This free, guided checker walks your finance team through the key decision points for IAS 32 Puttable and Obligation-on-Liquidation Instruments. Answer a few questions to see the likely treatment and the evidence to document.
Answer a few quick questions below. It is private - nothing is submitted or stored - and takes about a minute.
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.
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
A puttable instrument is one the holder can put back to the issuer for cash or another financial asset, or that is automatically put back on a future event such as the holder's death or retirement. Examples include cooperative shares, open-ended fund units, and partnership interests with withdrawal rights. The put creates a contractual obligation that would default to financial liability classification unless the narrow IAS 32.16A-16B exception is met.
Use the interactive tool above to see how this applies to your situation.
Official guidance: IFRS issued standards
An obligation-on-liquidation instrument requires the issuer to deliver a pro rata share of net assets to holders only when the entity winds up, whether the winding-up is certain, at the holder's option, or contingent. IAS 32.16C and application guidance AG14E-AG14F provide an equity exception parallel to the puttable exception. The common trap is treating a fixed liquidation preference or a redemption at a set price as qualifying - only a genuine pro rata residual claim does.
Apply the standard IAS 32.15-16 contractual-obligation test for liability versus equity; the puttable and liquidation exceptions in IAS 32.16A-16D do not apply.
Official guidance: IFRS issued standards
Both the puttable and obligation-on-liquidation exceptions require the holder to participate pro rata in the residual net assets rather than to receive a fixed return independent of entity performance. Test the settlement terms: a claim capped at par, or a guaranteed minimum, breaks the pro rata condition. The common misapplication is treating a redemption at net asset value that is subject to a fixed floor as a pure residual claim.
Classify as a financial liability under IAS 32.16A(a); a holder without a pro rata residual claim does not qualify for the puttable equity exception.
Official guidance: IFRS issued standards
The puttable or liquidation exception applies only to the class of instruments that is subordinate to all other classes. Rank the capital structure and confirm no class - preference shares, debt, or another equity tranche - stands ahead of the instrument on liquidation. A common misapplication is ignoring instruments held by related parties or outside the group that in substance rank ahead of the class being tested.
Classify as a financial liability under IAS 32.16A(b); only the most subordinated class of instruments can qualify for the puttable equity exception.
Official guidance: IFRS issued standards
All instruments within the subordinated class must have identical features and share equally in residual returns. Compare the terms of every instrument in the class: a preferential dividend, an enhanced redemption right, or a guaranteed return for some holders defeats the exception. The trap is assuming a single class is homogeneous without checking side agreements or different tranches issued at different times.
Classify as a financial liability under IAS 32.16A(c); preferential rights within the subordinate class mean the instruments are not identical and fail the exception.
Official guidance: IFRS issued standards
The exception requires the total expected cash flows over the instrument's life to be based substantially on the entity's profit or loss, the change in its recognised net assets, or the change in the fair value of its recognised and unrecognised net assets. Fixed-return instruments, or those with only a nominal linkage to net assets, do not qualify. Test the substance of the return, not merely its label.
Classify as a financial liability under IAS 32.16A(e); an instrument whose return is substantially fixed rather than tied to entity performance does not qualify.
Official guidance: IFRS issued standards
The put price must equal the holder's pro rata share of net assets measured at the redemption date. A fixed cash amount, a formula tied to an index or earnings multiple, or a floor and cap around net asset value all break the exception because the settlement is no longer a pure residual claim. Trace the redemption clause to the net-asset measurement basis to confirm.
Classify as a financial liability under IAS 32.16A(a); a redemption amount not equal to the pro rata share of net assets fails the puttable exception.
Official guidance: IFRS issued standards
Where the host is not a financial asset, IFRS 9.4.3.3 requires an embedded derivative to be separated when its economic characteristics are not closely related to the host, a standalone instrument with the same terms would meet the derivative definition, and the hybrid is not measured at fair value through profit or loss in its entirety. Conversion options, leverage features, and inflation multipliers are common candidates even when the host qualifies as puttable equity.
Use the interactive tool above to see how this applies to your situation.
Official guidance: IFRS issued standards
Separate the non-closely-related embedded derivative from the host and measure it at fair value through profit or loss. The residual host may still qualify as equity under the puttable exception. If the embedded derivative cannot be measured separately at fair value, IFRS 9.4.3.6 requires the entire hybrid to be measured at FVTPL, which would preclude equity classification.
Complete IFRS 9.4.3.3 separation and fair-value-through-profit-or-loss measurement of the embedded derivative before finalising host classification.
Official guidance: IFRS issued standards
A compound instrument contains both a liability component and an equity component from a single contract, most commonly a convertible bond. IAS 32.28 requires the components to be separated at initial recognition: measure the liability first and assign the residual to equity. The split is required even where the host is a puttable instrument that otherwise qualifies for the equity exception.
Use the interactive tool above to see how this applies to your situation.
Official guidance: IFRS issued standards
Measure the liability component as the fair value of a similar liability that does not have the equity conversion feature, then assign the residual of the instrument's total fair value to the equity component (IAS 32.31-32). Transaction costs are allocated to the two components in proportion to the proceeds (IAS 32.38). The equity component is not remeasured after initial recognition.
Complete the IAS 32.31-32 bifurcation - liability component at the fair value of a similar liability without the equity feature, residual to equity - before initial recognition.
Official guidance: IFRS issued standards
Puttable instruments classified as equity trigger the specific disclosures in IAS 1.136A - summary quantitative data on the amount classified as equity, the objectives and policies for managing the redemption obligation, and the expected cash outflow on redemption with how it was determined. IAS 32.30 and IFRS 7 add classification-judgement and terms disclosures. The trap is presenting the instruments as ordinary equity without the redemption-specific information.
Prepare the IAS 1.136A and IAS 32.30 disclosures on classification, terms, and expected redemption before the financial statements are authorised.
Official guidance: IFRS issued standards
Confirm consistency between classification, initial measurement, and disclosure before finalising the accounting. A pure puttable instrument that meets IAS 32.16A-16B is presented wholly in equity; a convertible or otherwise compound instrument is split under IAS 32.28. Select the outcome that matches the analysis completed in the preceding steps.
Present in equity under IAS 32.16A-16D and record put exercises and distributions directly in equity without remeasurement. Maintain separate liability and equity components under IAS 32.28 and accrete the liability at the effective interest rate under IFRS 9.
Official guidance: IFRS issued standards
Send us your situation and one of our senior CPAs will review it with you - fixed fee, no surprises.
Contact Us