IAS 32 — Accounting for warrants that are initially classified as liabilities

Date recorded:


The Committee received a submission describing a fact pattern in which an entity issues a warrant that gives the holder the right to buy the entity’s own equity instruments at a price that will be fixed at a future. The warrant is classified as a financial liability at initial recognition. The submitter asked whether the issuer reclassifies the warrant as equity when the exercise price is subsequently fixed. There are three views in practice: View 1—the issuer is prohibited from reclassifying the warrant; View 2—the issuer has an accounting policy choice with regards to reclassifying the warrant; and View 3—the issuer is required to reclassify the warrant.

Staff analysis

The staff did not perform outreach because stakeholders had already confirmed that the issue is prevalent and the staff is aware of the different accounting practices applied to the fact pattern. Also, the staff noted that the published guidance in the accounting manuals of the large accounting firms described different views which shows the diversity in practice. Moreover, the feedback received from stakeholders highlighted that the requirements in IAS 32 are unclear about whether an entity reassesses the classification of a financial instrument after initial recognition. In view of these, the staff had already flagged the reclassification of financial instruments to the Board in October 2019 as a topic to consider in its Financial Instruments with Characteristics of Equity (FICE) project.

Based on the staff’s research, the question of whether IAS 32 permits reclassification after initial recognition arises in other circumstances where the instrument’s contractual terms are unchanged but there are subsequent changes in meeting the fixed-for-fixed criteria. Therefore, they considered the fact pattern described part of a broader practice issue and that it should not be analysed in isolation.

The staff analysed that there are no general requirements in IAS 32 for reclassifying financial liabilities and equity instruments after initial recognition. IAS 32:16E-16F set out requirements for reclassifying specific instruments (i.e. puttable instruments) which are a limited scope exception. This exception cannot be applied as an analogy to the fact pattern described. Furthermore, IFRS 9:3.1.1 sets out requirements for derecognising financial liabilities when and only when they are extinguished. The submission indeed refers to both “reclassifying” the financial liability to an equity instrument, and “derecognising” the financial liability and “recognising” an equity instrument. But some stakeholders considered the interaction between IAS 32 and the derecognition criteria in IFRS 9 on this matter is unclear.

In view of such diversity in practice and the prevalence of the matter, reclassification between financial liabilities and equity instruments was identified as one of the practice issues the Board will consider in its FICE project. The project is focusing on clarifying some underlying principles in IAS 32 and adding application requirements to facilitate consistent application. The Board could also decide to develop a principle if there is no implicit or explicit principle underpinning a particular IAS 32 requirement.

Staff recommendation

Based on the above analysis, the staff recommended not adding the issue to the Committee’s standard-setting agenda, because the matter, in isolation, is too narrow. Instead, they recommended publishing a tentative agenda decision to explain this. The staff believe that the broader issues of reclassifying financial instruments are better addressed as part of the Board’s FICE project.


All Committee members agreed with not adding the issue to the Committee’s standard-setting agenda and that the broader issue of reclassifying financial instruments should be addressed as part of the FICE project.

Several Committee members considered that stating that IAS 32 has no requirement to reclassify financial instruments after initial recognition may indicate that IAS 32 does not allow reclassification. Therefore, they recommended amending it to "IAS 32 is silent in this aspect". However, there were a number of Committee members who supported the statement because it is the general requirement of IAS 32 if there is no change in contractual term of the financial instruments and they considered it factual and neutral. Therefore, the staff decided to keep the statement.

Given there is diversity in practice, some Committee members recommended adding disclosure for the accounting policies for the reclassification of the financial instruments after initial recognition to indicate whether the entity does the reclassification or not. However, the staff disagreed with this because it may imply there is an accounting policy choice before such matter is concluded in the FICE project.

The Committee decided, by the vote of all, not to add the matter to its standard-setting agenda. Also, by a vote of 13:1, the Committee members agreed with the suggested edits to the agenda decision.

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