in accordance with IAS 32. It’s important to note that the specific presentation and disclosure requirements may vary depending on the nature and characteristics of the financial instruments and the applicable accounting framework in the jurisdiction where the entity operates. Entities should refer to the specific requirements of IAS 32 and seek professional advice as needed to ensure compliance with the applicable accounting standards.