At its meeting on June 20-22, 2022, the IASB met to continue its discussions on the reclassification of financial instruments issued by an entity as financial liabilities or equity instruments when the substance of the contractual terms changes without a modification to the contract. The IASB tentatively decided to add general requirements on reclassification to IAS 32 to prohibit reclassification other than for changes in the substance of the contractual terms arising from changes in circumstances outside the contract. This approach does not affect reclassifications already required in IAS 32.

The IASB also tentatively decided to clarify that when the substance of the contractual terms changes because of changes in circumstances outside the contract: (i) financial liability reclassified from equity would be measured at fair value at the date of reclassification. Any difference between the carrying amount of the equity instrument and the fair value of the financial liability would be recognized in equity; (ii) an equity instrument reclassified from a financial liability would be measured at the carrying value of the financial liability at the date of reclassification. No gain or loss would be recognized; and (iii) a reclassification would be accounted for in the reporting period in which the change in circumstances occurred. The IASB also acknowledged the importance of disclosures in helping users of financial statements better understand the change in classification and its effect on measurement, if any. The IASB will discuss other topics set out in the project plan at its future meetings.

Review the IASB Update and podcast on the Board's Web site.