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Sir,for PYQ Sep/Dec 2017 Q4 (a)(ii)
“Equity classification avoids the negative impact which liability classification has on reported earnings, gearing ratios and debt covenants. It also results in the instrument falling outside the scope of IFRS 9 Financial Instruments, thereby avoiding the complicated ongoing measurement requirements of that standard.”
What means of equity classification results on the instrument failing out the scope of IFRS 9?
Thank you.
I think what it means is that IFRS 9 does not deal with presentation of Financial Instruments which is the purview of IFRS 32. It deals with measurement, recognition and derecognition of Financial Instruments.
With IFRS 32 the focus is on obligation. If there is to obligation to pay you simply classify the instrument as equity. This classification escapes the need to go through the treatment in IFRS 9 that needs to do with the likes of amortised cost measurement, which is a bit complex.
I think what it means is that IFRS 9 does not deal with presentation of Financial Instruments which is the purview of IFRS 32. It deals with measurement, recognition and derecognition of Financial Instruments.
With IFRS 32 the focus is on obligation. If there is to obligation to pay you simply classify the instrument as equity. This classification escapes the need to go through the treatment in IFRS 9 that needs to do with the likes of amortised cost measurement, which is a bit complex.
Simply trying to say that if you classify something as equity – you don’t need to remeasure – which makes life easier for the accounts preparer
Apologies – not as eloquent as ladesmunic who’s put it rather more professionally!
“With IFRS 32 the focus is on obligation. If there is to obligation to pay you simply classify the instrument as equity. This classification escapes the need to go through the treatment in IFRS 9 that needs to do with the likes of amortised cost measurement, which is a bit complex.”
Will it should be no obligation to pay is classified as equity and have the obligation to pay is a liability?
Yes – that’s correct – but make sure you keep your explanations very simple in the exam
Liability = obligation to deliver cash
Equity = residual interestThank you so much! I understand now
@ladesmunic @Stephen Widberg
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