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Financial Instruments with the Characteristics of Equity

Date recorded:

Scope exemption for share-based payments

The Boards considered granting a scope exemption for share based payments from the requirements of the Financial Instruments with Characteristics of Equity project.

The Boards considered this issue in the context of the Approach 4.1 and Approach 4 (as discussed on the October joint meeting). Both Boards preferred to scope out share-based payments from the scope of the project under the Approach 4.1. Nonetheless, some Board members were concerned that a full exemption from the project was not economically justified, especially in the post-vesting period. More specifically, some Board members expressed their preference for a more limited exemption under the Approach 4 (for instance, covering only stock options in the pre-vesting period). On the other hand, other Board members were concerned that scoping-in share-based payments in the project would re-open the debates that preceded deliberations of share based payments standards on which no consensus existed.

Finally, both Boards approved a scope exemption for share based payments from the project under both Approach 4 and Approach 4.1.

Presentation of physically-settled forward purchase contracts and physically-settled written put options

The Board revisited their tentative decision (made in June 2009) that these instruments should be presented net with changes in income (consistent with other derivatives).

Most of the Board members were uncomfortable with that decision as it would lead to reporting of many changes of own share price in profit or loss. Consequently, both Boards failed to confirm their original tentative decision.

Some proponents of the gross presentation of physically-settled forward purchase contracts noted that such approach would avoid most of the structuring opportunities and that it was an approach preferred by the regulators. Nonetheless, other Board members struggled to apply such logic for physically-settled written put options or physically-settled forward sale contracts and did not see any economic justification for a different accounting treatment.

One Board member proposed an alternative of net presentation with changes reported directly in equity. As several Board members found that alternative worth exploring, the Board asked the staff to analyse consequences of such a decision. The Board expects to deliberate the issue on a next meeting.

Classifying share-settled instruments as equity

The Boards discussed the decision from the October Joint meeting to pursue Approach 4.1, which would classify some instruments settled by delivering shares as equity. This approach was supported by most of the IASB members. On the other hand, most of the FASB members preferred Approach 4 as a starting point for any potential exemptions to a general principle.

After a prolonged and inconclusive debate covering implications of each of the approaches on classification of convertible debt and fixed-for-fixed condition as well as potential for reduction of scope of the project to amend IAS 32, the Boards finally agreed refocus their discussion on the original issue. Back in October 2009 the Approach 4.1 was perceived as a minor modification of the Approach 4 that subsequently proved to be more substantive. The Boards asked the staff to come back to Approach 4 and consider a less substantive modification than Approach 4.1 and present its analysis to the Board at a future meeting.