How does the new 'substantive business purpose' test for contingent settlement provisions change the IAS 32 equity classification analysis in practice?

Business Combinations — Disclosures, Goodwill and Impairment — 21 April 2026: - Performance information subset: retained the proposal to require disclosure for only a subset of business combinations using a threshold approach (11 of 13 agreed); thresholds set at 10% for revenue and assets; operating profit threshold removed; qualitative thresholds removed (11 of 13 agreed). - Exemption: refined exemption wording to cover statutory legal or regulatory breaches only (not social or operational consequences); removed the proposal to require disclosure of the reason for applying the exemption; decided not to define "seriously prejudicial" or add examples (all 13 agreed). - IAS 36 value in use: retained the proposal to remove the requirement to exclude cash flows from uncommitted future restructurings and asset enhancements when calculating value in use (9 of 13 agreed). Statement of Cash Flows and Related Matters (IAS 7) — 22 April 2026. Tentatively decided to propose including in the definition of cash equivalents in IAS 7 the requirement that cash equivalents be held for the purpose of meeting short-term cash commitments rather than for investment or other purposes (9 of 13 agreed). No decisions on clarifying application guidance for investments with a maturity of three months or less. IAS 32 Financial Instruments with Characteristics of Equity — In redeliberation; measurement issues for contingent settlement provisions moved to Amortised Cost Measurement project. Next step: continue redeliberating remaining classification topics. IFRS 16 Post-implementation Review — Cash flow disclosure exploration moved to IAS 7 project. Next step: deliberate other feedback on the Request for Information.

How does removing the exclusion of uncommitted restructuring cash flows from IAS 36 value-in-use calculations affect impairment testing?

- Entities with contingent settlement provisions in financial instruments should review their IAS 32 classification analysis in light of the clarified "substantive business purpose" test. The confirmed approach requires both probability and nature of the contingent event to be considered; instruments with genuine commercial rationale for contingencies will retain equity classification even when the triggering event is remote. - Lessees applying IFRS 16 should anticipate new disclosure requirements for lease-related cash flow components in the statement of cash flows. Finance teams should begin mapping each category of lease cash outflow (principal repayments, interest, variable lease payments, short-term and low-value exemptions) to their presentation line items in preparation for the forthcoming requirement. - Preparers involved in business combinations should note that the 10% revenue/asset threshold approach for performance disclosure will reduce the population of acquisitions requiring detailed post-acquisition reporting. The removal of the operating profit threshold and all qualitative thresholds simplifies the scoping exercise. - IAS 32 Financial Instruments: Presentation - IFRS 9 Financial Instruments - IFRS 16 Leases - IAS 28 Investments in Associates and Joint Ventures - IAS 36 Impairment of Assets - IAS 7 Statement of Cash Flows - IFRS 18 Presentation and Disclosure in Financial Statements - IAS 1 Presentation of Financial Statements

IASB April 2026 Update

Tentative decisions

Financial Instruments with Characteristics of Equity (IAS 32) — 20 April 2026. The IASB continued redeliberating the Exposure Draft on Financial Instruments with Characteristics of Equity, focusing on contingent settlement provisions. Key decisions: (a) proceed with proposed requirements on classification of instruments containing contingent settlement provisions, with clarifications that IAS 32 paragraph 25 applies only where settlement giving rise to a financial liability can occur ONLY as a result of an uncertain future event beyond the control of both issuer and holder; (b) dividend payments recognised as expenses if shares are wholly classified as liabilities — resolving an inconsistency in IAS 32; (c) liquidation described as a process permanently ceasing an entity's operations; (d) when assessing whether a contractual term is "not genuine", an entity considers both probability AND nature of the contingent event, including whether the event has a substantive business purpose — a term with a substantive business purpose is genuine even if the probability of the event is remote. The IASB decided NOT to proceed with proposed measurement requirements for financial liabilities arising from contingent settlement provisions within this project — those issues will be addressed in the Amortised Cost Measurement project.

Post-implementation Review of IFRS 16 Leases — 21 April 2026. Focused on lessee lease-related cash flows: tentatively decided to explore requiring lessees to disclose the components of total cash outflow for leases together with the line item in the statement of cash flows where each component is presented (12 of 13 agreed); to be explored in the Statement of Cash Flows and Related Matters project. Decided to take no action on: (a) classification and presentation of lease-related cash flows by lessees; (b) lack of comparability between lessee cash flows and those of entities that borrow to buy assets (12 of 13 agreed). No action on other matters about usefulness of lessees' lease-related cash flows (all 13 agreed).

Amortised Cost Measurement — 21 April 2026. Tentatively decided to amend paragraph B5.4.5 of IFRS 9 to require that an entity adjust the effective interest rate (EIR) to account for re-estimation of the contractual cash flows of a financial asset or liability that provides consideration for the time value of money or for credit risk (all 13 agreed).

Equity Method (IAS 28) — 22 April 2026. Redeliberation of the Exposure Draft on Equity Method of Accounting:

Cost of an associate: confirmed proposal to include deferred tax effects related to adjusting the investor's share of the associate's identifiable assets and liabilities to fair value in the carrying amount of the investment (all 13 agreed); clarified that when an investor issues equity or debt instruments to obtain significant influence, it accounts for costs to issue these instruments in accordance with IAS 32 and IFRS 9 (all 13 agreed); decided NOT to require a pre-recognition reassessment before recognising a bargain purchase gain (12 of 13 agreed).
Purchases of additional ownership interests: confirmed the proposal to recognise a bargain purchase gain in profit or loss (all 13 agreed); confirmed that an investor with a nil carrying amount is NOT required to immediately recognise previously unrecognised losses when it purchases an additional ownership interest (all 13 agreed).

Business Combinations — Disclosures, Goodwill and Impairment — 21 April 2026:

Performance information subset: retained the proposal to require disclosure for only a subset of business combinations using a threshold approach (11 of 13 agreed); thresholds set at 10% for revenue and assets; operating profit threshold removed; qualitative thresholds removed (11 of 13 agreed).
Exemption: refined exemption wording to cover statutory legal or regulatory breaches only (not social or operational consequences); removed the proposal to require disclosure of the reason for applying the exemption; decided not to define "seriously prejudicial" or add examples (all 13 agreed).
IAS 36 value in use: retained the proposal to remove the requirement to exclude cash flows from uncommitted future restructurings and asset enhancements when calculating value in use (9 of 13 agreed).

Statement of Cash Flows and Related Matters (IAS 7) — 22 April 2026. Tentatively decided to propose including in the definition of cash equivalents in IAS 7 the requirement that cash equivalents be held for the purpose of meeting short-term cash commitments rather than for investment or other purposes (9 of 13 agreed). No decisions on clarifying application guidance for investments with a maturity of three months or less.

Active projects

IAS 32 Financial Instruments with Characteristics of Equity — In redeliberation; measurement issues for contingent settlement provisions moved to Amortised Cost Measurement project. Next step: continue redeliberating remaining classification topics.

IFRS 16 Post-implementation Review — Cash flow disclosure exploration moved to IAS 7 project. Next step: deliberate other feedback on the Request for Information.

Amortised Cost Measurement — Active standard-setting; EIR adjustment requirement tentatively decided. Next step: continue deliberating issues within scope.

Equity Method (IAS 28) — In redeliberation of the Exposure Draft. Next step: continue redeliberating all outstanding proposals.

Business Combinations — Disclosures, Goodwill and Impairment — In redeliberation. Next step: continue redeliberating proposals in the Exposure Draft.

Statement of Cash Flows (IAS 7) — Active standard-setting. Next step: continue considering how to improve financial reporting for each topic in the project plan.

What it means for preparers

Entities with contingent settlement provisions in financial instruments should review their IAS 32 classification analysis in light of the clarified "substantive business purpose" test. The confirmed approach requires both probability and nature of the contingent event to be considered; instruments with genuine commercial rationale for contingencies will retain equity classification even when the triggering event is remote.

Lessees applying IFRS 16 should anticipate new disclosure requirements for lease-related cash flow components in the statement of cash flows. Finance teams should begin mapping each category of lease cash outflow (principal repayments, interest, variable lease payments, short-term and low-value exemptions) to their presentation line items in preparation for the forthcoming requirement.

Preparers involved in business combinations should note that the 10% revenue/asset threshold approach for performance disclosure will reduce the population of acquisitions requiring detailed post-acquisition reporting. The removal of the operating profit threshold and all qualitative thresholds simplifies the scoping exercise.

Standards in scope

IAS 32 Financial Instruments: Presentation
IFRS 9 Financial Instruments
IFRS 16 Leases
IAS 28 Investments in Associates and Joint Ventures
IAS 36 Impairment of Assets
IAS 7 Statement of Cash Flows
IFRS 18 Presentation and Disclosure in Financial Statements
IAS 1 Presentation of Financial Statements

IASB April 2026 Board Update

What did the IASB decide in its April 2026 board meetings?

Tentative decisions

Active projects

What it means for preparers

Standards in scope