Topic 501 - Financial instruments: Presentation

This topic includes FAQs relating to the following IFRS standards, IFRIC Interpretations and SIC Interpretations:

IAS 32 Financial Instruments: Presentation

IFRIC 2 Members’ Shares in Co‑operative Entities and Similar Instruments

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

Other resources

  • IFRS At a Glance by standard is available here
  • IFRS in Practice: Accounting for Convertible Notes is available here

 

Sub-topic within this main topic are set out below, with links to IFRS Interpretation Committee agenda decisions and BDO IFRS FAQs relating to that sub-topic below each sub-topic:

Sub-topic Number Sub-topic and Related FAQ
501.1 Scope and definitions
  • 501.1.1.1
  • 501.1.1.2
501.2 Definition of financial assets
501.3 Definition of financial liabilities
  • 501.3.1.1
  • 501.3.1.2
501.4 Definition of equity
501.5 Classification as liability or equity - general
  • 501.5.1.1
  • 501.5.1.2
  • 501.5.1.3
  • 501.5.1.4
  • 501.5.1.5
501.6 Exception: puttable instruments
  • 501.6.1.1
  • 501.6.1.2
501.7 Exception: instruments that impose an obligation only on liquidation
501.8 Contracts settled in an entity's own equity instruments
501.9 Derivatives: 'fixed for fixed' test
501.10 Non-derivatives: 'fixed for fixed' test
501.11 Share splits and bonus issues
501.12 Contingent settlement provisions
501.13 Obligation to buy own equity instruments
501.14 Compound financial instruments
501.15 Classification of convertible instruments
  • 501.15.1.1
  • 501.15.1.2
501.16 Classification of preference shares
501.17 Reclassification of financial instruments
  • 501.17.1.1
501.18 Settlement of financial liabilities with equity instruments
501.19 Presentation of interest, dividends, losses and gains
  • 501.19.1.1
501.20 Offsetting financial assets and financial liabilities
  • 501.20.1.1
501.21 Other issues

 

FAQ#

Title

Text of FAQ

501.1.1.1

IFRIC Agenda Decision - Employee long‑service leave

November 2005 - The IFRIC considered whether a liability for long‑service leave falls within IAS 19 or whether it is a financial liability within the scope of IAS 32.

The IFRIC noted that IAS 19 indicates that employee benefit plans include a wide range of formal and informal arrangements. It is therefore clear that the exclusion of employee benefit plans from IAS 32 extends to all employee benefits covered by IAS 19.

The IFRIC decided that, since the Standard was clear, it would not expect diversity in practice and would not add this item to its agenda.

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501.1.1.2

IFRIC Agenda Decision - Deposits on returnable containers

May 2008 - The IFRIC was asked to provide guidance on the accounting for the obligation to refund deposits on returnable containers. In some industries, entities that distribute their products in returnable containers collect a deposit for each container delivered and have an obligation to refund this deposit when containers are returned by the customer. The issue was whether the obligation should be accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

The IFRIC noted that paragraph 11 of IAS 32 defines a financial instrument as ‘any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.’ Following delivery of the containers to its customers, the seller has an obligation only to refund the deposit for any returned containers.

In circumstances in which the containers are derecognised as part of the sale transaction, the obligation is an exchange of cash (the deposit) for the containers (non‑financial assets). Whether that exchange transaction occurs is at the option of the customer. Because the transaction involves the exchange of a non‑financial item, it does not meet the definition of a financial instrument in accordance with IAS 32.

In contrast, when the containers are not derecognised as part of the sale transaction, the customer’s only asset is its right to the refund. In such circumstances, the obligation meets the definition of a financial instrument in accordance with IAS 32 and is therefore within the scope of IAS 39. In particular, paragraph 49 of IAS 39 states that ‘the fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.’ The IFRIC concluded that divergence in this area was unlikely to be significant and therefore decided not to add this issue to its agenda.

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501.3.1.1

IFRIC Agenda Decision - Classification of liability for a prepaid card in the issuer’s financial statements

March 2016 - The Interpretations Committee received a request to clarify how an entity classifies the liability that arises when it issues a prepaid card in exchange for cash and how the entity accounts for any unspent balance on such a card. Specifically, the Interpretations Committee discussed a prepaid card with the following features:

a.

no expiry date and no back-end fees, which means that any balance on the prepaid card does not reduce unless it is spent by the cardholder;

b.

non-refundable, non-redeemable and non-exchangeable for cash;

c.

redeemable only for goods or services to a specified monetary amount;

d.

redeemable only at specified third-party merchants that, depending upon the card programme, range from a single merchant to all merchants that accept a specific card network. Upon redemption by the cardholder at a merchant(s) for goods or services, the entity delivers cash to the merchant(s).

The Interpretations Committee was asked to consider whether the liability for the prepaid card is a non-financial liability on the basis that the entity does not have an obligation to deliver cash to the cardholder.

The Interpretations Committee observed that the entity’s liability for the prepaid card meets the definition of a financial liability. This is because the entity:

a.

has a contractual obligation to deliver cash to the merchants on behalf of the cardholder, which is conditional upon the cardholder using the prepaid card to purchase goods or services; and

b.

does not have an unconditional right to avoid delivering cash to settle this contractual obligation.

Consequently, an entity that issues such a card applies the requirements in IFRS 9 Financial Instruments (IAS 39 Financial Instruments: Recognition and Measurement) to account for the financial liability for the prepaid card.

The Interpretations Committee noted that customer loyalty programmes were outside the scope of its discussion on this issue.

In the light of the existing requirements in IAS 32 Financial Instruments: Presentation and IFRS 9 (IAS 39), the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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501.3.1.2

IFRIC Agenda Decision - Accounting for repayable cash receipts

May 2016 - The Interpretations Committee received a request to clarify the accounting for cash received from a government to help an entity finance a research and development project. More specifically, the request asked whether the entity must recognise the cash received as a liability (on the basis that the entity has received a forgivable loan as defined in IAS 20 Accounting for Government Grants and Disclosure of Government Assistance) or in profit or loss (on the basis that the entity has received a government grant as defined in IAS 20). The cash received from the government is repayable in cash only if the entity decides to exploit and commercialise the results of the research phase of the project. The terms of that repayment can result in the government receiving as much as twice the amount of the original cash proceeds if the project is successful. If the entity decides not to exploit and commercialise the results of the research phase, the cash received is not repayable in cash, but instead the entity must transfer to the government the rights to the research.

The Interpretations Committee noted that, in this arrangement, the entity has obtained financing for its research and development project. The Interpretations Committee observed that the cash receipt described in the submission gives rise to a financial liability (applying paragraph 20(a) of IAS 32 Financial Instruments: Presentation) because the entity can avoid a transfer of cash only by settling a non-financial obligation (ie by transferring the rights to the research to the government). The entity accounts for that financial liability applying IFRS 9 Financial Instruments (IAS 39 Financial Instruments: Recognition and Measurement).

The Interpretations Committee noted that, in the arrangement described in the submission, the cash received from the government does not meet the definition of a forgivable loan in IAS 20. This is because, in this arrangement, the government does not undertake to waive repayment of the loan, but rather to require settlement in cash or by transfer of the rights to the research.

The Interpretations Committee noted that, applying paragraph B5.1.1 of IFRS 9 (paragraph AG64 of IAS 39), the entity assesses at initial recognition whether part of the cash received from the government is for something other than the financial instrument. For example, in the fact pattern described in the submission, part of the cash received (the difference between the cash received and the fair value of the financial liability) may represent a government grant. If this is the case, the entity accounts for the government grant applying IAS 20.

The Interpretations Committee noted that the requirements in IFRS Standards provide an adequate basis to enable an entity to account for the cash received from the government.

In the light of the existing requirements in IFRS Standards, the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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501.5.1.1

IFRIC Agenda Decision - Changes in the contractual terms of an existing equity instrument resulting in it being reclassified to financial liability

November 2006 - The IFRIC was asked to consider a situation in which an amendment to the contractual terms of an equity instrument resulted in the instrument being classified as a financial liability of the issuer.

Two issues were discussed:

  1. on what basis the financial liability should be measured at the date when the terms were changed and
  2. how any difference between the carrying amount of the previously recognised equity instrument and the amount of the financial liability recognised at the date when the terms were changed should be accounted for.

The IFRIC noted that at the time when the contractual terms were changed, a financial liability was initially recognised, and, furthermore, that a financial liability on initial recognition is measured at its fair value in accordance with paragraph 43 of IAS 39 Financial Instruments: Recognition and Measurement. [IFRS 9 Financial Instruments replaced IAS 39. The requirements of paragraph 43 of IAS 39 relating to the initial measurement of financial liabilities were relocated to paragraph 5.1.1 of IFRS 9] The IFRIC observed that Example 3 of IFRIC 2 Members’ Shares in Co‑operative Entities and Similar Instruments deals with a similar situation. In that example, at the time when the financial liabilities are recognised, when the terms are changed, they are recognised at their fair value.

The IFRIC observed that the change in the terms of the instrument gave rise to derecognition of the original equity instrument. The IFRIC noted that paragraph 33 of IAS 32 Financial Instruments: Presentation states that no gain or loss shall be recognised in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. The IFRIC, therefore, believed that, at the time when the terms were changed, the difference between the carrying amount of the equity instrument and the fair value of the newly recognised financial liability should be recognised in equity.

The IFRIC believed that the requirements of IFRS, taken as a whole, were sufficiently clear and that the issue was not expected to have widespread relevance in practice. The IFRIC therefore decided that the issue should not be added to the agenda.

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501.5.1.2

IFRIC Agenda Decision - Classification of a financial instrument as liability or equity

November 2006 - At its meeting in March 2006 the IFRIC discussed a submission for a possible agenda item relating to the role of contractual obligations and economic compulsion in the classification of financial instruments. At that meeting and the following meeting in May, the IFRIC agreed not to add the item to the agenda but did not agree on reasons to be given for that decision.

At the IFRIC meeting in July, the Chairman reported the Board’s discussions on the issue at its meeting in June 2006.

As stated in the June 2006 IASB Update, the Board discussed whether so‑called economic compulsion should affect the classification of a financial instrument (or a component of a financial instrument) under IAS 32. This issue had previously been debated at the IFRIC meetings in March and May 2006.

For a financial instrument (or a component of a financial instrument) to be classified as a financial liability under IAS 32, the issuer must have a contractual obligation either

  • to deliver cash or another financial asset to the holder of the instrument, or
  • to exchange financial assets or financial liabilities with the holder under conditions that are potentially unfavourable to the issuer.

(Different requirements apply to financial instruments that may or will be settled in the issuer’s own equity instruments.) The Board confirmed that such a contractual obligation could be established explicitly or indirectly, but it must be established through the terms and conditions of the instrument. Thus, by itself, economic compulsion would not result in a financial instrument being classified as a liability under IAS 32.

The Board also stressed that IAS 32 requires an assessment of the substance of the contractual arrangement. It does not, however, require or permit factors not within the contractual arrangement to be taken into consideration in classifying a financial instrument. In view of the Board’s discussion, the IFRIC believed that it could not achieve anything substantial by adding the issue on the agenda. Instead, the IFRIC agreed to draw the Board’s attention to comments raised by constituents and to ask the Board whether anything could be done to achieve even greater clarity on this point.

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501.5.1.3

IFRIC Agenda Decision - Shareholder discretion

March 2010 - The IFRIC received a request for guidance on whether a financial instrument, in the form of a preference share that includes a contractual obligation to deliver cash, is a financial liability or equity, if the payment is at the ultimate discretion of the issuer’s shareholders.

The IFRIC noted that paragraph AG26 of IAS 32 identifies that when distributions to holders of preference shares are at the discretion of the issuer, the shares are equity instruments.

The IFRIC identified that diversity may exist in practice in assessing whether an entity has an unconditional right to avoid delivering cash if the contractual obligation is at the ultimate discretion of the issuer’s shareholders, and consequently whether a financial instrument should be classified as a financial liability or equity.

The IFRIC noted that the Board is currently undertaking a project to improve and simplify the financial reporting requirements for financial instruments with characteristics of equity. The main objectives of this project are to develop a better distinction between equity and non‑equity instruments and convergence of IFRSs and US GAAP.

Consequently, the IFRIC recommended that the Board address this issue as part of its current project on Financial Instruments with Characteristics of Equity. The Board’s project was expected to address the distinction between equity and non‑equity instruments in a shorter period than the IFRIC would require to complete its due process. Therefore, the IFRIC decided not to add this issue to its agenda.

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501.5.1.4

IFRIC Agenda Decision - Classification of financial instruments that give the issuer the contractual right to choose the form of settlement

September 2013 - The IFRS Interpretations Committee received a request to clarify how an issuer would classify three financial instruments in accordance with IAS 32 Financial Instruments: Presentation. None of the financial instruments had a maturity date but each gave the holder the contractual right to redeem at any time. The holder's redemption right was described differently for each of the three financial instruments; however in each case the issuer had the contractual right to choose to settle the instrument in cash or a fixed number of its own equity instruments if the holder exercised its redemption right. The issuer was not required to pay dividends on the three instruments but could choose to do so at its discretion.

The Interpretations Committee noted that paragraph 15 of IAS 32 requires the issuer of a financial instrument to classify the instrument in accordance with the substance of the contractual arrangement. Consequently, the issuer cannot achieve different classification results for financial instruments with the same contractual substance simply by describing the contractual arrangements differently.

Paragraph 11 in IAS 32 sets out the definitions of both a financial liability and an equity instrument. Paragraph 16 describes in more detail the circumstances in which a financial instrument meets the definition of an equity instrument.

The Interpretations Committee noted that a non-derivative financial instrument that gives the issuer the contractual right to choose to settle in cash or a fixed number of its own equity instruments meets the definition of an equity instrument in IAS 32 as long as the instrument does not establish an obligation to deliver cash (or another financial asset) indirectly through its terms and conditions. Paragraph 20(b) of IAS 32 provides the example that an indirect contractual obligation would be established if a financial instrument provides that on settlement the entity will deliver either cash or its own equity instruments whose value is determined to exceed substantially the value of the cash.

The Committee also acknowledged that financial instruments, in particular those that are more structured or complex, require careful analysis to determine whether they contain equity and non equity components that must be accounted for separately in accordance with IAS 32.

The Interpretations Committee noted that if the issuer has a contractual obligation to deliver cash, that obligation meets the definition of a financial liability.

The Interpretations Committee considered that in the light of its analysis of the existing IFRS requirements, an interpretation was not necessary and consequently decided not to add the issue to its agenda.

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501.5.1.5 

IFRIC Agenda Decision - Special Purpose Acquisition Companies (SPAC): Classification of Public Shares as Financial Liabilities or Equity

The Committee received a request about whether a special purpose acquisition company (SPAC), in applying IAS 32, classifies public shares it issues as financial liabilities or equity instruments. A SPAC is a listed entity that is established to acquire a yet-to-be-identified target entity. 

The request described a SPAC that issues two classes of shares: founder shares (Class A) and public shares (Class B). The Class B shareholders: 

a. individually have the contractual right to demand a reimbursement of their shares if the SPAC’s shareholders approve the acquisition of a target entity. 

b. are reimbursed if the SPAC is liquidated. The SPAC is liquidated if no target entity is acquired within a specified period. 

c. along with the Class A shareholders, have the contractual right to extend the SPAC’s life indefinitely if no target entity is acquired. 

The request asked about the effect of the shareholders’ contractual right to extend the SPAC’s life indefinitely on the classification of the Class B shares—in particular, whether the shareholders’ decision to extend the SPAC’s life is considered to be within the control of the SPAC. This assessment is needed to determine whether the SPAC has the unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation. 

The Committee observed that IAS 32 includes no requirements on how to assess whether a decision of shareholders is treated as a decision of the entity. The Committee acknowledged that similar questions about shareholder decisions arise in other circumstances. Assessing whether a decision of shareholders is treated as a decision of the entity has been identified as one of the practice issues the International Accounting Standards Board (IASB) will consider in its Financial Instruments with Characteristics of Equity (FICE) project. The Committee concluded that the matter described in the request is, in isolation, too narrow for the IASB or the Committee to address in a cost-effective manner. Instead, the IASB should consider the matter as part of its broader discussions on the FICE project. For these reasons, the Committee decided not to add a standard-setting project to the work plan. The Committee nonetheless noted the importance of the SPAC disclosing information in the notes to its financial statements about the classification of its public shares. 

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501.6.1.1

IFRIC Agenda Decision - Classification of puttable and perpetual instruments

March 2009 - The IFRIC received a request for guidance on the application of paragraph 16A(c) of IAS 32, which states that ‘All financial instruments in the class of instruments that is subordinate to all other classes of instruments have identical features’. The request asked for guidance on the classification of an entity’s puttable instruments that are subordinate to all other classes of instruments when the entity also has perpetual instruments that are classified as equity.

The IFRIC noted that a financial instrument is first classified as a liability or equity instrument in accordance with the general requirements of IAS 32. That classification is not affected by the existence of puttable instruments. As a second step, if a financial instrument would meet the general definition of a liability because it is puttable to the issuer, the entity considers the conditions in paragraphs 16A and 16B of IAS 32 to determine whether it should be classified as equity. Consequently, the IFRIC noted that IAS 32 does not preclude the existence of several classes of equity.

The IFRIC also noted that paragraph 16A(c) applies only to ‘instruments in the class of instruments that is subordinate to all other classes of instruments’. Paragraph 16A(b) specifies that the level of an instrument’s subordination is determined by its priority in liquidation. Accordingly, the existence of the put does not of itself imply that the puttable instruments are less subordinate than the perpetual instruments.

Given the requirements in IAS 32, the IFRIC did not expect significant diversity in practice to develop. Therefore the IFRIC decided not to add this issue to its agenda.

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501.6.1.2

IFRIC Agenda Decision - Classification of puttable instruments that are non-controlling interests

November 2013 - The Interpretations Committee discussed a request for guidance on the classification, in the consolidated financial statements of a group, of puttable instruments that are issued by a subsidiary but that are not held, directly or indirectly, by the parent. The submitter asked about puttable instruments classified as equity instruments in the financial statements of the subsidiary in accordance with paragraphs 16A⁠–⁠16B of IAS 32 Financial Instruments: Presentation (‘puttable instruments’) that are not held, directly or indirectly, by the parent. The question asked was whether these instruments should be classified as equity or liability in the parent’s consolidated financial statements.

The submitter claims that paragraph 22 of IFRS 10 Consolidated Financial Statements is not consistent with paragraph AG29A of IAS 32, because:

a.

IFRS 10 defines non-controlling interests (NCI) as equity in a subsidiary not attributable, directly or indirectly, to a parent;

b.

according to paragraph 22 of IFRS 10 a parent shall present non-controlling interests (NCI) in the consolidated statement of financial position within equity; but

c.

according to paragraph AG29A of IAS 32, instruments classified as equity instruments in accordance with paragraphs 16A⁠–⁠16D of IAS 32 in the separate or individual financial statements of the subsidiary that are NCI are classified as liabilities in the consolidated financial statements of the group.

The Interpretations Committee noted that paragraphs 16A⁠–⁠16D of IAS 32 state that puttable instruments and 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 meet the definition of a financial liability. These instruments are classified as equity in the financial statements of the subsidiary as an exception to the definition of a financial liability if all relevant requirements are met. Paragraph AG29A clarifies that this exception applies only to the financial statements of the subsidiary and does not extend to the parent’s consolidated financial statements. Consequently, these financial instruments should be classified as financial liabilities in the parent’s consolidated financial statements.

The Interpretations Committee therefore concluded that in the light of the existing guidance in IAS 32, neither an interpretation nor an amendment to a Standard was necessary and consequently decided not to add this issue to its agenda.

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501.15.1.1

IFRIC Agenda Decision - a financial instrument that is mandatorily convertible into a variable number of shares (subject to a cap and a floor) but gives the issuer the option to settle by delivering the maximum (fixed) number of shares

January 2014 - The Interpretations Committee discussed how an issuer would assess the substance of a particular early settlement option included in a financial instrument in accordance with IAS 32 Financial Instruments: Presentation. The instrument has a stated maturity date and at maturity the issuer must deliver a variable number of its own equity instruments to equal a fixed cash amount, subject to a cap and a floor. The cap and the floor limit and guarantee, respectively, the number of equity instruments to be delivered. The issuer is required to pay interest at a fixed rate. The issuer has the contractual right to settle the instrument at any time before maturity. If the issuer chooses to exercise that early settlement option, it must:

a.

deliver the maximum number of equity instruments specified in the contract; and

b.

pay in cash all of the interest that would have been payable if the instrument had remained outstanding until its maturity date.

The Interpretations Committee noted that the definitions of financial asset, financial liability and equity instrument in IAS 32 are based on the financial instrument’s contractual rights and contractual obligations. However, paragraph 15 of IAS 32 requires the issuer of a financial instrument to classify the instrument in accordance with the substance of the contractual arrangement. Consequently, the Interpretations Committee noted that if a contractual term of a financial instrument lacks substance, that contractual term would be excluded from the classification assessment of the instrument.

The Interpretations Committee noted that the issuer cannot assume that a financial instrument (or its components) meets the definition of an equity instrument simply because the issuer has the contractual right to settle the financial instrument by delivering a fixed number of its own equity instruments. The Interpretations Committee noted that judgement will be required to determine whether the issuer’s early settlement option is substantive and thus should be considered in determining how to classify the instrument. If the early settlement option is not substantive, that term would not be considered in determining the classification of the financial instrument.

The Interpretations Committee noted that the guidance in paragraph 20(b) of IAS 32 is relevant because it provides an example of a situation in which one of an instrument’s settlement alternatives is excluded from the classification assessment. Specifically, the example in that paragraph describes an instrument that the issuer will settle by delivering either cash or its own shares and states that one of the settlement alternatives should be excluded from the classification assessment in some circumstances.

The Interpretations Committee noted that to determine whether the early settlement option is substantive, the issuer will need to understand whether there are actual economic or other business reasons that the issuer would exercise the option. In making that assessment, the issuer could consider, along with other factors, whether the instrument would have been priced differently if the issuer’s early settlement option had not been included in the contractual terms. The Interpretations Committee also noted that factors such as the term of the instrument, the width of the range between the cap and the floor, the issuer’s share price and the volatility of the share price could be relevant to the assessment of whether the issuer’s early settlement option is substantive. For example, the early settlement option may be less likely to have substance—especially if the instrument is short-lived—if the range between the cap and the floor is wide and the current share price would equate to the delivery of a number of shares that is close to the floor (ie the minimum). That is because the issuer may have to deliver significantly more shares to settle early than it may otherwise be obliged to deliver at maturity.

The Interpretations Committee considered that in the light of its analysis of the existing IFRS requirements, neither an interpretation nor an amendment to a Standard was necessary and consequently decided not to add the issue to its agenda.

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501.15.1.2

IFRIC Agenda Decision - Accounting for a financial instrument that is mandatorily convertible into a variable number of shares subject to a cap and a floor

May 2014 - The Interpretations Committee discussed how an issuer would account for a particular mandatorily convertible financial instrument in accordance with IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments. The financial instrument has a stated maturity date and, at maturity, the issuer must deliver a variable number of its own equity instruments to equal a fixed cash amount—subject to a cap and a floor, which limit and guarantee, respectively, the number of equity instruments to be delivered.

The Interpretations Committee noted that the issuer’s obligation to deliver a variable number of the entity’s own equity instruments is a non-derivative that meets the definition of a financial liability in paragraph 11(b)(i) of IAS 32 in its entirety. Paragraph 11(b)(i) of the definition of a liability does not have any limits or thresholds regarding the degree of variability that is required. Therefore, the contractual substance of the instrument is a single obligation to deliver a variable number of equity instruments at maturity, with the variation based on the value of those equity instruments. Such a single obligation to deliver a variable number of own equity instruments cannot be subdivided into components for the purposes of evaluating whether the instrument contains a component that meets the definition of equity. Even though the number of equity instruments to be delivered is limited and guaranteed by the cap and the floor, the overall number of equity instruments that the issuer is obliged to deliver is not fixed and therefore the entire obligation meets the definition of a financial liability.

Furthermore, the Interpretations Committee noted that the cap and the floor are embedded derivative features whose values change in response to the price of the issuer’s equity share. Therefore, assuming that the issuer has not elected to designate the entire instrument under the fair value option, the issuer must separate those features and account for the embedded derivative features separately from the host liability contract at fair value through profit or loss in accordance with IAS 39 or IFRS 9. 

The Interpretations Committee considered that in the light of its analysis of the existing IFRS requirements, an Interpretation was not necessary and consequently decided not to add the issue to its agenda.

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501.17.1.1 IFRIC Agenda Decision – Accounting for Warrants that are Classified as Financial Liabilities on Initial Recognition

October 2021 - The Committee received a request about the application of IAS 32 in relation to the reclassification of warrants. Specifically, the request described a warrant that provides the holder with the right to buy a fixed number of equity instruments of the issuer of the warrant for an exercise price that will be fixed at a future date. At initial recognition, because of the variability in the exercise price, the issuer in applying paragraph 16 of IAS 32 classifies these instruments as financial liabilities. This is because for a derivative financial instrument to be classified as equity, it must be settled by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments (‘fixed-for-fixed condition’). The request asked whether the issuer reclassifies the warrant as an equity instrument following the fixing of the warrant’s exercise price after initial recognition as specified in the contract, given that the fixed-for-fixed condition would at that stage be met.

The Committee observed that IAS 32 contains no general requirements for reclassifying financial liabilities and equity instruments after initial recognition when the instrument’s contractual terms are unchanged. The Committee acknowledged that similar questions about reclassification arise in other circumstances. Reclassification by the issuer has been identified as one of the practice issues the Board will consider addressing in its Financial Instruments with Characteristics of Equity (FICE) project. The Committee concluded that the matter described in the request is, in isolation, too narrow for the Board or the Committee to address in a cost-effective manner. Instead, the Board should consider the matter as part of its broader discussions on the FICE project. For these reasons, the Committee decided not to add a standard-setting project to the work plan.

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501.19.1.1

IFRIC Agenda Decision - Transaction costs to be deducted from equity

September 2008 - The IFRIC received a request for guidance on the extent of transaction costs to be accounted for as a deduction from equity in accordance with IAS 32 paragraph 37 and on how the requirements of IAS 32 paragraph 38 to allocate transaction costs that relate jointly to one or more transaction should be applied. This issue relates specifically to the meaning of the terms ‘incremental’ and ‘directly attributable’.

The IFRIC noted that only incremental costs directly attributable to issuing new equity instruments or acquiring previously outstanding equity instruments are related to an equity transaction in accordance with IAS 32. The IFRIC also noted that judgement will be required to determine which costs are related solely to other activities undertaken at the same time as issuing equity, such as becoming a public company or acquiring an exchange listing, and which are costs that relate jointly to both activities that must be allocated in accordance with paragraph 38.

In view of the existing guidance, the IFRIC decided not to add this issue to its agenda.

However, the IFRIC also noted that the terms ‘incremental’ and ‘directly attributable’ are used with similar but not identical meanings in many Standards and Interpretations. The IFRIC recommended that common definitions should be developed for both terms and added to the Glossary as part of the Board’s Annual Improvements project.

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501.20.1.1

IFRIC Agenda Decision - Offsetting and cash-pooling arrangements

March 2016 - The Interpretations Committee received a request to clarify an issue related to IAS 32 Financial Instruments: Presentation. The issue relates to whether a particular cash-pooling arrangement would meet the requirements for offsetting in accordance with IAS 32—specifically, whether the regular physical transfers of balances (but not at the reporting date) into a netting account would be sufficient to demonstrate an intention to settle the entire period-end account balances on a net basis in accordance with paragraph 42(b) of IAS 32.

For the purposes of the analysis, the Interpretations Committee considered the specific example included in the request, which describes a cash-pooling arrangement involving subsidiaries within a group, each of which have legally separate bank accounts. At the reporting date, the group has the legally enforceable right to set off balances in these bank accounts in accordance with paragraph 42(a) of IAS 32. Interest is calculated on a notional basis using the net balance of all the separate bank accounts. In addition, the group instigates regular physical transfers of balances into a single netting account. However, such transfers are not required under the terms of the cash-pooling arrangement and are not performed at the reporting date. Furthermore, at the reporting date, the group expects that its subsidiaries will use their bank accounts before the next net settlement date, by placing further cash on deposit or by withdrawing cash to settle other obligations.

In considering whether the group could demonstrate an intention to settle on a net basis in accordance with paragraph 42(b) of IAS 32, the Interpretations Committee observed that:

a.

paragraph 46 of IAS 32 states that net presentation more appropriately reflects the amounts and timings of the expected future cash flows only when there is an intention to exercise a legally enforceable right to set off; and

b.

in accordance with paragraph 47 of IAS 32, when assessing whether there is an intention to settle net, an entity considers normal business practices, the requirements of the financial markets and other circumstances that may limit the ability to settle net.

Consequently, within the context of the particular cash-pooling arrangement described by the submitter, the Interpretations Committee noted that the group should consider the principles above in order to assess whether, at the reporting date, there is an intention to settle its subsidiaries’ bank account balances on a net basis or whether the intention is for its subsidiaries to use those individual bank account balances for other purposes before the next net settlement date. In this regard, the Interpretations Committee observed that the group expects cash movements to take place on individual bank accounts before the next net settlement date because the group expects its subsidiaries to use those bank accounts in their normal course of business. Consequently, the Interpretations Committee noted that, to the extent to which the group did not expect to settle its subsidiaries’ period-end account balances on a net basis, it would not be appropriate for the group to assert that it had the intention to settle the entire period-end balances on a net basis at the reporting date. This is because presenting these balances net would not appropriately reflect the amounts and timings of the expected future cash flows, taking into account the group’s and its subsidiaries’ normal business practices. However, the Interpretations Committee also observed that in other cash-pooling arrangements, a group’s expectations regarding how subsidiaries will use their bank accounts before the next net settlement date may be different. Consequently it was noted that, in those circumstances, the group would be required to apply judgement in determining whether there was an intention to settle on a net basis at the reporting date.

The Interpretations Committee also observed that the results of the outreach did not suggest that the particular type of cash-pooling arrangement described by the submitter was widespread. Furthermore, it was noted that many different types of cash-pooling arrangements exist in practice. Consequently, the determination of what constitutes an intention to settle on a net basis would depend on the individual facts and circumstances of each case. The Interpretations Committee further noted that an entity should also consider the disclosure requirements related to offsetting of financial assets and financial liabilities in the applicable IFRS Standards. 

In the light of this and the existing requirements in IFRS Standards, the Interpretations Committee decided that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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