IASB seeks clarity between liabilities and equity

The International Accounting Standards Board (IASB) is seeking comment on proposed guidance that seeks to clarify when a financial instrument should be classified as a liability or as equity.

The distinction between liabilities and equity is an important consideration in how companies and other entities present financial information. That’s because the classification of these financial instruments affects how an entity’s financial position and performance are depicted.

An IFRS Standards Discussion Paper published Thursday is designed to address diversity in accounting practices related to International Accounting Standard (IAS) No. 32, Financial Instruments: Presentation, which currently outlines how a company that issues financial instruments should distinguish financial liabilities from equity instruments.

While IAS 32 has worked well for most financial instruments, some companies have found it difficult to classify some complex financial instruments that combine features of both debt (liabilities) and ordinary shares (equity instruments), the IASB said in a statement.

The approach proposed by the IASB would:

• Provide a clear rationale for why a financial instrument would be classified as either a liability or equity without fundamentally changing the existing classification outcomes of IAS 32.
• Enhance the information provided through presentation and disclosure.

The Discussion Paper Financial Instruments With Characteristics of Equity is open for comments until Jan. 7.

— Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.