HKAS 32 - Financial Instruments - Presentation (Condensed)

Objective & Scope

Objective

Establish principles for presenting financial instruments as liabilities or equity, offsetting financial assets and liabilities, classifying instruments from the issuer's perspective, and classifying related interest, dividends, losses, and gains.

Scope

Applies to all entities and all types of financial instruments, except:

Insurance Contract Exceptions

HKAS 32 does apply to derivatives embedded in HKFRS 17 contracts, separated investment components, financial guarantee contracts (if HKFRS 9 applied), credit card contracts meeting insurance definition, and instruments where entity elects HKFRS 9.

Contracts to Buy/Sell Non-Financial Items

Applies to contracts that can be settled net in cash, as if they were financial instruments. Exception: contracts held for receipt/delivery per expected usage requirements. A written option that can be settled net is always within scope.

Definitions

Financial Instrument

Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial Asset

Any asset that is cash, an equity instrument of another entity, a contractual right to receive cash or exchange financial assets under favourable conditions, or a contract settled in own equity instruments (non-derivative with variable number, or derivative not fixed-for-fixed).

Financial Liability

Any liability that is a contractual obligation to deliver cash or exchange under unfavourable conditions, or a contract settled in own equity instruments (non-derivative with variable number, or derivative not fixed-for-fixed).

Equity Instrument

Any contract evidencing a residual interest in assets after deducting all liabilities.

Puttable Instrument

Gives holder the right to put back to issuer for cash or another financial asset, or is automatically put back on occurrence of uncertain future event or death/retirement.

Liabilities vs Equity

Core Classification Principle

Classify on initial recognition based on substance of contractual arrangement and definitions.

Conditions for Equity Classification

An instrument is equity if, and only if, both conditions are met:

Puttable Instruments Exception

Classified as equity if all five features are met: pro rata share on liquidation, subordinate class, identical features, no other cash obligation, and cash flows based on profit/loss or net asset changes.

Reclassification

From equity to liability: measure liability at fair value, difference in equity. From liability to equity: measure equity at carrying value of liability.

Compound Financial Instruments

Definition

A non-derivative financial instrument containing both a liability and an equity component. Example: bond convertible into a fixed number of ordinary shares.

Measurement on Initial Recognition

Conversion and Extinguishment

On conversion at maturity: derecognise liability, recognise as equity, no gain/loss. On early redemption: allocate consideration, gain/loss on liability in P&L, amount for equity in equity.

Treasury Shares

Core Principle

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 profit or loss on the purchase, sale, issue, or cancellation of an entity's own equity instruments.

Exception for Investment Funds

An entity may irrevocably elect, on an instrument-by-instrument basis, not to deduct from equity a treasury share included in an investment fund. Instead, account for it as a financial asset at fair value through profit or loss under HKFRS 9.

Agency Holdings

When an entity holds its own equity on behalf of others (e.g., for a client), there is an agency relationship and those holdings are not included in the entity's statement of financial position.

Interest, Dividends, Losses & Gains

Core Principle

Interest, dividends, losses, and gains relating to a financial liability are recognised as income or expense in profit or loss. Distributions to holders of an equity instrument are recognised directly in equity. Transaction costs of an equity transaction are deducted from equity.

Classification Impact

Transaction Costs

Equity transaction costs are incremental costs directly attributable to the equity transaction, deducted from equity. Costs of abandoned equity transactions are recognised as an expense. For compound instruments, allocate proportionally.

Offsetting a Financial Asset and a Financial Liability

Core Principle

A financial asset and a financial liability shall be offset and the net amount presented 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.

Right of Set-Off

Must be a legal right, currently available, and legally enforceable in normal course of business, event of default, and event of insolvency or bankruptcy.

When Offsetting is Usually Inappropriate