Ind AS 32: Financial Instruments: Presentation

Standard orientation

What Ind AS 32 is designed to achieve

Establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.

Scope: Applies to most recognised and unrecognised financial instruments, subject to exclusions for consolidated interests, employee benefits, insurance contracts, share-based payments and specified own-use contracts. Recognition, measurement and disclosure are principally addressed by Ind AS 109 and Ind AS 107.

Liability test

A contractual obligation to deliver cash or another financial asset generally creates a liability.

Equity test

A residual interest with no contractual delivery obligation can qualify as equity.

Own equity

Derivative equity classification generally requires fixed amount of cash for fixed number of own shares.

Offsetting

Allowed only with a current legally enforceable set-off right and intention to settle net or simultaneously.

Reading method: Requirements are paraphrased and grouped where they form one integrated rule. Apply the current notified text for final conclusions.

Full standard map

Paragraph-by-paragraph register

Paragraphs	Requirement and simple decode
1–3	Objective and scope Explains presentation objectives and the relationship with Ind AS 109 and Ind AS 107.
4	Scope exclusions Excludes specified subsidiaries/associates/JVs, employee-benefit rights, insurance contracts, share-based payments and certain reimbursement rights.
5–7	Own-use contracts Contracts to buy or sell non-financial items are outside the standard only when entered into and held for expected purchase, sale or usage requirements; net-settlement features can bring them into scope.
8–10	Written options and settlement practice A contract can be within scope when it permits net cash settlement, routine net settlement, ready convertibility to cash or delivery for dealer profit-taking.
11	Core definitions Defines financial instrument, financial asset, financial liability, equity instrument and fair value.
13–14	Substance over legal form Classify on contractual substance at initial recognition, not legal label or management intention.
15–16	Basic liability and equity principle An obligation to deliver cash/another asset or exchange on potentially unfavourable terms is a liability; equity is a residual interest.
16A–16B	Puttable instruments exception A puttable instrument can be equity only when it meets all narrowly specified conditions and has no disqualifying features.
16C–16D	Obligations arising only on liquidation Certain pro-rata liquidation instruments can be equity when all strict conditions are met.
16E–16F	Reclassification of exception instruments Reclassify prospectively when an instrument starts or ceases to meet the puttable/liquidation exception.
17–20	No contractual obligation and settlement discretion Economic compulsion alone is not a contractual obligation; issuer discretion over distributions and redemption is critical.
21–24	Settlement in own equity instruments A non-derivative requiring delivery of a variable number of shares is generally a liability; a derivative is equity only when the fixed-for-fixed condition is met, subject to specific exceptions.
22A	Rights issues exception Certain pro-rata rights/options denominated in any currency can be equity when offered to all existing owners of the same class.
23	Obligation to purchase own equity A forward purchase or written put over own shares creates a financial liability for the redemption amount, with equity debited.
24	Contingent settlement in own equity Classification follows whether settlement exposes the issuer to delivering a variable value or otherwise fails equity conditions.
25	Contingent settlement provisions A contingent cash-settlement feature normally creates a liability unless the contingency is not genuine, occurs only on liquidation or another narrow condition is met.
26	Settlement alternatives If one settlement alternative results in liability classification, the instrument is generally a financial asset or liability unless all alternatives qualify as equity.
28–32	Compound financial instruments Separate liability and equity components of instruments such as convertible debt at initial recognition; do not revise the split later merely because conversion probability changes.
31–32	Measurement of components Measure the liability first at fair value without the equity conversion feature; assign the residual to equity.
33–34	Treasury shares Deduct reacquired own equity instruments from equity. No gain or loss is recognised in P&L on purchase, sale, issue or cancellation.
35–36	Interest, dividends, gains and losses Liability-related returns are income/expense; equity distributions are recognised directly in equity, net of related tax effects.
37–38	Transaction costs Deduct incremental costs of an equity transaction from equity; allocate compound-issue costs to liability and equity components.
40–41	Income-tax and distributable-profit effects Apply Ind AS 12 to tax effects; legal availability of distributable reserves does not determine accounting classification.
42	Offsetting principle Offset only when there is a current legally enforceable set-off right and intention to settle net or realise and settle simultaneously.
43–50	Offsetting application Distinguishes net presentation from derecognition and explains simultaneous settlement, master netting agreements, collateral and multiple counterparties.
AG1–AG14	Application guidance—definitions and scope Explains monetary items, contractual rights, physical assets, executory contracts and economic benefits.
AG25–AG29A	Application guidance—classification Addresses preference shares, distributions, redemption, puttable instruments and members’ shares in co-operatives.
AG30–AG35	Application guidance—own equity derivatives Provides fixed-for-fixed and settlement examples.
AG36–AG39	Application guidance—compound instruments and treasury shares Explains component measurement and presentation.
AG38A–AG38F	Application guidance—offsetting Clarifies enforceability in normal business and default, and gross settlement systems equivalent to net settlement.

Major areas decoded

Technical requirements in simple language

Legal label is not decisive

Redeemable preference shares can be liabilities even when company law calls them share capital. Conversely, qualifying perpetual instruments can be equity.

Fixed-for-fixed discipline

A conversion option fails equity classification when either the cash amount or number of shares varies, unless a specific exception applies.

Compound instruments

Convertible bonds are split once at inception. Subsequent finance cost uses the effective interest rate on the liability component.

Puttable exception

The exception is narrow and requires the instrument to be the most subordinated class, share net assets pro rata and meet other conditions.

Treasury shares

Own-share transactions never generate accounting gains or losses. Consideration and directly attributable costs remain within equity.

Offsetting is rare

A master netting agreement alone is insufficient. The right must be currently enforceable and the entity must intend net or simultaneous settlement.

Foreign-currency rights issues

The rights issue exception can preserve equity classification when offered pro rata to all holders of the same class.

Visual learning

Finin2min decision map

Editable SVG and high-resolution PNG versions are included in the batch assets.

Exceptions and highlights

What professionals frequently overlook

Economic pressure to redeem is not itself a contractual obligation, though the contract may still create one.
Issuer discretion over dividends supports equity only when no other cash-delivery obligation exists.
Puttable and liquidation-only equity exceptions have cumulative conditions and are not broad exemptions.
A variable-share settlement obligation is usually a liability even though settlement uses own shares.
Contingent settlement features can create liabilities even when the triggering event is outside both parties’ control.
Treasury shares are deducted from equity and never treated as financial assets.
Offsetting criteria are assessed at reporting date and across relevant legal jurisdictions.
Collateral and a master netting agreement do not automatically justify balance-sheet offsetting.

Practical application

Transaction examples

Fact pattern

Treatment

Reason

Redeemable preference shares with mandatory redemption

Financial liability

The issuer must deliver cash.

Perpetual preference shares with fully discretionary dividends

Potential equity

There may be no contractual cash obligation.

Convertible debenture with fixed conversion ratio

Compound instrument

Separate liability and equity components.

Written put requiring repurchase of own shares

Financial liability

Recognise present value of redemption amount.

Reacquisition of own shares

Deduct from equity

No P&L gain or loss.

Receivable and payable under master netting agreement

Usually present gross

Offset only if both paragraph 42 criteria are met.

Accounting mechanics

Illustrative journal entries

Entries are simplified and may require tax, foreign-exchange or presentation adjustments.

Issue of compound instrument

Dr Cash Cr Financial liability — present value Cr Equity — conversion option

Finance cost on liability component

Dr Finance cost Cr Financial liability

Purchase of treasury shares

Dr Treasury shares / Equity Cr Cash

Written put over own shares

Dr Equity Cr Financial liability — redemption amount

CA / finance / boardroom cases

Applied case studies

1. Redeemable preference share

Applied case

An instrument pays discretionary dividends but is mandatorily redeemable for ₹100 crore after five years.

Finin2min analysis: The redemption obligation creates a liability. Discretionary dividends do not convert the redemption principal into equity.

2. Variable share settlement

Applied case

A bond is settled by issuing shares equal to ₹50 crore at settlement-date market price.

Finin2min analysis: It is a financial liability because the entity delivers a variable number of shares equal to a fixed value.

3. Convertible bond

Applied case

₹1,000 crore debt converts into a fixed number of shares at holder option. Similar non-convertible debt yields 10%.

Finin2min analysis: Measure the liability using the 10% market yield and recognise the residual proceeds in equity.

4. Netting arrangement

Applied case

Two banks have reciprocal balances and a master agreement enforceable only on default. They normally settle gross.

Finin2min analysis: Present gross because there is no current enforceable right in normal circumstances and no net-settlement intention.

5. Puttable fund units

Applied case

Fund units are redeemable at net asset value and are the most subordinated identical class.

Finin2min analysis: They may qualify for the narrow puttable equity exception only if every condition in paragraphs 16A–16B is met.

Global comparison

Ind AS versus IFRS and US GAAP

Topic	Ind AS	IFRS	US GAAP
Redeemable instruments	Liability/equity follows contractual obligation, with narrow puttable exceptions.	Broadly aligned with IAS 32.	US GAAP may present certain redeemable instruments in temporary/mezzanine equity.
Convertible debt	Split liability and equity when fixed-for-fixed equity component exists.	Broadly aligned.	US GAAP conversion-feature separation rules differ and have been simplified for many instruments.
Own-share put	Recognise liability and debit equity.	Broadly aligned.	US GAAP classification and measurement differ.
Treasury shares	Equity deduction; no P&L.	Broadly aligned.	Cost or par-value methods within equity.
Offsetting	Strict right-and-intention test.	Broadly aligned.	US GAAP permits broader offsetting for some derivatives and repo arrangements.

Implementation lens

Implications for key stakeholders

CFO / Treasury

Review term sheets before issuance and model leverage consequences.

Legal

Confirm enforceability, settlement alternatives and netting rights.

Tax

Assess deductible returns and deferred-tax effects without driving classification.

Investor relations

Explain liability/equity classification and non-cash finance costs.

Audit committee

Challenge structured terms, side letters and offsetting judgements.

Quality-control watchlist

Common errors and exam traps

Classifying by legal name rather than contractual substance.
Treating mandatory redeemable preference shares as equity.
Ignoring variable-share settlement.
Failing to separate a convertible instrument at inception.
Remeasuring the equity component after initial recognition.
Recognising treasury-share gains in P&L.
Offsetting based only on a master netting agreement.
Ignoring contingent settlement clauses.
Treating economic compulsion as automatically contractual.
Failing to allocate issue costs between compound components.

Finin2min Q&A

Frequently asked questions

1. Are preference shares always equity?

No. Mandatory redemption or non-discretionary returns can create liabilities.

2. What is fixed-for-fixed?

A derivative exchanges a fixed amount of cash or another financial asset for a fixed number of own equity instruments.

3. Can treasury shares be assets?

No. They are deducted from equity.

4. When can balances be offset?

Only with a current enforceable set-off right and net/simultaneous settlement intention.

5. Is a convertible bond always compound?

Only when it contains both a liability component and an equity conversion feature.

6. Does tax classification determine Ind AS classification?

No.

Two-minute revision

Finin2min cheat sheet

CONTRACTUAL OBLIGATION? → LIABILITY · RESIDUAL + FIXED-FOR-FIXED? → EQUITY · BOTH? → SPLIT · OFFSET ONLY IF RIGHT + INTENT

Validation register

Primary and authoritative sources

ICAI Compendium 2025–26Primary or authoritative validation source.
Open source ↗

IFRS Foundation — IAS 32Primary or authoritative validation source.
Open source ↗

ICAI Ind AS resourcesPrimary or authoritative validation source.
Open source ↗

Review date: 26 June 2026. Recheck later MCA notifications and ICAI compendiums before applying to a later period.