Establishes principles for presenting financial instruments as liabilities or equity.
Prescribes rules for offsetting financial assets and financial liabilities.
Aims to enhance users' understanding of an entity's financial position, performance, and cash flows arising from financial instruments through consistent classification and clear presentation.
IAS 32 focuses solely on presentation; recognition and measurement are covered by IFRS 9.
Applies to all types of financial instruments, both recognized and unrecognized.
IAS 32 does NOT apply to:
Interests in subsidiaries, associates, and joint ventures accounted for under IFRS 10, IAS 27, or IAS 28 (but applies to derivatives on such interests unless the derivative meets the definition of an equity instrument).
Employersā€™ rights and obligations under employee benefit plans (IAS 19).
Insurance contracts (IFRS 17, previously IFRS 4).
Financial instruments within the scope of IFRS 2 *Share-based Payment* (except for certain contracts outside scope of IFRS 2).
Contracts for contingent consideration in a business combination (IFRS 3) and certain rights/obligations under leases (IFRS 16).
Classify as Financial Liability if the issuer has a contractual obligation:
To deliver cash or another financial asset to the holder; OR
To exchange financial assets or liabilities with the holder under conditions that are potentially unfavourable to the issuer.
Classify as Equity Instrument if both conditions below are met:
The instrument includes no contractual obligation to deliver cash/another financial asset or exchange under potentially unfavourable conditions; AND
If the instrument will or may be settled in the issuer's own equity instruments, it is either:
A non-derivative with no obligation to deliver a variable number of own equity instruments; OR
A derivative settled only by exchanging a fixed amount of cash/another financial asset for a fixed number of own equity instruments ('fixed-for-fixed' condition).
Examples:
Equity Examples: Ordinary shares (non-redeemable), some preference shares (if non-redeemable & dividends discretionary), warrants meeting fixed-for-fixed criteria.
Liability Examples: Loans payable, trade payables, mandatorily redeemable preference shares, instruments with obligatory interest payments, derivatives settled net in cash or with variable shares.
Some instruments (e.g., convertible bonds or bonds with detachable warrants) contain both a liability component and an equity component.
Accounting Treatment (Split Accounting):
Issuer must classify the component parts separately at initial recognition.
Determine the carrying amount of the liability component first by measuring the fair value of a similar liability that does not have an associated equity component.
The carrying amount assigned to the equity component is the residual amount after deducting the liability component's fair value from the fair value of the entire instrument.
The initial classification of the components is not revised as a result of a change in the likelihood that a conversion option will be exercised.
Transaction costs are allocated proportionately between liability and equity components.
If an entity reacquires its own equity instruments (treasury shares), these instruments are deducted from equity.
No gain or loss shall be recognized in profit or loss on the purchase, sale, issue, or cancellation of an entity's own equity instruments.
Consideration paid or received for treasury shares is recognized directly in equity.
A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity:
Currently has a legally enforceable right to set off the recognized amounts; AND
Intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
If either condition is not met, offsetting is not permitted. The existence of a master netting agreement alone is not sufficient without the intention to settle net or simultaneously.
Simultaneous settlement occurs when transactions happen effectively at the same moment (e.g., through a clearing house).
IAS 32 allows certain puttable instruments (obligating entity to repurchase for cash on holder's request) and instruments imposing obligation on liquidation to be classified as equity if they meet strict criteria:
Entitles holder to a pro-rata share of net assets on liquidation.
Is in the most subordinate class of instruments.
All instruments in the most subordinate class have identical features.
Instrument has no other features that would meet the definition of a financial liability.
Total expected cash flows attributable to the instrument over its life are based substantially on P&L, change in recognized net assets, or change in fair value of recognized/unrecognized net assets.
This is a narrow exception allowing instruments with liability features (put option) to be equity under specific circumstances reflecting residual interest.
IAS 32 requires disclosures to help users understand the significance of financial instruments to the entity's financial position and performance, and the nature and extent of risks arising from them (though risk disclosures are primarily in IFRS 7). Key IAS 32 presentation-related disclosures include:
Financial Liabilities and Equity Instruments:
Information about the terms and conditions of financial instruments that affect the amount, timing, and certainty of future cash flows.
Information about the nature of instruments issued (e.g., details of preference shares, convertible debt).
Compound Instruments:
Description of the liability and equity components.
Initial carrying amounts allocated to each component.
Offsetting:
Quantitative information showing the gross amounts subject to offsetting, amounts offset under IAS 32 criteria, net amounts presented, and amounts subject to enforceable master netting arrangements but not offset.
Treasury Shares:
Number of shares held, consideration paid/received for shares bought/sold during the period.
Assessing the substance of contractual terms to determine if an obligation exists (liability vs equity).
Evaluating whether settlement in own equity instruments meets the 'fixed-for-fixed' criterion for equity classification of derivatives.
Determining the fair value of the liability component of a compound instrument.
Assessing the legal enforceability of the right to offset and the entity's intention regarding net settlement.
Evaluating whether puttable instruments meet all the stringent criteria for equity classification.
