affected by the hedged items. Consequently, the line item relating to the hedged
item will remain unaffected by the hedge accounting. [IFRS 9.6.6.4, B6.6.13].
This would apply, for example, to a cash flow hedge of a group of foreign currency
denominated sales and expenses. The hedging gains or losses would be presented
in a line item that is separate from both revenue and the relevant expense line
item(s). [IFRS 9.B6.6.15].
Another example would be a fair value hedge of a net position involving a fixed-
rate asset and a fixed-rate liability. Hedge accounting would normally involve
recognising the net interest accrual on the interest rate swap in profit or loss. In
this case the net interest accrual should be presented in a line item separate from
gross interest revenue and gross interest expense.
This is to avoid the grossing up of net gains or losses on a single instrument into
offsetting gross amounts and recognising them in different line items. [IFRS 9.B6.6.16].
These requirements imply that gains and losses from hedging instruments in other
hedging relationships would be presented in the same line item that is affected by the
hedged item (at least to the extent the hedge is effective) rather than being shown
separately, although this is not explicitly stated in IFRS 9.
7.1.4 Embedded
derivatives
IFRS 9 explicitly states that it does not address whether embedded derivatives should
be presented separately in the statement of financial position. However, the standard is
silent about the presentation in profit or loss. [IFRS 9.4.3.4]. In practice, it will depend on
the nature both of the hybrid and the host whether related gains and losses are included
in the same or separate captions within profit or loss.
For example, a borrowing with commodity-linked coupons that is accounted for as a
simple debt host and an embedded commodity derivative might give rise to interest
expense and other finance income (or expense) respectively that would often be
reported in separate captions within profit or loss. Alternatively, changes in the fair
value of an embedded prepayment option in a host borrowing that is accounted for
separately may be included in the same caption within profit or loss as interest expense
on the host debt instrument if the value of the option varies largely as a result of change
in interest rates.
7.1.5
Entities whose share capital is not equity
Gains and losses related to changes in the carrying amount of a financial liability are
recognised as income or expense in profit or loss even when they relate to an instrument
that includes a right to the residual interest in the assets of the entity in exchange for
cash or another financial asset, such as shares in mutual funds and co-operatives (see
Chapter 43 at 4.6). Any gain or loss arising from the remeasurement of such an
instrument (including the impact of dividends paid, where appropriate) should be
presented separately on the face of the statement of comprehensive income (or income
statement) when it is relevant in explaining the entity’s performance. [IAS 32.41].
The following example illustrates a format for a statement of comprehensive income (or
income statement) that may be used by entities such as mutual funds that do not have
equity as defined in IAS 32, although other formats may be acceptable.
Financial
instruments:
Presentation and disclosure 4245
Example 50.14: Statement of comprehensive income (or income statement)
format for a mutual fund
Statement of comprehensive income (income statement) for the year ended 31 December 2019 [IAS 32.IE32]
2019
2018
€
€
Revenue 2,956
1,718
Expenses (classified by nature or function)
(644)
(614)
Profit from operating activities
2,312
1,104
Finance costs
– other finance costs
(47)
(47)
– distributions to members
(50)
(50)
Change in net assets attributable to unit holders
2,215
1,007
Although it may not be immediately clear, the final line item in this format is an
expense. Therefore the entity’s ‘profit or loss’ (as that term is used in IAS 1) for 2019
is €2,312 – €47 – €50 – €2,215 = €nil.
The next example illustrates a format for a statement of comprehensive income (or
income statement) that may be used by entities whose share capital is not equity as
defined in IAS 32 because the entity has an obligation to repay the share capital on
demand, for example co-operatives, but which do have some equity (such as other
reserves). Again, other formats may be acceptable.
Example 50.15: Statement of comprehensive income (income statement) format
for a co-operative
Statement of comprehensive income (income statement) for the year ended 31 December 2019 [IAS 32.IE33]
2019
2018
€
€
Revenue 472
498
Expenses (classified by nature or function)
(367)
(396)
Profit from operating activities
105
102
Finance costs
– other finance costs
(4)
(4)
– distributions to members
(50)
(50)
Change in net assets attributable to members
51
48
In this example, the line item ‘Finance costs – distributions to members’ is an expense
and the final line item is equivalent to ‘profit or loss’.
Corresponding statement of financial position formats for both of these examples are
shown at 7.4.6 below.
7.2
Gains and losses recognised in other comprehensive income
IAS 1 requires income and expense not recognised within profit or loss to be included
in a statement of comprehensive income. [IAS 1.82A]. Material items of income and
expense and gains and losses that result from financial assets and financial liabilities
4246 Chapter 50
which are included in other comprehensive income are required to be disclosed
separately and should include at least the following:
• the amount of gain or loss attributable to changes in a liability’s credit risk for those
financial liabilities designated as at fair value through profit or loss; [IFRS 7.20(a)(i)]
• the revaluation gain or loss arising on equity investments designated at fair value
through other comprehensive income; [IFRS 7.20(a)(vii)] and
• revaluation gains or losses arising on debt instruments measured at fair value
through other comprehensive income, showing separately: [IFRS 7.20(a)(viii)]
• the amount of gain or loss recognised in other comprehensive income during
the period; and
• the amount reclassified upon derecognition from accumulated other
comprehensive income to profit or loss for the period.
The application of hedge accounting can also result in the recognition in other
comprehensive income of gains and losses arising on
hedging instruments and the
reclassification thereof. However, when an entity removes such a gain or loss that was
recognised in other comprehensive income and includes it in the initial cost or other
carrying amount of a non-financial asset or liability, that should not be regarded as a
reclassification adjustment and hence should not affect, or be included within, other
comprehensive income. [IAS 1.96, IFRS 9.BC6.380].
The following items should also be disclosed on the face of the statement of comprehensive
income as allocations of total comprehensive income for the period: [IAS 1.81B(b)]
• total comprehensive income attributable to non-controlling interests; and
• total comprehensive income attributable to owners of the parent.
7.3
Statement of changes in equity
The following information should be included in the statement of changes in equity: [IAS 1.106]
• total comprehensive income for the period, showing separately the total amounts
attributable to owners of the parent and to non-controlling interests; and
• for each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing changes resulting from:
• profit or loss;
• other comprehensive income; and
• transactions with owners acting in their capacity as owners, showing separately:
• contributions by and distributions to owners; and
• changes in ownership interests in subsidiaries that do not result in a loss
of control.
An analysis of other comprehensive income by item should be presented for each
component of equity, either in the statement or in the notes. [IAS 1.106A].
Where hedge accounting is applied, IFRS 7 specifies additional information that should
be presented within the reconciliation and analysis noted above or the notes thereto.
This is covered in more detail at 4.3.3 above.
Financial
instruments:
Presentation and disclosure 4247
As noted at 7.2 above, when an entity applying IFRS 9 removes a gain or loss on a cash flow
hedge that was recognised in other comprehensive income in order to include it in the initial
cost or other carrying amount of a non-financial asset or liability, that adjustment should not
be included within other comprehensive income. [IFRS 9.BC6.380]. Such an entry should
instead be presented within the statement of changes of equity (because it affects an entity’s
net assets and hence its equity), albeit separately from other comprehensive income.
The amount of dividends recognised as distributions to owners during the period should
be disclosed on the face of the statement of changes in equity or in the notes. [IAS 1.107].
In addition, IAS 32 notes that IAS 1 requires the amount of transaction costs accounted
for as a deduction from equity in the period to be disclosed separately. [IAS 32.39].
If an entity reacquires its own equity instruments from related parties disclosure should
be provided in accordance with IAS 24 (see Chapter 35). [IAS 32.34].
If an entity such as a mutual fund or a co-operative has no issued equity instruments, it
may still need to present a statement of changes in equity. For example, such an entity
may have gains or losses arising on debt instruments measured at fair value through
other comprehensive income that are recognised in equity; also co-operatives, for
example, may have a balance on equity.
7.4
Statement of financial position
7.4.1
Offsetting financial assets and financial liabilities
It is common for reporting entities to enter into offsetting arrangements with their
counterparties. Offsetting arrangements allow market participants to manage
counterparty credit risks, and manage liquidity risk. In particular, netting arrangements
generally reduce the credit risk exposures of market participants to counterparties
relative to their gross exposures. Such mechanisms also permit the management of
existing market risk exposures by taking on offsetting contracts with the same
counterparty rather than assuming additional counterparty risk by entering into an
offsetting position with a new counterparty. Furthermore, for a regulated financial
institution, position netting may also have regulatory capital implications.
IAS 1 sets out a general principle that assets and liabilities should not be offset except
where such offset is permitted or required by an accounting standard or interpretation
(see Chapter 3 at 4.1.5.B). [IAS 1.32]. This general prohibition on offset is due to the fact that
net presentation of assets and liabilities generally does not provide a complete depiction
of the assets and liabilities of an entity. In particular, offsetting obscures the existence of
some assets and liabilities in the statement of financial position and it impacts key financial
ratios such as gearing, and measures such as total assets or liabilities.
IAS 32 provides some exceptions to this general rule in the case of financial assets and
liabilities. IAS 32 requires a financial asset and a financial liability to be offset and the net
amount reported in the statement of financial position when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognised amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the
liability simultaneously.
4248 Chapter 50
These two conditions are often called the IAS 32 Offsetting Criteria. There is, however,
one exception to the offsetting requirement. This exception arises when a transferred
financial asset does not qualify for derecognition. In such a circumstance, the
transferred asset and the associated liability must not be offset, [IAS 32.42], even if they
otherwise satisfy the offsetting criteria (see Chapter 48 at 5.5.1).
IAS 32 argues that offset is appropriate in the circumstances set out in (a) and (b) above,
because the entity has, in effect, a right to, or an obligation for, only a single net future
cash flow and, hence, a single net financial asset or financial liability. In other
circumstances, financial assets and financial liabilities are presented separately from
each other, consistently with their characteristics as resources or obligations of the
entity. [IAS 32.43]. Furthermore, the amount resulting from offsetting must also reflect the
reporting entity’s expected future cash flows from settling two or more separate
financial instruments. [IAS 32.BC94].
Offset is not equivalent to derecognition, since offsetting does not result in the financial
asset or the financial liability being removed from the statement of financial position,
but in net presentation of a net financial asset or a net financial liability. Moreover, no
gain or loss can ever arise on offset, but may arise on derecognition. [IAS 32.44].
IAS 32 acknowledges that an enforceable right to set off a financial asset and a financial
liability affects the rights and obligations associated with that asset and liability and may
affect an entity’s exposure to credit and liquidity risk. However, such a right is not, in
itself, a sufficient basis for offsetting. The entity may still realise the asset and liability
separately and, in the absence of an intenti
on to exercise the right or to settle
simultaneously, the amount and timing of an entity’s future cash flows are not affected.
Similarly, an intention by one or both parties to settle on a net basis without the legal
right to do so is not sufficient to justify offsetting because the rights and obligations
associated with the individual financial asset and financial liability remain unaltered.
[IAS 32.46, AG38E].
IAS 32 elaborates further on the detail of the offsetting criteria as set out in the
following subsections.
7.4.1.A Criterion
(a):
Enforceable legal right of set-off
IAS 32 describes a right of set-off as a debtor’s legal right, by contract or otherwise (for
example, it may arise as a result of a provision in law or a regulation), to settle or
otherwise eliminate all or a portion of an amount due to a creditor by applying against
that amount an amount due from the creditor. The enforceability of the right of set-off
is thus essentially a legal matter, so that the specific conditions supporting the right may
vary from one legal jurisdiction to another. [IAS 32.45]. Care must therefore be taken to
establish which laws apply to the relationships between the parties.
In unusual circumstances, a debtor (A) may have a legal right to apply an amount due
from a third party (B) against an amount due to a creditor (C), provided that there is an
agreement among A, B and C that clearly establishes A’s right to set off amounts due
from B against those due to C. [IAS 32.45]. For example, a foreign branch of a US bank
makes a loan to a foreign subsidiary of a US parent with the parent required to deposit
an amount equal to the loan in the US bank for the same term. The terms of the
transactions may give the bank a legal right to set off the amount due to the parent
Financial
instruments:
Presentation and disclosure 4249
against the amount owed by the foreign subsidiary. Another example is bank accounts
maintained for a group of companies where each member of the group agrees that its
credit balance may be the subject of set-off in respect of debit balances of other
members of the group. In our experience, not all jurisdictions recognise this type of
contractual multilateral set-off arrangement, particularly in bankruptcy scenarios.
A right of set-off may currently be available or it may be contingent on a future event
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 841