FINANCIAL REPORTING

FINANCIAL INSTRUMENT

INTRODUCTION
- Debt Instrument – Debt is borrowing – Loan notes, Treasury bills, Commercial
papers, Corporate Bonds, Government Bonds
- Equity Instrument – Share capital – This is used to raise money from
shareholders. E.g. Ordinary share capital, Preference share capital

IAS 32: Financial Instrument Presentation

IFRS 9: Financial Instrument recognition and Measurement

IAS 32: Financial Instrument Presentation

- Definitions
- Classification and presentation of financial instruments into Debt instruments
and Equity Instruments
- Compound Financial Instruments

Definitions
- Financial Instruments
This is any contract that gives rise to financial asset of one entity and financial liability
or equity instrument of another entity.

Party A Party B
Financial Asset Financial Liability
Equity Instrument

Financial Asset: This is any contract that is:

- Cash - Cash
- Equity instrument of another entity – buying shares in another entity.
- Contractual right to receive cash or another financial asset; - you have lent
money to a counterparty or when you sell on credit
- or to exchange financial asset with another entity under conditions that are
potentially favorable to the entity.

Financial Liabilities: This is a contractual obligation to deliver cash or another

financial asset; or to exchange financial asset with another entity under conditions that
are potentially unfavorable to the entity.

Equity Instrument: Residual interest in the asset of an entity after deducting all
liabilities.
 - Financial Assets
- Financial Liabilities
- Equity Instruments

QUESTION - ASSIGNMENT

The following relates to Networth Plc for the year ended 31 December 2021
a. Networth owns cash of N5,000.
b. Networth owns a demand deposit of N1,000,000 with First Bank.
c. Networth’s statement of financial position includes N2,500,000 shares of Google Inc.
d. Networth’s statement of financial position includes Inventory of N56,000.
e. Networth sold goods amounting to N55,000 to Layi ltd on credit.
f. On December 2021, Networth received an advance payment of N250,000 from one of its
customers, Muri Ltd to deliver goods in January 2022.
g. Networth’s statement of financial position includes a current tax liability of N5,000 as well
as a deferred tax liability of N6,500.
h. Networth purchased a Bitcoin of N5,500,000.
Required
Determine whether the items above are financial assets or financial liabilities and also state whether a
financial instrument exists as at 31 December 2021.

1.4 QUESTIONS
Akwa Nig. Limited is a private limited company planning to be registered with the Nigeria Exchange Limited
(NGX). The company is engaged in the conversion of petrol engine into compressed gas engine. The
following are the transaction of the company in respect of its debts and equity instruments.

Transaction 1
Akwa Nig. Limited issued 40million non-redeemable N1 preference share at par value. Under the terms
relating to the preference shares, a dividend is payable on the preference shares only if Akwa Nig. Limited
also pays a dividend on its ordinary shares for the same period. (5 Marks)

Transaction 2
Akwa Nig. Limited entered into a contract with a supplier to buy a significant item of equipment. Under the
terms of the agreement the supplier will receive ordinary shares with an equivalent value of N5million one
year after the equipment is delivered. (5 Marks)

Transaction 3
The directors of Akwa Nig. Limited on becoming director are required to invest a fixed agreed sum of money
in a special class of N1 ordinary shares that only directors hold. Dividend payments on the shares are
discretionary and are ratified at the Annual General Meeting (AGM) of the company. When a director’s
service contract expires, Akwa Nig. Limited is required to repurchase the shares at their nominal value.

A senior accountant in your company (Akwa Nig. Limited) has asked for your advise on how the above
transactions should be treated in the financial statements of your company in accordance with IAS 32 –
Financial Instruments: Presentation.

Required: Write a memo on the above request, discussing and justifying how each of the transactions
should be treated in the financial statements, in accordance with IAS 32 – Financial Instruments:
Presentation. (Total 15 Marks)
SOLUTION

From: Accountant
To: Senior Accountant
Date: July 27th 2025
Subject: Accounting treatment of Transactions

I write to you in respect of the subject matter.

The following paragraphs explains the treatments of the given transactions using IAS 32 financial
instrument presentation as a guide.

Transaction 1
The preference shares that was issued by Awka-Nig Lts is a non-redeemable shares, which means that the
company will not pay back the money or investment to the shareholder. This indicates that the instrument
is an equity instrument.
Additionally, we were informed that dividend are paid to the preference shareholders only when the
ordinary shareholders are paid dividend. This also shows that the company does not have an obligation to
deliver cash, hence, it further strengthens our position that this instrument is an equity instrument.
The entity should treat the non-redeemable preference shares as an equity instruments. This is recognized
by Debiting Bank and Crediting equity instrument.

Transaction 2
Awka Nig will recognize the equipment as Property, plant and equipment in line with IAS 16. But the mode
of settlement is through the company shares. Ordinarily where an entity issues ordinary shares, this should
treated as an equity instruments. IAS 32 states that where the issues of ordinary shares is a variable number
of ordinary shares, the share issue will be treated as a financial liability.
So, the entity will treat the share issue as a financial liability by debiting the equipment and crediting
financial liability.
Additionally, the settlement will occur in one year time, therefore, we have to discount the #5m to its
present value, It is the present value that will be recognized in the books.

Transaction 3
The ordinary shares issued to the directors seems to be a variable number of shares the directors are
required to pay a fixed sum, so the the shares that will be ultimately issued will vary. Furthermore, the
divdend payment are discretionary, this shows that the company has no obligation to deliver cash.
However, the entity is required to repurchase the shares from the directors, indicating that the entity has
an obligation to deliver cash to the directors when their contract expires.
Following from the above, the ordinary shares issued to the new directors will be treated as a financial
liability by debiting Bank and Crediting Financial liability.

Conclusion
From the treatment above, I hope I have clarified the treatment of the given transactions. If you require
further clarifications, please do not hesitate to reach out to me.

Thank you

Opoola Wasiu
Accountant
1.5 QUESTIONS - Assignment

1. Company A issues preference shares that carry a fixed cumulative dividend and must be
redeemed after 5 years. How should these shares be classified under IFRS?
2. A firm issues bonds with a feature that allows conversion into equity at the discretion of
the bondholder. Should this be classified as debt, equity, or a compound financial
instrument?
3. Company B issues perpetual bonds with no maturity date and has discretion over interest
payments. How should this instrument be classified?
4. Company C issues ordinary shares but with an agreement to repurchase them at a fixed
price in the future. How should these shares be classified?
5. A company issues mandatorily redeemable preference shares that are legally classified as
equity. However, IFRS requires liability classification under certain conditions. Should this
be classified as an equity or debt?
6. A financial instrument has a fixed interest payment but allows the issuer to defer
payments indefinitely without any penalty. Should this be classified as debt or equity?
7. Company D issues a hybrid instrument with an embedded derivative. The instrument pays
a fixed coupon but allows the issuer to settle in shares. How should the instrument be
classified?
8. A start-up issues shares with a put option, allowing investors to sell them back to the
company at a predetermined price after five years. Should this be classified as equity or
liability?
9. A company receives funding through a convertible loan note, which will convert into a
variable number of shares based on a future market price. How should this be accounted
for?
IFRS 9: RECOGNITION AND DERECOGNITION OF FINANCIAL INSTRUMENTS

Recognition of financial instruments

Financial instruments are recognized when an entity becomes a party to the contract.
An entity can become a party to a contract either at the date of agreement or the date of
commitment.

Derecognition of financial assets

Financial assets can be derecognized when the following conditions exist:
- The contractual right to the cash flows has expired
- There is a transfer of substantial risk and reward attributable to the financial
asset.
o Unconditional sale of the financial asset
o Sale of a financial asset with a repurchase option at fair value

Derecognition of financial liabilities

Financial liabilities can be derecognized when the obligation In the contract has been
extinguished. That is, the obligation is either transferred, cancelled or discharged.

QUESTION

XYZ Bank holds a portfolio of trade receivables amounting to N5 million. To improve its liquidity, the
bank enters into an agreement with ABC Investors, selling the receivables for N4.8 million. Under the
terms of the agreement:

1. XYZ Bank transfers the legal rights to receive cash dlows from the receivables to ABC Investors.
2. However, XYZ Bank provides a guarantee to ABC Investors that if any of the receivables become
uncollectible, XYZ Bank will compensate ABC Investors for the loss.
3. The bank retains the right to repurchase specidic receivables under certain conditions.

Required:
Based on IFRS 9 Financial Instruments, should XYZ Bank derecognize the trade receivables from its
financial statements? Justify your answer by evaluating whether the risks and rewards of ownership have
been transferred.

Solution

Financial asset can be derecognized when the following conditions exists:

- The contractual right to the cash flows has expired

- There is a transfer of substantial risk and reward attributable to the financial asset.

From the question, the contractual right to the cash flows has expired because, the Bank has transferred
its legal right to receive cash flows.

However, the Bank has made commitments to compensate the investors for any loss, this signifies that
the Bank retains substantial credit risk. Therefore, the Bank has not transferred substantial risk and it
should derecognize the trade receivables.
QUESTION - ASSIGNMENT

ABC Corporation, a large manufacturing company, holds a portfolio of long-term loan receivables
amounting to N50 million. To improve its liquidity position, ABC enters into a securitization transaction
with XYZ Special Purpose Entity (SPE), structured as follows:

1. Transfer of Loan Receivables: ABC transfers the loan receivables to XYZ SPE in exchange for
immediate cash of N45 million.
2. Risk Retention: ABC retains a 10% [irst-loss position, meaning it absorbs the dirst N5 million
of any credit losses on the portfolio.
3. Servicing of Loans: ABC continues to service the loans on behalf of XYZ SPE, collecting payments
and handling delinquencies. For this service, ABC receives an annual servicing fee of 1% of the
outstanding loan balance.
4. Variable Consideration: If the loans perform better than expected (i.e., credit losses are lower
than projected), ABC is entitled to a performance-based fee equal to 20% of any excess
collections over an agreed threshold.
5. Legal Transfer of Ownership: The legal rights to the loans are transferred to XYZ SPE, and
creditors of ABC cannot reclaim these assets in the event of ABC’s insolvency.

Required:

Under IFRS 9, should ABC Corporation derecognize the loan receivables from its financial statements?
Provide a structured analysis using the derecognition criteria, considering risk and reward transfer,
control assessment, and potential ongoing involvement.

SOLUTION

Financial Asset can be derecognized where the following criteria are met:

- The contractual rights to the cash flows has expired

- There is a transfer of substantial risk and reward

From the question, the legal transfer of ownership shows that the contractual right to receive cash has
expired.

Additionally, Since ABC corporations retains a 10% first loss position, which shows that in case of credit
loss, the entity will bear a significant credit risk. This clearly shows that, the entity has not transferred
substantial risk.

Moreover, ABC corporation will also get performance-based fee on excess recovery, which shows that, the
entity still enjoys the reward attributable to this financial asset.

It is important to note, the service fee of 1% for the services rendered by ABC corporations does not affect
the derecognition of the financial asset. It can recognize this fee as an income in its books.

Following from the above, ABC corporations cannot derecognize the financial assets because it hasn’t
transferred the substantial risk and reward attributable to ownership of the financial asset.

However, since it has collected #45m, this amount will be treated as a financial liability in its books.
IFRS 9: MEASUREMENT

- Equity instrument – According to CAMA 2020, share capital are measured at nominal value. This
nominal value can be determined from CAC documents (Form 2)

Financial Assets

- Equity Investments – Where an entity buy share in another

Initial Measurement

Initially, equity investments is measured at the transaction price (the amount paid for the investment).

IFRS 9 requires that all equity investment must be classified at the date of acquisition. They are classified
either at:

- Fair Value Through Profit or Loss (FVTPL)

- Fair Value Through Other Comprehensive Income (FVTOCI)

Basis of classification:

- Held for trading or speculation

- Held for the long term.

If the equity investment is held for trading or speculation, it will be classified at Fair Value Through Profit
or Loss.

If the equity investment is held for the long term, it will be classified at Fair Value Through Other
Comprehensive Income.

For example: An entity acquired equity shares for #10m; it intends to sell within one year.

Dr Financial Asset at FVTPL

Cr Bank

Transaction Cost – This is the like the professional fees of the stockbroker, Stamp duties & Stock exchange
fees.

This transaction cost will be capitalized i.e, added to the cost of the financial asset if the asset is classified
at Fair Value Through other Comprehensive Income. It will be expensed to P or L if the financial asset is
classified at fair value through profit or loss.

Subsequent Measurement
Equity investment is subsequently measured either at:
- Fair Value Through Other Comprehensive Income
- Fair Value Through Profit or Loss

Debt Investment – Where an entity has contractual right to receive cash

Initial Measurement

Initially, Debt investment is measured at its transaction price (i.e, the amount invested).
IFRS 9 requires that an entity must classify the debt investment. They are classified in either of the
following ways:

1. Amortized Cost
2. Fair value through other comprehensive income
3. Fair value through profit or loss

Basis of classification

- Business Model Test: Business model is how an entity makes money.

o Collect Interest income and principal repayment
o Collect Interest income and principal repayment plus selling of the debt investment
where there is an opportunity to make a higher yield.
- Contractual Cashflow test: there is a contract that supports how the entity makes money.

You classify a debt investment at amortized where the business model is to collect solely interest income
and principal repayment. And there is a contract that support the business model.

You classify a debt investment at Fair Value through Other Comprehensive Income where the business
model is to collect interest income and principal repayment as well as sell the debt investment.

The classification as Fair Value Through Profit or Loss is a default classification in the sense that an entity
can decide or make an election to designate all its debt investments at FVTPL.

Transaction Cost:

The transaction will be added to the initial cost of the debt investment if it is classified either at amortized
cost or fair value through other comprehensive income. Whilst it is expensed to profit or Loss where is
classified at FVTPL.

Subsequent Measurement

Debt investment is subsequently measured either at:

1. Amortized Cost
2. FVTOCI
3. FVTPL

Amortized Cost

Scenario 1:

Wasiu PLC purchases a #10m 5% Commercial paper from Dangote PLC. The term is 3 years.

Initial Measurement:
Debit Financial Asset at Amortized Cost - #10m
Credit Bank #10m

At the end of each year: (Yr 1 – 3)

The entity will receive and recognize the annual interest.

The interest is 5% * #10m - #500k

Dr Bank #500k
Cr Interest income (P or L) #500k

At the end of the third year:

Dr Bank #10m
Cr Financial Asset at Amortized Cost #10m

Scenario 2:

Wasiu PLC purchases a #10m 5% Commercial paper from Dangote PLC. The term is 3 years. At
repayment, Wasiu PLC will get #11m. The effective interest rate is 8.08%.

Initial Measurement:
Dr Financial Asset at Amortized Cost #10m
Cr Bank #10m

At the end of Year 1:

The interest income to be recognized to P or L is 8.08% * #10m = #808k

Dr Interest Receivable #808k
Cr Interest Income (P or L) #808k

The interest received will be 5% * #10m = #500k

Dr Bank #500k
Cr Interest receivable #500k

The balance in the interest receivable will be transferred to the financial asset Account (#10m + #308K)
#10,308.

There is a short cut for the above entries for your exams:

Using Amortization Schedule

Year Balance b/f Interest receivable Interest received Balance c/f

N'000 @ 8.08% N’000 @ 5% N’000 N’000
1 10,000 808 (500) 10,308
2 10,308 832.8 (500) 10,640.8
3 10,640.8 859.8 (500) 11,000.5

Financial Liability

Initial Measurement – Net Proceeds (Transaction price – transaction cost)

Classification – Amortized Cost

Subsequent measurement – Amortized Cost

Wasiu PLC issues a #10m 5% Commercial paper. The term is 3 years. At repayment, Wasiu PLC will pay
#11m. Wasiu Plc incurs transaction cost of #200k. The effective interest rate is 8.85%.

Year Balance b/f Interest payable Interest paid Balance c/f

N'000 @ 8.85% N’000 @ 5% N’000 N’000
1 9,800 867.3 (500) 10,167.3
2 10,167.3 899.8 (500) 10,567.1
3 10,567.1 935.1 (500) 11,002
IAS 32: COMPOUND FINANCIAL INSTRUMENTS

Compound financial instrument is an instrument that has the characteristics of both equity instruments
and debt instruments. Examples of such instrument is convertible debts. These are debt that the holder or
investor has a choice of either collecting the principal repayment in cash or shares. The accounting
challenge here is that the issuer does not know the decision of the investor; therefore he does not know
whether to account for the instrument as a financial liability or an equity instrument.
In this case, IAS 32 requires that, the convertible debt should be treated as both equity instrument and
financial liability.
To do this, we will determine the value of the financial liability, while taking the equity instrument as the
balancing figure.

4.1 QUESTION
Ferry Ltd issues 4,000 convertible bonds at 1 January 20X21. The bonds have a four-year term and are
issued at par with a face value of N2,000 per bond, giving total proceeds of N8,000,000. Interest is payable
annually in arrears at a nominal annual interest rate of 6%. Each bond is convertible at any time up to
maturity into 250 ordinary shares.
When the bonds are issued, the prevailing market interest rate for similar debt without conversion options
is 9%.
Required: What is the value of the equity component in the bond?

SOLUTION

Sales proceeds or the amount borrowed is #8,000,000

1 January 2021:

Annuity factor: 1 – (1+r)^-n

r
Discount factor: (1 + r)^-n
Determine the financial liability
Year Cashflows Amount Df @ 9% PV
# # #
1-4 Interest 6% *8,000,000 (480,000) 3.24 1,555,200
4 Principal 8,000,000 0.708 5,667,400
7,222,600
Sales proceeds 8,000,000
Equity component (Bal fig) 777,400

At the end of each year, the financial liability will be measured at amortized cost:
Using amortization schedule
Year Balance b/f Interest payable Interest paid Balance c/f
@ 9% @6%
1 7,222,600 650,034 (480,000) 7,392,634

Statement of profit or loss

For the year ended
Interest paid 650,034

Statement of financial position

As at year ended
Non-current liabilities
Convertible debt 7,392,634

Equity
Equity component 777,400
4.2 QUESTION - Assignment
A company issued N20m of 4% convertible loan notes at par on 1 January 2021. The loan notes are
redeemable for cash or convertible into equity shares on the basis of 20 shares per N100 of debt at the
option of the loan note holder on 31 December 2024. Similar but non-convertible loan notes carry an
interest rate of 9%.
Required: Show how these loan notes should be accounted for in the financial statements at 31 December
2021

3.3 QUESTION
On 1 January 20X10 nomba purchase a debenture for N2,000. The debt instrument is due to mature on 31
December 20X14. The instrument has a principal amount of N2,500 and the instrument carry a fixed
interest at 4.72% that is paid annually (The effective interest rate is 10%).
How should nomba account for the debt instrument over its five-year term?

SOLUTION

Using Amortization Schedule

Year Balance b/f Interest receivable Interest received Balance c/f

N N @10% N @ 4.72% N
2010 2,000 200 (118) 2,082
2011 2,082 208.2 (118) 2,172.2
2012 2,172.2 217.22 (118) 2,271.42
2013 2,271.42 227.14 (118) 2,380.60
2014 2,380.60 238 (118) 2,500.7

3.4 QUESTION
On 1 January 20X18 Latino acquires a quoted investment in the shares of Essay ltd with the intention of
holding it in the long term. The investment cost N400,000. At Latino year end of 31 December 20X18, the
market price of an identical investment is N475,000.
How is the asset initially and subsequently measured? Latino ltd has elected to recognize changes in the
fair value of the equity investment in other comprehensive income.

SOLUTION

Equity Investment – FVTOCI

Initial Measurement – Transaction price

N400,000

Subsequent measurement (31 Dec 2018)

Equity Investment at FVTOCI = #475,000

Changes in fair value = fair value gain

#75,000 – recognized to OCI
3.5 QUESTION
In January 20X18 Kash ltd purchased 40,000 N1 listed equity shares at a price of N2 per share. Transaction
costs were N4,500. At the year-end of 31 December 20X18, these shares were trading at N3.50. A dividend
of 20k per share was received on 31 October 20X18.
Show the financial statement extracts at 31 December 20X8 relating to this investment on the basis that:
(a) The shares were bought for trading (conditions for FVTOCI have not been met)
(b) Conditions for FVTOCI have been met

SOLUTION
Equity Investment
a. Held for trading - FVTPL

Extract of statement of profit or loss

For the year ended 31 December 2008 #
Transaction costs 4,500
Fair value gain ((3.5 – 2) * 40,000) 60,000
Dividend received (0.2 * 40,000) 8,000

Extract of statement of financial position

As at year ended 31 December 2008 #
Current Assets
Equity Investment at FVTPL (3.5 * 40,000) 140,000

b. Held for long term - FVTOCI

Extract of statement of profit or loss

For the year ended 31 December 2008 #
Dividend received (0.2 * 40,000) 8,000

Extract of statement of other comprehensive income

For the year ended 31 December 2008 #
Fair value gain
- Initial investment (2 * 40,000) + 4,500 = 84,500
- Subsequent measurement (3.5 * 40,000) = 140,000 55,500

Extract of statement of financial position

As at year ended 31 December 2008 #
Non-current assets
Equity Investment at FVTOCI 140,000

3.6 QUESTION
Ren ltd issues a bond for N251,889 on 1 January 20X17. No interest is payable on the bond, but it will be
redeemed on 31 December 20X19 for N300,000. The effective interest rate of the bond is 3%.
Required: Calculate the charge to profit or loss of Ren ltd for the year ended 31 December 20X17 and the
balance outstanding at 31 December 20X17

Solution
Using Amortization schedule
Year Balance b/f Interest payable Interest paid Balance c/f
@3%
2017 251,889 7,556.67 - 259,445.67

Statement of profit or loss

Finance income 7,556.67

Statement of financial position

Non-current liability
Bond at amortized cost 259,445.67
3.7 QUESTION - Assignment
On 1 January 20X17 Wakeb ltd issued N600,000 loan notes. Issue costs were N200. The loan notes do not
carry interest but are redeemable at a premium of N152 389 on 31 December 20X18. The effective finance
cost of the debentures is 12%.
What is the finance cost in respect of the loan notes for the year ended 31 December 20X18?

3.8 QUESTION - Assignment

On 1 January 20X17, DEBBY ltd issued a debt instrument with a coupon rate of 3.5% at a par value of
N6,000,000. The directly attributable costs of issue were N120,000. The debt instrument is repayable on
31 December 20X23 at a premium of N1,100,000.
What is the total amount of the finance cost associated with the debt instrument?