Liability or equity? A practical guide to the classification of financial instruments under IAS 32
Published by the IFRS team at Grant Thornton International Ltd.
When an entity issues a financial instrument, it must determine its classification either as a liability (debt) or as equity. This determination has an immediate and significant effect on the entity's reported results and financial position. Understanding the classification process and its effects is therefore a critical issue for management.
IAS 32 Financial Instruments: Presentation (IAS 32) addresses this classification process. Although its approach is founded upon principles, its outcomes sometimes seem surprising. Instead of looking at the legal form, it focuses on the instruments' contractual obligations, which can itself be challenging. Partially in recognition of these problems, the International Accounting Standards Board issued amendments to IAS 32 in 2008 which depart from the core principles of the Standard.
This publication offers extensive insights into the more problematic aspects of debt and equity classification under IAS 32, including those that are expected to arise from the amendments published in 2008.