Financial Instruments: Presentation

In April 2001 the International Accounting Standards Board (Board) 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 Board 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 Board 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 Board
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.
In May 2017 when IFRS 17 Insurance Contracts was issued, it amended the treasury share
requirements to provide an exemption in specific circumstances.
Other Standards have made minor consequential amendments to IAS 32. They
include Improvements to IFRSs (issued May 2010), IFRS 10 Consolidated Financial
Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), IFRS 13 Fair
Value Measurement (issued May 2011), Presentation of Items of Other Comprehensive
Income (Amendments to IAS 1) (issued June 2011), Disclosures—Offsetting Financial Assets and
Financial Liabilities (Amendments to IFRS 7) (issued December 2011), Annual Improvements to
IFRSs 2009–2011 Cycle (issued May 2012), Investment Entities (Amendments to IFRS 10,
IFRS 12 and IAS 27) (issued October 2012), IFRS 9 Financial Instruments (Hedge Accounting
and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 15 Revenue
from Contracts with Customers (issued May 2014), IFRS 9 Financial Instruments (issued July
2014), IFRS 16 Leases (issued January 2016), Annual Improvements to IFRS Standards
2015–2017 Cycle (issued December 2017), Amendments to References to the Conceptual
Framework in IFRS Standards (issued March 2018) and Amendments to IFRS 17 (issued June
2020).

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 IFRS 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.

International Accounting Standard 32
Financial Instruments: Presentation
Objective

[Deleted]
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.

Scope

This Standard shall be applied by all entities to all types of financial
instruments except:
(a) 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.
(b) employers’ rights and obligations under employee benefit plans, to
which IAS 19 Employee Benefits applies.
(c) [deleted]
(d) insurance contracts as defined in IFRS 17 Insurance Contracts or
investment contracts with discretionary participation features
within the scope of IFRS 17. However, this Standard applies to:
(i) derivatives that are embedded in contracts within the scope
of IFRS 17, if IFRS 9 requires the entity to account for them
separately.

(ii) investment components that are separated from contracts
within the scope of IFRS 17, if IFRS 17 requires such
separation, unless the separated investment component is an
investment contract with discretionary participation
features within the scope of IFRS 17.
(iii) an issuer’s rights and obligations arising under insurance
contracts that meet the definition of financial guarantee
contracts, if the issuer applies IFRS 9 in recognizing and
measuring the contracts. However, the issuer shall apply
IFRS 17 if the issuer elects, in accordance with paragraph 7(e)
of IFRS 17, to apply IFRS 17 in recognizing and measuring the
contracts.
(iv) an entity’s rights and obligations that are financial
instruments arising under credit card contracts, or similar
contracts that provide credit or payment arrangements, that
an entity issues that meet the definition of an insurance
contract if the entity applies IFRS 9 to those rights and
obligations in accordance with paragraph 7(h) of IFRS 17 and
paragraph 2.1(e)(iv) of IFRS 9.
(v) an entity’s rights and obligations that are financial
instruments arising under insurance contracts that an entity
issues that limit the compensation for insured events to the
amount otherwise required to settle the policyholder’s
obligation created by the contract if the entity elects, in
accordance with paragraph 8A of IFRS 17, to apply IFRS 9
instead of IFRS 17 to such contracts.

(e) [deleted]
(f) financial instruments, contracts and obligations under share-based
payment transactions to which IFRS 2 Share-based Payment applies,
except for
(i) contracts within the scope of paragraphs 8–10 of this
Standard, to which this Standard applies,
(ii) paragraphs 33 and 34 of this Standard, which shall be
applied to treasury shares purchased, sold, issued or
cancelled in connection with employee share option plans,
employee share purchase plans, and all other share-based
payment arrangements.

[Deleted]

This Standard shall be applied to those contracts to buy or sell a non-
financial item that can be settled net in cash or another financial

instrument, or by exchanging financial instruments, as if the contracts
were financial instruments, with the exception of contracts that were
entered into and continue to be held for the purpose of the receipt or
delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements. However, this Standard shall be
applied to those contracts that an entity designates as measured at fair
value through profit or loss in accordance with paragraph 2.5 of IFRS 9
Financial Instruments.
There are various ways in which a contract to buy or sell a non-financial item
can be settled net in cash or another financial instrument or by exchanging
financial instruments. These include:
(a) when the terms of the contract permit either party to settle it net in
cash or another financial instrument or by exchanging financial
instruments;
(b) when the ability to settle net in cash or another financial instrument,
or by exchanging financial instruments, is not explicit in the terms of
the contract, but the entity has a practice of settling similar contracts
net in cash or another financial instrument, or by exchanging financial
instruments (whether with the counterparty, by entering into
offsetting contracts or by selling the contract before its exercise or
lapse);
(c) when, for similar contracts, the entity has a practice of taking delivery
of the underlying and selling it within a short period after delivery for
the purpose of generating a profit from short-term fluctuations in
price or dealer’s margin; and
(d) when the non-financial item that is the subject of the contract is
readily convertible to cash.
A contract to which (b) or (c) applies is not entered into for the purpose of the
receipt or delivery of the non-financial item in accordance with the entity’s
expected purchase, sale or usage requirements, and, accordingly, is within the
scope of this Standard. Other contracts to which paragraph 8 applies are
evaluated to determine whether they were entered into and continue to be
held for the purpose of the receipt or delivery of the non-financial item in
accordance with the entity’s expected purchase, sale or usage requirement,
and accordingly, whether they are within the scope of this Standard.
A written option to buy or sell a non-financial item that can be settled net in
cash or another financial instrument, or by exchanging financial instruments,
in accordance with paragraph 9(a) or (d) is within the scope of this Standard.
Such a contract cannot be entered into for the purpose of the receipt or
delivery of the non-financial item in accordance with the entity’s expected
purchase, sale or usage requirements.

Definitions

(see also paragraphs AG3–AG23)
The following terms are used in this Standard with the meanings specified:
A financial instrument is any contract that gives rise to a financial asset of
one entity and a financial liability or equity instrument of another entity.

A financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another
entity; or
(ii) to exchange financial assets or financial liabilities with
another entity under conditions that are potentially
favorable to the entity; or

(d) a contract that will or may be settled in the entity’s own equity
instruments and is:
(i) a non-derivative for which the entity is or may be obliged to
receive a variable number of the entity’s own equity
instruments; or
(ii) a derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial asset
for a fixed number of the entity’s own equity instruments.
For this purpose the entity’s own equity instruments do not
include puttable financial instruments classified as equity
instruments in accordance with paragraphs 16A and 16B,
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 and are classified as equity
instruments in accordance with paragraphs 16C and 16D, or
instruments that are contracts for the future receipt or
delivery of the entity’s own equity instruments.

A financial liability is any liability that is:
(a) a contractual obligation:
(i) to deliver cash or another financial asset to another
entity; or
(ii) to exchange financial assets or financial liabilities with
another entity under conditions that are potentially
unfavorable to the entity; or

(b) a contract that will or may be settled in the entity’s own equity
instruments and is:
(i) a non-derivative for which the entity is or may be obliged to
deliver a variable number of the entity’s own equity
instruments; or

(ii) a derivative that will or may be settled other than by the
exchange of a fixed amount of cash or another financial
asset for a fixed number of the entity’s own equity
instruments. For this purpose, rights, options or warrants to
acquire a fixed number of the entity’s own equity
instruments for a fixed amount of any currency are equity
instruments if the entity offers the rights, options or
warrants pro rata to all of its existing owners of the same
class of its own non-derivative equity instruments. Also, for
these purposes the entity’s own equity instruments do not
include puttable financial instruments that are classified as
equity instruments in accordance with paragraphs 16A and
16B, 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 and are classified as equity
instruments in accordance with paragraphs 16C and 16D, or
instruments that are contracts for the future receipt or
delivery of the entity’s own equity instruments.
As an exception, an instrument that meets the definition of
a financial liability is classified as an equity instrument if it has all
the features and meets the conditions in paragraphs 16A and
16B or paragraphs 16C and 16D.
An equity instrument is any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. (See IFRS 13 Fair Value Measurement.)
A puttable instrument is a financial instrument that gives the holder the
right to put the instrument back to the issuer for cash or another financial
asset or is automatically put back to the issuer on the occurrence of an
uncertain future event or the death or retirement of the instrument
holder.
The following terms are defined in Appendix A of IFRS 9 or paragraph 9 of
IAS 39 Financial Instruments: Recognition and Measurement and are used in this
Standard with the meaning specified in IAS 39 and IFRS 9.
• amortized cost of a financial asset or financial liability
• derecognition
• derivative
• effective interest method
• financial guarantee contract
• financial liability at fair value through profit or loss
• firm commitment

• forecast transaction
• hedge effectiveness
• hedged item
• hedging instrument
• held for trading
• regular way purchase or sale
• transaction costs.
In this Standard, ‘contract’ and ‘contractual’ refer to an agreement between
two or more parties that has clear economic consequences that the parties
have little, if any, discretion to avoid, usually because the agreement is
enforceable by law. Contracts, and thus financial instruments, may take a
variety of forms and need not be in writing.
In this Standard, ‘entity’ includes individuals, partnerships, incorporated
bodies, trusts and government agencies.

Presentation
Liabilities and equity

(see also paragraphs AG13–AG14J
and AG25–AG29A)
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 in accordance with the substance of the
contractual arrangement and the definitions of a financial liability,
a financial asset and an equity instrument.
When an issuer applies the definitions in paragraph 11 to determine whether
a financial instrument is an equity instrument rather than a financial liability,
the instrument is an equity instrument if, and only if, both conditions (a) and
(b) below are met.
(a) The instrument includes no contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the
issuer.

(b) If the instrument will or may be settled in the issuer’s own equity
instruments, it is:
(i) a non-derivative that includes no contractual obligation for the
issuer to deliver a variable number of its own equity
instruments; or

(ii) a derivative that will be settled only 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, rights,
options or warrants to acquire a fixed number of the entity’s
own equity instruments for a fixed amount of any currency are
equity instruments if the entity offers the rights, options or
warrants pro rata to all of its existing owners of the same class
of its own non-derivative equity instruments. Also, for these
purposes the issuer’s own equity instruments do not include
instruments that have all the features and meet the conditions
described in paragraphs 16A and 16B or paragraphs 16C and
16D, or instruments that are contracts for the future receipt or
delivery of the issuer’s own equity instruments.

A contractual obligation, including one arising from a derivative financial
instrument, that will or may result in the future receipt or delivery of the
issuer’s own equity instruments, but does not meet conditions (a) and (b)
above, is not an equity instrument. As an exception, an instrument that meets
the definition of a financial liability is classified as an equity instrument if it
has all the features and meets the conditions in paragraphs 16A and
16B or paragraphs 16C and 16D.

Puttable instruments

A puttable financial instrument includes a contractual obligation for the
issuer to repurchase or redeem that instrument for cash or another financial
asset on exercise of the put. As an exception to the definition of a financial
liability, an instrument that includes such an obligation is classified as
an equity instrument if it has all the following features:
(a) It entitles the holder to a pro rata share of the entity’s net assets in the
event of the entity’s liquidation. The entity’s net assets are those assets
that remain after deducting all other claims on its assets. A pro rata
share is determined by:
(i) dividing the entity’s net assets on liquidation into units of
equal amount; and
(ii) multiplying that amount by the number of the units held by
the financial instrument holder.

(b) The instrument is in the class of instruments that is subordinate to all
other classes of instruments. To be in such a class the instrument:
(i) has no priority over other claims to the assets of the entity on
liquidation, and
(ii) does not need to be converted into another instrument before it
is in the class of instruments that is subordinate to all other
classes of instruments.

(c) All financial instruments in the class of instruments that is
subordinate to all other classes of instruments have identical features.
For example, they must all be puttable, and the formula or other
method used to calculate the repurchase or redemption price is the
same for all instruments in that class.
(d) Apart from the contractual obligation for the issuer to repurchase or
redeem the instrument for cash or another financial asset, the
instrument does not include any 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 unfavorable to the entity, and it is not a contract that
will or may be settled in the entity’s own equity instruments as set out
in subparagraph (b) of the definition of a financial liability.
(e) The total expected cash flows attributable to the instrument over the
life of the instrument are based substantially on the profit or loss, the
change in the recognized net assets or the change in the fair value of
the recognized and unrecognized net assets of the entity over the life of
the instrument (excluding any effects of the instrument).
For an instrument to be classified as an equity instrument, in addition to the
instrument having all the above features, the issuer must have no other
financial instrument or contract that has:
(a) total cash flows based substantially on the profit or loss, the change in
the recognized net assets or the change in the fair value of the
recognized and unrecognized net assets of the entity (excluding any
effects of such instrument or contract) and
(b) the effect of substantially restricting or fixing the residual return to
the puttable instrument holders.
For the purposes of applying this condition, the entity shall not consider
non-financial contracts with a holder of an instrument described in
paragraph 16A that have contractual terms and conditions that are similar to
the contractual terms and conditions of an equivalent contract that might
occur between a non-instrument holder and the issuing entity. If the entity
cannot determine that this condition is met, it shall not classify the puttable
instrument as an equity instrument.

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

Some financial instruments include a contractual obligation for the issuing
entity to deliver to another entity a pro rata share of its net assets only on
liquidation. The obligation arises because liquidation either is certain to occur
and outside the control of the entity (for example, a limited life entity) or is
uncertain to occur but is at the option of the instrument holder. As an
exception to the definition of a financial liability, an instrument that includes
such an obligation is classified as an equity instrument if it has all the
following features:

(a) It entitles the holder to a pro rata share of the entity’s net assets in the
event of the entity’s liquidation. The entity’s net assets are those assets
that remain after deducting all other claims on its assets. A pro rata
share is determined by:
(i) dividing the net assets of the entity on liquidation into units of
equal amount; and
(ii) multiplying that amount by the number of the units held by
the financial instrument holder.

(b) The instrument is in the class of instruments that is subordinate to all
other classes of instruments. To be in such a class the instrument:
(i) has no priority over other claims to the assets of the entity on
liquidation, and
(ii) does not need to be converted into another instrument before it
is in the class of instruments that is subordinate to all other
classes of instruments.

(c) All financial instruments in the class of instruments that is
subordinate to all other classes of instruments must have an identical
contractual obligation for the issuing entity to deliver a pro rata share
of its net assets on liquidation.
For an instrument to be classified as an equity instrument, in addition to the
instrument having all the above features, the issuer must have no other
financial instrument or contract that has:
(a) total cash flows based substantially on the profit or loss, the change in
the recognized net assets or the change in the fair value of the
recognized and unrecognized net assets of the entity (excluding any
effects of such instrument or contract) and
(b) the effect of substantially restricting or fixing the residual return to
the instrument holders.
For the purposes of applying this condition, the entity shall not consider
non-financial contracts with a holder of an instrument described in
paragraph 16C that have contractual terms and conditions that are similar to
the contractual terms and conditions of an equivalent contract that might
occur between a non-instrument holder and the issuing entity. If the entity
cannot determine that this condition is met, it shall not classify the
instrument as an equity instrument.

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

An entity shall classify a financial instrument as an equity instrument in
accordance with paragraphs 16A and 16B or paragraphs 16C and 16D from the
date when the instrument has all the features and meets the conditions set
out in those paragraphs. An entity shall reclassify a financial instrument from
the date when the instrument ceases to have all the features or meet all the conditions set out in those paragraphs. For example, if an entity redeems all
its issued non-puttable instruments and any puttable instrument that remain
outstanding have all the features and meet all the conditions in paragraphs
16A and 16B, the entity shall reclassify the puttable instruments as equity
instruments from the date when it redeems the non-puttable instruments.
An entity shall account as follows for the reclassification of an instrument in
accordance with paragraph 16E:
(a) It shall reclassify an equity instrument as a financial liability from the
date when the instrument ceases to have all the features or meet the
conditions in paragraphs 16A and 16B or paragraphs 16C and 16D. The
financial liability shall be measured at the instrument’s fair value at
the date of reclassification. The entity shall recognise in equity any
difference between the carrying value of the equity instrument and the
fair value of the financial liability at the date of reclassification.
(b) It shall reclassify a financial liability as equity from the date when the
instrument has all the features and meets the conditions set out
in paragraphs 16A and 16B or paragraphs 16C and 16D. An equity
instrument shall be measured at the carrying value of the financial
liability at the date of reclassification.

No contractual obligation to deliver cash or another financial asset

(paragraph 16(a))
With the exception of the circumstances described in paragraphs 16A and 16B
or paragraphs 16C and 16D, a critical feature in differentiating a financial
liability from an equity instrument is the existence of a contractual obligation
of one party to the financial instrument (the issuer) either to deliver cash or
another financial asset to the other party (the holder) or to exchange financial
assets or financial liabilities with the holder under conditions that are
potentially unfavourable to the issuer. Although the holder of an equity
instrument may be entitled to receive a pro rata share of any dividends or
other distributions of equity, the issuer does not have a contractual obligation
to make such distributions because it cannot be required to deliver cash or
another financial asset to another party.
The substance of a financial instrument, rather than its legal form, governs its
classification in the entity’s statement of financial position. Substance and
legal form are commonly consistent, but not always. Some financial
instruments take the legal form of equity but are liabilities in substance and
others may combine features associated with equity instruments and features
associated with financial liabilities. For example:
(a) a preference share that provides for mandatory redemption by the
issuer for a fixed or determinable amount at a fixed or determinable
future date, or gives the holder the right to require the issuer to
redeem the instrument at or after a particular date for a fixed or
determinable amount, is a financial liability.

(b) a financial instrument that gives the holder the right to put it back to
the issuer for cash or another financial asset (a ‘puttable instrument’)
is a financial liability, except for those instruments classified as equity
instruments in accordance with paragraphs 16A and 16B or paragraphs
16C and 16D. The financial instrument is a financial liability even
when the amount of cash or other financial assets is determined on the
basis of an index or other item that has the potential to increase or
decrease. The existence of an option for the holder to put the
instrument back to the issuer for cash or another financial asset means
that the puttable instrument meets the definition of a financial
liability, except for those instruments classified as equity instruments
in accordance with paragraphs 16A and 16B or paragraphs 16C and
16D. For example, open-ended mutual funds, unit trusts, partnerships
and some co-operative entities may provide their unitholders or
members with a right to redeem their interests in the issuer at any
time for cash, which results in the unitholders’ or members’ interests
being classified as financial liabilities, except for those instruments
classified as equity instruments in accordance with paragraphs 16A
and 16B or paragraphs 16C and 16D. However, classification as a
financial liability does not preclude the use of descriptors such as ‘net
asset value attributable to unitholders’ and ‘change in net asset value
attributable to unitholders’ in the financial statements of an entity
that has no contributed equity (such as some mutual funds and unit
trusts, see Illustrative Example 7) or the use of additional disclosure to
show that total members’ interests comprise items such as reserves
that meet the definition of equity and puttable instruments that do
not (see Illustrative Example 8).
If an entity does not have an unconditional right to avoid delivering cash or
another financial asset to settle a contractual obligation, the obligation meets
the definition of a financial liability, except for those instruments classified as
equity instruments in accordance with paragraphs 16A and 16B or
paragraphs 16C and 16D. For example:
(a) a restriction on the ability of an entity to satisfy a contractual
obligation, such as lack of access to foreign currency or the need to
obtain approval for payment from a regulatory authority, does not
negate the entity’s contractual obligation or the holder’s contractual
right under the instrument.
(b) a contractual obligation that is conditional on a counterparty
exercising its right to redeem is a financial liability because the entity
does not have the unconditional right to avoid delivering cash or
another financial asset.
A financial instrument that does not explicitly establish a contractual
obligation to deliver cash or another financial asset may establish an
obligation indirectly through its terms and conditions. For example:

(a) a financial instrument may contain a non-financial obligation that
must be settled if, and only if, the entity fails to make distributions or
to redeem the instrument. If the entity can avoid a transfer of cash or
another financial asset only by settling the non-financial obligation,
the financial instrument is a financial liability.
(b) a financial instrument is a financial liability if it provides that on
settlement the entity will deliver either:
(i) cash or another financial asset; or
(ii) its own shares whose value is determined to exceed
substantially the value of the cash or other financial asset.
Although the entity does not have an explicit contractual obligation to
deliver cash or another financial asset, the value of the share
settlement alternative is such that the entity will settle in cash. In any
event, the holder has in substance been guaranteed receipt of an
amount that is at least equal to the cash settlement option (see
paragraph 21).

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

A contract is not an equity instrument solely because it may result in the
receipt or delivery of the entity’s own equity instruments. An entity may have
a contractual right or obligation to receive or deliver a number of its own
shares or other equity instruments that varies so that the fair value of the
entity’s own equity instruments to be received or delivered equals the amount
of the contractual right or obligation. Such a contractual right or obligation
may be for a fixed amount or an amount that fluctuates in part or in full in
response to changes in a variable other than the market price of the entity’s
own equity instruments (eg an interest rate, a commodity price or a financial
instrument price). Two examples are (a) a contract to deliver as many of the
entity’s own equity instruments as are equal in value to CU100,1
and
(b) a contract to deliver as many of the entity’s own equity instruments as are
equal in value to the value of 100 ounces of gold. Such a contract is a financial
liability of the entity even though the entity must or can settle it by delivering
its own equity instruments. It is not an equity instrument because the entity
uses a variable number of its own equity instruments as a means to settle the
contract. Accordingly, the contract does not evidence a residual interest in the
entity’s assets after deducting all of its liabilities.
Except as stated in paragraph 22A, a contract that will be settled by the entity
(receiving or) delivering a fixed number of its own equity instruments in
exchange for a fixed amount of cash or another financial asset is an equity
instrument. For example, an issued share option that gives the counterparty a
right to buy a fixed number of the entity’s shares for a fixed price or for a
fixed stated principal amount of a bond is an equity instrument. Changes in
the fair value of a contract arising from variations in market interest rates
that do not affect the amount of cash or other financial assets to be paid or received, or the number of equity instruments to be received or delivered,
on settlement of the contract do not preclude the contract from being an
equity instrument. Any consideration received (such as the premium received
for a written option or warrant on the entity’s own shares) is added directly to
equity. Any consideration paid (such as the premium paid for a purchased
option) is deducted directly from equity. Changes in the fair value of an equity
instrument are not recognised in the financial statements.
If the entity’s own equity instruments to be received, or delivered, by the
entity upon settlement of a contract are puttable financial instruments with
all the features and meeting the conditions described in paragraphs 16A and
16B, or 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 with all the features and meeting the conditions described in
paragraphs 16C and 16D, the contract is a financial asset or a financial
liability. This includes a contract that will be settled by the entity receiving or
delivering a fixed number of such instruments in exchange for a fixed amount
of cash or another financial asset.
With the exception of the circumstances described in paragraphs 16A and 16B
or paragraphs 16C and 16D, a contract that contains an obligation for an
entity to purchase its own equity instruments for cash or another financial
asset gives rise to a financial liability for the present value of the redemption
amount (for example, for the present value of the forward repurchase price,
option exercise price or other redemption amount). This is the case even if the
contract itself is an equity instrument. One example is an entity’s obligation
under a forward contract to purchase its own equity instruments for cash. The
financial liability is recognised initially at the present value of the redemption
amount, and is reclassified from equity. Subsequently, the financial liability is
measured in accordance with IFRS 9. If the contract expires without delivery,
the carrying amount of the financial liability is reclassified to equity. An
entity’s contractual obligation to purchase its own equity instruments gives
rise to a financial liability for the present value of the redemption amount
even if the obligation to purchase is conditional on the counterparty
exercising a right to redeem (eg a written put option that gives the
counterparty the right to sell an entity’s own equity instruments to the entity
for a fixed price).
A contract that will be settled by the entity delivering or receiving a fixed
number of its own equity instruments in exchange for a variable amount of
cash or another financial asset is a financial asset or financial liability. An
example is a contract for the entity to deliver 100 of its own equity
instruments in return for an amount of cash calculated to equal the value of
100 ounces of gold.

Contingent settlement provisions

A financial instrument may require the entity to deliver cash or another
financial asset, or otherwise to settle it in such a way that it would be a
financial liability, in the event of the occurrence or non-occurrence of
uncertain future events (or on the outcome of uncertain circumstances) that such as a change in a stock market index, consumer price index, interest rate
or taxation requirements, or the issuer’s future revenues, net income or
debt-to-equity ratio. The issuer of such an instrument does not have the
unconditional right to avoid delivering cash or another financial asset
(or otherwise to settle it in such a way that it would be a financial liability).
Therefore, it is a financial liability of the issuer unless:
(a) the part of the contingent settlement provision that could require
settlement in cash or another financial asset (or otherwise in such a
way that it would be a financial liability) is not genuine;
(b) the issuer can be required to settle the obligation in cash or another
financial asset (or otherwise to settle it in such a way that it would be a
financial liability) only in the event of liquidation of the issuer; or
(c) the instrument has all the features and meets the conditions in
paragraphs 16A and 16B.

Settlement options

When a derivative financial instrument gives one party a choice over how it
is settled (eg the issuer or the holder can choose settlement net in cash or
by exchanging shares for cash), it is a financial asset or a financial liability
unless all of the settlement alternatives would result in it being an equity
instrument.
An example of a derivative financial instrument with a settlement option that
is a financial liability is a share option that the issuer can decide to settle net
in cash or by exchanging its own shares for cash. Similarly, some contracts to
buy or sell a non-financial item in exchange for the entity’s own equity
instruments are within the scope of this Standard because they can be settled
either by delivery of the non-financial item or net in cash or another financial
instrument (see paragraphs 8–10). Such contracts are financial assets or
financial liabilities and not equity instruments.
Compound financial instruments (see also
paragraphs AG30–AG35 and Illustrative Examples 9–12)
The issuer of a non-derivative financial instrument shall evaluate the terms
of the financial instrument to determine whether it contains both a
liability and an equity component. Such components shall be classified
separately as financial liabilities, financial assets or equity instruments in
accordance with paragraph 15.
An entity recognises separately the components of a financial instrument that
(a) creates a financial liability of the entity and (b) grants an option to the
holder of the instrument to convert it into an equity instrument of the entity.
For example, a bond or similar instrument convertible by the holder into a
fixed number of ordinary shares of the entity is a compound financial
instrument. From the perspective of the entity, such an instrument comprises
two components: a financial liability (a contractual arrangement to deliver
cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into
a fixed number of ordinary shares of the entity). The economic effect of
issuing such an instrument is substantially the same as issuing
simultaneously a debt instrument with an early settlement provision and
warrants to purchase ordinary shares, or issuing a debt instrument with
detachable share purchase warrants. Accordingly, in all cases, the entity
presents the liability and equity components separately in its statement of
financial position.
Classification of the liability and equity components of a convertible
instrument is not revised as a result of a change in the likelihood that a
conversion option will be exercised, even when exercise of the option may
appear to have become economically advantageous to some holders. Holders
may not always act in the way that might be expected because, for example,
the tax consequences resulting from conversion may differ among holders.
Furthermore, the likelihood of conversion will change from time to time. The
entity’s contractual obligation to make future payments remains outstanding
until it is extinguished through conversion, maturity of the instrument or
some other transaction.
IFRS 9 deals with the measurement of financial assets and financial liabilities.
Equity instruments are instruments that evidence a residual interest in the
assets of an entity after deducting all of its liabilities. Therefore, when the
initial carrying amount of a compound financial instrument is allocated to its
equity and liability components, the equity component is assigned the
residual amount after deducting from the fair value of the instrument as a
whole the amount separately determined for the liability component. The
value of any derivative features (such as a call option) embedded in the
compound financial instrument other than the equity component (such as an
equity conversion option) is included in the liability component. The sum of
the carrying amounts assigned to the liability and equity components on
initial recognition is always equal to the fair value that would be ascribed to
the instrument as a whole. No gain or loss arises from initially recognising the
components of the instrument separately.
Under the approach described in paragraph 31, the issuer of a bond
convertible into ordinary shares first determines the carrying amount of the
liability component by measuring the fair value of a similar liability (including
any embedded non-equity derivative features) that does not have an associated
equity component. The carrying amount of the equity instrument represented
by the option to convert the instrument into ordinary shares is then
determined by deducting the fair value of the financial liability from the fair
value of the compound financial instrument as a whole.

Treasury shares

(see also paragraph AG36)
If an entity reacquires its own equity instruments, those instruments
(‘treasury shares’) shall be deducted from equity. No gain or loss shall be
recognised in profit or loss on the purchase, sale, issue or cancellation of
an entity’s own equity instruments. Such treasury shares may be acquired and held by the entity or by other members of the consolidated group.
Consideration paid or received shall be recognised directly in equity.
Some entities operate, either internally or externally, an investment fund that
provides investors with benefits determined by units in the fund and
recognise financial liabilities for the amounts to be paid to those investors.
Similarly, some entities issue groups of insurance contracts with direct
participation features and those entities hold the underlying items. Some such
funds or underlying items include the entity’s treasury shares. Despite
paragraph 33, an entity may elect not to deduct from equity a treasury share
that is included in such a fund or is an underlying item when, and only when,
an entity reacquires its own equity instrument for such purposes. Instead, the
entity may elect to continue to account for that treasury share as equity and
to account for the reacquired instrument as if the instrument were a financial
asset and measure it at fair value through profit or loss in accordance with
IFRS 9. That election is irrevocable and made on an instrument-by-instrument
basis. For the purposes of this election, insurance contracts include
investment contracts with discretionary participation features. (See IFRS 17
for terms used in this paragraph that are defined in that Standard.)
The amount of treasury shares held is disclosed separately either in the
statement of financial position or in the notes, in accordance with IAS 1
Presentation of Financial Statements. An entity provides disclosure in accordance
with IAS 24 Related Party Disclosures if the entity reacquires its own equity
instruments from related parties.

Interest, dividends, losses and gains

(see also
paragraph AG37)
Interest, dividends, losses and gains relating to a financial instrument or a
component that is a financial liability shall be recognised as income or
expense in profit or loss. Distributions to holders of an equity instrument
shall be recognised by the entity directly in equity. Transaction costs of an
equity transaction shall be accounted for as a deduction from equity.
Income tax relating to distributions to holders of an equity instrument and to
transaction costs of an equity transaction shall be accounted for in accordance
with IAS 12 Income Taxes.
The classification of a financial instrument as a financial liability or an equity
instrument determines whether interest, dividends, losses and gains relating
to that instrument are recognised as income or expense in profit or loss. Thus,
dividend payments on shares wholly recognised as liabilities are recognised as
expenses in the same way as interest on a bond. Similarly, gains and losses
associated with redemptions or refinancings of financial liabilities are
recognised in profit or loss, whereas redemptions or refinancings of equity
instruments are recognized as changes in equity. Changes in the fair value of
an equity instrument are not recognized in the financial statements.

An entity typically incurs various costs in issuing or acquiring its own equity
instruments. Those costs might include registration and other regulatory fees,
amounts paid to legal, accounting and other professional advisers, printing
costs and stamp duties. The transaction costs of an equity transaction are
accounted for as a deduction from equity to the extent they are incremental
costs directly attributable to the equity transaction that otherwise would have
been avoided. The costs of an equity transaction that is abandoned are
recognized as an expense.
Transaction costs that relate to the issue of a compound financial instrument
are allocated to the liability and equity components of the instrument in
proportion to the allocation of proceeds. Transaction costs that relate jointly
to more than one transaction (for example, costs of a concurrent offering of
some shares and a stock exchange listing of other shares) are allocated to
those transactions using a basis of allocation that is rational and consistent
with similar transactions.
The amount of transaction costs accounted for as a deduction from equity in
the period is disclosed separately in accordance with IAS 1.
Dividends classified as an expense may be presented in the statement(s) of
profit or loss and other comprehensive income either with interest on other
liabilities or as a separate item. In addition to the requirements of this
Standard, disclosure of interest and dividends is subject to the requirements of
IAS 1 and IFRS 7. In some circumstances, because of the differences between
interest and dividends with respect to matters such as tax deductibility, it is
desirable to disclose them separately in the statement(s) of profit or loss and
other comprehensive income. Disclosures of the tax effects are made in
accordance with IAS 12.
Gains and losses related to changes in the carrying amount of a financial
liability are recognized as income or expense in profit or loss even when they
relate to an instrument that includes a right to the residual interest in the
assets of the entity in exchange for cash or another financial asset (see
paragraph 18(b)). Under IAS 1 the entity presents any gain or loss arising from
remeasurement of such an instrument separately in the statement of
comprehensive income when it is relevant in explaining the entity’s
performance.

Offsetting a financial asset and a financial liability

(see also paragraphs AG38A–AG38F and AG39)
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:
(a) currently has a legally enforceable right to set off the recognized
amounts; and
(b) intends either to settle on a net basis, or to realize the asset and
settle the liability simultaneously.

In accounting for a transfer of a financial asset that does not qualify for
derecognition, the entity shall not offset the transferred asset and the
associated liability (see IFRS 9, paragraph 3.2.22).
This Standard requires the presentation of financial assets and financial
liabilities on a net basis when doing so reflects an entity’s expected future
cash flows from settling two or more separate financial instruments. When an
entity has the right to receive or pay a single net amount and intends to do so,
it has, in effect, only a single financial asset or financial liability. In other
circumstances, financial assets and financial liabilities are presented
separately from each other consistently with their characteristics as resources
or obligations of the entity. An entity shall disclose the information required
in paragraphs 13B–13E of IFRS 7 for recognized financial instruments that are
within the scope of paragraph 13A of IFRS 7.
Offsetting a recognized financial asset and a recognized financial liability and
presenting the net amount differs from the derecognition of a financial asset
or a financial liability. Although offsetting does not give rise to recognition of
a gain or loss, the derecognition of a financial instrument not only results in
the removal of the previously recognized item from the statement of financial
position but also may result in recognition of a gain or loss.
A right of set-off is a debtor’s legal right, by contract or otherwise, to settle or
otherwise eliminate all or a portion of an amount due to a creditor by
applying against that amount an amount due from the creditor. In unusual
circumstances, a debtor may have a legal right to apply an amount due from a
third party against the amount due to a creditor provided that there is an
agreement between the three parties that clearly establishes the debtor’s right
of set-off. Because the right of set-off is a legal right, the conditions supporting
the right may vary from one legal jurisdiction to another and the laws
applicable to the relationships between the parties need to be considered.
The existence of an enforceable right to set off a financial asset and a financial
liability affects the rights and obligations associated with a financial asset and
a financial liability and may affect an entity’s exposure to credit and liquidity
risk. However, the existence of the right, by itself, is not a sufficient basis for
offsetting. In the absence of an intention to exercise the right or to settle
simultaneously, the amount and timing of an entity’s future cash flows are
not affected. When an entity intends to exercise the right or to settle
simultaneously, presentation of the asset and liability on a net basis reflects
more appropriately the amounts and timing of the expected future cash flows,
as well as the risks to which those cash flows are exposed. An intention by one
or both parties to settle on a net basis without the legal right to do so is not
sufficient to justify offsetting because the rights and obligations associated
with the individual financial asset and financial liability remain unaltered.
An entity’s intentions with respect to settlement of particular assets and
liabilities may be influenced by its normal business practices, the
requirements of the financial markets and other circumstances that may limit
the ability to settle net or to settle simultaneously. When an entity has a right
of set-off, but does not intend to settle net or to realize the asset and settle the liability simultaneously, the effect of the right on the entity’s credit risk
exposure is disclosed in accordance with paragraph 36 of IFRS 7.
Simultaneous settlement of two financial instruments may occur through, for
example, the operation of a clearing house in an organized financial market or
a face-to-face exchange. In these circumstances the cash flows are, in effect,
equivalent to a single net amount and there is no exposure to credit or
liquidity risk. In other circumstances, an entity may settle two instruments by
receiving and paying separate amounts, becoming exposed to credit risk for
the full amount of the asset or liquidity risk for the full amount of the
liability. Such risk exposures may be significant even though relatively brief.
Accordingly, realization of a financial asset and settlement of a financial
liability are treated as simultaneous only when the transactions occur at the
same moment.
The conditions set out in paragraph 42 are generally not satisfied and
offsetting is usually inappropriate when:
(a) several different financial instruments are used to emulate the
features of a single financial instrument (a ‘synthetic instrument’);
(b) financial assets and financial liabilities arise from financial
instruments having the same primary risk exposure (for example,
assets and liabilities within a portfolio of forward contracts or other
derivative instruments) but involve different counterparties;
(c) financial or other assets are pledged as collateral for non-recourse
financial liabilities;
(d) financial assets are set aside in trust by a debtor for the purpose of
discharging an obligation without those assets having been accepted by
the creditor in settlement of the obligation (for example, a sinking
fund arrangement); or
(e) obligations incurred as a result of events giving rise to losses are
expected to be recovered from a third party by virtue of a claim made
under an insurance contract.
An entity that undertakes a number of financial instrument transactions with
a single counterparty may enter into a ‘master netting arrangement’ with that
counterparty. Such an agreement provides for a single net settlement of all
financial instruments covered by the agreement in the event of default on, or
termination of, any one contract. These arrangements are commonly used by
financial institutions to provide protection against loss in the event of
bankruptcy or other circumstances that result in a counterparty being unable
to meet its obligations. A master netting arrangement commonly creates a
right of set-off that becomes enforceable and affects the realization or
settlement of individual financial assets and financial liabilities only following
a specified event of default or in other circumstances not expected to arise in
the normal course of business. A master netting arrangement does not provide
a basis for offsetting unless both of the criteria in paragraph 42 are satisfied.
When financial assets and financial liabilities subject to a master netting arrangement are not offset, the effect of the arrangement on an entity’s
exposure to credit risk is disclosed in accordance with paragraph 36 of IFRS 7.
[Deleted]

Effective date and transition

An entity shall apply this Standard for annual periods beginning on or after
1 January 2005. Earlier application is permitted. An entity shall not apply this
Standard for annual periods beginning before 1 January 2005 unless it also
applies IAS 39 (issued December 2003), including the amendments issued in
March 2004. If an entity applies this Standard for a period beginning before
1 January 2005, it shall disclose that fact.
Puttable Financial Instruments and Obligations Arising on Liquidation (Amendments
to IAS 32 and IAS 1), issued in February 2008, required financial instruments
that contain all the features and meet the conditions in paragraphs 16A and
16B or paragraphs 16C and 16D to be classified as an equity instrument,
amended paragraphs 11, 16, 17–19, 22, 23, 25, AG13, AG14 and AG27, and
inserted paragraphs 16A–16F, 22A, 96B, 96C, 97C, AG14A–AG14J and AG29A.
An entity shall apply those amendments for annual periods beginning on or
after 1 January 2009. Earlier application is permitted. If an entity applies the
changes for an earlier period, it shall disclose that fact and apply the related
amendments to IAS 1, IAS 39, IFRS 7 and IFRIC 2 at the same time.
Puttable Financial Instruments and Obligations Arising on Liquidation introduced a
limited scope exception; therefore, an entity shall not apply the exception by
analogy.
The classification of instruments under this exception shall be restricted to
the accounting for such an instrument under IAS 1, IAS 32, IAS 39, IFRS 7 and
IFRS 9. The instrument shall not be considered an equity instrument under
other guidance, for example IFRS 2.
This Standard shall be applied retrospectively.
IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraph 40. An entity shall apply those amendments
for annual periods beginning on or after 1 January 2009. If an entity applies
IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for
that earlier period.
IFRS 3 Business Combinations (as revised in 2008) deleted paragraph 4(c). An
entity shall apply that amendment for annual periods beginning on or after
1 July 2009. If an entity applies IFRS 3 (revised 2008) for an earlier period, the
amendment shall also be applied for that earlier period. However, the
amendment does not apply to contingent consideration that arose from a
business combination for which the acquisition date preceded the application
of IFRS 3 (revised 2008). Instead, an entity shall account for such consideration
in accordance with paragraphs 65A–65E of IFRS 3 (as amended in 2010).

When applying the amendments described in paragraph 96A, an entity is
required to split a compound financial instrument with an obligation to
deliver to another party a pro rata share of the net assets of the entity only on
liquidation into separate liability and equity components. If the liability
component is no longer outstanding, a retrospective application of those
amendments to IAS 32 would involve separating two components of equity.
The first component would be in retained earnings and represent the
cumulative interest accreted on the liability component. The other component
would represent the original equity component. Therefore, an entity need not
separate these two components if the liability component is no longer
outstanding at the date of application of the amendments.
Paragraph 4 was amended by Improvements to IFRSs issued in May 2008. An
entity shall apply that amendment for annual periods beginning on or after
1 January 2009. Earlier application is permitted. If an entity applies the
amendment for an earlier period it shall disclose that fact and apply for that
earlier period the amendments to paragraph 3 of IFRS 7, paragraph 1 of IAS 28
and paragraph 1 of IAS 31 issued in May 2008. An entity is permitted to apply
the amendment prospectively.
Paragraphs 11 and 16 were amended by Classification of Rights Issues issued in
October 2009. An entity shall apply that amendment for annual periods
beginning on or after 1 February 2010. Earlier application is permitted. If an
entity applies the amendment for an earlier period, it shall disclose that fact.
[Deleted]
Paragraph 97B was amended by Improvements to IFRSs issued in May 2010. An
entity shall apply that amendment for annual periods beginning on or after
1 July 2010. Earlier application is permitted.
[Deleted]
IFRS 10 and IFRS 11 Joint Arrangements, issued in May 2011, amended
paragraphs 4(a) and AG29. An entity shall apply those amendments when it
applies IFRS 10 and IFRS 11.
IFRS 13, issued in May 2011, amended the definition of fair value in
paragraph 11 and amended paragraphs 23 and AG31. An entity shall apply
those amendments when it applies IFRS 13.
Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued
in June 2011, amended paragraph 40. An entity shall apply that amendment
when it applies IAS 1 as amended in June 2011.
Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32), issued
in December 2011, deleted paragraph AG38 and added paragraphs
AG38A–AG38F. An entity shall apply those amendments for annual periods
beginning on or after 1 January 2014. An entity shall apply those amendments
retrospectively. Earlier application is permitted. If an entity applies those
amendments from an earlier date, it shall disclose that fact and shall also
make the disclosures required by Disclosures—Offsetting Financial Assets and
Financial Liabilities (Amendments to IFRS 7) issued in December 2011.

Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to
IFRS 7), issued in December 2011, amended paragraph 43 by requiring an
entity to disclose the information required in paragraphs 13B–13E of IFRS 7
for recognized financial assets that are within the scope of paragraph 13A of
IFRS 7. An entity shall apply that amendment for annual periods beginning on
or after 1 January 2013 and interim periods within those annual periods. An
entity shall provide the disclosures required by this amendment
retrospectively.
Annual Improvements 2009–2011 Cycle, issued in May 2012, amended paragraphs
35, 37 and 39 and added paragraph 35A. An entity shall apply that
amendment retrospectively in accordance with IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors for annual periods beginning on or
after 1 January 2013. Earlier application is permitted. If an entity applies that
amendment for an earlier period it shall disclose that fact.
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in
October 2012, amended paragraph 4. An entity shall apply that amendment
for annual periods beginning on or after 1 January 2014. Earlier application of
Investment Entities is permitted. If an entity applies that amendment earlier it
shall also apply all amendments included in Investment Entities at the same
time.
[Deleted]
IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended
paragraph AG21. An entity shall apply that amendment when it applies
IFRS 15.
IFRS 9, as issued in July 2014, amended paragraphs 3, 4, 8, 12, 23, 31, 42, 96C,
AG2 and AG30 and deleted paragraphs 97F, 97H and 97P. An entity shall apply
those amendments when it applies IFRS 9.
IFRS 16 Leases, issued in January 2016, amended paragraphs AG9 and AG10. An
entity shall apply those amendments when it applies IFRS 16.
IFRS 17, issued in May 2017, amended paragraphs 4, AG8 and AG36, and added
paragraph 33A. Amendments to IFRS 17, issued in June 2020, further amended
paragraph 4. An entity shall apply those amendments when it applies IFRS 17.

Withdrawal of other pronouncements

This Standard supersedes IAS 32 Financial Instruments: Disclosure and Presentation
revised in 2000.2
This Standard supersedes the following Interpretations:
(a) SIC-5 Classification of Financial Instruments—Contingent Settlement Provisions;
(b) SIC-16 Share Capital—Reacquired Own Equity Instruments (Treasury Shares);
and

(c) SIC-17 Equity—Costs of an Equity Transaction.
This Standard withdraws draft SIC Interpretation D34 Financial Instruments—
Instruments or Rights Redeemable by the Holder.

Appendix
Application Guidance
IAS 32 Financial Instruments: Presentation

This appendix is an integral part of the Standard.
This Application Guidance explains the application of particular aspects of the
Standard.
The Standard does not deal with the recognition or measurement of financial
instruments. Requirements about the recognition and measurement of
financial assets and financial liabilities are set out in IFRS 9.

Definitions (paragraphs 11–14)
Financial assets and financial liabilities

Currency (cash) is a financial asset because it represents the medium of
exchange and is therefore the basis on which all transactions are measured
and recognized in financial statements. A deposit of cash with a bank or
similar financial institution is a financial asset because it represents the
contractual right of the depositor to obtain cash from the institution or to
draw a cheque or similar instrument against the balance in favor of a
creditor in payment of a financial liability.
Common examples of financial assets representing a contractual right to
receive cash in the future and corresponding financial liabilities representing
a contractual obligation to deliver cash in the future are:
(a) trade accounts receivable and payable;
(b) notes receivable and payable;
(c) loans receivable and payable; and
(d) bonds receivable and payable.
In each case, one party’s contractual right to receive (or obligation to pay) cash
is matched by the other party’s corresponding obligation to pay (or right to
receive).
Another type of financial instrument is one for which the economic benefit to
be received or given up is a financial asset other than cash. For example, a
note payable in government bonds gives the holder the contractual right to
receive and the issuer the contractual obligation to deliver government bonds,
not cash. The bonds are financial assets because they represent obligations of
the issuing government to pay cash. The note is, therefore, a financial asset of
the note holder and a financial liability of the note issuer.
‘Perpetual’ debt instruments (such as ‘perpetual’ bonds, debentures and
capital notes) normally provide the holder with the contractual right to
receive payments on account of interest at fixed dates extending into the
indefinite future, either with no right to receive a return of principal or a

right to a return of principal under terms that make it very unlikely or very
far in the future. For example, an entity may issue a financial
instrument requiring it to make annual payments in perpetuity equal to a
stated interest rate of 8 per cent applied to a stated par or principal amount of
CU1,000.3
Assuming 8 per cent to be the market rate of interest for the
instrument when issued, the issuer assumes a contractual obligation to make
a stream of future interest payments having a fair value (present value) of
CU1,000 on initial recognition. The holder and issuer of the instrument have
a financial asset and a financial liability, respectively.
A contractual right or contractual obligation to receive, deliver or
exchange financial instruments is itself a financial instrument. A chain of
contractual rights or contractual obligations meets the definition of a
financial instrument if it will ultimately lead to the receipt or payment of cash
or to the acquisition or issue of an equity instrument.
The ability to exercise a contractual right or the requirement to satisfy a
contractual obligation may be absolute, or it may be contingent on the
occurrence of a future event. For example, a financial guarantee is a
contractual right of the lender to receive cash from the guarantor, and a
corresponding contractual obligation of the guarantor to pay the lender, if the
borrower defaults. The contractual right and obligation exist because of a past
transaction or event (assumption of the guarantee), even though the lender’s
ability to exercise its right and the requirement for the guarantor to perform
under its obligation are both contingent on a future act of default by the
borrower. A contingent right and obligation meet the definition of a financial
asset and a financial liability, even though such assets and liabilities are not
always recognized in the financial statements. Some of these contingent rights
and obligations may be contracts within the scope of IFRS 17.
A lease typically creates an entitlement of the lessor to receive, and an
obligation of the lessee to pay, a stream of payments that are substantially the
same as blended payments of principal and interest under a loan agreement.
The lessor accounts for its investment in the amount receivable under a
finance lease rather than the underlying asset itself that is subject to the
finance lease. Accordingly, a lessor regards a finance lease as a financial
instrument. Under IFRS 16, a lessor does not recognize its entitlement to
receive lease payments under an operating lease. The lessor continues to
account for the underlying asset itself rather than any amount receivable in
the future under the contract. Accordingly, a lessor does not regard an
operating lease as a financial instrument, except as regards individual
payments currently due and payable by the lessee.

Physical assets (such as inventories, property, plant and equipment), right-of-
use assets and intangible assets (such as patents and trademarks) are

not financial assets. Control of such physical assets, right-of-use assets and
intangible assets creates an opportunity to generate an inflow of cash or
another financial asset, but it does not give rise to a present right to receive
cash or another financial asset.

Assets (such as prepaid expenses) for which the future economic benefit is the
receipt of goods or services, rather than the right to receive cash or
another financial asset, are not financial assets. Similarly, items such as
deferred revenue and most warranty obligations are not financial
liabilities because the outflow of economic benefits associated with them is
the delivery of goods and services rather than a contractual obligation to pay
cash or another financial asset.
Liabilities or assets that are not contractual (such as income taxes that are
created as a result of statutory requirements imposed by governments) are not
financial liabilities or financial assets. Accounting for income taxes is dealt
with in IAS 12. Similarly, constructive obligations, as defined in IAS 37
Provisions, Contingent Liabilities and Contingent Assets, do not arise from contracts
and are not financial liabilities.

Equity instruments

Examples of equity instruments include non-puttable ordinary shares, some
puttable instruments (see paragraphs 16A and 16B), some 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 (see paragraphs 16C and
16D), some types of preference shares (see paragraphs AG25 and AG26), and
warrants or written call options that allow the holder to subscribe for or
purchase a fixed number of non-puttable ordinary shares in the issuing entity
in exchange for a fixed amount of cash or another financial asset. An entity’s
obligation to issue or purchase a fixed number of its own equity instruments
in exchange for a fixed amount of cash or another financial asset is an equity
instrument of the entity (except as stated in paragraph 22A). However, if such
a contract contains an obligation for the entity to pay cash or another
financial asset (other than a contract classified as equity in accordance with
paragraphs 16A and 16B or paragraphs 16C and 16D), it also gives rise to a
liability for the present value of the redemption amount (see
paragraph AG27(a)). An issuer of non-puttable ordinary shares assumes a
liability when it formally acts to make a distribution and becomes legally
obliged to the shareholders to do so. This may be the case following the
declaration of a dividend or when the entity is being wound up and any assets
remaining after the satisfaction of liabilities become distributable to
shareholders.
A purchased call option or other similar contract acquired by an entity that
gives it the right to reacquire a fixed number of its own equity instruments in
exchange for delivering a fixed amount of cash or another financial asset is
not a financial asset of the entity (except as stated in paragraph 22A). Instead,
any consideration paid for such a contract is deducted from equity.

The class of instruments that is subordinate to all other classes

(paragraphs 16A(b) and 16C(b))
One of the features of paragraphs 16A and 16C is that the financial
instrument is in the class of instruments that is subordinate to all other
classes.

When determining whether an instrument is in the subordinate class, an
entity evaluates the instrument’s claim on liquidation as if it were to liquidate
on the date when it classifies the instrument. An entity shall reassess the
classification if there is a change in relevant circumstances. For example, if
the entity issues or redeems another financial instrument, this may affect
whether the instrument in question is in the class of instruments that is
subordinate to all other classes.
An instrument that has a preferential right on liquidation of the entity is not
an instrument with an entitlement to a pro rata share of the net assets of the
entity. For example, an instrument has a preferential right on liquidation if it
entitles the holder to a fixed dividend on liquidation, in addition to a share of
the entity’s net assets, when other instruments in the subordinate class with a
right to a pro rata share of the net assets of the entity do not have the same
right on liquidation.
If an entity has only one class of financial instruments, that class shall be
treated as if it were subordinate to all other classes.

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

(paragraph 16A(e))
The total expected cash flows of the instrument over the life of the
instrument must be substantially based on the profit or loss, change in the
recognized net assets or fair value of the recognized and unrecognized net
assets of the entity over the life of the instrument. Profit or loss and the
change in the recognized net assets shall be measured in accordance with
relevant IFRSs.

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

(paragraphs 16A and 16C)
The holder of a puttable financial instrument or an instrument that imposes
on the entity an obligation to deliver to another party a pro rata share of the
net assets of the entity only on liquidation may enter into transactions with
the entity in a role other than that of an owner. For example, an instrument
holder may also be an employee of the entity. Only the cash flows and the
contractual terms and conditions of the instrument that relate to the
instrument holder as an owner of the entity shall be considered when
assessing whether the instrument should be classified as equity under
paragraph 16A or paragraph 16C.
An example is a limited partnership that has limited and general partners.
Some general partners may provide a guarantee to the entity and may be
remunerated for providing that guarantee. In such situations, the guarantee
and the associated cash flows relate to the instrument holders in their role as
guarantors and not in their roles as owners of the entity. Therefore, such a
guarantee and the associated cash flows would not result in the general
partners being considered subordinate to the limited partners, and would be
disregarded when assessing whether the contractual terms of the limited
partnership instruments and the general partnership instruments are
identical.

Another example is a profit or loss sharing arrangement that allocates profit
or loss to the instrument holders on the basis of services rendered or business
generated during the current and previous years. Such arrangements are
transactions with instrument holders in their role as non-owners and should
not be considered when assessing the features listed in paragraph 16A or
paragraph 16C. However, profit or loss sharing arrangements that allocate
profit or loss to instrument holders based on the nominal amount of their
instruments relative to others in the class represent transactions with the
instrument holders in their roles as owners and should be considered when
assessing the features listed in paragraph 16A or paragraph 16C.
The cash flows and contractual terms and conditions of a transaction between
the instrument holder (in the role as a non-owner) and the issuing entity must
be similar to an equivalent transaction that might occur between a
non-instrument holder and the issuing entity.

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)
A condition for classifying as equity a financial instrument that otherwise
meets the criteria in paragraph 16A or paragraph 16C is that the entity has no
other financial instrument or contract that has (a) total cash flows based
substantially on the profit or loss, the change in the recognized net assets or
the change in the fair value of the recognized and unrecognized net assets of
the entity and (b) the effect of substantially restricting or fixing the residual
return. The following instruments, when entered into on normal commercial
terms with unrelated parties, are unlikely to prevent instruments that
otherwise meet the criteria in paragraph 16A or paragraph 16C from being
classified as equity:
(a) instruments with total cash flows substantially based on specific assets
of the entity.
(b) instruments with total cash flows based on a percentage of revenue.
(c) contracts designed to reward individual employees for services
rendered to the entity.
(d) contracts requiring the payment of an insignificant percentage of
profit for services rendered or goods provided.
Derivative financial instruments
Financial instruments include primary instruments (such as receivables,
payables and equity instruments) and derivative financial instruments (such
as financial options, futures and forwards, interest rate swaps and currency
swaps). Derivative financial instruments meet the definition of a financial
instrument and, accordingly, are within the scope of this Standard.

Derivative financial instruments create rights and obligations that have the
effect of transferring between the parties to the instrument one or more of
the financial risks inherent in an underlying primary financial instrument. On
inception, derivative financial instruments give one party a contractual right
to exchange financial assets or financial liabilities with another party under
conditions that are potentially favorable, or a contractual obligation to
exchange financial assets or financial liabilities with another party under
conditions that are potentially unfavorable. However, they generally4
do not
result in a transfer of the underlying primary financial instrument on
inception of the contract, nor does such a transfer necessarily take place on
maturity of the contract. Some instruments embody both a right and an
obligation to make an exchange. Because the terms of the exchange are
determined on inception of the derivative instrument, as prices in financial
markets change those terms may become either favorable or unfavorable.
A put or call option to exchange financial assets or financial
liabilities (ie financial instruments other than an entity’s own equity
instruments) gives the holder a right to obtain potential future economic
benefits associated with changes in the fair value of the financial instrument
underlying the contract. Conversely, the writer of an option assumes an
obligation to forgo potential future economic benefits or bear potential losses
of economic benefits associated with changes in the fair value of the
underlying financial instrument. The contractual right of the holder and
obligation of the writer meet the definition of a financial asset and a financial
liability, respectively. The financial instrument underlying an option contract
may be any financial asset, including shares in other entities and
interest-bearing instruments. An option may require the writer to issue a debt
instrument, rather than transfer a financial asset, but the instrument
underlying the option would constitute a financial asset of the holder if the
option were exercised. The option-holder’s right to exchange the financial
asset under potentially favorable conditions and the writer’s obligation to
exchange the financial asset under potentially unfavorable conditions are
distinct from the underlying financial asset to be exchanged upon exercise of
the option. The nature of the holder’s right and of the writer’s obligation are
not affected by the likelihood that the option will be exercised.
Another example of a derivative financial instrument is a forward contract to
be settled in six months’ time in which one party (the purchaser) promises to
deliver CU1,000,000 cash in exchange for CU1,000,000 face amount of fixed
rate government bonds, and the other party (the seller) promises to deliver
CU1,000,000 face amount of fixed rate government bonds in exchange for
CU1,000,000 cash. During the six months, both parties have a contractual
right and a contractual obligation to exchange financial instruments. If the
market price of the government bonds rises above CU1,000,000, the conditions
will be favorable to the purchaser and unfavorable to the seller; if the
market price falls below CU1,000,000, the effect will be the opposite. The
purchaser has a contractual right (a financial asset) similar to the right under a call option held and a contractual obligation (a financial liability) similar to
the obligation under a put option written; the seller has a contractual right (a
financial asset) similar to the right under a put option held and a contractual
obligation (a financial liability) similar to the obligation under a call option
written. As with options, these contractual rights and obligations constitute
financial assets and financial liabilities separate and distinct from the
underlying financial instruments (the bonds and cash to be exchanged). Both
parties to a forward contract have an obligation to perform at the agreed time,
whereas performance under an option contract occurs only if and when the
holder of the option chooses to exercise it.
Many other types of derivative instruments embody a right or obligation to
make a future exchange, including interest rate and currency swaps, interest
rate caps, collars and floors, loan commitments, note issuance facilities and
letters of credit. An interest rate swap contract may be viewed as a variation of
a forward contract in which the parties agree to make a series of future
exchanges of cash amounts, one amount calculated with reference to a
floating interest rate and the other with reference to a fixed interest rate.
Futures contracts are another variation of forward contracts, differing
primarily in that the contracts are standardized and traded on an exchange.

Contracts to buy or sell non-financial items

(paragraphs 8–10)
Contracts to buy or sell non-financial items do not meet the definition of a
financial instrument because the contractual right of one party to receive a
non-financial asset or service and the corresponding obligation of the other
party do not establish a present right or obligation of either party to receive,
deliver or exchange a financial asset. For example, contracts that provide for
settlement only by the receipt or delivery of a non-financial item (eg an
option, futures or forward contract on silver) are not financial instruments.
Many commodity contracts are of this type. Some are standardized in form
and traded on organized markets in much the same fashion as some derivative
financial instruments. For example, a commodity futures contract may be
bought and sold readily for cash because it is listed for trading on an exchange
and may change hands many times. However, the parties buying and selling
the contract are, in effect, trading the underlying commodity. The ability to
buy or sell a commodity contract for cash, the ease with which it may be
bought or sold and the possibility of negotiating a cash settlement of the
obligation to receive or deliver the commodity do not alter the fundamental
character of the contract in a way that creates a financial instrument.
Nevertheless, some contracts to buy or sell non-financial items that can be
settled net or by exchanging financial instruments, or in which the
non-financial item is readily convertible to cash, are within the scope of the
Standard as if they were financial instruments (see paragraph 8).
Except as required by IFRS 15 Revenue from Contracts with Customers, a contract
that involves the receipt or delivery of physical assets does not give rise to a
financial asset of one party and a financial liability of the other party unless
any corresponding payment is deferred past the date on which the physical assets are transferred. Such is the case with the purchase or sale of goods on
trade credit.
Some contracts are commodity-linked, but do not involve settlement through
the physical receipt or delivery of a commodity. They specify settlement
through cash payments that are determined according to a formula in the
contract, rather than through payment of fixed amounts. For example, the
principal amount of a bond may be calculated by applying the market price of
oil prevailing at the maturity of the bond to a fixed quantity of oil. The
principal is indexed by reference to a commodity price, but is settled only in
cash. Such a contract constitutes a financial instrument.
The definition of a financial instrument also encompasses a contract that gives
rise to a non-financial asset or non-financial liability in addition to a financial
asset or financial liability. Such financial instruments often give one party an
option to exchange a financial asset for a non-financial asset. For example, an
oil-linked bond may give the holder the right to receive a stream of fixed
periodic interest payments and a fixed amount of cash on maturity, with the
option to exchange the principal amount for a fixed quantity of oil. The
desirability of exercising this option will vary from time to time depending on
the fair value of oil relative to the exchange ratio of cash for oil (the exchange
price) inherent in the bond. The intentions of the bondholder concerning the
exercise of the option do not affect the substance of the component assets.
The financial asset of the holder and the financial liability of the issuer make
the bond a financial instrument, regardless of the other types of assets and
liabilities also created.
[Deleted]

Presentation
Liabilities and equity (paragraphs 15–27)
No contractual obligation to deliver cash or another financial asset
(paragraphs 17–20)

Preference shares may be issued with various rights. In determining whether
a preference share is a financial liability or an equity instrument, an issuer
assesses the particular rights attaching to the share to determine whether it
exhibits the fundamental characteristic of a financial liability. For example, a
preference share that provides for redemption on a specific date or at the
option of the holder contains a financial liability because the issuer has an
obligation to transfer financial assets to the holder of the share. The potential
inability of an issuer to satisfy an obligation to redeem a preference share
when contractually required to do so, whether because of a lack of funds, a
statutory restriction or insufficient profits or reserves, does not negate the
obligation. An option of the issuer to redeem the shares for cash does not
satisfy the definition of a financial liability because the issuer does not have a
present obligation to transfer financial assets to the shareholders. In this case,
redemption of the shares is solely at the discretion of the issuer. An obligation may arise, however, when the issuer of the shares exercises its option, usually
by formally notifying the shareholders of an intention to redeem the shares.
When preference shares are non-redeemable, the appropriate classification is
determined by the other rights that attach to them. Classification is based on
an assessment of the substance of the contractual arrangements and the
definitions of a financial liability and an equity instrument. When
distributions to holders of the preference shares, whether cumulative or
non-cumulative, are at the discretion of the issuer, the shares are equity
instruments. The classification of a preference share as an equity instrument
or a financial liability is not affected by, for example:
(a) a history of making distributions;
(b) an intention to make distributions in the future;
(c) a possible negative impact on the price of ordinary shares of the issuer
if distributions are not made (because of restrictions on paying
dividends on the ordinary shares if dividends are not paid on the
preference shares);
(d) the amount of the issuer’s reserves;
(e) an issuer’s expectation of a profit or loss for a period; or
(f) an ability or inability of the issuer to influence the amount of its profit
or loss for the period.

Settlement in the entity’s own equity instruments

(paragraphs 21–24)
The following examples illustrate how to classify different types of contracts
on an entity’s own equity instruments:
(a) A contract that will be settled by the entity receiving or delivering a
fixed number of its own shares for no future consideration, or
exchanging a fixed number of its own shares for a fixed amount of
cash or another financial asset, is an equity instrument (except as
stated in paragraph 22A). Accordingly, any consideration received or
paid for such a contract is added directly to or deducted directly from
equity. One example is an issued share option that gives the
counterparty a right to buy a fixed number of the entity’s shares for a
fixed amount of cash. However, if the contract requires the entity to
purchase (redeem) its own shares for cash or another financial asset at
a fixed or determinable date or on demand, the entity also recognizes
a financial liability for the present value of the redemption amount
(with the exception of instruments that have all the features and meet
the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D).
One example is an entity’s obligation under a forward contract to
repurchase a fixed number of its own shares for a fixed amount of
cash.

(b) An entity’s obligation to purchase its own shares for cash gives rise to
a financial liability for the present value of the redemption amount
even if the number of shares that the entity is obliged to repurchase is
not fixed or if the obligation is conditional on the counterparty
exercising a right to redeem (except as stated in paragraphs 16A and
16B or paragraphs 16C and 16D). One example of a conditional
obligation is an issued option that requires the entity to repurchase its
own shares for cash if the counterparty exercises the option.
(c) A contract that will be settled in cash or another financial asset is a
financial asset or financial liability even if the amount of cash or
another financial asset that will be received or delivered is based on
changes in the market price of the entity’s own equity (except as stated
in paragraphs 16A and 16B or paragraphs 16C and 16D). One example
is a net cash-settled share option.
(d) A contract that will be settled in a variable number of the entity’s own
shares whose value equals a fixed amount or an amount based on
changes in an underlying variable (eg a commodity price) is a financial
asset or a financial liability. An example is a written option to buy gold
that, if exercised, is settled net in the entity’s own instruments by the
entity delivering as many of those instruments as are equal to the
value of the option contract. Such a contract is a financial asset or
financial liability even if the underlying variable is the entity’s own
share price rather than gold. Similarly, a contract that will be settled
in a fixed number of the entity’s own shares, but the rights attaching
to those shares will be varied so that the settlement value equals a
fixed amount or an amount based on changes in an underlying
variable, is a financial asset or a financial liability.

Contingent settlement provisions

(paragraph 25)
Paragraph 25 requires that if a part of a contingent settlement provision that
could require settlement in cash or another financial asset (or in another way
that would result in the instrument being a financial liability) is not genuine,
the settlement provision does not affect the classification of a financial
instrument. Thus, a contract that requires settlement in cash or a variable
number of the entity’s own shares only on the occurrence of an event that is
extremely rare, highly abnormal and very unlikely to occur is an equity
instrument. Similarly, settlement in a fixed number of an entity’s own shares
may be contractually precluded in circumstances that are outside the control
of the entity, but if these circumstances have no genuine possibility of
occurring, classification as an equity instrument is appropriate.

Treatment in consolidated financial statements

In consolidated financial statements, an entity presents non-controlling
interests—ie the interests of other parties in the equity and income of its
subsidiaries—in accordance with IAS 1 and IFRS 10. When classifying a
financial instrument (or a component of it) in consolidated financial
statements, an entity considers all terms and conditions agreed between members of the group and the holders of the instrument in determining
whether the group as a whole has an obligation to deliver cash or another
financial asset in respect of the instrument or to settle it in a manner that
results in liability classification. When a subsidiary in a group issues a
financial instrument and a parent or other group entity agrees additional
terms directly with the holders of the instrument (eg a guarantee), the group
may not have discretion over distributions or redemption. Although the
subsidiary may appropriately classify the instrument without regard to these
additional terms in its individual financial statements, the effect of other
agreements between members of the group and the holders of the instrument
is considered in order to ensure that consolidated financial statements reflect
the contracts and transactions entered into by the group as a whole. To the
extent that there is such an obligation or settlement provision, the instrument
(or the component of it that is subject to the obligation) is classified as a
financial liability in consolidated financial statements.
Some types of instruments that impose a contractual obligation on the entity
are classified as equity instruments in accordance with paragraphs 16A and
16B or paragraphs 16C and 16D. Classification in accordance with those
paragraphs is an exception to the principles otherwise applied in this Standard
to the classification of an instrument. This exception is not extended to the
classification of non-controlling interests in the consolidated financial
statements. Therefore, instruments classified as equity instruments in
accordance with either paragraphs 16A and 16B or paragraphs 16C and 16D in
the separate or individual financial statements that are non-controlling
interests are classified as liabilities in the consolidated financial statements of
the group.

Compound financial instruments

(paragraphs 28–32)
Paragraph 28 applies only to issuers of non-derivative compound financial
instruments. Paragraph 28 does not deal with compound financial
instruments from the perspective of holders. IFRS 9 deals with the
classification and measurement of financial assets that are compound
financial instruments from the holder’s perspective.
A common form of compound financial instrument is a debt instrument with
an embedded conversion option, such as a bond convertible into ordinary
shares of the issuer, and without any other embedded derivative
features. Paragraph 28 requires the issuer of such a financial instrument to
present the liability component and the equity component separately in the
statement of financial position, as follows:
(a) The issuer’s obligation to make scheduled payments of interest and
principal is a financial liability that exists as long as the instrument is
not converted. On initial recognition, the fair value of the liability
component is the present value of the contractually determined
stream of future cash flows discounted at the rate of interest applied at
that time by the market to instruments of comparable credit status
and providing substantially the same cash flows, on the same terms,
but without the conversion option.

(b) The equity instrument is an embedded option to convert the liability
into equity of the issuer. This option has value on initial recognition
even when it is out of the money.
On conversion of a convertible instrument at maturity, the entity derecognizes
the liability component and recognizes it as equity. The original equity
component remains as equity (although it may be transferred from one line
item within equity to another). There is no gain or loss on conversion at
maturity.
When an entity extinguishes a convertible instrument before maturity
through an early redemption or repurchase in which the original conversion
privileges are unchanged, the entity allocates the consideration paid and any
transaction costs for the repurchase or redemption to the liability and equity
components of the instrument at the date of the transaction. The method
used in allocating the consideration paid and transaction costs to the separate
components is consistent with that used in the original allocation to the
separate components of the proceeds received by the entity when the
convertible instrument was issued, in accordance with paragraphs 28–32.
Once the allocation of the consideration is made, any resulting gain or loss is
treated in accordance with accounting principles applicable to the related
component, as follows:
(a) the amount of gain or loss relating to the liability component is
recognized in profit or loss; and
(b) the amount of consideration relating to the equity component is
recognized in equity.
An entity may amend the terms of a convertible instrument to induce early
conversion, for example by offering a more favorable conversion ratio or
paying other additional consideration in the event of conversion before a
specified date. The difference, at the date the terms are amended, between the
fair value of the consideration the holder receives on conversion of the
instrument under the revised terms and the fair value of the consideration the
holder would have received under the original terms is recognized as a loss in
profit or loss.

Treasury shares

(paragraphs 33–34)
An entity’s own equity instruments are not recognized as a financial asset
regardless of the reason for which they are reacquired. Paragraph 33 requires
an entity that reacquires its own equity instruments to deduct those equity
instruments from equity (but see also paragraph 33A). However, when an
entity holds its own equity on behalf of others, eg a financial institution
holding its own equity on behalf of a client, there is an agency relationship
and as a result those holdings are not included in the entity’s statement of
financial position.

Interest, dividends, losses and gains

(paragraphs 35–41)
The following example illustrates the application of paragraph 35 to a
compound financial instrument. Assume that a non-cumulative preference
share is mandatorily redeemable for cash in five years, but that dividends are
payable at the discretion of the entity before the redemption date. Such an
instrument is a compound financial instrument, with the liability component
being the present value of the redemption amount. The unwinding of the
discount on this component is recognized in profit or loss and classified as
interest expense. Any dividends paid relate to the equity component and,
accordingly, are recognized as a distribution of profit or loss. A similar
treatment would apply if the redemption was not mandatory but at the option
of the holder, or if the share was mandatorily convertible into a variable
number of ordinary shares calculated to equal a fixed amount or an amount
based on changes in an underlying variable (eg commodity). However, if any
unpaid dividends are added to the redemption amount, the entire instrument
is a liability. In such a case, any dividends are classified as interest expense.

Offsetting a financial asset and a financial liability

(paragraphs 42–50)
[Deleted]

Criterion that an entity ‘currently has a legally enforceable right to
set off the recognized amounts’

(paragraph 42(a))
A right of set-off may be currently available or it may be contingent on a
future event (for example, the right may be triggered or exercisable only on
the occurrence of some future event, such as the default, insolvency or
bankruptcy of one of the counterparties). Even if the right of set-off is not
contingent on a future event, it may only be legally enforceable in the normal
course of business, or in the event of default, or in the event of insolvency or
bankruptcy, of one or all of the counterparties.
To meet the criterion in paragraph 42(a), an entity must currently have a
legally enforceable right of set-off. This means that the right of set-off:
(a) must not be contingent on a future event; and
(b) must be legally enforceable in all of the following circumstances:
(i) the normal course of business;
(ii) the event of default; and
(iii) the event of insolvency or bankruptcy
of the entity and all of the counterparties.
The nature and extent of the right of set-off, including any conditions
attached to its exercise and whether it would remain in the event of default or
insolvency or bankruptcy, may vary from one legal jurisdiction to another.
Consequently, it cannot be assumed that the right of set-off is automatically
available outside of the normal course of business. For example, the
bankruptcy or insolvency laws of a jurisdiction may prohibit, or restrict, the right of set-off in the event of bankruptcy or insolvency in some
circumstances.
The laws applicable to the relationships between the parties (for example,
contractual provisions, the laws governing the contract, or the default,
insolvency or bankruptcy laws applicable to the parties) need to be considered
to ascertain whether the right of set-off is enforceable in the normal course of
business, in an event of default, and in the event of insolvency or bankruptcy,
of the entity and all of the counterparties (as specified in paragraph AG38B(b)).

Criterion that an entity ‘intends either to settle on a net basis, or to
realize the asset and settle the liability simultaneously’

(paragraph 42(b))
To meet the criterion in paragraph 42(b) an entity must intend either to settle
on a net basis or to realize the asset and settle the liability simultaneously.
Although the entity may have a right to settle net, it may still realize the asset
and settle the liability separately.
If an entity can settle amounts in a manner such that the outcome is, in
effect, equivalent to net settlement, the entity will meet the net settlement
criterion in paragraph 42(b). This will occur if, and only if, the gross
settlement mechanism has features that eliminate or result in insignificant
credit and liquidity risk, and that will process receivables and payables in a
single settlement process or cycle. For example, a gross settlement system that
has all of the following characteristics would meet the net settlement
criterion in paragraph 42(b):
(a) financial assets and financial liabilities eligible for set-off are
submitted at the same point in time for processing;
(b) once the financial assets and financial liabilities are submitted for
processing, the parties are committed to fulfil the settlement
obligation;
(c) there is no potential for the cash flows arising from the assets and
liabilities to change once they have been submitted for processing
(unless the processing fails—see (d) below);
(d) assets and liabilities that are collateralized with securities will be
settled on a securities transfer or similar system (for example, delivery
versus payment), so that if the transfer of securities fails, the
processing of the related receivable or payable for which the securities
are collateral will also fail (and vice versa);
(e) any transactions that fail, as outlined in (d), will be re-entered for
processing until they are settled;
(f) settlement is carried out through the same settlement institution
(for example, a settlement bank, a central bank or a central securities
depository); and

(g) an intraday credit facility is in place that will provide sufficient
overdraft amounts to enable the processing of payments at the
settlement date for each of the parties, and it is virtually certain that
the intraday credit facility will be honored if called upon.
The Standard does not provide special treatment for so-called ‘synthetic
instruments’, which are groups of separate financial instruments acquired
and held to emulate the characteristics of another instrument. For example, a
floating rate long-term debt combined with an interest rate swap that involves
receiving floating payments and making fixed payments synthesizes a fixed
rate long-term debt. Each of the individual financial instruments that together
constitute a ‘synthetic instrument’ represents a contractual right or obligation
with its own terms and conditions and each may be transferred or settled
separately. Each financial instrument is exposed to risks that may differ from
the risks to which other financial instruments are exposed. Accordingly, when
one financial instrument in a ‘synthetic instrument’ is an asset and another is
a liability, they are not offset and presented in an entity’s statement of
financial position on a net basis unless they meet the criteria for offsetting in
paragraph 42.
[Deleted]

Approval by the Board of IAS 32 issued in December 2003

International Accounting Standard 32 Financial Instruments: Disclosure and Presentation (as
revised in 2003) was approved for issue by thirteen of the fourteen members of the
International Accounting Standards Board. Mr Leisenring dissented. His dissenting
opinion is set out after the Basis for Conclusions.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman
Mary E Barth
Hans-Georg Bruns
Anthony T Cope
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
Patricia L O’Malley
Harry K Schmid
John T Smith
Geoffrey Whittington
Tatsumi Yamada

Approval by the Board of Puttable Financial Instruments and
Obligations Arising on Liquidation (Amendments to IAS 32 and
IAS 1) issued in February 2008

Puttable Financial Instruments and Obligations Arising on Liquidation (Amendments to IAS 32
and IAS 1 Presentation of Financial Statements) was approved for issue by eleven of the
thirteen members of the International Accounting Standards Board. Professor Barth and
Mr Garnett dissented. Their dissenting opinions are set out after the Basis for
Conclusions.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman
Mary E Barth
Stephen Cooper
Philippe Danjou
Jan Engström
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
John T Smith
Tatsumi Yamada
Wei-Guo Zhang

Approval by the Board of Classification of Rights Issues
(Amendment to IAS 32) issued in October 2009

Classification of Rights Issues (Amendment to IAS 32) was approved for issue by thirteen of
the fifteen members of the International Accounting Standards Board. Messrs Leisenring
and Smith dissented from the issue of the amendment. Their dissenting opinions are set
out after the Basis for Conclusions.
Sir David Tweedie Chairman
Stephen Cooper
Philippe Danjou
Jan Engström
Patrick Finnegan
Robert P Garnett
Gilbert Gélard
Amaro Luiz de Oliveira Gomes
Prabhakar Kalavacherla
James J Leisenring
Patricia McConnell
Warren J McGregor
John T Smith
Tatsumi Yamada
Wei-Guo Zhang

Approval by the Board of Offsetting Financial Assets and
Financial Liabilities (Amendments to IAS 32) issued in December
2011

Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) was approved for
issue by the fifteen members of the International Accounting Standards Board.
Hans Hoogervorst Chairman
Ian Mackintosh Vice-Chairman
Stephen Cooper
Philippe Danjou
Jan Engström
Patrick Finnegan
Amaro Luiz de Oliveira Gomes
Prabhakar Kalavacherla
Elke König
Patricia McConnell
Takatsugu Ochi
Paul Pacter
Darrel Scott
John T Smith
Wei-Guo Zhang