Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697752538556.pdf (Georgia)
ekonomika da biznesi, 2020, №1, გვ.

ECONOMICS AND BUSINESS, 2020, №1, pp.

108-118 108-118 finansebi da sabanko saqme ◊ aRricxva, analizi, auditi FINANCE, BANKING ◊ ACCAUNTING, AUDITING Some Aspects of Loan and Capital Financial Instruments Levan Sabauri Professor Iv.

Javakhishvili Tbilisi State University levan.sabauri@tsu.ge Nadezhda Kvatashidze Associate Professor Iv.
Javakhishvili Tbilisi State University nadejda.kvatashidze@tsu.ge Financial Instruments are any contract that generates both the ﬁnancial assets of one enterprise as well as the ﬁnancial liability of the second enterprise or the equity instrument.

In many cases, the contract does not clearly indicate what the enterprise has to do with ﬁnancial liabilities or equity instruments.
Emission and equity instruments are implemented in different conditions, which determine the actual economic content of the instrument.

Their recognition, measurement and accounting procedures differ signiﬁcantly, while their correct classiﬁcation affects the ﬁnancial indexes and the ﬁnancial conclusions and decisions made by an user of the ﬁnancial information.

Thus, it is important to properly identify, measure and reﬂect in the ﬁnancial statements all ﬁnancial instruments.
Keywords: Financial instruments; Loan instruments, Equity instruments; Difficult ﬁnancial instruments, Option.

JEL Codes: G10, G18, G21 Introduction When preparing the ﬁnancial statements, it is important to distinguish between loan and equity ﬁnancial instruments.

Their classiﬁcation affects the company’s ﬁnancial indicators, namely, its agreements (covenants).
The difficulty lies in the fact that many instruments can have characteristics of ﬁnancial liabilities and equity instruments simultaneously (L.Sabauri, 2018).

When it is difficult to ﬁnd out what we are dealing with - equity or loan instrument, the principle of superiority of the economic content on a legal form, shall apply.
IAS 32 Financial instruments: Presentation - The main objective is to determine the principles of liabilities or equity of ﬁnancial instruments as well 108 Some Aspects of Loan and Capital Financial Instruments as the principles of ﬁnancial assets and ﬁnancial liabilities.
Understanding the rules of classiﬁcation of ﬁnancial instruments and the effective use of these rules are important for a company leadership for the following reasons, at least (IASB, 2016): • Classiﬁcation of ﬁnancial instruments as a capital or classiﬁcation has a signiﬁcant impact on the organization’s indicators, namely on the covenants; • Shareholders may accept negatively a classiﬁcation of the ﬁnancial instrument in a form of the equity instrument, if they consider that such instrument causes uncertainty of shares in the equity capital of the organization; • Shareholders might not like to classify ﬁnancial instruments as liabilities, since liabilities have normally the accrued interest that reduce proﬁt, while decrease of the proﬁt affects the company’s ability to pay dividends on shares; • The difference between loan and equity instruments is important when the organization makes ﬁnancial instruments at the time of business / enterprise merger.
Prior to the classiﬁcation of the ﬁnancial instruments, it is necessary to ﬁnd out what is meant under the ﬁnancial obligation (debt instrument) and the capital instrument (equity instrument) in the standards (Stephen G. Ryan, 2012).
How to distinguish between loan and equity instruments According to IAS 32 [1, p.11], aa ﬁnancial liability is any liability that is: (a) a contractual obligation: (i) to deliver cash or another ﬁnancial asset to another entity; or (ii) to exchange ﬁnancial assets or ﬁnancial liabilities with another entity under conditions that are potentially unfavourable to the entity; or (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.
In connection to the last paragraph, an explanation is needed that the enterprise’s own equity instruments for a ﬁxed amount of any currency unit in the ﬁxed amount of purchase rights, options and warrants – are the equity instruments, if the enterprise presents its own class of non-derivative equity instruments to all its holders, on a proportional basis (Mary E. Barth, Katherine Schipper, 2008).
At the same time, the items listed below does not belong to the entity’s own equity instruments, for this purpose: 109 Levan Sabauri, Nadezhda Kvatashidze  Returnable ﬁnancial instruments (with the right to redemption) [1, pp.

16a; 16 b].

Returns is a ﬁnancial instrument that allows the owner to return the refund through the money transfer or other ﬁnancial assets or automatically returns the issuer in the event of an uncertain event in the future or when the instrument holder dies or pension [1, p.11].
 Instruments that the enterprise undertakes to transfer to the other party the proportionate share of the net assets of the enterprise in case of liquidation and are classiﬁed as equity instruments [1, pp.

16, d];  Acceptance or delivery agreements of the future enterprise of the enterprise;  Exception: An instrument that meets a ﬁnancial liability is classiﬁed as a equity instrument if it has all the features and meets all relevant conditions required by IAS 32.
The main feature of the loan instrument is to pay the issuer (the issuer) the money or the ﬁnancial instrument to the holder of the instrument.

Contract obligation may arise with the request of payment of principal, interest or dividends of the debt.

Such a contract may be directly or indirectly based on the terms of the agreement.

For example, the bond under which the issuer must pay interest and repurchase or repay it, classiﬁed as a liability (Sabauri L.2015).
In contrary to the obligations, the equity instrument is any agreement conﬁrming ownership of shares remaining after the deduction of all its liabilities in enterprise assets [1, p. 11].

For example, classiﬁcation of ordinary shares with which the payments are made only by the wishes of the issuer, the issuer is an equity instrument.

An equity instrument may also be considered a ﬁnancial instrument that can be covered or may be covered by equity instruments issued by the issuer.
Thus, the privileged shares, which are subject to conversion, are ﬁxed as ﬁxed ﬁxed quantity of ordinary shares or on the event of occurrence that will occur and also be classiﬁed as a equity instrument.

At the same time, the contract is not always recognized as an equity instrument in the registry of the issuer only because it is assumed to be accepted or transmitted by the issuer’s equity instruments.
In such a case, the classiﬁcation of the contracts depends on whether the amounts of equity instruments, receivables or ﬁnancial assets to be transferred are considered to be: a.

If the contract provides for the transfer or transfer of the distinctly ﬁxed (ﬁxed) quantity issued by the enterprise in exchange for a clearly deﬁned (ﬁxed) amount or other ﬁnancial assets, such a contract shall be considered an equity instrument; b.
If there is any change in the transfer or acceptable amount or equity instruments, such a contract shall be deemed to be a ﬁnancial asset or liability.

110 Some Aspects of Loan and Capital Financial Instruments For example, if the enterprise shall transfer the equity instruments of its own emissions, the value of which is equivalent to the sum, the other side of the contract will be the only one who will receive the money or equity instruments whose value is equal to that amount.
Therefore, such a contract is considered as a loan instrument (Kvatashidze Nadezhda, 2012).
In order to be considered as a loan instrument, the following should be established: • Whether the issuer is obliged to buy their own instruments by force or contract; • Redeeming instruments by the decision of the other party of the Treaty; • The term of the instrument circulation is limited; • Whether the instrumental redemption is due to the future unforeseen occurrence or in the absence of which the Contracting Parties can not inﬂuence; • Does the issuer pay any kind of dividends if he / she can refuse to pay if such a decision is made by its shareholders?
Classiﬁcation of a ﬁnancial instrument as the liability or equity instrument should be based on the legal basis of the principle of economic substance.

Some tools are structured to achieve certain goals related to taxation, ﬁnancial accounting or regulatory requirements.

In such a time it is difficult to reveal the economic content of the instrument.
For example, privileged shares whose owner may require their redemption from the issuer, are treated as debt instruments, even if legally recognized as equity instruments.

The classiﬁcation of the privileged shares shall be taken into consideration as to the speciﬁc funding of the instrument’s funding and the contract relating to the income received from it.

For instance, privileged shares in some states differ from the usual just by assuming that the precedent of dividends is precedent.
In this case, privileged action can be considered as an equity instrument (Sabauri L. 2017).

Legislation or release conditions in different countries oblige the issuer to redeem privileged shares - in this case they are classiﬁed as ﬁnancial liabilities.

The enterprise must decide how to classify the instrument at initial re- co gnition.

The IAS 32 does not directly reﬂect the further change of such classiﬁcation.
Exceptions are refundable instruments and instruments that oblige the enterprise to transfer the proportionate share of its net assets to the other party only during liquidation, cases related to reclassiﬁcation [1, 16e, 16f].

The distinctive feature of the loan and equity instrument is that when the issuer does not have the unconditional right to prevent payment of money and other ﬁnancial assets for the purpose of payment of liabilities.
Such an obligation can be established directly or indirectly, but its basis shall be the terms of the ﬁnancial instrument itself.

111 Levan Sabauri, Nadezhda Kvatashidze Economic necessity should not have a decisive impact on the classiﬁcation of a ﬁnancial instrument.

For example, restrictions on the ability of the enterprise to perform such an obligation when it does not have a sufficient amount of distribution winnings, does not violate its contractual obligations.
When it is Difficult to Classify the Instrument Sometimes dividing equity and loan instruments is not easy.

For example, when shares or options are a way of settlement, and allowsa variable number of shares, or when a ﬁnancial instrument allows to the owner to request a redemption.

For example, the enterprise undertakes to repay a credit debt of 10 MIO CU through issuing after a year its own shares in a value of 12 MIO CU.
In this case, the enterprise undertakes to transfer to the creditor not a ﬁxed amount of shares nut the number of shares valued as 12 MIO CU.

Since the market value of the shares is changeable, a different amount of shares may be issued on the day of repayment of the credit debt, and not the amount ﬁxed as at the date of the contract.

Such a contract is not an equity instrument, since the enterprise uses a variable equity instrument to cover the contractual obligation.
Consequently, this Agreement does not guarantee ownership of the shares remaining after the deduction of all its liabilities in the enterprise assets and is classiﬁed as the ﬁnancial liability [1, p. 21].

The contract, which is compensated by the company for a ﬁxed quantity of its equity instruments (receiving or transferring), is a equity instrument in exchange for a ﬁxed amount of cash or other ﬁnancial asset.

The second situation - the stock option.

The company has released its own stock options.


The number of shares that the owner of the option can receive in exchange of payment of 1,0 MIO CU, depends on the volume of sales of the enterprise in the previous reporting period.

On the one hand, the option for the stock issuer enterprise means the emission of its equity instruments in exchange for the money to be received.
However, on the other hand, the issuer enterprise is obliged to transfer not the ﬁxed number of shares but the variable amount which depends upon the volume of the sales.

Accordingly, the enterprise should not classify the option as an equity instrument (Lopes P.T., Rodrigues L.L.

2006).

According to the ﬁnancial instrument with the right to redemption, the issuer is obliged to redeem or cover the instrument for money or other ﬁnancial assets at the time of sale of such right.
Classiﬁcation of shares of the open-type equity funds is associated with certain difficulties.

The open-type equity fund (OEF) is an investment fund the shares of which can be sold to the Fund managing company at any day, on the basis of of daily calculation of the net assets of this fund.

Correspondingly, 112 Some Aspects of Loan and Capital Financial Instruments the OEFs are the instruments with the redemption right.
In general, the similar instruments are classiﬁed as the loan instruments because they include the redemption right, but, they cannot be classiﬁed as the equity instrument unless they hold all the features deﬁned by Points 16a and 16b of IAS 32: It entitles the holder to a pro rata share of the entity’s net assets in the event of the entity’s liquidation.

The instrument is in the class of instruments that is subordinate to all other classes of instruments.
To be in such a class the instrument has no priority over other claims to the assets of the entity on liquidation, and does not need to be converted into another instrument before it is in the class of instruments that is subordinate to all other classes of instruments All ﬁnancial instruments in the class of instruments that is subordinate to all other classes of instruments have identical features Apart from the contractual obligation for the issuer to repurchase or redeem the instrument for cash or another ﬁnancial asset, the instrument does not include any contractual obligation to deliver cash or another ﬁnancial asset to another entity, or to exchange ﬁnancial assets or ﬁnancial liabilities with another entity under conditions that are potentially unfavorable to the entity, and it is not a contract that will or may be settled in the entity’s own equity instruments as set out in subparagraph (b) of the deﬁnition of a ﬁnancial liability.
The total expected cash ﬂows attributable to the instrument over the life of the instrument are based substantially on the proﬁt or loss, the change in the recognized net assets or the change in the fair value of the recognized and unrecognized net assets of the entity over the life of the instrument (excluding any effects of the instrument) In addition to the above listed, to classify the instrument as the equity one, it is necessary that an issuer must not have any other ﬁnancial instrument or contract that satisﬁes the two criteria simultaneously:  Total cash ﬂows based substantially on the proﬁt or loss, the change in the recognized net assets or the change in the fair value of the recognized and unrecognized net assets of the entity (excluding any effects of such instrument or contract) and  The effect of substantially restricting or ﬁxing the residual return to the puttable instrument holders.
For the purposes of applying this condition, the entity shall not consider non-ﬁnancial contracts with a holder of an instrument described in Paragraph 16a that have contractual terms and conditions that are similar to the contractual terms and conditions of an equivalent contract that might occur between a non- instrument holder and the issuing entity.
If the entity cannot determine that 113 Levan Sabauri, Nadezhda Kvatashidze this condition is met, it shall not classify the puttable instrument as an equity instrument Although such shares are classiﬁed according to IAS 32 as the equity instruments, they are not considered so for the purpose of use of IFRS 9 [2, p.5.7.5], since they do not meet the interpretation of equity from the very beginning (IASB, 2014).
Difficult Financial Instruments - Instruments with Capital and Liability Elements Some ﬁnancial instruments include both liability and equity elements.

For example, bonds convertible to a strictly deﬁned number of shares are: a ﬁnancial obligation element is a part of the contract on cash transfer, and the equity instrument element is the holder’s right to perform its conversion into a ﬁxed quantity of ordinary shares of the enterprise.
In this case the liability element is reﬂected separately from the capital element.

The real value of the paid or compensated amount shall be distributed between the part of the ﬁnancial obligation and the component of the equity in time of the initial recognition of such instrument.

The fair value of a ﬁnancial liability is measured by the fair value of a similar liability which is not related to the right of conversion in the shares (option).
While the fair value of the equity of the capital is determined as the difference between the actual value of the ﬁnancial instrument and the real value of its composition as a ﬁnancial liability (Steve Collings, 2012).

Conclusion:  The classiﬁcation of the right to acquire additional shares by the existing shareholders may be made as equity instruments, if the price is expressed in currency, which differs from the functional currency of the enterprise.
The value of the right may be expressed in the currency, which differs from the functional currency of the enterprise if the enterprise securities are quoted in more than one jurisdiction or is required by the legislation.

If a ﬁxed price is expressed not in a functional currency, the condition is usually not fulﬁlled by a certain amount of shares on a certain amount of money.
Nevertheless, according to IAS 32, such right to purchase additional shares is classiﬁed into the issuer’s account as a equity tool for the following reasons:  Besides, for this purpose, rights, options or warrants to acquire a ﬁxed number of the entity’s own equity instruments for a ﬁxed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata 114 Some Aspects of Loan and Capital Financial Instruments to all of its existing owners of the same class of its own non-derivative equity instruments [1,IAS 32, p.11];  The right to buy ﬁxed quantity of ordinary shares with ﬁxed amount expressed in any currencies (including currencies other than functional) are recognized as equity instruments if these rights are allotted to each owner of their own non-derivative equity instruments on a proportionate basis (IAS 32, p.16);  Classiﬁcation of the ﬁnancial instruments as the loan and equity instruments, should be based on the deﬁnitions provided by IAS 32;  When classifying the ﬁnancial instruments as the loan and equity instruments, the principle of superiority of the economic content on a legal form, shall apply;  Difficult ﬁnancial instruments are classiﬁed as the liability and capital elements.
ლიტერატურა: • IASB.

(2014, August 22).

https://www.ifrs.org/supporting-implementation/supporting- materials-by-ifrs-standard/ifrs-9/.

Retrieved from ifrs.org.

• IASB.

(2016, November).

https://www.ifrs.org/issued-standards/list-of-standards/ias- 32-ﬁnancial-instruments-presentation/.

Retrieved from ifrs.org.

• კვა ტა ში ძე ნ.

(2012).

ფი ნან სუ რი ინ სტრუ მენ ტე ბის შე ფა სე ბა.


პ. გუ გუშ ვი ლის ეკო- ნო მი კის ინ სტი ტუ ტი სა და თსუ -ის სა ერ თა შო რი სო სა მეც ნი ე რო- პრაქ ტი კუ ლი კონ ფე რენ ცი ის „ე როვ ნუ ლი ეკო ნო მი კა და გლო ბა ლი ზა ცი ის“ მა სა ლე ბი.

ტ.2.

გვ.

21-24.

2012. თბი ლი სი.

• Sabauri L. (2015).

INFLUENCE OF ACCOUNTING BALANCE INDICATORS ON INVESTMENT EVALUTION.

Applied Finance and Accounting , 57-68.

• საბაური ლ.

(2017).

სატარიფო რეგულირების პირობებში აღრიცხვის ზოგიერთი საკითხების შესახებ.
ჟურნალი „ეკონომიკა და ბიზნესი“.

2017. გვ.176-184.

თბილისი.

• Sabauri L. (2018).

Approval and Introduction of the International Financial Reporting Standards (IFRS) in Georgia: Challenges and Perspectives.

Journal of Accounting & Marketing , 2-4.

• Mary E. Barth, Schipper K. (2008).

Financial Reporting Transparency.

Financial Reporting Transparency, 173-190.

• Lopes P. T., Rodrigues L.L.

(2006).


Accounting for Financial Instruments: An Analysis of the Determinants of Disclosure in the Portuguese Stock Exchange.

The International Journal of Accounting, 25-56.

• Stephen G. Ryan (2012).

“Financial Reporting for Financial Instruments”.

Foundations and Trends® in Accounting, 187-354.

• Collings St. (2012).

Steve’s Guide to Complex Financial Instruments.

In S. Collings, Steve’s Guide to Complex Financial Instruments.
115 Levan Sabauri, Nadezhda Kvatashidze References: • • • • • • • • • • IASB.

(2014, August 22).

https://www.ifrs.org/supporting-implementation/supporting- materials-by-ifrs-standard/ifrs-9/.

Retrieved from ifrs.org.

IASB.

(2016, November).

https://www.ifrs.org/issued-standards/list-of-standards/ias- 32-ﬁnancial-instruments-presentation/.

Retrieved from ifrs.org.

Kvatashidze N. (2012).

Pinansuri instrumentebis shepaseba.

[Valuation of Financial Instruments.


Materials of Reports made at the International Scientiﬁc-Practical Conference Held at P.Gugushvili Institute of Economics of Ivane Javakhishvili Tbilisi State University, pp.

21-24.

Tbilisi].

(in Georgian).

Sabauri L. (2015).

Inﬂuence of Accaunting Balance Indicators on Investment Evalution.

Applied Finance and Accounting , 57-68.

Sabauri L. (2017).

Sataripo regulirebis pirobebshi aghritskhvis zogierti sakitkhebis shesakheb.
[Some Issues of Accounting in Tariff Regulation Conditions.

Economics and Business, 176-184.]

(in Georgian.)

Sabauri L. (2018).

A Approval and Introduction of the International Financial Reporting Standards (IFRS) in Georgia: Challenges and Perspectives.

Journal of Accounting & Marketing , 2-4.

Mary E. Barth, Schipper K. (2008).

Financial Reporting Transparency.

Financial Reporting Transparency, 173-190.

Lopes P. T., Rodrigues L.L.

(2006).


Accounting for Financial Instruments: An Analysis of the Determinants of Disclosure in the Portuguese Stock Exchange.

The International Journal of Accounting, 25-56.

Stephen G. Ryan.

(2012).

“Financial Reporting for Financial Instruments”.

Foundations and Trends® in Accounting, 187-354.

Collings,St.

(2012).

Steve’s Guide to Complex Financial Instruments.

In S. Collings, Steve’s Guide to Complex Financial Instruments.
116 სესხის და კაპიტალის ფინანსური ინსტრუმენტების ზოგიერთი ასპექტი სესხის და კაპიტალის ფინანსური ინსტრუმენტების ზოგიერთი ასპექტი ლევან საბაური ივ.ჯავახიშვილის სახ.

თბილისის სახელმწიფო უნივერსიტეტის პროფესორი levan.sabauri@tsu.ge ნადეჟდა კვატაშიძე ივ.ჯავახიშვილის სახ.
თბილისის სახელმწიფო უნივერსიტეტის ასოცირებული პროფესორი nadejda.kvatashidze@tsu.ge ფი ნან სუ რი ინ სტრუ მენ ტე ბი არის ნე ბის მი ე რი ხელ შეკ რუ ლე ბა, რო მე ლიც წარ მო შობს რო გორც ერ თი სა წარ მოს ფი ნან სურ აქ ტივს, ასე ვე მე ო რე სა წარ- მოს ფი ნან სურ ვალ დე ბუ ლე ბას ან წი ლობ რივ ინ სტრუ მენტს.

ხშირ შემ თხვე ვა ში ხელ შეკ რუ ლე ბა ში ნათ ლად არ ჩანს რას თან აქვს სა წარ მოს საქ მე - ფი ნან სურ ვალ დე ბუ ლე ბას თან, თუ წი ლობ რივ ინ სტრუ მენ ტთან.
სა სეს ხო და წი ლობ რი ვი ინ სტრუ მენ ტე ბის ემი სია ხდე ბა სხვა დას ხვა პი რო ბე ბით, რაც გან საზღ ვრავს ინ სტრუ მენ ტის რე ა ლურ ეკო ნო მი კურ ში ნა არს.

მა თი აღი ა რე ბის, შე ფა სე ბის და აღ რიცხ ვის წე სი მნიშ ვნე ლოვ ნად გან სხვავ დე ბა, ხო ლო მა თი სწო რი კლა სი ფი- კა ცია გავ ლე ნას ახ დენს ფი ნან სურ კო ე ფი ცი ენ ტებ ზე და ფი ნან სუ რი ინ ფორ მა- ცი ის მომ ხმა რებ ლე ბის მი ერ გა კე თე ბულ დას კვნებ ზე და მი ღე ბულ გა დაწყ ვე ტი- ლე ბებ ზე.
ამ დე ნად, მნიშ ვნე ლო ვა ნია ყვე ლა ფი ნან სუ რი ინ სტრუ მენ ტე ბის სწო- რად იდენ ტი ფი ცი რე ბა, შე ფა სე ბა და ასახ ვა ფი ნან სურ ან გა რიშ გე ბა ში.

საკ ვან ძო სიტყ ვე ბი: ფი ნან სუ რი ინ სტრუ მენ ტე ბი, სა სეს ხო ინ სტრუ მენ- ტე ბი, წი ლობ რი ვი ინ სტრუ მენ ტე ბი, რთუ ლი ფი ნან სუ რი ინ სტრუ მენ ტე ბი, ოფ- ცი ო ნი.

117