Summary of the approach of IAS 21

Chapter 20 – Financial Instruments Page 275 6 Treasury Shares If an entity acquires its own shares, they are deducted from equity. Such shares are known as treasury shares. [IAS 32.33] An entity should not recognise any gain or loss made from a transaction involving treasury shares, and any consideration paid or received should be recognised directly in equity. [IAS 32.33] The amount of treasury shares held should be disclosed either in the statement of financial position or in the notes to the financial statements in accordance with IAS 1 Presentation of financial statements. 7 Interest, Dividends, Losses and Gains Where interest, dividends, losses or gains arise in relation to a financial instrument that is classified as a financial liability, they should be recognised in profit or loss for the period. [IAS 32.35] Dividends payable in respect of a financial instrument that is classified as a financial liability are classified as an expense. For example, dividends payable in respect of redeemable preference shares are presented as finance costs in the statement of comprehensive income. They may either be reported as part of interest or presented as a separate line item. Distributions, such as dividends, paid to holders of a financial instrument classified as equity should be charged directly against equity. [IAS 32.35] When equity shares are issued, the transaction costs should be deducted from equity, net of any related income tax benefit. The transaction costs to be deducted are only the incremental costs directly attributable to the transaction that would have been otherwise avoided. [IAS 32.25] Illustration 3 An entity issues 100,000 new CU1 ordinary shares which have a fair value of CU2.50 per share. Professional fees in respect of the share issue are CU50,000. The costs are deductible in arriving at the entity’s income tax liability. The rate of tax is 40. The management of the entity estimates that costs incurred internally for time incurred working on the share issue are CU25,000. The internal costs should be recognised in profit or loss for the period. The professional fees are directly attributable to the transaction and CU30,000 should be deducted from equity CU50,000 net of 40 tax. Equity will increase by CU220,000 100,000 x CU2.50 - CU30,000. Chapter 20 – Financial Instruments Page 276 8 Offsetting Financial assets and financial liabilities should generally be presented as separate items in the statement of financial position. However, it is possible to report financial assets and liabilities net where the entity has a legally enforceable right to offset the amounts and the entity intends to settle on a net basis. If the amounts are not settled on a net basis, then they may still be offset if the entity intends to realise the asset and settle the liability simultaneously. [IAS 32.42] 9 Objectives and Scope of IAS 39 The objective of IAS 39 is to establish principles for recognising and measuring financial assets and financial liabilities. The scope of IAS 39 is consistent with IAS 32; however there are a number of additional exceptions to its application. These include rights and obligations under a leasing arrangement as accounted for in accordance with IAS 17 Leases. However, certain elements of a lease are within the scope of IAS 39. For example a lease receivable recognised by a lessor is subject to IAS 39’s derecognition and impairment provisions, a finance lease obligation of a lessee is subject to its derecognition criteria and IAS 39 applies where a lease contains what is called an embedded derivative. [IAS 39.2] An equity instrument that meets the definition of a financial instrument but is an investment in an associate, subsidiary or joint venture is not subject to the requirements of IAS 39, nor are certain financial guarantees in relation to non-payment by a specified debtor. A loan commitment that cannot be settled by the payment of cash or another financial instrument is also outside of the scope of IAS 39. [IAS 39.2] A loan commitment designated as a financial liability at fair value with the changes in fair value reported directly in profit or loss is specifically identified as being within the scope of IAS 39. [IAS 39.4] Liabilities in relation to financial guarantee contracts are within the scope of IAS 39. A financial guarantee contract is defined as being one that requires the issuer to make specified payments to reimburse any loss that the holder may make where the debtor has failed to make the required payments when they were due as set out in the terms of the debt instrument. 10 Recognition and Measurement of Financial Instruments A financial asset or financial liability should be recognised when an entity enters into the contractual provisions of the financial instrument. [IAS 39.14] The value at which a financial asset or financial liability should originally be measured is its fair value plus, in certain circumstances, any directly attributable transaction costs, such as fees and commissions paid to brokers and advisors. [IAS 39.43] For subsequent measurement of financial assets, the treatment depends on the categorisation of the financial asset, as explained below. Where an entity holds investments in equity instruments that do not have a quoted price in an active market and it is not possible to calculate their fair values reliably, they should be measured at cost. Derivatives that are linked to such investments, or require the delivery of such an investment, should also be measured at cost. [IAS 39.46] An entity is required to consider whether financial assets are impaired carried at more than