This free, guided checker walks your finance team through the key decision points for IAS 32 Financial Liability versus Equity. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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Classify by substance not legal form; regulatory capital labels alone do not determine equity classification. Read every payment, redemption, and exchange clause: an obligation can arise from coupons, principal, holder puts, or exchanges under potentially unfavourable conditions (IAS 32.11; IAS 32.15). A common trap is treating an instrument labelled capital or preferred as equity when a dated maturity or mandatory coupon creates a financial liability.
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Official guidance: IFRS issued standards
Non-cumulative discretionary distributions support equity classification when no other contractual payment feature exists. Discretion must survive the whole document: check for dividend pushers or stoppers, cumulative catch-up clauses, and default or cross-default provisions triggered by non-payment (IAS 32.AG26). Economic compulsion, such as market expectation that coupons will be paid, does not by itself create a contractual obligation.
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Official guidance: IFRS issued standards
Perpetual instruments with regulator-approved redemption and no fixed maturity are common equity features in Tier 1 capital consultations. Confirm redemption is solely at the issuer's option: a holder put or a mandatory redemption on a fixed or determinable date creates a liability regardless of any approval requirement (IAS 32.AG25). The need for regulatory approval to make a payment does not negate an obligation that is otherwise mandatory (IAS 32.19(a)).
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Official guidance: IFRS issued standards
Write-down features that permanently absorb losses support equity classification when they do not create a remaining liability to holders. Test whether the trigger is instead a contingent settlement provision: if the issuer must deliver cash on a genuine event outside its control other than liquidation, IAS 32.25 requires liability classification. Reinstatement or write-up mechanics after recovery need separate analysis because they can restore a contractual obligation.
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Official guidance: IFRS issued standards
Assess all coupons, principal, puts, step-ups, and contingent settlement events together including non-payment bank events within issuer control. An obligation conditional only on the holder exercising a redemption right still fails the test because the issuer cannot unconditionally avoid payment (IAS 32.19(b)). Restrictions such as needing regulatory approval or lacking foreign currency do not negate an otherwise mandatory obligation (IAS 32.19(a)).
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Official guidance: IFRS issued standards
Settlement only on liquidation may meet the IAS 32.25 exception when the event always leads to liquidation and is outside issuer control. Also confirm whether the trigger is genuine: IAS 32.25(a) disregards only settlement terms that are extremely rare, highly abnormal, and very unlikely to occur. Regulatory and non-viability triggers in bank capital instruments are generally genuine, so they create liabilities unless settlement is by permanent write-down or a qualifying share conversion.
Classify the obligation as a financial liability because a genuine contingent settlement provision can require cash settlement in circumstances outside the issuer's control (IAS 32.25).
Official guidance: IFRS issued standards
Discretion must be substantive and not defeated by another mandatory term or cross-default to fixed coupons. Trace every clause that can move cash to holders, including gross-up clauses, make-whole amounts, and fees, and look through side letters and linked agreements: a payment obligation placed in a separate document is still part of the contractual arrangement. Distributions that become mandatory once declared do not defeat equity classification if declaration itself is discretionary (IAS 32.AG26).
A contractual payment feature the issuer cannot avoid requires classification as a financial liability (IAS 32.16(a); IAS 32.19).
Official guidance: IFRS issued standards
Foreign-currency and variable-share provisions require specific analysis of the fixed-for-fixed condition and exceptions. Standard anti-dilution adjustments that preserve the relative rights of existing shareholders generally do not break fixed-for-fixed, but ratchets tied to future financing prices or timing usually do. The foreign-currency exception is narrow: it covers rights, options, and warrants offered pro rata to all existing owners of the same class for a fixed amount of any currency (IAS 32.11).
A conversion feature that fails the fixed-for-fixed condition is accounted for as a financial liability or an embedded derivative rather than equity (IAS 32.11; IAS 32.22).
Official guidance: IFRS issued standards
Measure the liability component first at fair value and assign the residual to equity. Under IAS 32.31-32, the liability component equals the fair value of a similar standalone debt instrument without the conversion feature, priced at a market rate for equivalent non-convertible debt; the equity component is the residual and is never remeasured. Allocate transaction costs to the components in proportion to the allocation of proceeds (IAS 32.38).
Separate the compound instrument into liability and equity components at initial recognition (IAS 32.28), measuring the liability component first and assigning the residual to equity (IAS 32.31-32). Classify the instrument as equity when no liability feature remains and the own-equity conditions in IAS 32.16 are met.
Official guidance: IFRS issued standards
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