In April 2001 the International Accounting Standards Board (IASB) adopted IAS 32 Financial Instruments: Disclosure and Presentation, which had been issued by the International Accounting Standards Committee in 2000. IAS 32 Financial Instruments: Disclosure and Presentation had originally been issued in June 1995 and had been subsequently amended in 1998 and 2000.

The IASB issued a revised IAS 32 in December 2003 as part of its initial agenda of technical

projects. This revised IAS 32 also incorporated the guidance contained in related Interpretations (SIC-5 Classification of Financial Instruments-Contingent Settlement Provisions, SIC-16 Share Capital-Reacquired Own Equity Instruments (Treasury Shares) and SIC-17 Equity—Costs of an Equity Transaction). It also incorporated guidance previously proposed in draft SIC

Interpretation D34 Financial Instruments—Instruments or Rights Redeemable by the Holder.

In December 2005 the IASB amended IAS 32 by relocating all disclosures relating to

financial instruments to IFRS 7 Financial Instruments: Disclosures. Consequently, the title of IAS 32 changed to Financial Instruments: Presentation.

In February 2008 IAS 32 was changed to require some puttable financial instruments and

obligations arising on liquidation to be classified as equity. In October 2009 the IASB amended IAS 32 to require some rights that are denominated in a foreign currency to be classified as equity. The application guidance in IAS 32 was amended in December 2011 to address some inconsistencies relating to the offsetting financial assets and financial liabilities criteria.

CONTENTS

INTRODUCTION

INTERNATIONAL ACCOUNTING STANDARD 32

FINANCIAL INSTRUMENTS: PRESENTATION

OBJECTIVE

SCOPE

DEFINITIONS (SEE ALSO PARAGRAPHS AG3-AG23)

PRESENTATION

Liabilities and equity (see also paragraphs AG13-AG145 and AG25-AG29A)

Puttable instruments

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

Reclassification of puttable instruments and 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

No contractual obligation to deliver cash or another financial asset (paragraph

16(a))

Settlement in the entity's own equity instruments (paragraph 16(b))

Contingent settlement provisions

Settlement options

Compound financial instruments (see also paragraphs AG30-AG35 and

Illustrative Examples 9-12)

Treasury shares (see also paragraph AG36)

Interest, dividends, losses and gains (see also paragraph AG37)

Offsetting a financial asset and a financial liability (see also paragraphs

AG38A-AG38F and AG39)

EFFECTIVE DATE AND TRANSITION

WITHDRAWAL OF OTHER PRONOUNCEMENTS

APPENDIX

APPLICATION GUIDANCE

DEFINITIONS (PARAGRAPHS 11-14)

Financial assets and financial liabilities

Equity instruments

The class of instruments that is subordinate to all other classes (paragraphs

16A(b) and 16C(b))

Total expected cash flows attributed to the instrument over the life of the

instrument (paragraph 16A(e))

Transactions entered into by an instrument holder other than as owner of the

entity (paragraph 16A and 16C)

No other financial instrument or contract with total cash flows that substantially

fixes or restricts the residual return to the instrument holder (paragraphs 16B

and 16D)

Derivative financial instruments

Contracts to buy or sell non-financial items (paragraphs 8-10)

PRESENTATION

Liabilities and equity (paragraphs 15-27)

No contractual obligation to deliver cash or another financial asset (paragraphs

17-20)

Settlement in the entity's own equity instruments (paragraphs 21-24)

Contingent settlement provisions (paragraph 25)

Treatment in consolidated financial statements

Compound financial instruments (paragraphs 28-32)

Treasury shares (paragraphs 33 and 34)

Interest, dividends, losses and gains (paragraphs 35-41)

Offsetting a financial asset and a financial liability (paragraphs 42-50)

Criterion that an entity 'currently has a legally enforceable right to set off the

recognised amounts' (paragraph 42(a))

Criterion that an entity 'intends either' to settle on a net basis, or to realise the

asset and settle the liability simultaneously (paragraph 42(b))

FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS

EDITION

APPROVAL BY THE BOARD OF IAS 32 ISSUED IN DECEMBER 2003

APPROVAL BY THE BOARD OF AMENDMENTS TO IAS 32:

Puttable Financial Instruments and Obligations Arising on Liquidation

(Amendments to IAS 32 and IAS 1) issued in February 2008

Classification of Rights Issues (Amendments to IAS 32) issued in October

2009

Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)

issued in December 2011

BASIS FOR CONCLUSIONS

DISSENTING OPINIONS

ILLUSTRATIVE EXAMPLES

International Accounting Standard 32 Financial Instruments: Presentation (IAS 32) is set out in paragraphs 2-100 and the Appendix. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 32 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

Introduction

Reasons for revising IAS 32 in December 2003

 

International Accounting Standard 32 Financial Instruments: Disclosure and Presentation (IAS 32)1 replaces IAS 32 Financial Instruments: Disclosure and Presentation (revised in 2000), and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is permitted. The Standard also replaces the

following Interpretations and draft Interpretation:

          SIC-5 Classification of Financial Instruments—Contingent Settlement Provisions;

          SIC-16 Share Capital—Reacquired Own Equity Instruments (Treasury Shares);

          SIC-17 Equity—Costs of an Equity Transaction; and

          draft SIC-D34 Financial Instruments—Instruments or Rights Redeemable by the

Holder.

The main changes

              The main changes from the previous version of IAS 32 are described below.

Scope

              The scope of IAS 32 has, where appropriate, been conformed to the scope of

IAS 39.

     This Introduction refers to IAS 32 as revised in December 2003. In August 2005 the IASB amended

IAS 32 by relocating all disclosures relating to financial instruments to IFRS 7 Financial Instruments: Disclosures. In February 2008 the IASB amended IAS 32 by requiring some puttable financial instruments and some financial 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 to be classified as equity.

     In August 2005 the IASB relocated all disclosures relating to financial instruments to IFRS 7 Financial

Instruments: Disclosures.

 

In November 2013 the scope of IAS 32 was conformed to the scope of IAS 39 as amended in November 2013 regarding the accounting for some executory contracts (which was changed as a result of replacing the hedge accounting requirements in IAS 39).

Principle

In summary, when an issuer determines whether a financial instrument is a

financial liability or an equity instrument, the instrument is an equity instrument if, and only if, both conditions (a) and (b) are met.

         The instrument includes no 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 issuer.

         If the instrument will or may be settled in the issuer's own equity

instruments, it is:

 

a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments;

or

a derivative that will be settled by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. For this purpose, the issuer's own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the issuer's own equity instruments.

 

In addition, when an issuer has an obligation to purchase its own shares for cash or another financial asset, there is a liability for the amount that the issuer is obliged to pay.

The definitions of a financial asset and a financial liability, and the description of an equity instrument, are amended consistently with this principle.

Classification of contracts settled in an entity's own

equity instruments

The classification of derivative and non-derivative contracts indexed to, or

settled in, an entity's own equity instruments has been clarified consistently with the principle in paragraph IN6 above. In particular, when an entity uses its own equity instruments 'as currency' in a contract to receive or deliver a variable number of shares whose value equals a fixed amount or an amount based on changes in an underlying variable (eg a commodity price), the contract

is not an equity instrument, but is a financial asset or a financial liability.

Puttable instruments

IAS 32 incorporates the guidance previously proposed in draft SIC Interpretation 34 Financial Instruments—Instruments or Rights Redeemable by the Holder. Consequently, a financial instrument that gives the holder the right to

put the instrument back to the issuer for cash or another financial asset (a 'puttable instrument') is a financial liability of the issuer. In response to comments received on the Exposure Draft, the Standard provides additional guidance and illustrative examples for entities that, because of this requirement, have no equity or whose share capital is not equity as defined in IAS 32.

IAS 32 incorporates the conclusion previously in SIC-5 Classification of Financial

Instruments—Contingent Settlement Provisions that a financial instrument is a financial liability when the manner of settlement depends on the occurrence or non-occurrence of uncertain future events or on the outcome of uncertain circumstances that are beyond the control of both the issuer and the holder. Contingent settlement provisions are ignored when they apply only in the event of liquidation of the issuer or are not genuine.

Settlement options

Under IAS 32, a derivative financial instrument is a financial asset or a financial liability when it gives one of the parties to it a choice of how it is settled unless all of the settlement alternatives would result in it being an equity instrument.

Measurement of the components of a compound

financial instrument on initial recognition

The revisions eliminate the option previously in IAS 32 to measure the liability

component of a compound financial instrument on initial recognition either as a residual amount after separating the equity component, or by using a relative-fair-value method. Thus, any asset and liability components are separated first and the residual is the amount of any equity component. These requirements for separating the liability and equity components of a compound financial instrument are conformed to both the definition of an equity instrument as a residual and the measurement requirements in IFRS 9.

Interest, dividends, losses and gains

IAS 32 incorporates the guidance previously in SIC-17 Equity—Costs of an Equity

Transaction. Transaction costs incurred as a necessary part of completing an equity transaction are accounted for as part of that transaction and are deducted from equity.

Disclosure

              [Deleted]

              In August 2005 the Board revised disclosures about financial instruments and

relocated them to IFRS 7 Financial Instruments: Disclosures.

Withdrawal of other pronouncements

              As a consequence of the revisions to this Standard, the Board withdrew the three

Interpretations and one draft Interpretation of the former Standing Interpretations Committee noted in paragraph IN1.

Potential impact of proposals in exposure drafts

              [Deleted]

Reasons for amending IAS 32 in February 2008

 

In February 2008 the IASB amended IAS 32 by requiring some financial instruments that meet the definition of a financial liability to be classified as equity. Entities should apply the amendments for annual periods beginning on or after 1 January 2009. Earlier application is permitted.

The amendment addresses the classification of some:

         puttable financial 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.

              The objective was a short-term, limited scope amendment to improve the

financial reporting of particular types of financial instruments that meet the definition of a financial liability but represent the residual interest in the net assets of the entity.

International Accounting Standard 32

Financial Instruments: Presentation

Objective

Scope

 

The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments; the classification of related interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset.

The principles in this Standard complement the principles for recognising and measuring financial assets and financial liabilities in IFRS 9 Financial Instruments, and for disclosing information about them in IFRS 7 Financial Instruments: Disclosures.

This Standard shall be applied by all entities to all types of financial

instruments except:

 

those interests in subsidiaries, associates or joint ventures that are

accounted for in accordance with IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements or IAS 28 Investments in Associates and Joint Ventures. However, in some cases,

IFRS 10, IAS 27 or IAS 28 require or permit an entity to account for an

interest in a subsidiary, associate or joint venture using IFRS 9; in those cases, entities shall apply the requirements of this Standard. Entities shall also apply this Standard to all derivatives linked to interests in subsidiaries, associates or joint ventures.

employers' rights and obligations under employee benefit plans,

to which IAS 19 Employee Benefits applies.

[deleted]

insurance contracts as defined in IFRS 4 Insurance Contracts.

However, this Standard applies to derivatives that are embedded in insurance contracts if IFRS 9 requires the entity to account for them separately. Moreover, an issuer shall apply this Standard to financial guarantee contracts if the issuer applies IFRS 9 in recognising and measuring the contracts, but shall apply IFRS 4 if the issuer elects, in accordance with paragraph 4(d) of IFRS 4, to apply IFRS 4 in recognising and measuring them.

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