11/06/2025
IFRS for SMEs – Section 22: Liabilities and Equity
Section 22 provides guidance on how small and medium-sized entities (SMEs) should distinguish between liabilities and equity and how to account for and present them in the financial statements.
Key Concepts of Section 22
1. Distinction Between Liabilities and Equity
A liability is a present obligation arising from past events, expected to result in an outflow of resources.
Equity represents the residual interest in the assets of the entity after deducting all liabilities.
2. Equity Instruments
Equity instruments include ordinary shares, preference shares (non-redeemable), and other ownership interests.
Instruments are classified as equity if:
They do not include a contractual obligation to deliver cash or another financial asset.
They cannot be settled in a variable number of shares.
3. Liability Instruments
Instruments that require repayment of cash or other financial assets are classified as financial liabilities, not equity.
For example: redeemable preference shares are generally liabilities, not equity, because they require repayment.
4. Compound Financial Instruments
If a financial instrument has both liability and equity components, it is classified and accounted for separately.
Example: Convertible bonds — split into liability (bond) and equity (conversion option) parts.
5. Treasury Shares
Own equity instruments reacquired by the entity (treasury shares) are deducted from equity. No gain or loss is recognized on purchase, sale, issue, or cancellation.
6. Dividends and Distributions
Dividends declared on equity instruments are recognized directly in equity.
Dividends on liabilities (e.g., interest on redeemable shares) are recognized as expenses.
