IAS 32 Financial Instruments Presentation | IFRS Lectures | ACCA Exam | International Accounting

Summary

Professor Farhad introduces IFRS 32, focusing on financial instruments and their presentation. He defines financial assets, liabilities, and equity, explaining their characteristics and differences. The session covers the basics of financial instruments, including contracts that give rights to receive cash or exchange financial assets and liabilities. The professor also discusses the classification of financial instruments as liabilities or equity, highlighting the importance of understanding contractual obligations. Examples of financial liabilities and equity instruments are provided, with an emphasis on the distinction between the two for proper accounting treatment.

Takeaways

• 📚 The session focuses on IFRS 32, which deals with the presentation of financial instruments.
• 🔗 Professor Farhad reminds viewers to connect with him on various platforms like YouTube, Instagram, and Facebook for more accounting, auditing, and tax lectures.
• 🎓 The topic of financial instruments is briefly covered in the CPA and ACCA exams.
• 💻 The instructor's website offers donations to support the channel and promotional offers for study materials like Becker's courses with $1,000 off.
• 📈 Becker's course provides extensive study materials including over 10,000 multiple-choice questions and exercises for CPA exam preparation.
• 📝 The definition of a financial instrument according to IFRS 32 is a contract that gives rise to both a financial asset for one entity and a financial liability or equity for another.
• 💼 Financial assets include cash, contracts that give the right to receive cash or another financial asset, and equity instruments like stocks in another entity.
• 📉 Financial liabilities are contractual obligations to deliver cash or another financial asset, and can include bonds, loans, and other debt instruments.
• 🏢 Equity instruments represent a residual interest in the assets of an entity after deducting liabilities, but do not include instruments accounted for under the equity method or consolidated method.
• 🔑 The distinction between financial liabilities and equity instruments can depend on the contractual terms and whether the instrument can be settled in the entity's own equity.
• 🔄 Compound financial instruments, such as convertible bonds, have features of both equity and liability and require split accounting to separately report the two components.

Q & A

What is the main focus of the session presented by Professor Farhad?

The main focus of the session is IFRS 32, which deals with financial instruments and their presentation.

What does IFRS 32 define as a financial instrument?

IFRS 32 defines a financial instrument as any contract that gives rise to both a financial asset of one entity and a financial liability or equity of another entity.

What are the different types of financial assets mentioned in the script?

The different types of financial assets mentioned include cash, a contract that gives the right to receive cash or another financial asset (like debt instruments), a contractual right to exchange financial assets or liabilities under favorable conditions (like call and put options), and equity instruments.

What is the definition of a financial liability according to the script?

A financial liability is a contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or liabilities under potentially unfavorable conditions.

What is the difference between equity method and the consolidated method in accounting for equity instruments?

The equity method is used when there is significant influence (usually when ownership is between 20% and 50%), while the consolidated method is used when there is control (usually when ownership is more than 50%).

How does the script define an equity instrument?

An equity instrument is defined as any contract that evidences a residual interest in the assets of an entity after deducting its liabilities.

What is the significance of the Federal Reserve Bank interest rate in the example of preferred stock?

The Federal Reserve Bank interest rate is significant because if it rises above 5%, it triggers a contingency that allows the preferred stockholders to redeem their shares at par value, making it a financial liability for the company.

What is a compound financial instrument and how is it accounted for?

A compound financial instrument is one that has features of both an equity and a liability. It should be split into its liability and equity components and accounted for separately using methods such as the with-and-without method or the incremental method.

What is the purpose of issuing convertible bonds from the issuer's perspective?

The purpose of issuing convertible bonds is to allow the company to pay a lower interest rate than they would have to pay without the conversion feature, potentially attracting more investors and giving them the option to convert the bond into common stock.

How is the fair value of a convertible bond determined in the script's example?

The fair value of a convertible bond is determined by comparing the bond's issue price to the present value of its principal and interest payments, using the market interest rate for similar bonds without the conversion feature.

What is the journal entry for issuing a convertible bond according to the script?

The journal entry for issuing a convertible bond would debit cash for the total issue price, credit bonds payable for the fair value of the liability component, and credit the remainder to additional paid-in capital for the equity component.