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Canciller Pas1

PAS 22 outlines the presentation of financial instruments, defining financial assets, liabilities, and equity instruments, which arise from contracts between parties. It distinguishes between financial and nonfinancial assets and liabilities, and explains the concept of compound financial instruments that contain both liability and equity elements. The document mandates 'split accounting' for such instruments, requiring separate evaluation and allocation of consideration received between the liability and equity components.

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6 views2 pages

Canciller Pas1

PAS 22 outlines the presentation of financial instruments, defining financial assets, liabilities, and equity instruments, which arise from contracts between parties. It distinguishes between financial and nonfinancial assets and liabilities, and explains the concept of compound financial instruments that contain both liability and equity elements. The document mandates 'split accounting' for such instruments, requiring separate evaluation and allocation of consideration received between the liability and equity components.

Uploaded by

cancillerstephaniehilum
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PAS 22

FINANCIAL INSTRUMENTS – PRESENTATION

FINANCIAL INSTRUMENT
PAS 32, paragraph 11
• any contract that gives rise to both a financial asset of one entity and a financial
liability or equity instrument of another entity
• financial asset, a financial liability and an equity instrument

CHARACTERISTICS
✓ There must be a contract.
✓ There are at least two parties to the contract..
✓ The contract shall give rise to a financial asset of one party and financial liability
or equity instrument of another party.

FINANCIAL ASSET
• Cash
• A contractual right to receive cash or another financial asset from another entity
• A contractual right to exchange financial instruments with another entity under
favorable conditions
• An equity instrument of another entity

Examples of financial asset


✓ Cash or currency
✓ Cash deposit in bank
✓ Accounts receivable
✓ Notes receivable
✓ Loans receivable
✓ investment in shares or equity instruments

Examples of nonfinancial asset


✓ Physical assets, such as inventory and property, plant and equipment
✓ Intangible assets, such as patent and trademark
✓ Prepaid, expenses

FINANCIAL LIABILITY
• To deliver cash or other financial asset to another entiy.
• To exchange financial instruments with another entity under conditions that are
potentially unfavorable.

Examples of financial liabilities


✓ Accounts payable
✓ Notes payable
✓ Loans payable
✓ Bonds payable

Examples of nonfinancial liabilities


✓ Deferred revenue and warranty obligations because the outflow of economic
benefits is the delivery of goods and services rather than a contractual obligation
to pay cash.
✓ Income tax payable because it is imposed by law and noncontractual
✓ Constructive obligations because the obligations do not arise from contract
EQUITY INSTRUMENT
• any contract that evidences a residual interest in assets of entity after deducting all
the liabilities.
✓ Ordinary share capital
✓ Preference share capital
✓ Share options or share warrants

COMPOUND FINANCIAL INSTRUMENT


PAS 32, paragraph 28,
• financial instrument contains both liability and equity element from perspective of
issuer.
• one component of financial instrument meets definition of financial liability and
another component of the financial instrument meets the definition of equity instrument.
✓ Bonds payable issued with share warrants
✓ Convertible bonds payable

ACCOUNTING FOR COMPOUND INSTRUMENT


• issuer of financial instrument shall evaluate terms of instrument contains liability and
an equity
• if financial instrument contains both a liability and equity, PAS 32 mandates accounted
for separately.
• approach in accounting for compound financial instrument is known as "split
accounting".
• consideration received from issuance of compound financial instrument shall be
allocated between the liability and equity components.
• fair value of liability component is first determined, deducted from total consideration
received from the issuance of the compound financial instrument.
• residual amount is allocated to the equity component

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