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IAS 32, titled Financial Instruments: Presentation, is an International Accounting Standard issued by the International Accounting Standards Board (IASB). It establishes principles for presenting financial instruments as either liabilities or equity and for offsetting financial assets and financial liabilities.^[1] It is part of a triad of standards governing financial instruments, alongside IFRS 9 (recognition and measurement) and IFRS 7 (disclosures).^[2]

The fundamental principle of IAS 32 is that a financial instrument should be classified as either a financial liability or an equity instrument according to the substance of the contractual arrangement, rather than its legal form.^[3]

A financial instrument is classified as a financial liability if there is a contractual obligation:^[4]

• To deliver cash or another financial asset to another entity.
• To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the issuer.

A common example is a redeemable preference share. If the issuer is required to redeem the share for cash at a specific date, the instrument is classified as a liability, even though it is legally called a "share."^[5]

An instrument is an equity instrument only if it includes no contractual obligation to deliver cash or another financial asset. This is often referred to as the "residual interest" in the assets of an entity after deducting all of its liabilities.^[6]

IAS 32 requires the issuer of a non-derivative financial instrument to evaluate the terms of the instrument to determine whether it contains both a liability and an equity component. Such components must be classified separately.^[7]

The most frequent example is convertible debt. The instrument is split into:^[8]

1. Liability component: The contractual obligation to pay interest and principal (measured by discounting the cash flows at the market rate for a similar non-convertible bond).
2. Equity component: The holder's option to convert the bond into shares (calculated as the residual amount).

If an entity reacquires its own equity instruments (treasury shares), those instruments are deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue, or cancellation of an entity's own equity instruments.^[9]

A financial asset and a financial liability shall be offset, and the net amount reported in the statement of financial position, only when an entity:^[10]

• Currently has a legally enforceable right to set off the recognized amounts.
• Intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.