When an entity issues a financial instrument, it must determine its classification either as a liability or as equity. That determination has an immediate and significant effect on the entity’s reported results and financial position.
Liability classification affects an entity’s gearing ratios and typically results in any payments being treated as interest and charged to earnings. Equity classification avoids these impacts but may be perceived negatively by investors if it is seen as diluting their existing equity interests.
IAS 32 ‘Financial Instruments: Presentation’ (IAS 32) addresses this classification process.
Understanding the classification process and its effects is therefore a critical issue for management and must be kept in mind when evaluating alternative financing options.
This Grant Thornton
report addresses IAS 32’s key application issues and includes interpretational guidance in certain problematic areas.
- The importance of classification as liability or equity
- What is a contractual obligation to pay cash or another financial asset?
- Instruments settled in an entity’s own equity instruments
- Puttable instruments and obligations arising on liquidation
- Compound financial instruments