Financial Instrument Is Defined by Ias 32 ‘Any Contract That Gives Rise to Financial Asset of One Entity and a Financial Liability or Equity Instrument of Another Entity.’

2144 Words9 Pages
Financial instrument is defined by IAS 32 ‘any contract that gives rise to financial asset of one entity and a financial liability or equity instrument of another entity.’ (IAS 32: 11) Financial instruments consist of financial assets, financial liability and equity instruments. Example of equity instruments are ordinary shares. Examples of a financial liability are debentures, loan from another entity and trade payables. One way of distinguishing equity from liability is with preference shares. Irredeemable preference shares are equity because they are never repaid and redeemable preference shares are a financial liability because they are paid back like a loan. To distinguish correctly between equity and liability, firstly if there is a…show more content…
To present the liabilities credit risk in the Statement of Comprehensive Income, the Board introduced a two-step approach. The two-step approach is explained clearly in the exposure draft which will not affect profit or loss. In the change of liabilities of fair value will be recorded in the income statement. Thereafter the change in fair value included due to own credit will be taken out and recorded in the Statement of Comprehensive Income. If an entity applies the fair value option for financial liabilities and financial assets, an accounting mismatch could arise in the income statement. This is mentioned in the exposure draft. The Board still needs to deal with the accounting mismatch and has asked for comments in the exposure draft. The change in the liabilities credit risk is reported to be useful by users. This can be useful to users because it allows the entity to be compared with other entities, it can show when an entity is struggling and how risky it is. The two-step approach will certainly have a change on the former methodology because under the fair value option. Changes in the credit risk of a financial liability with regards to IAS 39, requires the entire fair value change to be presented in the income statement. This means changes due to own credit will be recognised in the income statement which causes instability. The reason own credit causes instability in the income statement, is because gains or losses ensuing from changes in the

More about Financial Instrument Is Defined by Ias 32 ‘Any Contract That Gives Rise to Financial Asset of One Entity and a Financial Liability or Equity Instrument of Another Entity.’

Open Document