Which two categories are used in IFRS 32 to subdivide all financial instruments?
SynopsisIAS 32 classifies financial instruments into: Show
...in accordance with the substance of the arrangement and the definitions of these elements. In certain cases, such as convertible debt, the instrument is split into a liability and equity element. Financial assets and liabilities may only be offset where there is a legally enforceable right to offset and the entity intends to settle on a net basis. Any treasury shares are deducted from equity. Interest, dividends, losses and gains related to a financial liability are recognised in profit or loss; dividends in relation to equity instruments are recognised directly in equity.
The International Accounting Standards Board (IASB) provides free access to the consolidated unaccompanied international accounting standards for the current year through its website. Free registration is required. This unaccompanied version does not include additional content that accompanies the full standard, such as illustrative examples, implementation guidance and bases for conclusions. Which version of the standard?Financial Reporting Faculty members who joined the faculty prior to 1 November 2022 have premium access to the consolidated edition of IFRS and amendments through the IASB's IFRS Standards Navigator service. Please log into IFRS Standards Navigator to access electronic versions of the standards through these links. Please be aware that as part of the changes to ICAEW faculty membership, this service will be withdrawn after 31 December 2022. Recent amendmentsFull access to details of all the amendments is only available to Financial Reporting Faculty members. Find out how to join the faculty. The following interpretations refer to IAS 32
Current proposals
This page was last updated 30 August 2022. The DP outlines clearer classification principles while keeping IAS 32’s existing requirements essentially unchanged. IAS 32 Financial Instruments: Presentation sets out how an issuer distinguishes between a financial liability
and equity and works well for many, simpler financial instruments. However, classifying more complex financial instruments under IAS 32 – e.g. those with characteristics of equity – can be more challenging, leading to diversity in practice. In response, the IASB has published a discussion paper (DP)
Financial Instruments with Characteristics of Equity (FICE) that seeks to improve IAS 32 by: “These proposals could mean more liabilities and less equity – plus enhanced presentation and disclosure – for hybrid capital instruments.” Chris Spall, Clearer classification principlesTo help issuers of financial instruments distinguish between a liability and equity, the Board proposes that issuers assess the presence or otherwise of two particular features of an instrument – i.e. the timing and the amount. A non-derivative financial instrument would be classified as a financial liability if it contains:
Since equity is ‘the residual interest in the assets of the entity after deducting all of its liabilities’, a contract that contains neither of the two features would be classified as equity. In a change to current IAS 32 requirements, the timing and the amount features would be applied consistently, regardless of whether a contract is settled by delivering an entity’s own equity. For example, irredeemable fixed-rate cumulative preference shares would be classified as a financial liability. This is because the amount is independent of an entity’s available economic resources – i.e. an issuer is not required to pay the principal and dividend before liquidation but the fixed-rate dividends accumulate over time. These preference shares might be classified as equity under current IAS 32. Derivatives on own equity are currently classified as equity using the fixed-for-fixed condition. However, since IAS 32 does not explain the rationale for this condition, it is difficult to apply in practice when a derivative is more complex. Consistent with the principles for classifying non-derivative financial instruments, the DP clarifies that the classification of a derivative on own equity would be determined using the timing and amount features. This means that a derivative on own equity would be classified as a financial asset or a financial liability if:
A derivative on own equity is classified as equity if neither of the conditions above are met. The DP also discusses the relationship between compound instruments and redemption obligation arrangements and proposes that transactions that have the same settlement outcome should be accounted for consistently, regardless of how the transaction is structured – e.g. a convertible bond and a written put option on own equity. Enhanced presentation and disclosure proposedTo help distinguish the broad spectrum of financial instruments, the Board proposes that more information is disclosed in the financial statements to help users assess an entity’s financial position and performance and ease comparison between entities. For example, financial liabilities that provide equity-like returns would be distinguished from other financial liabilities by separate presentation in the statement of financial position, and presentation of their income and expenses in other comprehensive income (OCI) without subsequent reclassification. This would also apply to non-equity derivatives. In response to investors’ requests for more information, the Board is proposing additional disclosures on equity instruments as well as considering how returns on equity are distributed or attributed among the different equity instruments an entity issues. Find out moreThe IASB’s comment deadline on the proposals closed on 7 January 2019. Read our comment letter(PDF 818 KB) to learn more about KPMG’s position. The Board will consider the comments received on this DP before deciding whether to develop an exposure draft with proposals to amend or replace parts of IAS 32 and/or to develop non-mandatory guidance. For more information on the proposals, speak to your KPMG contact. What are the two criteria used to classify financial assets?IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications - those measured at amortised cost and those measured at fair value.
What are the two categories required by IAS 39 for classification of financial liabilities?Classification of financial liabilities
Under IFRS 9, there will be the same two financial liability classification categories as existed under IAS 39, i.e.: Financial liabilities at fair value through profit or loss. Financial liabilities at amortised cost.
What are the categories and classifications of financial instruments?Financial instruments may be divided into two types: cash instruments and derivative instruments. Financial instruments may also be divided according to an asset class, which depends on whether they are debt-based or equity-based. Foreign exchange instruments comprise a third, unique type of financial instrument.
What is a financial instrument according to IAS 32?Key definitions [IAS 32.11]
Financial instrument: a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial asset: any asset that is: cash. an equity instrument of another entity.
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