| Part of a series on |
| Accounting |
|---|
 |
IAS 32, titled Financial Instruments: Presentation, is an International Accounting Standard issued by the International Accounting Standards Board (IASB). It establishes principles for presenting financial instruments as either liabilities or equity and for offsetting financial assets and financial liabilities. [1] It is part of a triad of standards governing financial instruments, alongside IFRS 9 (recognition and measurement) and IFRS 7 (disclosures). [2]
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 contractual arrangement, rather than its legal form. [3]
A financial instrument is classified as a financial liability if there is a contractual obligation: [4]
A common example is a redeemable preference share. If the issuer is required to redeem the share for cash at a specific date, the instrument is classified as a liability, even though it is legally called a "share." [5]
An instrument is an equity instrument only if it includes no contractual obligation to deliver cash or another financial asset. This is often referred to as the "residual interest" in the assets of an entity after deducting all of its liabilities. [6]
IAS 32 requires the issuer of a non-derivative financial instrument to evaluate the terms of the instrument to determine whether it contains both a liability and an equity component. Such components must be classified separately. [7]
The most frequent example is convertible debt. The instrument is split into: [8]
If an entity reacquires its own equity instruments (treasury shares), those instruments are deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue, or cancellation of an entity's own equity instruments. [9]
A financial asset and a financial liability shall be offset, and the net amount reported in the statement of financial position, only when an entity: [10]
| Instrument Type | Primary Characteristic | Classification |
|---|---|---|
| Standard Bank Loan | Obligation to pay cash | Liability |
| Ordinary Shares | No obligation to pay cash | Equity |
| Mandatorily Redeemable Prefs | Obligation to pay cash at maturity | Liability |
| Convertible Bond | Debt with a conversion option | Compound (Liability + Equity) |
IAS 32 establishes principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. [11]
| Paragraph | Category | Disclosure Requirement | Description / Examples |
|---|---|---|---|
| IAS 32.15 | Classification | Liability vs. Equity | The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument. |
| IAS 32.28 | Compound Instruments | Disclosure of the separation of a non-derivative financial instrument into its liability and equity components (e.g., convertible bonds). | |
| IAS 32.33 | Treasury Shares | Deduction from Equity | If an entity reacquires its own equity instruments, those instruments ("treasury shares") must be deducted from equity. No gain or loss is recognized in P&L. |
| IAS 32.35 | Costs & Dividends | Transaction Costs | Disclosure of transaction costs of an equity transaction as a deduction from equity (net of any related income tax benefit). |
| IAS 32.42 | Offsetting | Net Presentation Criteria | Disclosure of the criteria met for offsetting (legal right to set off and intention to settle on a net basis). |
| IFRS 7.13A | Offsetting Disclosures | (Linked to IAS 32) Quantitative information about the gross and net amounts of financial instruments that are offset in the balance sheet. |