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The International Accounting Standards Board (Board) tentatively decided to explore making clarifying amendments to IAS 32 Financial Instruments: Presentation to address common accounting challenges that arise in practice when applying IAS 32. The Board aims to address those challenges by clarifying some underlying principles in IAS 32 and adding application guidance to facilitate consistent application of those principles. In addition, it intends to further develop some presentation and disclosure requirements. The Board’s tentative decisions were made after considering feedback on the Discussion Paper Financial Instruments with Characteristics of Equity, which was published in June 2018.

The Discussion Paper set out the Board's preferred approach to classification of a financial instrument, as a financial liability or an equity instrument, from an issuer’s perspective. The Board also explored enhanced presentation and disclosure requirements that would provide further information about financial instruments’ effects on an issuer's financial position and financial performance.

IASB® Update December 2021

The IASB met on 15 December 2021 to discuss the accounting for:

  • financial instruments with contingent settlement provisions; and
  • the effects of applicable laws on contractual terms of financial instruments.

Financial instruments with contingent settlement provisions (Agenda Papers 5A–5B)

The IASB tentatively decided to propose amendments to IAS 32 Financial Instruments: Presentation:

  • to clarify that financial instruments with contingent settlement provisions may be compound instruments;
  • to clarify that the liability component of a compound financial instrument with contingent settlement provisions, which could require immediate settlement if a contingent event occurs, is measured at the full amount of the conditional obligation;
  • to clarify that payments at the discretion of the issuer are recognised in equity, even if all the proceeds are initially allocated to the liability component of a compound financial instrument;
  • to specify that the term ‘liquidation’ in paragraph 25(b) of IAS 32 refers to when an entity is in the process of permanently ceasing operations; and
  • to specify that an assessment of whether a contract term is ‘not genuine’ under paragraph 25(a) of IAS 32 is not made by considering only the probability of the contingent event occurring.

All 12 IASB members agreed with these decisions.

The effects of applicable laws on contractual terms of financial instruments (Agenda Paper 5C)

The IASB tentatively decided to propose amendments to IAS 32 to require an entity to classify financial instruments as financial liabilities or equity by considering:

  • terms explicitly stated in the contract that give rise to rights and obligations that are in addition to, or more specific than, those established by applicable law; and
  • applicable laws that prevent the enforceability of a contractual right or a contractual obligation.

All 12 IASB members agreed with these decisions.

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