Ind AS 32 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Ind AS 32 sets out how an issuer presents financial instruments as financial liabilities or equity, based on contractual substance rather than legal form. It also governs offsetting of financial assets and liabilities, treatment of compound instruments, treasury shares, and presentation of related interest and dividends.
Overview
Ind AS 32, notified under the Companies (Indian Accounting Standards) Rules, 2015, deals purely with presentation. It sits alongside Ind AS 109 (recognition and measurement) and Ind AS 107 (disclosures). Its central contribution is the principle that an instrument is classified according to the economic substance of the contractual arrangement, not its name. A "preference share" may be a liability; a "debenture" may embed equity.
Scope and Applicability
The standard applies to all entities and to all types of financial instruments except those specifically excluded — interests in subsidiaries, associates and joint ventures (Ind AS 110/111/28), employer obligations under Ind AS 19, insurance contracts, and share-based payments under Ind AS 102. It classifies instruments from the perspective of the issuer into financial assets, financial liabilities and equity instruments.
Liability versus Equity — the Critical Test
An instrument is a financial liability if the issuer has a contractual obligation either (a) to deliver cash or another financial asset, or (b) to settle in a variable number of its own equity instruments. It is an equity instrument only if there is no such obligation and it represents a residual interest in assets after deducting liabilities.
Examples: ₹10,00,000 of redeemable preference shares carrying a mandatory 8% dividend and compulsory redemption after five years are a financial liability — the ₹80,000 annual "dividend" is really interest expense. Ordinary equity shares, and irredeemable preference shares with a fully discretionary dividend, are equity.
Compound Financial Instruments
A convertible instrument contains both a liability and an equity component and must be split at inception. Suppose a company issues 3-year convertible debentures for ₹1,00,00,000 with a 6% coupon, convertible into equity at the holder's option. A comparable non-convertible bond would carry 10%. The liability is measured at the present value of principal and interest discounted at 10%, say ₹90,20,000; the residual ₹9,80,000 is credited to equity. This allocation is never remeasured, even if conversion later becomes remote.
Offsetting Financial Assets and Liabilities
Netting on the balance sheet is permitted only when the entity (a) has a legally enforceable right of set-off, and (b) intends to settle net or simultaneously. Absent both, gross presentation is required — a common audit finding where entities net receivables and payables with the same counterparty without an enforceable master netting agreement.
Treasury Shares, Interest and Dividends
An entity's own equity instruments reacquired ("treasury shares") are deducted from equity; no gain or loss passes through profit or loss on their purchase, sale or cancellation. Interest, dividends, losses and gains relating to an instrument classified as a liability are recognised in profit or loss. Distributions to holders of instruments classified as equity are debited directly to equity, net of any related income-tax benefit.
Worked Example
A company issues 1,00,000 8% cumulative preference shares of ₹100 each (₹1,00,00,000), mandatorily redeemable at par after seven years. Because redemption is compulsory, the entire ₹1,00,00,000 is a financial liability. The ₹8,00,000 annual dividend is presented as finance cost in the statement of profit and loss, and the shares appear under borrowings — not under share capital — in the balance sheet.
Key Differences from the Old AS
Under the earlier Indian GAAP (AS 31, never made mandatory), redeemable preference shares sat within "share capital" and their dividend was an appropriation below the line. Ind AS 32 reclassifies many such instruments as debt, increasing reported leverage and reducing reported profit through higher finance costs. This substance-based reclassification is often the single largest presentation change on Ind AS transition.