IPSAS 28 is based on IAS 32 Financial Instruments – Presentation and IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments.
IPSAS 28 establishes principles for presenting financial instruments as liabilities or as net assets/equity and for offsetting financial assets and financial liabilities. Guidance is outlined on the classification of related interest, dividends and similar distributions and gains/losses.
IPSAS 28 was issued in January 2010 and applies to annual periods beginning on or after 1 January 2013.
History of IPSAS 28
Annual periods beginning on or after 1 January 2013, if applied earlier, IPSAS 29 and IPSAS 30 should also be applied.
Refer to IFAC website here
Summary of IPSAS 28 Financial Instruments - Presentation
IPSAS 28 establishes principles for presenting financial instruments as liabilities or as net assets/equity and for offsetting financial assets and financial liabilities [IPSAS 28.1].
Whilst IPSAS 28 deals with the presentation of financial instruments, IPSAS 29 deals with the measurement of financial instruments and IPSAS 30 deals with the disclosures relating to financial instruments.
This standard applies to entities that prepare and present financial statements under the accrual basis of accounting [IPSAS 28.3]. IPSAS 28 applies to all public sector entities other than GBEs [IPSAS 28.7].
The standard is applicable to all types of financial instruments except [IPSAS 28.3]:
• interests in controlled entities, associates or joint ventures that are accounted for in accordance with IPSAS 6, Consolidated and Separate Financial Statements, IPSAS 7, Investments in Associates, or IPSAS 8, Interests in Joint Ventures. However, IPSAS 28 is applicable to all derivatives on interests in controlled entities, associates, or joint ventures.
• Employers’ rights and obligations under employee benefit plans in the scope of IPSAS 25, Employee Benefits
• Obligations arising from insurance contracts. However, IPSAS 28 is applicable to:
o derivatives that are embedded in insurance contracts if they should be separately be accounted for by IPSAS 29
o financial guarantee contracts if the issuer elects to apply IPSAS 29 to these contracts
• financial instruments that are within the scope of international or national accounting standards because they contain a discretionary participation feature. These financial instruments are only exempt from applying paragraphs 13-37 and AG49-60 (analysing distinction between debt and equity instruments) but are subject to all other IPSAS 28 stipulations
• financial instruments, contracts and obligations under share based payment transactions except for the following exceptions:
o Contracts within the scope of paragraphs 4–6 of IPSAS 28 (see below)
o paragraphs 38 and 39 of this standard should be applied to treasury shares purchased, sold, issued, or cancelled in connection with employee share option plans employee share purchase plans, and all other share-based payment arrangements.
IPSAS 28 is applicable to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, except for contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected purchase, sale or usage requirements [IPSAS 28.4] (the “own use” exemption).
Key definitions [IPSAS 28.9]
Financial instrument: any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.
Equity instrument: any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities
Financial asset: any asset that is:
b) An equity instrument of another entity;
c) A contractual right:
i. To receive cash or another financial asset from another entity; or
ii. To exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or
d) A contract that will or may be settled in the entity’s own equity instruments and is:
i. A non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments
ii. A derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity's own equity instruments do not include instruments that are contracts for the future receipt or delivery of the entity's own equity instruments and puttable instruments classified as equity or certain liabilities arising on liquidation classified as equity instruments (as stipulated in IPSAS 28)
Financial liability: any liability that is:
a) (a) A contractual obligation:
i. to deliver cash or another financial asset to another entity
ii. to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity
b) A contract that will or may be settled in the entity’s own equity instruments and is:
i. a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments. For this purpose the entity's own equity instruments do not include instruments that are contracts for the future receipt or delivery of the entity's own equity instruments and puttable instruments classified as equity or certain liabilities arising on liquidation classified as equity instruments (as stipulated in IPSAS 28)
Puttable instrument: a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder.
Classification as Liability or Net Assets/Equity
The main principle is that a financial instrument, or its components, should be classified, upon initial recognition by the issuer, as a financial liability, a financial asset or as an equity instrument according to the substance of the contract and the definitions of a financial liability, financial asset and an equity instrument [IPSAS 28.13].
According to IPSAS 28 some exceptions exist to this principle. This will lead to financial instruments that meet the definition of a financial liability being classified as equity because they represent the residual interest in the net assets of the entity. The two exceptions identified by IPSAS 28, are [IPSAS 28.14]:
• puttable instruments meeting specific criteria
• obligations to deliver a pro rata share of the net assets of the entity on liquidation
A financial instrument is an equity instrument only when [IPSAS 28.14]:
(a) the instrument includes no contractual obligation to:
i. deliver cash or another financial asset to another entity
ii. exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer
(b) if the instrument will or may be settled in the issuer's own equity instruments, it is:
i. a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments
ii. a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments
In case of a puttable financial instrument, the issuer has a contractual obligation to repurchase or redeem the instrument against cash or another financial asset on exercise of the put. As an exception to the definition of a financial liability, an instrument that includes such an obligation is classified as an equity instrument if it has all of the features as described in paragraph 15 of IPSAS 28 [IPSAS 28.15].
Obligations to deliver a pro rata share of the net assets upon liquidation
An issuer of a financial instrument may have a contractual obligation to deliver to another entity a pro rata share of its net assets only on liquidation. The obligation arises because liquidation either is certain to occur and outside the control of the entity (e.g., a limited life entity) or is uncertain to occur but is at the option of the instrument holder. As an exception to the definition of a financial liability, an instrument that includes such an obligation is classified as an equity instrument if it has all of the features as described in paragraph 17 of IPSAS 28 [IPSAS 28.17].
Settlement in the entity’s own equity instruments
A contract is not an equity instrument solely because it may result in the receipt or delivery of the entity’s own equity instruments [IPSAS 28.25]. It only concerns an equity instrument if it meets the criteria defined in IPSAS 28.14b (see above).
Contingent settlement provisions
As a result of contingent settlement provisions contained in instrument, the issuer may not have an unconditional right to avoid settlement in cash or other financial instrument (or otherwise in such a way that it would be a financial liability). In that case the instrument is a financial liability of the issuer, except when [IPSAS 28.30]:
• the contingent settlement provision is not genuine
• the issuer can be required to settle the obligation only in the event of the issuer's liquidation
• the instrument has all the features and meets the conditions of a puttable instrument
If an instrument provides the choice of the way of settlement, the instrument is classified as a financial asset or a financial liability, except if each of the settlement options would result in the financial instrument being an equity instrument [IPSAS 28.31].
Compound financial instruments
Compound instruments have both a liability and an net assets/equity component from the issuer's perspective. The components should be accounted for and presented separately according to their substance based on the definitions of financial assets, financial liabilities and equity instruments [IPSAS 28.33].
The classification should be made at issuance of the financial instrument. The classification is not revised subsequently for change in the likelihood that the conversion option will be exercised [IPSAS 28.34-35].
The initial carrying amount of a compound financial instrument should be split into its equity and liability components, after deducting from the fair value of the instrument as a whole the amount that was determined for the liability component, the residual is allocated as the net assets/equity component [IPSAS 28.37].
Own equity instruments that are reacquired by the entity ('treasury shares') are deducted from net assets/equity. Gains or losses are not recognized in surplus or deficit on the purchase, sale, issue, or cancellation of these treasury shares. Treasury shares may be acquired and held by the entity or by other members of the economic entity. Consideration paid or received should be recognized directly in net assets/equity [IPSAS 28.38]
Interest, Dividends or Similar Distributions, Losses and Gains
Interest, dividends or similar distributions, losses, and gains relating to a financial instrument or a component that is a financial liability shall be recognized as revenue or expense in surplus or deficit. Distributions to holders of an equity instrument shall be recognized directly in net assets/equity, net of any related income tax benefit. Transaction costs incurred on transactions in net assets/equity shall be accounted for as a deduction from net assets/equity, net of any related income tax benefit [IPSAS 28.40].
Transaction costs related to compound financial instrument are allocated to the liability and net assets/equity components in proportion to the allocation of proceeds [IPSAS 28.43].
Financial assets and financial liabilities should be offset and presented net in the statement of financial position when the entity [IPSAS 28.47]:
• has a legally enforceable right to set off the amounts recognized
• intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously
Disclosures with regard to financial instruments are included in IPSAS 30 Financial Instruments: Disclosures.
Issuance of IPSAS 28: Financial Instruments: Presentation
1 January 2013
Effective date of IPSAS 28