Ind AS 32 Financial Instruments: Presentation: A Practitioner Guide for FY 2026-27
Ind AS 32 (Financial Instruments: Presentation) is the Indian Accounting Standard that prescribes how entities must classify financial instruments as liabilities or equity and when to offset them in the balance sheet.
The Ministry of Corporate Affairs notified Ind AS 32 via the Companies (Indian Accounting Standards) Rules, 2015. It became mandatory from 1 April 2016 for Phase I companies. There is no direct predecessor; ICAI issued AS 31 but it was never notified.
Investor preference shares with complex features are now common in Indian startups and unicorns. Ind AS 32’s substance-over-form test often results in such shares being classified as financial liabilities rather than equity under Companies Act terminology.
Ind AS 32 at a Glance
Ind AS 32 establishes the core principle that financial instruments must be classified based on their substance, not merely their legal form, as either financial liabilities or equity. The standard is primarily used by finance teams and statutory auditors preparing or reviewing financial statements under the Indian Accounting Standards framework.
| Field | Value |
|---|---|
| Standard Number | Ind AS 32 |
| Full Name | Financial Instruments: Presentation |
| Issuing Body | ICAI (Accounting Standards Board) |
| Notified By | MCA, Companies (Indian Accounting Standards) Rules, 2015, dated 16 February 2015 |
| Effective Date | 1 April 2015 (voluntary), 1 April 2016 (mandatory Phase I) |
| Supersedes | No direct predecessor; AS 31 was issued by ICAI but never notified |
| Equivalent Standard | No notified counterpart ↔ Ind AS 32 ↔ IAS 32 |
| Applies To | All companies required to follow Indian Accounting Standards. Ind AS 32 prescribes the principles for presenting financial instruments as financial liabilities or equity, and for offsetting financial assets and financial liabilities. |
What is Ind AS 32: Financial Instruments: Presentation?
Ind AS 32 sets out how companies must present financial instruments in their balance sheets, specifically whether an instrument qualifies as a liability or equity based on its contractual substance. The standard also prescribes strict rules for offsetting financial assets and liabilities and addresses compound instruments containing both debt and equity features.
ICAI introduced Ind AS 32 as part of India’s convergence with International Financial Reporting Standards (IFRS), aligning closely with IAS 32 issued by the International Accounting Standards Board. Unlike earlier frameworks where legal form often dictated presentation, this standard enforces a substance-over-form approach. Its notification by the Ministry of Corporate Affairs marked a significant shift from Indian GAAP.
Statutory auditors, CFOs, finance controllers, CA Final students, and anyone preparing or reviewing accounts under the Companies Act, 2013 routinely apply this standard.
Objective of Ind AS 32
- Establish principles for presenting financial instruments as liabilities or equity in the financial statements.
- Specify the offsetting requirements for financial assets and financial liabilities.
- Provide guidance on classifying instruments with both equity and liability features (compound instruments).
These objectives ensure that users of corporate financial statements receive transparent information about an entity’s capital structure and obligations. This aligns with the “true and fair view” requirement under Section 129 of the Companies Act, 2013, ensuring comparability across reporting periods and entities.
Who Must Apply Ind AS 32?
Entities covered, applicability table
All companies required to follow Indian Accounting Standards must apply Ind AS 32. The phased roadmap notified by MCA determines applicability:
| Phase | Net Worth / Listing Criteria | Effective Date |
|---|---|---|
| Phase I | Listed entities or unlisted companies with net worth ≥ Rs 500 crore | FY 2016-17 onwards |
| Phase II | Unlisted companies with net worth ≥ Rs 250 crore but < Rs 500 crore | FY 2017-18 onwards |
| NBFCs* | NBFCs meeting above thresholds; listed NBFCs irrespective of net worth | Staggered from FY 2018-19 |
*NBFC = Non-Banking Financial Company
Entities voluntarily adopting Ind AS must also comply from their first year of adoption.
Scope exclusions
Ind AS 32 does not apply to:
- Investments in subsidiaries, associates, joint ventures
- Employee benefit plans
- Share-based payments
- Insurance contracts
When the standard does not apply
Where excluded items arise:
- Investments in subsidiaries/associates/joint ventures are addressed by relevant consolidation standards.
- Employee benefit plans fall under Ind AS 19.
- Share-based payments are governed by Ind AS 102.
- Insurance contracts are covered by Ind AS 117.
Key Definitions under Ind AS 32
| Term | Definition |
|---|---|
| Financial liability | Contractual obligation to deliver cash/financial asset or exchange unfavourable conditions. |
| Equity instrument | Contract evidencing residual interest after deducting all liabilities from entity’s assets. |
| Compound financial instrument | Instrument containing both liability and equity components (e.g., convertible debenture). |
| Puttable instrument | Instrument giving holder right to put back to issuer for cash/another financial asset. |
| Treasury shares | Entity’s own equity instruments held by itself or group members. |
Recognition and Measurement under Ind AS 32
When to recognise
Under Para 15 of Ind AS 32, classification as a liability or equity is determined at initial recognition based on contractual substance, not legal form. The entity must assess all terms and conditions at inception; subsequent changes in market conditions do not alter classification unless contract terms themselves change.
For example, if Krishna Steel Industries issues preference shares mandatorily redeemable after five years with fixed dividends payable annually, these are classified as a financial liability at initial recognition due to an unavoidable obligation to pay cash.
Once classified at inception based on substance-over-form analysis, reclassification is permitted only if, and when, the contractual terms themselves are modified (not merely due to passage of time or changing expectations).
Initial measurement
Compound instruments, those containing both liability and equity elements, must be split into separate components at initial recognition (Para 28). The liability component is measured at fair value using prevailing market rates for similar non-convertible debt without an equity feature; any residual amount is attributed to equity.
Costs directly attributable to issuing an equity instrument are deducted from equity (Para 35). For example:
Liability component = Present value (PV) of future cash flows discounted at market rate
Equity component = Total proceeds, Liability component
Preference shares requiring mandatory redemption or fixed dividends meet Para 18 criteria for classification as a liability, even if legally termed “equity”.
Subsequent measurement
After initial recognition:
No reclassification between liability/equity unless contract terms change.
Interest expense on liability components accrues using effective interest rate method; recognised in profit/loss.
Dividends/distributions on items classified as liabilities are charged to profit/loss; those on equity-classified items reduce reserves.
Treasury shares held by an entity/group member are deducted from equity; gains/losses on treasury share transactions bypass profit/loss.
Offsetting is permitted only if both a legally enforceable right exists and there is intent either to settle net or simultaneously (Para 42).
Offsetting criteria formula:
>
Offset only if:
- Legally enforceable right exists **and**
- Intention to settle net/simultaneously
Otherwise present gross amounts.
Substance Over Form for Preference Shares
The most practically significant rule in Ind AS 32 concerns preference share classification:
Mandatorily redeemable preference shares, or those carrying fixed dividend obligations, are financial liabilities even if legally termed “equity” (Para 18). Only discretionary dividend preference shares without redemption obligations qualify as “equity”.
This marks a sharp departure from legacy Indian GAAP where legal form prevailed. For compound instruments like convertible debentures, measure the liability portion at fair value using market rates applicable to similar non-convertible debt; attribute any residual amount representing conversion rights to equity.
In our audit practice we frequently observe companies misclassifying redeemable preference shares due to reliance on legal nomenclature instead of contractual substance, a critical compliance risk under NFRA scrutiny.
Worked Examples on Ind AS 32
Example 1: Convertible debenture - split presentation
Maharashtra Holdings issued Rs 100 crore of Compulsorily Convertible Debentures carrying an annual coupon of Rs 8 crore for three years before automatic conversion into equity shares at a fixed ratio. Comparable non-convertible debentures yield an annual market rate of interest at eleven percent.
Computation Table
| Component | Basis | Amount (Rs crore) |
|---|---|---|
| Liability | PV(interest payments @11% over three years) | Rs 19.55 |
| Equity | Residual = Face value, Liability component | Rs 80.45 |
| Total proceeds | Subscription received | Rs 100 |
Journal Entry
On issue date:
Dr Bank Rs 100 crore
Cr Debenture Liability (Financial Liability) Rs 19.55 crore
Cr Equity Component of Convertible Debenture Rs 80.45 crore
Subsequent years:
Accrete liability using EIR @11%. Equity component remains unchanged until conversion date when principal is settled via issue of new shares, not cash outflow.
Example 2: Mandatorily redeemable preference shares - liability classification
Krishna Capital issues Rs 25 crore cumulative redeemable preference shares carrying nine percent annual dividend, mandatory redemption after five years.
Computation Table
| Component | Basis | Amount (Rs crore) |
|---|---|---|
| Liability | Full proceeds recognised as liability | Rs 25 |
| Dividend | Annual finance cost @9% | Rs 2.25 |
| Redemption | Principal payable after five years | Rs 25 |
Journal Entry
On issue date:
Dr Bank Rs 25 crore
Cr Preference Share Liability (Financial Liability) Rs 25 crore
Annually:
Dr Finance Cost (P&L) Rs 2.25 crore
Cr Bank Rs 2.25 crore
Unlike legacy practice where such dividends would reduce reserves/equity directly, in this case both principal/redemption amounts flow through P&L as finance costs per Para 18 requirements under Ind AS 32 compliance.
Disclosure Requirements under Ind AS 32
Ind AS 32 mandates detailed disclosures to ensure users of financial statements understand the classification, terms, and risks associated with financial instruments. Schedule III to the Companies Act, 2013 requires compliance with these disclosures for transparent reporting and comparability across entities.
| Item | Requirement | Para Reference |
|---|---|---|
| Carrying amounts and methods | Cross-references Ind AS 107 disclosures | Para 1 |
| Information about contractual terms | Disclose terms and conditions for compound instruments and significant features of financial instruments | Cross-ref Ind AS 107 |
| Reclassifications | Where instrument terms change leading to reclassification | Implicit |
| Treasury shares | Disclose number, par value, and method of accounting | Implicit; cross-ref Schedule III |
| Set-off rights | Where financial assets and liabilities are presented net, disclose criteria met | Para 42 |
Auditors must verify that all required disclosures under Ind AS 32 are complete and accurate as part of their opinion on true and fair presentation under SA 700.
Common Mistakes & Industry-Specific Considerations
Common errors auditors flag
- Classifying mandatorily redeemable preference shares as equity instead of liability (most common error in Ind AS transition)
- Failing to split compound instruments at initial recognition
- Recognising dividends on liability-classified preference shares in equity instead of P&L
- Improper offsetting without legally enforceable right
- Treating contingent settlement provisions (e.g., dividend that becomes payable on event) as equity
Industry application notes
Holding companies: Many Indian holding companies use CCDs, OCDs, and CCPS in their capital structure. Each instrument requires a substance-over-form analysis under Ind AS 32. Misclassification can materially affect reported gearing ratios and regulatory compliance.
Real estate developers: Quasi-equity instruments are common in this sector to attract investors with project-linked returns. Proper classification as liability or equity directly impacts debt-equity ratios and covenants under lending agreements.
Startups and unicorns: Investor preference shares often carry anti-dilution or liquidation preference clauses. Under Ind AS 32, many such instruments are financial liabilities despite being labelled “equity” in company law documents. This affects EPS calculation and investor communications.
Ind AS 32 vs No notified counterpart vs IFRS: Key Differences
| Aspect | AS | Ind AS | IFRS |
|---|---|---|---|
| Preference share classification | By legal form (typically equity) | By substance (often liability if mandatorily redeemable) | Same as Ind AS |
| Compound instruments | Limited specific guidance | Mandatory split (Para 28) | Same |
| Treasury shares | Limited | Deduct from equity (Para 33) | Same |
| Offsetting criteria | Limited | Strict criteria (Para 42) | Same |
| Puttable instruments | Not addressed | Special equity classification possible (Para 16A-16D) | Same |
India’s Ind AS framework aligns closely with IFRS on financial instrument presentation. The major difference from legacy Indian GAAP is the strict application of substance-over-form for classifying preference shares and compound instruments. There are no material carve-outs from IAS 32 in this area; however, Indian companies must also comply with additional MCA disclosure requirements under Schedule III.
Latest Amendments to Ind AS 32 (FY 2026-27)
No amendments have been notified to Ind AS 32 for FY 2026-27 as of 2026-05-02. The standard continues to apply in its existing form.
Related Standards You Should Know
- [Ind AS 109](/ind-as-109-financial-instruments/), Recognition and measurement of financial instruments classified per Ind AS 32.
- [Ind AS 107](/ind-as-107-financial-instruments-disclosures/), Disclosure of financial instruments.
- [Ind AS 33](/ind-as-33-earnings-per-share/), EPS impact of liability vs equity classification (preference dividends).
- [Ind AS 102](/ind-as-102-share-based-payment/), Share-based payments outside Ind AS 32 scope but related concepts.
Need Help with Ind AS 32 Compliance?
Patron Accounting LLP provides end-to-end support for companies implementing or auditing compliance with Ind AS 32 Financial Instruments: Presentation. Our team combines technical expertise with real-world experience across sectors.
Services include:
- Statutory Audit
- Ind AS Advisory
- Financial Reporting & Schedule III Compliance
- Disclosure Review
Schedule a 30-minute consultation with our Ind AS team, Pune · Mumbai · Delhi · Gurugram.
Frequently Asked Questions (FAQs)
All companies required to follow Indian Accounting Standards must apply Ind AS 32 when preparing their standalone or consolidated financial statements. This includes listed entities, large unlisted companies meeting the net worth thresholds notified by the Ministry of Corporate Affairs, and voluntarily adopting entities.
Under Ind AS 32, preference shares are classified based on contractual substance. Mandatorily redeemable or fixed-dividend preference shares are treated as financial liabilities. Only non-redeemable, discretionary dividend preference shares qualify as equity. Legal form alone does not determine classification.
A compound financial instrument contains both a liability component and an equity component within a single contract, such as convertible debentures. At initial recognition, the issuer must split the instrument into separate liability and equity portions based on present value calculations.
Convertible debentures require split accounting at inception. The issuer recognises a liability component measured at fair value using market rates for similar non-convertible debt; any residual amount is attributed to equity representing the conversion option.
Mandatorily redeemable preference shares are classified as financial liabilities under Para 18 of Ind AS 32 because they create an unavoidable obligation to deliver cash or another asset at maturity, regardless of legal terminology in company documents.
Offsetting is permitted only if both a legally enforceable right exists at all times during the reporting period and there is an intention either to settle net or simultaneously (Para 42). Otherwise, present gross amounts separately in the balance sheet.
Treasury shares, an entity’s own equity instruments held by itself or its subsidiaries, are deducted from total equity in the balance sheet under Para 33. Gains or losses on transactions involving treasury shares do not impact profit or loss.
A puttable instrument gives the holder the right to return it to the issuer for cash or another asset. In certain cases described in Paras 16A-16D, such instruments may be classified as equity even though they contain redemption features.
Frequent errors include misclassifying redeemable preference shares as equity, failing to split compound instruments at inception, recognising dividends on liability-classified shares through reserves instead of P&L, improper offsetting without enforceable rights, and incorrect treatment of contingent settlement provisions.
India’s version of IAS 32, Ind AS 32, is nearly identical regarding presentation principles. However, Indian companies must also comply with additional disclosure requirements specified by Schedule III to the Companies Act, 2013 alongside those mandated by ICAI standards.
About This Article
Reviewed by CA & CS Team · Patron Accounting LLP
Technical reviewer: CA Sundram Gupta, FCA
Last reviewed: 2026-05-02
Sources: ICAI Compendium of Accounting Standards · MCA Notification (Companies (Indian Accounting Standards) Rules, 2015, dated 16 February 2015) · IFRS Foundation