FAQs – Presentation of Financial Instruments

What are treasury shares and how are these presented What are treasury shares and how are these presented in the financial statements? If an entity acquires its own equity instruments, these instruments are known as ‘treasury shares’ and are 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. 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. The amount of treasury shares…

Own use exemption as per the Accounting Standard What is meant by own use exemption as per the Accounting Standard? Contracts that are entered into for the purpose of the receipt or delivery of a non-financial item for the entity’s own use is excluded from the scope of Accounting Standards for financial instruments. However, contracts that an entity designates as measured at fair value through profit or loss are not excluded even when such contracts are meant for own use. A contract to buy or sell a non-financial item that is settled net in cash or by exchanging another financial…

Criteria for classifying as either financial liability or equity What is the core criteria while classifying a financial instrument as either financial liability or equity? The core criteria while classifying a financial instrument is to examine whether there exists a future obligation on the part of the entity to part with either cash or any other financial asset of the company while settling a particular contract. The substance of a financial instrument, rather than its legal form, governs its classification in the entity’s balance sheet. Substance and legal form are commonly consistent, but not always. Some financial instruments take the…

Contract is settled through the entity’s own equity instrument When a contract is settled through the entity’s own equity instrument, can it be regarded as equity? A contract that will be settled by the entity receiving or delivering a fixed number of its own shares for no future consideration or exchanging a fixed number of its own shares for a fixed amount of cash or another financial asset, is an equity instrument. If such a contract can be settled by the entity by receiving or delivering a variable number of its own shares for an amount that is not yet…

Consequences of treating equity vs liability What are the consequences of treating a contract as equity and how its treatment is different if treated as liability? The consequences of treating particular contract as equity are as follows: Treatment when the financial instrument is equity: 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…

Classification of Foreign Currency Convertible Bond (FCCB) An entity has issued a foreign currency convertible bond (FCCB). The Bond is denominated in foreign currency and would be converted into a fixed number of equity shares. Will this be treated as equity instrument or as a financial liability? Contracts that will be settled by an entity delivering a fixed number of its own equity instruments in exchange for a fixed amount of foreign currency are treated as a liability as per IFRS 9. Accordingly, contracts which include a conversion option in a foreign currency denominated convertible bond are liabilities. A derivative…

Bifurcation of compound financial instruments Should the entity monitor a compound financial instrument in bifurcating such instrument into liability and equity component constantly and account for the same on every reporting period? A compound financial instrument should be evaluated for the terms of the financial instrument to determine whether it contains both a liability and an equity component. Each component should be classified separately as financial liabilities, financial assets or equity instruments. An entity should recognise separately the components of a financial instrument that: creates a financial liability of the entity; and grants an option to the holder of the…