Is there any hierarchy to use in determining a financial instrument to be liability or an equity instruments of the issuer?
No – IAS 32 does not contain a clear hierarchy to be used in determining whether a financial instrument is a financial liability or an equity instruments of the issuer. The various rules need to be read together and it is not clear which ones take precedence. Sometimes the rules and guidance contradict each other.
For example, the substance of a financial instrument may appear to be a liability (e.g. there may be escalating ‘dividend’ payments if certain events occur, such that one would always expect the issuer to pay the dividend even if it is not strictly legally required to, but the strict wording of paragraph 16 overrides this by requiring a contractual obligation to pay dividends.)
Earlier creation of IAS 32 assisted in the development of IAS 39
Liability or an equity instruments of the issuer :
Standard-setters first set rules on disclosure before tackling measurement in the hope of gaining useful information from the disclosures to assist in determining measurement rules. The disclosures would have helped to identify the types of financial instruments and associated risks in the market and so would have assisted the standard-setters in the development of IAS 39.
