IAS 32 Equity and Financial Liabilities
have to be distinguished by an issuer of more complex financial instruments
For many (most!), simpler financial instruments the classification as a financial liability or equity works well. So, classifying more complex financial instruments under IAS 32 – e.g. those with characteristics of equity – can be more challenging, leading to diversity in practice. IAS 32 Equity and Financial Liabilities
IN SHORT to check off
An instrument, or its components, is classified on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.
A financial instrument is a financial liability if it contains a contractual obligation to transfer cash or another financial asset.
A financial instrument is also classified as a financial liability if it is a derivative that will or may be settled in a variable number of the entity’s own equity instruments or a non-derivative that comprises an obligation to deliver a variable number of the entity’s own equity instruments.
An obligation for an entity to acquire its own equity instruments gives rise to a financial liability, unless certain conditions are met.
As an exception to the general principle, certain puttable instruments and instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation are classified as equity instruments if certain conditions are met.
The contractual terms of preference shares and similar instruments are evaluated to determine whether they have the characteristics of a financial liability.
The components of compound financial instruments, which have both liability and equity characteristics, are accounted for separately.
A non-derivative contract that will be settled by an entity delivering its own equity instruments is an equity instrument if, and only if, it will be settled by delivering a fixed number of its own equity instruments.
A derivative contract that will be settled by the entity delivering a fixed number of its own equity instruments for a fixed amount of cash is an equity instrument. If such a derivative contains settlement options, then it is an equity instrument only if all settlement alternatives lead to equity classification.
Incremental costs that are directly attributable to issuing or buying back own equity instruments are recognised directly in equity.
Treasury shares are presented as a deduction from equity.
Gains and losses on transactions in an entity’s own equity instruments are reported directly in equity.
Dividends and other distributions to the holders of equity instruments, in their capacity as owners, are recognised directly in equity.
NCI are classified within equity, but separately from equity attributable to shareholders of the parent.