Advanced Accounting: Reporting of Financial Instruments (MAA725)

This report provides a comprehensive analysis of financial instruments, focusing on their classification as either equity or liability instruments, and the subsequent reporting requirements. The report delves into the provisions of IAS 32, explaining the criteria for recognizing financial instruments and the reporting processes that follow. It highlights the importance of correctly classifying financial instruments for transparency in financial statements and discusses the differences in classification. The report includes examples of financial instrument classifications, flowcharts illustrating the classification process, and details on the required disclosures as per IFRS 7. Furthermore, the report also covers a practical task involving forward contracts, including calculations and journal entries to illustrate the accounting treatment for such transactions. Overall, the report provides a detailed overview of financial instrument reporting, classification, and the relevant accounting standards.

Running head: ADVANCED ACCOUNTING
Advanced Accounting
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Task 1...............................................................................................................................................2
Introduction..................................................................................................................................2
Discussion....................................................................................................................................3
Conclusion...................................................................................................................................7
Task 2...............................................................................................................................................7
Journal Entries.............................................................................................................................8
Reference.........................................................................................................................................9

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Task 1
Introduction
The focus of assessment is to understand the reporting process which is followed for
financial instruments for a business. The main focus of the analysis would be on the
classification of financial instruments and how the same can impact the entire financial position
of the business. The analysis would be referring to the provisions which is stated in IAS 32 for
understanding the recognition criteria and also the reporting process which is to be followed after
the same has been recognized (Uyar, Kılıç and Gökçen 2016). In addition to this, the discussion
would also be showing if there exist a different in the classification of different financial
instruments as liability instrument or equity instrument and how the same are recognized in the
annual report for a company. The analysis would also be citing examples of methods which is
used as per accounting standards for the purpose of classification. The discussion would be
showing the disclosures which needs to be provided in this respect as well.
Discussion
Financial Instruments are instruments which effectively creates financial asset for one
party and creates a financial liability for another party. Financial instruments can be portrayed as
assets and liabilities depending on the nature of the financial instrument which is being
considered. In addition to this, it is very important for a business to effectively to classify the
financial instruments either on the basis of equity or debt for the purpose of maintaining
transparency in the operations. The financial instruments of a business need to be appropriately
identified for the purpose of reporting in the financial statements and a business need to follow
IAS 32 for the purpose of reporting. The provisions of IAS 32 is applicable on contracts where

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there is a transaction for buying or selling of non-financial item that can be dealth in cash or
other sort of payments. In lieu of such payments, financial instruments are utilized by the parties
(Iasplus.com. 2020). This can be applied in a proper manner in reporting of the instruments in
the financial reports of the business.
It is considered to be important to classify the financial instruments for a business either
as a financial liability or an equity instrument as per the contract which is related to the financial
instrument and not considering the legal form of financial instrument. As per para 15 of IAS 32,
the management of a company needs to classify the financial instrument as liability or debt at the
time of initial recognition of the financial instrument. However, there are two exception which is
related to the rule which is mainly related to certain instruments which are capable of meeting
certain criteria and other obligations depending on the circumstances (Gerlein et al. 26). The
classification of a financial instrument on the basis of liability or an equity is based on the
substance of the contractual relation of the instruments and not just the legal form which is
associated with the instruments. The classification of the instrument is considered to be
important for the purpose of effectively reporting as the same allows the management to provide
appropriate disclosures of the appropriate position in financial terms for the business. The
provisions of IAS 32 also make it clear that the financial instrument should be recognized on
their substances and not their legal form and once the same is decided the same cannot be
changed due to changed circumstances (Ouyang, Xiao and Zhong 2017). The business which is
making the initial recognition of the financial instrument needs to take the decisions regarding
the classification for the financial instruments.
An instrument can be presented as a liability when the person issuing is or is required to
deliver either cash or another financial asset to the other party. On the other hand, it is to be

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noted that an instrument is regarded as an equity when it represents a residual interest in the
assets of the issuer. A table which is presented below appropriately shows different instruments
and appropriate classification of the instruments either on the basis of equity of liabilities for the
business.
Figure 1: (Examples of Classification of Instruments)
Source: (Rio, and Miserey, Chicago Mercantile Exchange Inc 2014)
The table above shows specific examples of financial instruments and how the same are
classified by the management of the company and reported in the books of accounts of the
business. The criteria for classification of the financial instrument should be in adherence to
relevant provisions which are stated in IAS 32. In order to further understand the classification

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process for intangible assets for a business the flow chart. The flow chart appropriately shows the
methods which is used for ascertaining the classification of the instruments.
Figure 2: (Flowchart for the Classification of the Instruments)
Source: (Byrne 2014)
The flow chart above shows the tests which are conducted by a business for ascertaining
the classification for an instrument so that it can be recognized as equity or liabilities for the
business. The classification of the financial instruments is considered to be important so that the
entity is able to effectively present the liabilities and equities which is associated with the
company appropriately in the financial reports of the business. The financial instruments which
are kept by an entity for the purpose of collecting the same for collection. The equity instruments
of a business are held by a business for the purpose of collection or the same can be sold.

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The classification is fundamental principle for recognizing the financial instruments in
the annual report and therefore if the same is not done than the financial reports for the business
would not be showing accurate information for the financial year. Therefore, it can be said that
appropriate presentation of the financial situation for the financial information must be presented
appropriately so that the investors are able to understand equity and liabilities position of the
business separately (Denga and Jain 2016). The disclosures which is required to be presented by
a business are appropriately stated in IFRS 7. The two main category of disclosure which should
be provided in the annual reports of a business includes disclosures regarding the relevance of
the financial instruments and also regarding the risks which are associated with the financial
instruments. The annual report should provide proper disclosure relating to the same.
Conclusion
The above discussion appropriately shows the reporting criteria which a business is
required to follow for the purpose of effectively formulating financial reports. The reporting and
classification of financial instruments on the basis of equity or liability instruments is the key
matter of discussion for the assessment. The provisions of IAS 32 is considered for the purpose
of reference and how the same help in the classification of financial instruments for a business.
In addition to this, the analysis also shows disclosures which is associated with the reporting of
financial instruments.
Task 2
Dat
e
Spot
rate
Forwa
rd
rate
Receivable on
forward
contract
Amount payable on
forward contract
Fair value of
forward
contract
Gain/(loss) on
forward contract
1-
Jun-
19 1.00 0.90 100,000.00 100,000.00 90,000.00 10,000.00

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30-
Jun-
19 0.91 0.89 100,000.00 100,000.00 89,000.00 11,000.00
1-
Oct-
19 0.85 0.85 100,000.00 100,000.00 85,000.00 15,000.00
Journal Entries
Date Account Debit Credit
1-Jun-19 Forward contract receivable 100,000.00
Forward contract payable 100,000.00
1-Jun-19 Forward contract receivable 10,000.00
Other comprehensive income 10,000.00
30-Jun-19 Forward contract receivable 100,000.00
Forward contract payable 100,000.00
30-Jun-19 Forward contract receivable 11,000.00
Other comprehensive income 11,000.00
1-Oct-19 Forward contract receivable 15,000.00
Other comprehensive income 15,000.00
1-Oct-19 Forward contract payable 100,000.00
Cash 100,000.00
1-Oct-19 Cash 15,000.00
Forward contract receivable 15,000.00
1-Oct-19 Inventory 100,000.00
Other comprehensive income 15,000.00
Cash 115,000.00

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Reference
Byrne, L.T., 2014. Accounting for Financial Instruments: Difficulties with Fair Value
Measurement and Reporting.
Denga, S. and Jain, A., 2016. Definition, classification and use of derivative financial
instruments.
Gerlein, E.A., McGinnity, M., Belatreche, A. and Coleman, S., 2016. Evaluating machine
learning classification for financial trading: An empirical approach. Expert Systems with
Applications, 54, pp.193-207.
Iasplus.com. (2020). IAS 32 — Financial Instruments: Presentation. [online] Available at:
https://www.iasplus.com/en/standards/ias/ias32 [Accessed 15 Jan. 2020].
Ouyang, X., Xiao, Y. and Zhong, J., 2017, March. Comparison of Statistical Classification of
Financial Instruments and the Relevant Contents of Accounting Standards. In 2017 7th
International Conference on Education, Management, Computer and Society (EMCS 2017).
Atlantis Press.
Rio, S. and Miserey, S., Chicago Mercantile Exchange Inc, 2014. Standardization and
management of over-the-counter financial instruments. U.S. Patent Application 14/011,330.
Uyar, A., Kılıç, M. and Gökçen, B.A., 2016. Compliance with IAS/IFRS and firm
characteristics: evidence from the emerging capital market of Turkey. Economic research-
Ekonomska istraživanja, 29(1), pp.148-161.