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Put options over non-controlling interests

Date recorded:

The IFRS Interpretations Committee (the 'Committee') has been dealing with a request for clarification regarding the accounting by a parent for put options written over the non-controlling interest ('NCI') of a consolidated subsidiary. In September, based on a recommendation from the Committee, the Board discussed a possible scope exclusion to IAS 32 for put options written over the NCI in the consolidated financial statements of a group.

The objective of the scope exclusion would be to address a potential inconsistency between the requirements of IAS 32, IAS 39 and IFRS 9 for measuring financial liabilities and the requirements in IAS 27 and IFRS 10 for accounting for transactions with owners in their capacity as owners; that is, whether the offsetting entry for subsequent measurement changes should be to profit or loss or to equity.

The Board voted not to amend the scope of IAS 32 to exclude these put options over non-controlling interests. However, the Board expressed support for considering addressing the potential inconsistency, by clarifying the accounting for subsequent changes in the measurement of such puts rather than by changing the measurement basis of the non-controlling interest. The Board asked the staff to obtain feedback from the IFRS Interpretations Committee on whether they wanted to be involved in further considering this issue.

During the November Interpretations Committee meeting, the Committee confirmed its willingness to continue consideration of this issue but requested clear instructions from the Board on what matters the Committee should consider.

In obtaining this feedback for the Committee the staff requested the Board consider whether the Committee should address the diversity in accounting for the subsequent measurement of the liability recognised for NCI puts and the scope of instruments to which any amendments should apply. Regarding clarifying IFRSs to address the diversity in practice of accounting for NCI puts, the staff presented the Board with three possible alternatives of where the remeasurement of the liability should be recognised: 1) profit or loss, 2) equity, or 3) other comprehensive income ('OCI'). Regarding the potential scope of any clarifications on subsequent remeasurements, the staff asked the Board to consider whether the Committee should focus on 1) only NCI puts, 2) NCI puts and NCI forwards, or 3) all put options and forward contracts.

One Committee member questioned the presumption that these transactions should fall within the scope of IAS 27 as being transactions with shareholders, arguing instead these are transactions with co-investors of an investment rather than the reporting entity's own shareholders. However other Board members and the staff said that such a view would require an entire reconsideration of the scope of IAS 27.

Some of the Board members questioned whether including OCI as one of the alternatives for the Committee to consider was appropriate, preferring instead to limit the Committee's consideration only to profit or loss or equity. They felt that if the Board was opposed to using OCI then they should not allow the Committee to spend their time developing a recommendation that the Board would ultimately not support. However, other Board members felt that no alternative should be taken off the table and that all possible approaches should be open for the Committee's consideration. One Board member questioned if OCI were to be considered by the Committee, if the Committee had given any consideration to whether OCI should be recycled. The staff responded that the Committee had not previously considered an OCI alternative as their previous efforts were focused on interpreting IFRSs while this new mandate would be more of a research type of role. The Board took an informal poll of where the Board members preferences lie with nine Board members preferring recognition of subsequent changes in the liability in profit or loss and six Board members preferring equity. The Committee will consider the Board's preliminary views in their further consideration of the issue.

In discussing the potential scope of the issue to be considered by the Committee, one Board member questioned if the Committee preferred recognition in profit or loss whether the scope would be relevant. However, his view was that if equity was the route taken then keeping the scope sufficiently narrow would be important. Ten of the Board members expressed preliminary support for the Committee to focus on application to both NCI puts and NCI forwards while four Board members were supportive of limiting only to NCI puts.

The Board finished the discussion by emphasising that they were looking for a pros and cons analysis from the Committee on both issues.