IAS 32
Active
Financial Instruments: Presentation
Prescribes the principles for presenting financial instruments as financial liabilities or equity, and for offsetting financial assets and financial liabilities.
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Conceptual Framework Linkage
Why the liability/equity classification test comes DIRECTLY from the Framework
The Conceptual Framework defines a LIABILITY as a present obligation to transfer an economic resource, and EQUITY as the residual interest in assets after deducting liabilities. IAS 32 applies this exact distinction to financial instruments – the legal FORM of an instrument (e.g. calling it a "share") is irrelevant if its SUBSTANCE creates a genuine obligation.
HOW IAS 32 MAPS TO THE FRAMEWORK
Substance over form – the classification is determined by the SUBSTANCE of the contractual arrangement, not merely its legal form (e.g. "preference shares" can be liabilities in substance) Faithful representation – misclassifying a genuine obligation as equity would overstate equity and understate leverage, materially distorting a user's assessment of financial risk The residual interest concept – equity, by definition, has NO contractual obligation to deliver cash or another financial asset; ANY such obligation, however structured, points toward liability classification
IAS 32's classification test is one of the most direct, unmediated applications of the Conceptual Framework's own definitions anywhere in IFRS – there is very little "standard-specific" machinery layered on top; it largely just asks whether the Framework's liability definition is met.
Why IAS 32 is presentation-only, with IFRS 9 measuring
IAS 32 answers WHERE an instrument, or component of an instrument, sits (liability, equity, or split between both) – it does NOT provide measurement rules; those come from IFRS 9 (financial liabilities/assets) and general equity accounting principles.
Classification outcomeSubsequent measurement basis
Financial liabilityIFRS 9 – amortised cost or fair value, as applicable
Equity instrumentNot remeasured; simply presented within equity at the amount received (less issue costs)
Qualitative characteristics in action: the clean separation of PRESENTATION (IAS 32) from MEASUREMENT (IFRS 9) reflects the Framework's structured approach – get the classification right first, since it determines which measurement regime subsequently applies.
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Scope & Applicability
What IAS 32 covers
IAS 32 establishes principles for presenting financial instruments as liabilities or equity, and for offsetting financial assets and financial liabilities – applied by all entities issuing or holding financial instruments.
SCOPE EXCLUSIONS (COMMON TO ALL FINANCIAL INSTRUMENT STANDARDS)
Interests in subsidiaries, associates, and joint ventures accounted for under IFRS 10/IAS 27/IAS 28 (except where those standards require IAS 32/IFRS 9 treatment for certain items) Employers' rights and obligations under employee benefit plans (IAS 19) Insurance contracts (IFRS 17), though derivatives embedded in insurance contracts remain within scope Contracts for contingent consideration in a business combination (IFRS 3), from the acquirer's perspective Share-based payment transactions (IFRS 2), except for treasury share purchases related to employee share option plans
Key definitions you must know
Financial liability
A contractual obligation to deliver cash or another financial asset to another entity, OR to exchange financial assets/liabilities under potentially unfavourable conditions, OR a contract settled in the entity's own equity instruments that meets specific conditions.
Equity instrument
Any contract that evidences a RESIDUAL interest in the assets of an entity after deducting all of its liabilities.
Financial instrument
Any contract that gives rise to a financial asset of one entity AND a financial liability or equity instrument of another entity.
Compound financial instrument
A non-derivative financial instrument that contains BOTH a liability component and an equity component from the ISSUER's perspective (e.g. a convertible bond).
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The Liability vs Equity Test – The Core Question
Does the issuer have a contractual obligation to deliver cash (or another financial asset)?
The critical feature distinguishing a financial liability from an equity instrument is the EXISTENCE of a contractual obligation on one party to the financial instrument (the issuer) EITHER to deliver cash/another financial asset to another party, OR to exchange financial instruments with another party under conditions potentially UNFAVOURABLE to the issuer.
Points toward LIABILITY classification
Mandatory redemption at a fixed/determinable date or at the holder's option; contractually obligated dividend/coupon payments the issuer cannot avoid; obligations settled in a VARIABLE number of the issuer's own shares whose value equals a fixed amount (or an amount based on a variable other than the issuer's own share price)
Points toward EQUITY classification
No contractual obligation to deliver cash; distributions are discretionary (declared at the issuer's option); settlement (if any) via a FIXED number of the issuer's own equity instruments for a FIXED amount of cash (the "fixed-for-fixed" condition)
"Redeemable preference shares" are almost always financial LIABILITIES, not equity, DESPITE their legal name and form – because the issuer has a contractual obligation to redeem (deliver cash) at a future date, satisfying the liability definition regardless of what the instrument is called.
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Compound Instruments – Splitting Liability and Equity
The split accounting method
STEP-BY-STEP APPROACH
1) Measure the LIABILITY component first, at the fair value of a similar liability WITHOUT the equity conversion feature
2) The EQUITY component is the RESIDUAL – total proceeds LESS the liability component (a "with-and-without" method)
2) The EQUITY component is the RESIDUAL – total proceeds LESS the liability component (a "with-and-without" method)
This residual approach ensures the liability and equity components ALWAYS sum to total proceeds – the equity component is NEVER independently valued, only derived by subtraction.
Worked example – convertible bond split
Example 1: Splitting a convertible bond into liability and equity
An entity issues a convertible bond for total proceeds of $10,000,000. A similar bond WITHOUT the conversion option would have a fair value of $9,200,000, calculated by discounting the bond's cash flows at the market rate for a similar non-convertible bond.
Liability component = $9,200,000 (present value of cash flows using the market rate for a non-convertible bond)
Equity component (residual) = 10,000,000 − 9,200,000 = $800,000
Equity component (residual) = 10,000,000 − 9,200,000 = $800,000
Dr
Cash $10,000,000
SOFP
Cr
Financial liability – convertible bond $9,200,000
SOFP
Cr
Equity – convertible bond option reserve $800,000
Equity
Transaction costs are allocated between the two components PRO RATA to their relative carrying amounts – once split, the liability component is subsequently accreted to face value via the effective interest method under IFRS 9, while the equity component is never remeasured.
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Puttable Instruments – The Narrow Exception to Equity Classification
A specific relief for certain co-operative/partnership-style instruments
Some financial instruments give the HOLDER a right to put the instrument back to the issuer for cash (e.g. shares in a co-operative, or units in a partnership) – technically meeting the liability definition. IAS 32 provides a NARROW exception permitting equity classification if ALL of a specific, strict set of conditions are met.
KEY CONDITIONS FOR THE PUTTABLE INSTRUMENT EXCEPTION
Entitles the holder to a pro-rata share of the entity's net assets on liquidation Is in the class of instruments SUBORDINATE to all other classes All instruments in that subordinate class have IDENTICAL features Besides the put right, the instrument has no other contractual obligation to deliver cash/another financial asset, or to exchange under potentially unfavourable conditions Total expected cash flows attributable to the instrument over its life are based substantially on profit/loss, change in recognised net assets, or change in fair value over the instrument's life
This is a genuinely narrow exception, most commonly relevant for co-operative entities, mutual funds, and certain partnership structures – the vast majority of ordinary puttable/redeemable instruments do NOT qualify and remain classified as liabilities.
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Preference Shares – Classification Walkthrough
Reading the terms carefully
FeatureClassification impact
Mandatorily redeemable at a fixed dateLIABILITY
Redeemable at the HOLDER's optionLIABILITY (holder can compel cash delivery)
Redeemable ONLY at the ISSUER's option, dividends fully discretionaryEQUITY (issuer avoids any obligation)
Cumulative, mandatory fixed dividendLIABILITY (or a liability component, if also convertible)
Worked example – mandatorily redeemable preference shares
Example 2: Preference shares classified as a liability
An entity issues 100,000 preference shares of $10 each ($1,000,000 total), mandatorily redeemable at par in 5 years, with a fixed 6% cumulative dividend the issuer cannot avoid paying.
Despite being LEGALLY called "shares," this instrument meets the financial liability definition in FULL (mandatory redemption AND mandatory dividend) – classified entirely as a financial liability, with the "dividend" payments actually presented as INTEREST expense in the SOPL, not as a distribution of profit.
Reclassifying the dividend as interest expense is a direct consequence of the substance-over-form classification – this materially changes both the SOFP gearing ratio AND the SOPL, since what looks like a dividend distribution becomes a P&L charge.
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Treasury Shares
An entity cannot recognise a gain/loss on its own shares
If an entity reacquires its OWN equity instruments, those instruments ("treasury shares") are DEDUCTED from equity – NO gain or loss is recognised in profit or loss on the purchase, sale, issue, or cancellation of an entity's own equity instruments. Consideration paid or received is recognised DIRECTLY in equity.
This is a direct application of the Framework's principle that an entity cannot profit from transactions with its OWNERS in their capacity as owners – treasury share transactions are, by definition, transactions in the entity's own equity, never income-statement events.
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Offsetting Financial Assets & Liabilities
The two-condition offsetting test – with worked example
A financial asset and a financial liability shall be OFFSET, and the net amount presented, when, and ONLY when, an entity BOTH: (a) currently has a legally enforceable right to set off the recognised amounts; AND (b) intends either to settle on a net basis, or to realise the asset and settle the liability SIMULTANEOUSLY.
Example 3: Failing the offsetting test
An entity has a $500,000 receivable from, and a $500,000 payable to, the SAME counterparty. A master netting agreement gives a legally enforceable right of set-off ONLY in the event of default or bankruptcy of the counterparty – not in the ORDINARY course of business.
These amounts CANNOT be offset in the financial statements – a right of set-off that exists ONLY on default does not meet the "currently" enforceable and intention-to-settle-net conditions REQUIRED for presentation on a net basis. Both the $500,000 receivable and $500,000 payable are presented GROSS on the SOFP, though offsetting-related disclosures under IFRS 7 may still be required.
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Disclosure Requirements
Required disclosures (most detailed disclosure now sits in IFRS 7)
CLASSIFICATION-RELATED DISCLOSURES
For compound instruments, the split between the liability and equity components at initial recognition Circumstances of any puttable instrument classified as equity under the narrow exception
OFFSETTING DISCLOSURES
Gross amounts, amounts offset in accordance with the criteria, and resulting net amounts presented Amounts subject to an enforceable master netting arrangement or similar agreement, whether or not offset
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Critical Judgments & Estimates
Where management judgement matters most
SIGNIFICANT JUDGEMENTS
Determining whether an instrument's substance creates a genuine contractual obligation, regardless of its legal label Whether a puttable instrument meets ALL the strict conditions for the narrow equity classification exception Whether a legally enforceable right of set-off is "currently" enforceable (not merely contingent on default) and whether net settlement is genuinely intended
SIGNIFICANT ESTIMATES
Fair value of the liability component of a compound instrument, using a market rate for a similar instrument without the equity feature Allocating transaction costs between the liability and equity components of a compound instrument
Classification decisions under IAS 32 can materially affect an entity's REPORTED GEARING and dividend cover ratios – reclassifying an instrument from equity to liability increases reported leverage and can convert "dividend" payments into P&L interest expense, both closely watched by lenders and analysts.
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IFRS vs US GAAP – Key Differences
Comparison – IAS 32 vs US GAAP (ASC 480 / ASC 470-20)
FeatureIFRS (IAS 32)US GAAP
Convertible bond split method"With-and-without": liability first at fair value, equity is the residual – NO subsequent remeasurement of either componentHistorically required more complex bifurcation approaches (e.g. cash conversion feature guidance); recent ASU 2020-06 simplified US GAAP to more closely resemble a single-liability approach in many cases, reducing prior divergence
Puttable instrument exceptionNarrow, specific exception permitting equity classification if strict conditions are metASC 480 has its own, differently structured criteria for mandatorily redeemable instruments and puttable equity – not identical mechanics to IAS 32's exception
Offsetting criteriaRequires BOTH a currently enforceable legal right AND intention to settle net/simultaneouslyBroadly similar dual test, though specific master netting agreement guidance differs in detail (particularly for derivatives under repurchase/reverse repurchase agreements)
Redeemable preference sharesAlmost always a liability if mandatorily redeemableSimilarly classified as a liability (or "mezzanine"/temporary equity in some cases) under ASC 480 – the "temporary equity" concept has no direct IFRS equivalent
The US GAAP concept of "temporary equity" or "mezzanine equity" – a presentation category BETWEEN liabilities and permanent equity, used for certain redeemable instruments – has NO direct equivalent under IFRS, where an instrument must be classified as either liability or equity (or split as a compound instrument), with no intermediate category.
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Statement Mapping – Where Every Classification Event Lands
Comprehensive event-to-statement mapping table
Event / transactionStatement(s) affectedNotes
Issue of ordinary shares (genuine equity)EquityNo liability recognised; proceeds credited to equity, net of issue costs
Issue of mandatorily redeemable preference sharesSOFPClassified in full as a financial liability
"Dividend" payments on liability-classified preference sharesSOPLPresented as interest expense, not a distribution of profit
Issue of a convertible bond (compound instrument)SOFP EquitySplit between liability (IFRS 9) and equity (residual) components
Accretion of the liability component to face valueSOPL SOFPEffective interest method under IFRS 9; equity component never remeasured
Purchase of treasury sharesEquityDeducted from equity; no gain/loss recognised
Sale/reissue of treasury sharesEquityConsideration recognised directly in equity, never through SOPL
Offsetting a financial asset and liability meeting both testsSOFPPresented net, rather than gross
Amounts subject to a master netting agreement, not meeting the offset testNotesPresented gross on the SOFP; disclosed per IFRS 7
Compound instrument component splitNotesMandatory disclosure of the initial split methodology and amounts
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Related Standards – Cross-Reference Map
How IAS 32 connects across the IFRS body of literature
StandardNature of the connection
IFRS 9Supplies ALL subsequent measurement rules once IAS 32 has determined an instrument (or component) is a financial liability or financial asset
IFRS 7Supplies the extensive disclosure requirements about financial instruments' nature and risks, complementing IAS 32's presentation/offsetting focus
IAS 1Governs where liability-classified vs equity-classified instruments are presented on the SOFP, and how "dividend" payments reclassified as interest are shown in the SOPL
IFRS 2Share-based payment arrangements are generally EXCLUDED from IAS 32's scope, except treasury share purchases connected to employee share plans
IFRS 3Contingent consideration classified as a liability (variable settlement) versus equity (fixed settlement) in a business combination follows IAS 32's underlying classification logic
IAS 21Foreign currency-denominated compound instruments require careful application of both the split-accounting rules here and IAS 21's translation rules
IAS 33The liability/equity split of compound instruments directly affects diluted earnings per share calculations, since only the equity (conversion) component is relevant to potential ordinary shares
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Quick-Reference Glossary
Fixed-for-fixed condition
The requirement that settlement in the issuer's own equity instruments involves a FIXED number of shares for a FIXED amount of cash/other financial asset, for the arrangement to qualify as an equity instrument.
Contingent settlement provisions
Clauses requiring settlement in cash (or otherwise as a liability) upon the occurrence of an uncertain future event outside the control of both parties – generally results in liability classification unless the contingency is not genuine or would only arise in remote/liquidation scenarios.
Treasury shares
An entity's own equity instruments reacquired by itself or its subsidiaries – deducted from equity, never treated as a financial asset.
Residual interest
The claim on an entity's assets remaining after deducting all liabilities – the Framework's definition of equity, which IAS 32 uses as its classification benchmark.
Master netting arrangement
A contractual agreement providing for a single net settlement of all instruments covered, typically in the event of default – does not automatically satisfy IAS 32's offsetting criteria unless net settlement is also the norm in the ordinary course of business.
Puttable instrument
A financial instrument giving the holder the right to sell it back to the issuer for cash or another financial asset – normally a liability, unless the narrow equity exception conditions are all satisfied.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
Sep-1991
Exposure Draft E40 Financial Instruments
Jan-1994
E40 was modified and re-exposed as Exposure Draft E48 Financial Instruments
Jun-1995
The disclosure and presentation portion of E48 was adopted as IAS 32 Financial Instruments: Disclosure and Presentation
01-Jan-1996
Effective date of IAS 32 (1995)
Dec-1998
IAS 32 was revised by IAS 39, effective 1 January 2001
17-Dec-2003
Revised version of IAS 32 issued by the IASB
01-Jan-2005
Effective date of IAS 32 (2003)
18-Aug-2005
Disclosure provisions of IAS 32 are replaced by IFRS 7 Financial Instruments: Disclosures effective 1 January 2007. Title of IAS 32 changed to Financial Instruments: Presentation
22-Jun-2006
Exposure Draft of proposed amendments relating to Puttable Instruments and Obligations Arising on Liquidation
14-Feb-2008
IAS 32 amended for Puttable Instruments and Obligations Arising on Liquidation
01-Jan-2009
Effective date of amendments for puttable instruments and obligations arising on liquidation
06-Aug-2009
Exposure Draft Classification of Rights Issues proposing to amend IAS 32
08-Oct-2009
Amendment to IAS 32 about Classification of Rights Issues
01-Feb-2010
Effective date of the October 2009 amendment
16-Dec-2011
Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) issued
17-May-2012
Amendments resulting from Annual Improvements 2009-2011 Cycle (tax effect of equity distributions). Click for More Information
01-Jan-2013
Effective date of May 2012 amendments (Annual Improvements 2009-2011 Cycle)
01-Jan-2014
Effective date of December 2011 amendments