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Financial Instruments Puttable at Fair Value

Date recorded:

This was a continuation of the discussion the Board had in its March meeting on proposed amendments to IAS 32, whereby financial instruments puttable at fair value and certain obligations arising on liquidation would be classified as equity, provided certain conditions are met. This discussion focussed on a staff analysis of the costs and benefits of the proposed amendments.

The staff analysis was that the main costs associated with the proposed amendments include:

  • requiring a new analysis of various financial instruments;
  • an increase in the complexity of IAS 32;
  • an increase in financial structuring opportunities; and
  • the costs of complying with the equity classification.

The staff analysis was that the main benefits associated with the proposed amendments include;

  • it addresses constituents' concerns about the classification of certain financial instruments;
  • it increases comparability between entities (for example between entities with financial instruments puttable at fair value that meet the requirements for equity classification and entities with ordinary shares); and
  • the classification is more relevant and more understandable.

The Board noted that whilst they liked the proposed accounting for financial instruments puttable at fair value, they did not believe that the proposed amendments were principle-based, and that the main benefit was that the classification was more relevant and understandable to users. They further noted that care would be needed in describing comparability as a benefit, as financial instruments puttable at fair value are different from ordinary equity shares in that they allow the holder to require redemption for a cash amount. Furthermore, the equity classification is only available to the most subordinated class of instrument. As such, very similar instruments may get a different classification where one is the most subordinated class of instrument and the other is not.

The Board then discussed the proposed amendments to IAS 1. These changes require three new disclosures, as follows:

  1. disclose information about the reclassification of instruments between equity and financial liabilities of the instruments affected by the amendments;
  2. disclose fair values of financial instruments puttable at fair value classified as equity; and
  3. disclose information about length of the life of a limited life entity.

As no new issues were raised, this should be the final discussion by the Board on this matter prior to issuance of an exposure draft.