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Classifying financial instruments

28 June 2018

The International Accounting Standards Board has pushed out a discussion paper on how companies issuing financial instruments should classify them in their financial statements.

IAS 32 ‘Financial Instruments: Presentation’ currently sets out how a company that issues financial instruments should distinguish financial liabilities from equity instruments. That distinction is important because the classification of the instrument affects how a company’s financial position and performance are depicted.

IAS 32 works well for most financial instruments, says the IASB. However, continuing financial innovation means that some companies find it challenging to classify some complex financial instruments that combine some features of both debt liabilities and ordinary shares equity instruments.

IAS 32 sets out the classification of financial instruments, from the perspective of the issuer, as financial liabilities or equity instruments, whereas IFRS 9 ‘Financial Instruments’ focuses in the recognition and measurement of financial assets and financial liabilities.

Challenges in classifying these instruments can result in diverse accounting in practice, which in turn makes it difficult for investors to assess and compare companies’ financial position and performance. In addition investors have demanded better information, particularly about equity instruments.

Read the next issue of PQ magazine for this story in full...

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