Researched by Hafsa Research and Analysis Company
1. Introduction — Why This IASB Project Matters
Financial instruments have become increasingly sophisticated as companies, financial institutions and investors develop new methods of raising capital, managing risk and linking financing arrangements to specific contractual and economic objectives.
Under IFRS Accounting Standards, the accounting treatment of financial instruments depends on their contractual terms and the applicable requirements. IFRS 9 addresses the classification and measurement of financial assets and financial liabilities from the holder’s and relevant accounting perspectives, while IAS 32 Financial Instruments: Presentation establishes the fundamental principles for determining whether an instrument issued by an entity is presented as a financial liability or as equity.
This distinction becomes particularly challenging when an instrument contains characteristics of both debt and equity. IAS 32 therefore uses principles such as the contractual-obligation assessment and the fixed-for-fixed condition for certain instruments involving an entity’s own equity instruments.
The increasing complexity of modern financing arrangements has created difficult application questions. Companies may issue convertible instruments, preference shares, puttable instruments, hybrid capital and arrangements containing contingent settlement provisions. These instruments can make the boundary between financial liabilities and equity difficult to determine consistently.
At the same time, the financial reporting environment is evolving rapidly. ESG-linked financing, technological innovation, artificial intelligence, changing capital structures and increasingly sophisticated financial products are creating new contractual arrangements that can challenge existing accounting requirements.
Against this background, the IASB’s Financial Instruments with Characteristics of Equity (FICE) project seeks to address important application challenges within IAS 32 and improve the information provided to users of financial statements.
The significance of FICE extends beyond technical accounting. Classification can influence reported liabilities and equity and may consequently affect leverage measures, earnings per share, disclosures, debt covenants and how investors interpret an entity’s financial position.
2. Current Project Status & Road to Implementation
The IASB is currently redeliberating the proposals contained in its November 2023 Exposure Draft, Financial Instruments with Characteristics of Equity following feedback received from stakeholders.
The Board is reconsidering and refining aspects of the proposed requirements, particularly in areas where existing IAS 32 requirements have generated application difficulties. The technical redeliberations are expected to continue during 2026, with final amendments currently expected to follow the completion of the IASB’s due process.
Therefore, the FICE proposals should not yet be treated as final amendments to IAS 32. Entities should continue applying the existing requirements until any final amendments become effective.
For preparers, however, the current stage of the project provides an opportunity to begin assessing potentially affected instruments, reviewing contractual terms and considering the possible consequences for financial reporting.
Expected Amendments and Areas of Development
The FICE project is broadly focused on the following areas:
1. Clarifying liability-versus-equity classification
The project seeks to improve how entities distinguish financial liabilities from equity when financial instruments contain characteristics of both.
2. Contingent settlement provisions
The IASB is considering the classification implications of instruments containing contingent settlement provisions, with further refinements being considered as part of the redeliberation process.
3. The fixed-for-fixed condition
The project is examining application questions relating to the fixed-for-fixed condition, particularly for derivatives involving an entity’s own equity instruments.
4. Discretionary payment features and other contractual terms
The IASB continues to consider how certain contractual features affect classification and how the existing requirements can be applied more consistently.
5. Presentation and disclosure
The broader FICE proposals seek to improve the information available to users about instruments classified as equity and the characteristics, risks and potential financial effects of those instruments.
Importantly, the final requirements, effective date and transition provisions remain subject to the completion of the IASB’s standard-setting process.
3. What Entities Should Monitor the FICE Project Now?
FICE is particularly relevant to entities that issue complex or hybrid financial instruments, rather than entities whose capital structures consist primarily of ordinary shares and conventional debt.
1. Listed Companies with Complex Capital Structures
Entities with the following arrangements should monitor developments closely:
- Convertible instruments
- Preference shares
- Instruments containing redemption or settlement features
- Share-based financing arrangements
- Hybrid capital instruments
2. Banks and Financial Institutions
Financial institutions frequently use sophisticated capital instruments. Particular attention may be required for:
- Regulatory capital instruments
- Hybrid debt/equity structures
- Instruments containing contingent settlement features
- Instruments with discretionary payment characteristics
3. Insurance Companies
Insurance groups may use complex capital and hybrid financing arrangements. Changes in liability-versus-equity assessment could potentially affect reported capital, leverage and disclosures.
4. Private Equity and Investment Businesses
Private-equity and investment structures frequently involve:
- Preference shares
- Convertible financing
- Investor put and call arrangements
- Structured investment instruments
These contractual features can create significant classification questions.
5. Technology and High-Growth Companies
Technology and other high-growth companies may rely heavily on venture-capital financing, convertible notes, preferred shares and investor-specific contractual rights.
6. Companies Preparing for IPOs or Major Fundraising
Companies entering capital markets should consider the accounting implications of proposed financing structures before transactions are executed, particularly where contractual terms could create uncertainty over liability-versus-equity classification.
7. Multinational Groups
Groups operating across multiple jurisdictions should consider how potential changes in classification and disclosure could affect consolidated financial statements, group reporting processes and key financial metrics.
The relevance of FICE is ultimately determined by the characteristics of the financial instrument rather than by industry alone.
4. Objective of the FICE Project
What Problem Is the IASB Trying to Solve?
IAS 32 has provided the fundamental framework for distinguishing financial liabilities from equity for many years. However, the increasing complexity of financial instruments has created challenging application questions.
Instruments containing both liability and equity characteristics can require significant judgement, and similar contractual features may sometimes result in different accounting conclusions.
The FICE project therefore seeks to improve the application of the existing framework.
Improving Classification Between Financial Liabilities and Equity
The project aims to clarify how entities determine whether particular financial instruments should be classified as financial liabilities or equity.
This distinction is significant because classification can affect reported liabilities, equity, leverage measures and other financial statement metrics.
Improving Presentation and Disclosure
The IASB also seeks to provide users of financial statements with better information about instruments classified as equity, including their characteristics, risks and potential effects on an entity’s financial position and performance.
Reducing Diversity in Practice
Different entities may reach different accounting conclusions for instruments with similar contractual features.
Greater clarity in the requirements could therefore improve consistency and comparability across financial statements.
5. Past vs Present vs Future
Past — Limitations and Application Issues under IAS 32
IAS 32 has long provided the fundamental principles for liability-versus-equity classification. However, financial innovation has resulted in increasingly complex instruments that were not always straightforward to assess under the existing requirements.
Convertible instruments, contingent settlement provisions, puttable instruments and complex derivatives can create difficult classification questions and significant areas of judgement.
Present — Current Requirements and IASB Developments
Entities continue to apply the existing IAS 32 requirements.
At the same time, the IASB is redeliberating the proposals contained in its FICE Exposure Draft, including issues surrounding contingent settlement provisions, the fixed-for-fixed condition and other challenging classification matters.
The proposed changes therefore remain under development and should not yet be treated as final requirements.
Future — A Changing Financial Reporting Landscape
If the FICE proposals are ultimately finalised, entities could have clearer requirements for assessing complex instruments and potentially enhanced information for investors.
The resulting changes could influence reported equity, liabilities, EPS, leverage measures and disclosures, depending on the final requirements and the contractual terms of individual instruments.
6. Impact on Existing Classification
The FICE project is particularly important for instruments where the distinction between financial liability and equity is not straightforward.
The eventual impact will depend on the final IASB requirements and the contractual terms of each individual instrument.
Ordinary Shares
Ordinary shares that clearly satisfy the existing equity classification requirements are generally less likely to be the primary focus of the FICE project.
The greater area of attention is instruments whose contractual terms create uncertainty over whether they should be classified as equity or liabilities.
Convertible Instruments
Convertible instruments can contain both debt and equity characteristics.
Their accounting assessment can become complex where the conversion terms do not clearly satisfy existing IAS 32 requirements. The FICE project is relevant to certain application questions surrounding these instruments.
Puttable Instruments
Puttable instruments give holders rights that may require the issuer to repurchase or redeem the instrument.
Because such arrangements can create contractual obligations to deliver cash or another financial asset, they can create difficult classification questions under IAS 32.
Contingent Settlement Provisions
These provisions are particularly important where settlement in cash or another financial asset becomes necessary if a specified future event occurs.
The IASB is considering how such provisions should affect liability-versus-equity classification.
Instruments with Variable Numbers of Shares
Where an entity may be required to deliver a variable number of its own shares, the fixed-for-fixed principle becomes particularly important.
The FICE project is examining application issues surrounding this area.
Other Complex Capital Structures
Preference shares, hybrid instruments and arrangements containing multiple contractual features can require significant judgement.
The FICE project seeks to improve consistency in applying IAS 32 to these structures.
Potential Effects on Liability-versus-Equity Classification
A change in classification can have consequences beyond the balance sheet.
It may affect reported liabilities, equity, leverage ratios, earnings per share, disclosures, debt covenants and investor perceptions.
7. Impact on Financial Statements & Key Metrics
The FICE project could have implications beyond technical classification. Where final requirements result in different classification or presentation, several important financial statement measures could potentially be affected.
Equity vs Liabilities
Classification determines whether an instrument is presented as equity or as a financial liability.
A change in classification could therefore alter reported liabilities, debt and total equity.
Profit or Loss
The classification of an instrument can influence the accounting treatment of related payments.
Amounts associated with financial liabilities may be recognised differently from distributions on equity instruments, potentially affecting reported profit or loss.
Earnings Per Share
The treatment of certain instruments can affect EPS calculations, particularly where instruments contain conversion or participation features.
Leverage Ratios
A reclassification between equity and liabilities can change debt-to-equity and other leverage measures.
This could influence how investors, lenders and rating agencies assess the entity’s financial position.
Debt Covenants
Where financing agreements contain financial-ratio requirements, changes in reported liabilities or equity could potentially affect covenant calculations.
Companies should therefore consider the contractual consequences of any future accounting changes.
Disclosures
Enhanced disclosure requirements could provide users with better information about the characteristics, risks and financial implications of instruments classified as equity.
Investor Interpretation
Changes in classification or enhanced presentation may influence how investors interpret an entity’s capital structure and financial risk.
Investors and analysts will need to distinguish between changes resulting from accounting classification and changes in the underlying economics of the business.
8. Expected Industries Affected
FICE is not an industry-specific project. Its relevance depends primarily on the contractual characteristics of financial instruments.
Nevertheless, some sectors are more likely to encounter complex financing arrangements.
1. Banking & Financial Services — Very High Relevance
Banks and financial institutions frequently use complex capital and hybrid instruments. Classification of instruments containing contingent settlement, conversion or discretionary payment features can therefore be particularly important.
2. Insurance — High Relevance
Insurance groups may use complex capital and hybrid financing arrangements. Potential classification changes could affect reported capital, leverage and disclosures.
3. Investment & Private Equity — High Relevance
Private-equity and investment businesses commonly use preference shares, convertible financing and investor-specific contractual arrangements.
4. Listed Groups with Convertible or Hybrid Instruments — High Relevance
Public companies issuing convertible bonds, preference shares or other hybrid instruments should monitor the project closely because classification can influence equity, liabilities, EPS and financial ratios.
5. Technology Companies with Complex Financing — Moderate to High Relevance
High-growth companies may rely on venture-capital financing, convertible notes, preferred shares and complex investor rights.
6. Pharmaceutical & Biotechnology — Moderate Relevance
Early-stage and growth-stage companies may use convertible financing, preference shares and other structured arrangements to finance research and development.
7. Energy & Infrastructure — Moderate Relevance
Large infrastructure projects can involve sophisticated financing arrangements, including hybrid capital and instruments with contingent or variable settlement features.
Overall Perspective
The greatest impact is likely to be concentrated not simply in particular industries, but among entities that issue financial instruments with complex contractual features.
9. Executives’ Thoughts — Strategic Implications
The FICE project should not be viewed solely as an accounting technicality. For executives, its potential implications extend to capital structure, financing strategy, financial reporting and investor communication.
What CFOs Should Be Asking
CFOs should identify which existing financial instruments could potentially be affected and determine whether their contractual terms create classification uncertainty.
They should also consider potential effects on equity, liabilities, EPS, leverage ratios and disclosures.
What Boards Should Monitor
Boards and audit committees should monitor the IASB’s progress and understand whether the company’s financing arrangements could be affected by the eventual requirements.
Particular attention should be given to material or highly complex instruments.
What Investors May Interpret Differently
Changes in classification or enhanced disclosures could influence how investors assess a company’s capital structure and financial risk.
Investors may need to distinguish between accounting changes and changes in the underlying economics of the business.
Whether Financing Structures May Need to Change
Companies entering into new financing arrangements should consider whether contractual terms could create future classification or reporting challenges.
However, financing decisions should be based on the economics and commercial objectives of the transaction, rather than solely on the existence of the FICE project.
Why Early Preparation Matters
Early preparation gives management time to:
- Inventory financial instruments
- Review contractual terms
- Identify potentially affected arrangements
- Engage auditors and advisers
- Assess possible financial statement effects
- Prepare investors and other stakeholders
The objective is not to implement requirements that are not yet final, but to understand potential exposure before the final requirements become effective.
10. Future Prospects
The long-term significance of the FICE project extends beyond the immediate classification of financial instruments.
If the IASB’s proposals are ultimately finalised, they could influence how companies structure financing, how financial statements are prepared and how investors compare entities with complex capital structures.
Long-Term Implications for Capital Structures
Companies may place greater emphasis on the accounting consequences of contractual terms when designing future financing arrangements.
The distinction between debt and equity could become an increasingly important consideration alongside cost of capital, liquidity and investor preferences.
Greater Comparability
Clearer requirements could reduce differences in how similar financial instruments are classified and presented across entities.
This could improve comparability for investors, analysts and other users of financial statements.
Potential Changes in Financial Reporting Practice
The project could lead to changes in classification assessments, presentation and disclosure practices.
Finance teams may need to strengthen their processes for reviewing complex financial instruments and documenting accounting judgements.
How Hybrid Financing Could Evolve
As companies increasingly use instruments combining debt and equity characteristics, the FICE project could encourage greater attention to the accounting implications of hybrid financing.
However, the economic substance and contractual terms of each instrument will remain central to its accounting treatment.
What the Project Means for Investors and Analysts
For investors and analysts, clearer classification and enhanced disclosures could provide a better understanding of the characteristics and risks of complex capital instruments.
This may improve analysis of leverage, capital structure, earnings and financial risk.
11. What Finance Professionals Should Learn
The FICE project provides an important reminder that financial reporting is evolving alongside financial innovation.
Finance professionals should develop a strong understanding of:
- IAS 32 liability-versus-equity classification
- The fixed-for-fixed condition
- Contingent settlement provisions
- Convertible and hybrid instruments
- Contractual-obligation analysis
- Financial statement presentation
- EPS implications
- Disclosure requirements
- The interaction between accounting and financing decisions
The most important lesson is that the contractual terms of an instrument can be just as important as its economic purpose when determining its accounting treatment.
12. Closing Thoughts
The Financial Instruments with Characteristics of Equity project represents an important stage in the IASB’s continuing effort to ensure that financial reporting remains relevant as financial markets and financing structures become increasingly sophisticated.
The central challenge is not simply whether an instrument looks like debt or equity. The deeper question is whether the contractual rights and obligations embedded within that instrument justify its classification as a financial liability or equity under the applicable accounting framework.
For businesses, the FICE project should therefore be viewed from two perspectives.
The first is technical: understanding how the eventual amendments may affect classification, presentation and disclosure.
The second is strategic: understanding how financial reporting requirements interact with capital structure, financing decisions, investor communication and financial performance indicators.
At present, the IASB’s work remains under development. The proposals should therefore not be treated as final requirements. Nevertheless, companies with complex financial instruments have an opportunity to act before implementation by identifying potentially affected arrangements, reviewing contractual terms and understanding where accounting outcomes could change.
For investors and analysts, the ultimate value of the project may lie in greater consistency and transparency. If the final requirements successfully reduce diversity in practice while providing more meaningful information about complex capital instruments, FICE could strengthen the comparability and usefulness of financial statements.
The future of financial reporting will increasingly require accounting standards to keep pace with financial innovation. FICE is one example of that continuing evolution—where the boundary between debt and equity is becoming not only an accounting question, but a strategic consideration for businesses, boards, investors and finance professionals.
Researched by Hafsa Research and Analysis Company
