A Strategic Guide to the IASB’s Debt-Equity Boundary Reform
prepared by Hafsa Research and Analysis Company
The Core Shift: Debt-Equity Boundary Is Being Redrawn
The IASB’s Financial Instruments with Characteristics of Equity (FICE) project is the most significant reform to IAS 32 in two decades. It addresses a fundamental problem: modern financing instruments blur the line between debt and equity in ways the current standard struggles to handle consistently.
The stakes are higher than technical classification. As EFRAG’s user outreach revealed, investors and analysts are “less concerned about the precise distinction between debt and equity but more concerned with consistency in application” . When similar instruments get different accounting treatments, comparability collapses—and leverage ratios, EPS, and covenant calculations become unreliable.
The IASB is redeliberating the November 2023 Exposure Draft throughout 2026, with final amendments expected after due process completion . This is not yet law. But the direction of travel is clear—and entities with complex instruments should be preparing now.
Solution 1: Identify Which Instruments Are at Risk
FICE is not an industry project. It is an instrument-characteristics project. The greatest impact will fall on entities that issue:
Convertible instruments. Instruments with conversion terms that fail the fixed-for-fixed condition are already classified as financial liabilities under current IAS 32 . FICE clarifies when adjustments to conversion terms remain consistent with equity classification.
Contingent settlement provisions. The IASB tentatively decided in April 2026 that paragraph 25 of IAS 32 applies when settlement giving rise to a financial liability depends on “an uncertain future event that is beyond the control of both the issuer and the holder” . The Board also clarified that a contractual term with a “substantive business purpose” is genuine even if the probability of the event is remote .
Puttable instruments and obligations arising on liquidation. These are already within the scope of FICE disclosure requirements .
Preference shares and hybrid capital. Instruments combining debt and equity features remain the central focus.
Action step: Inventory every financial instrument in your capital structure. For each, document whether conversion terms are fixed-for-fixed, whether settlement depends on contingent events, and whether any adjustment mechanisms exist. Flag those requiring judgment.
Solution 2: Understand the Fixed-for-Fixed Refinements
The February 2026 IASB meeting delivered important clarifications on the fixed-for-fixed condition :
Preservation adjustments (replacing the term ‘preservation adjustments’) are consistent with equity classification only if they:
- Aim to place future holders in an economic position comparable to current holders after a specified trigger event, and
- Do not expose the entity to additional risks compared to issuing the underlying equity instruments.
Passage-of-time adjustments (replacing the term ‘passage-of-time adjustments’) are consistent with equity classification only if they:
- Are predetermined, and
- Vary solely with the passing of time between potential exercise dates—not with time value of money.
A critical point: if a contract specifies multiple adjustments, each individual adjustment must meet the fixed-for-fixed condition. If any single adjustment fails, the entire derivative is classified as a financial asset or liability .
Action step: Review conversion and adjustment clauses in every derivative involving your own equity instruments. Test each adjustment mechanism against the refinements above. One failing clause can reclassify the entire instrument.
Solution 3: Prepare for Enhanced Disclosures
EFRAG’s feedback statement reveals that users strongly support the proposed disclosures, especially for “the terms and conditions of financial instruments with characteristics of both debt and equity” . Credit analysts specifically want priority on liquidation disclosures. Equity analysts want potential dilution disclosures.
However, respondents raised concerns about “disclosure overload” and “practical difficulties of providing information about priority on liquidation” . The IASB staff has acknowledged these concerns and is refining the proposals to focus disclosures more effectively.
The current direction includes:
- Terms and conditions that determine classification
- Cash flow characteristics relevant to understanding the instrument’s nature
- Terms about priority on liquidation (though focus is shifting away from liquidation specifically)
- Potential dilution of ordinary shares, including off-balance sheet commitments
Action step: Begin gathering the data now. Can you articulate the priority ranking of every instrument in a liquidation scenario? Can you calculate maximum potential dilution from all convertible instruments? If not, build that capability before the requirements become effective.
Solution 4: Assess Second-Order Effects on Covenants and Metrics
Classification changes ripple through financial statements. A reclassification from equity to liability:
- Increases reported liabilities and reduces equity
- Changes debt-to-equity and leverage ratios
- May affect EPS calculations
- Could trigger debt covenant calculations
The IASB tentatively decided not to proceed with proposed measurement requirements for contingent settlement provisions within FICE. Instead, measurement issues will be addressed in the Amortised Cost Measurement project . This reduces immediate complexity but defers resolution of related questions.
Action step: Model the impact of potential reclassifications on your key financial covenants. If a hybrid instrument currently classified as equity were reclassified as a liability, would you breach any covenant? If yes, engage lenders now—not after the rules change.
Solution 5: Monitor Progress and Engage
The FICE project remains under redeliberation. Key milestones ahead:
- Continued classification topic redeliberations through 2026
- Final amendments expected after due process completion
- Effective date not yet determined
EFRAG’s FIWG members noted that given the timeline to complete the project by 2026 and IFRS 18’s effective date of 2027, the FICE presentation and disclosure proposals should not be expedited before other proposals .
Action step: Assign responsibility for monitoring IASB updates. Engage with your auditors and industry bodies on the practical application challenges. Early preparation gives management time to inventory instruments, review contractual terms, and prepare stakeholders.
Executive Checklist: FICE Readiness
Inventory & Assessment:
- □ Inventory all financial instruments with debt and equity characteristics
- □ Document fixed-for-fixed compliance for all derivatives involving own equity
- □ Identify instruments with contingent settlement provisions
Disclosure Preparation:
- □ Map priority ranking of all instruments in liquidation
- □ Calculate maximum potential dilution from convertible instruments
- □ Document terms and conditions that determine classification
Impact Modeling:
- □ Model reclassification impact on leverage ratios and EPS
- □ Test debt covenant compliance under potential reclassifications
- □ Assess investor communication implications
Closing Thought
The FICE project is not merely a technical accounting exercise. It is a strategic consideration for any entity that issues complex financial instruments. As the IASB’s own user outreach confirmed, investors want consistency—and they will reward transparency.
The proposals should not yet be treated as final requirements. But the direction is clear. Entities that begin preparation now will be positioned to adapt smoothly when the rules change. Those that wait will face compressed timelines and potential surprises.
The boundary between debt and equity is being redrawn. The question is whether you will be ready.
Prepared by Hafsa Research and Analysis Company
