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Ind AS 32, Financial Instruments: Presentation, Summary

Indian Accounting Standard (Ind AS) 32 Summary

Indian Accounting Standard (Ind AS) 32, Financial Instruments: Presentation, establishes the principles for the  presentation of financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.

It applies to the classification of financial instruments from the perspective of the issuer, into financial assets, financial liabilities and equity instruments, the classification of related interest, dividend, losses and gains and the circumstances in which financial assets and financial liabilities should be offset.

The principles in this standard complement the principles for recognising and measuring financial assets and financial liabilities in Ind AS 109, Financial Instruments, and for disclosing information about them in Ind AS 107, Financial Instruments: Disclosures.

Financial instruments are contracts that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity. On initial recognition, financial instruments are classified as a financial liability or equity instrument in accordance with the substance of the contractual arrangement, (and not its legal form), and the definitions of financial liabilities and an equity instrument. If a financial instrument has both equity and liability components (compound financial instrument), then they are classified separately based on the contractual terms at issuance.

Puttable instruments and instruments that impose an obligation on the entity to deliver a pro rata share of net assets only on liquidation, are classified as equity instruments only if they are subordinate to all other classes of instruments, and meet all additional criteria specified in the standard.

Rights, options or warrants issued by the entity to acquire a fixed number of its own equity instruments for a fixed amount of cash are classified as equity, if the entity offers such rights, options, or warrants on a pro rata basis to all existing holders of the same class of its equity instruments.

An equity conversion option embedded in a convertible bond denominated in foreign currency to acquire a fixed number of the entity’s own equity instruments is an equity instrument if the exercise price is fixed in any currency.

Dividends on financial instruments classified as financial liabilities are recognised as an interest expense in the statement of profit or loss. Hence if preference shares meet the definition of a financial liability, the dividend is treated as an interest expense. Dividends and other distributions to the holders of equity instruments are recognised directly in equity.

Gains and losses on transactions in an entity’s own equity instruments are recognised directly in equity. Incremental costs that are directly attributable to equity transactions such as issuing or buying back own equity instruments or distributing dividends are recognised directly in equity.

A financial asset and financial liability can only be offset if the entity currently has a legally enforceable right to set off the recognised amounts and intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously.

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