Advance Accounting | GAAP and IFRS

Running head: ADVANCE ACCOUNTING
ADVANCE ACCOUNTING
Name of the Student
Name of the University
Author Note:

ADVANCE ACCOUNTING1
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Classification as liability or Equity..............................................................................................5
Conclusion.......................................................................................................................................7
Reference.......................................................................................................................................11

ADVANCE ACCOUNTING2
Introduction
Accounting for financial instruments is complex under IFRS. A broad review has been
provided considering IAS 32, ‘Financial Instrument: Presentation’, IFRS 7, ‘Financial
Instrument Disclosure’, and IAS 39. ‘Financial Instrument: Recognition and Measurement’. The
following chapters have been addressed among which includes classification of debt and equity
and scope of the requirement (Uyar, Kılıç and Gökçen, 2016). Financial Instrument can also be
interpret as any contract which gives an addition in the asset of one entity and a financial liability
or an instrument of equity to the other entity.
Discussion
General Accepted Accounting Principal (GAAP) explains the financial instrument as
money in form of cash or any other evidence of ownership interest in the company or an entity
(Wild, Creighton and Simmonds, 2015). The instrument can be in a form of contract which
imposes a contractual obligation on one entity, either to give cash or any other financial
instrument to a other entity or to exchange any financial instrument on unfavourable terms with
the other entity.
IAS 32 lays down principles for distinguishing between the financial instruments like
equity and liabilities. The classification of the financial instrument is governed by the contractual
terms rather than its legal form. IAS 32 outlines the requirement of accounting for presenting
financial instrument, particularly while classifying such instrument as a financial asset, financial
liabilities or equity instrument (Iasplus.com. 2020). An important feature which distinguishes a
liability from equity is that while issuing an instrument, if the issuer is required to issue cash or
any other financial asset to the bearer or holder than the instrument represents liability.

ADVANCE ACCOUNTING3
Classification of net asset is done when a residual interest is represented in the net asset of the
issuer (Pwc.com. 2020).
The financial instrument comprises of a financial asset, equity instrument and financial
liability (Mullinova, 2016). This instrument can be categorized into two groups:
 Cash Instrument: These are those instrument which is directly influenced by the market
and the market also determines the value. This instrument can be in the form of
securities, that is liquid i.e. readily transferable, and loans and deposits in which the
borrowers and lenders agree on the transfer.
 Derivative Instrument: These are those instrument which derives their value and
characteristics based on the vehicles underlying components such as interest rates, assets
or index. The instruments are over-the-counter (OTC) derivatives or can be exchange-
traded derivatives. The derivative on equity is accounted under IAS 39.
While considering any item in the balance sheet, it is important to understand the following
terms (Fabozzi, 2018):
 Financial Asset: These are non-existing asset the value of which is derived from a
contractual term like bonds, stocks and bank deposits. These assets are highly liquid as
compared to other tangible asset. Assets which are in the form of cash or cash equivalent
(Tan and Low, 2017) and includes a contract that will or may be settled from the equity
instrument of the entity and which is a non-derivative, and for which the entity will
receive a variable number of the other entity’s equity instrument is a financial asset.
Financial assets are different from non-financial assets as it includes tangible and
intangible assets.