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IFRS Foundation podcasts. Show Sections. Standard history. Related active projects Financial Instruments with Characteristics of Equity. Unconsolidated amendments. IAS plus. Login or Register Deloitte User? Welcome My account Logout. Search site. Toggle navigation. Navigation Standards. Navigation International Accounting Standards. Quick Article Links. Overview IAS 32 Financial Instruments: Presentation outlines the accounting requirements for the presentation of financial instruments, particularly as to the classification of such instruments into financial assets, financial liabilities and equity instruments.
Scope IAS 32 applies in presenting and disclosing information about all types of financial instruments with the following exceptions: [IAS However, IAS 32 applies to all derivatives on interests in subsidiaries, associates, or joint ventures. However, IAS 32 applies to derivatives that are embedded in insurance contracts if they are required to be accounted separately by IAS 39 financial instruments that are within the scope of IFRS 4 because they contain a discretionary participation feature are only exempt from applying paragraphs and AG analysing debt and equity components but are subject to all other IAS 32 requirements contracts and obligations under share-based payment transactions see IFRS 2 Share-based Payment with the following exceptions: this standard applies to contracts within the scope of IAS Financial asset: any asset that is: cash an equity instrument of another entity a contractual right to receive cash or another financial asset from another entity; or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or a contract that will or may be settled in the entity's own equity instruments and is: a non-derivative for which the entity is or may be obliged to receive a variable number of the entity's own equity instruments 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 themselves contracts for the future receipt or delivery of the entity's own equity instruments puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments Financial liability: any liability that is: a 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 unfavourable to the entity; or a contract that will or may be settled in the entity's own equity instruments and is 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 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 themselves contracts for the future receipt or delivery of the entity's own equity instruments; puttable instruments classified as equity or certain liabilities arising on liquidation classified by IAS 32 as equity instruments Equity instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Classification as liability or equity The fundamental principle of IAS 32 is that a financial instrument should be classified as either a financial liability or an equity instrument according to the substance of the contract, not its legal form, and the definitions of financial liability and equity instrument.
Illustration — issuance of fixed monetary amount of equity instruments A contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so that the fair value of the entity's own equity instruments to be received or delivered equals the fixed monetary amount of the contractual right or obligation is a financial liability.
Compound financial instruments Some financial instruments — sometimes called compound instruments — have both a liability and an equity component from the issuer's perspective. Treasury shares The cost of an entity's own equity instruments that it has reacquired 'treasury shares' is deducted from equity. Related Publications Deloitte comment letter on tentative agenda decision on warrants classified as financial liabilities on initial recognition 25 May Deloitte e-learning — IAS 32 07 Feb Deloitte comment letter on the IASB's discussion paper on financial instruments with characteristics of equity 17 Dec Related Standards.
Related Interpretations. Related Projects. See Legal for more information. To help issuers of financial instruments distinguish between a liability and equity, the Board proposes that issuers assess the presence or otherwise of two particular features of an instrument — i. A non-derivative financial instrument would be classified as a financial liability if it contains:.
For example, irredeemable fixed-rate cumulative preference shares would be classified as a financial liability. These preference shares might be classified as equity under current IAS Derivatives on own equity are currently classified as equity using the fixed-for-fixed condition. However, since IAS 32 does not explain the rationale for this condition, it is difficult to apply in practice when a derivative is more complex.
Consistent with the principles for classifying non-derivative financial instruments, the DP clarifies that the classification of a derivative on own equity would be determined using the timing and amount features.
This means that a derivative on own equity would be classified as a financial asset or a financial liability if:.
The DP also discusses the relationship between compound instruments and redemption obligation arrangements and proposes that transactions that have the same settlement outcome should be accounted for consistently, regardless of how the transaction is structured — e. For example, financial liabilities that provide equity-like returns would be distinguished from other financial liabilities by separate presentation in the statement of financial position, and presentation of their income and expenses in other comprehensive income OCI without subsequent reclassification.
This would also apply to non-equity derivatives. Request for proposal. Gain access to personalized content based on your interests by signing up today.
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