FRS 25 implements the international standard IAS 32 and (for accounting periods ending 31 December 2006) covers both presentation and disclosure requirements. For accounting periods beginning on or after 1 January 2007 the revised disclosure requirements FRS 29 replace the requirements in FRS 25.

The presentation requirements of FRS 25 deal with the classification of capital instruments issued between debt and equity and the implications of that classification for dividends and interest expense.

• Many preference shares are required to be shown as liabilities, rather than as part of shareholders' funds. A consequence of this is that dividends on preference shares shown as liabilities are treated as part of the interest expense.
• Compound instruments (in other words, instruments that comprise debt and equity, such as convertible debt) are required to be split into their debt and equity elements, with each element being accounted for separately.
• The FRS also includes detailed material on the classification of contracts on the equity instruments of the reporting entity.

FRS 25 also deals with the bringing together of receivables and payables on the balance sheet as a single (net) receivable or payable (ie 'offset').

The presentation requirements of FRS 25 apply to all entities for accounting periods beginning on of after 1 January 2005, which corresponds with the amendments to the Companies Act 1985 resulting from the EU Accounts Modernisation Directive that also require the classification of items on the balance sheet to have regard to their substance.

The disclosure requirements of FRS 25 require entities to provide a range of primarily risk-based qualitative and quantitative disclosures about the financial instruments they hold or have issued. FRS 25 requires quantitative credit risk disclosures and is less prescriptive than FRS 13. Companies will have more flexibility to choose the form that their disclosures should take.

The existing UK standard on financial instrument disclosures, FRS 13, applies only to listed entities and to banks and similar institutions. Most of these entities will be required to adopt the measurement rules of FRS 26 and accordingly fall within the scope of FRS 25’s disclosure requirements. For such entities, FRS 13 is withdrawn. However, FRS 13 remains in force for any banking or similar institution that does not fall within the scope of FRS 26 and does not voluntarily adopt that standard.

FRS 25 also has the effect of withdrawing FRS 4 ‘Capital Instruments’, except for material on the measurement of debt and gains and losses on the repurchase of debt. This material is withdrawn for entities applying the measurement requirements in FRS 26, but remains applicable for other entities. FRS 25 will also supersede two UITF Abstracts: 33 ‘Obligations in capital instruments’; and 37 ‘Purchases and sales of own shares’. FRS 25 also replaces the offset rules in FRS 5 ‘Reporting the Substance of Transactions’.

Subsequent amendments:

The ASB issued revised disclosure requirements for financial instruments in FRS 29 replacing those set out in FRS 25. FRS 29 has the effect of implementing the amended disclosure requirements of IFRS 7 'Financial Instruments: Disclosures', issued by the IASB in August 2005, in the UK. FRS 29 is applicable for accounting periods beginning on or after 1 January 2007.

During August 2008 the ASB issued an amendment to FRS 25 to change the classification from liabilities to equity of certain puttable financial instruments and for certain financial instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation. These changes, upon implementation, would ensure that FRS 25 remains converged with IAS 32, which was amended by the IASB in February 2008.

The amendment is effective for accounting periods beginning on or after 1 January 2010. Early adoption is only permitted for accounting periods beginning on or after 1 January 2009.