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IAS 32 – Put options written over non-controlling interests

Date recorded:

The Committee continued its discussion on the accounting for written put options over non-controlling interests. An education session was held during the January 2011 Committee meeting where the staff on the financial instruments with characteristics of equity (FICE) project team discussed their views on the possible direction and timing of the FICE project.

The Committee also discussed possible short-term solutions including a scope exception to IAS 32 so that written puts over non-controlling interests would be accounted for similar to other derivative contracts (i.e., fair value through profit or loss).

During the April Committee meeting, the staff recommended the Committee support a scope exception in IAS 32 for written puts over non-controlling interests and refer the matter to the Board for consideration.

The Committee generally agreed with the staff recommendations. However, certain committee members discussed why written puts over non-controlling interests would be specifically scoped out while similar economic contracts would not (examples cited were puts embedded in other contracts and forward contracts).

Another committee member raised the issue that a fixed-for-fixed written put that would otherwise meet the definition of equity would be scoped out of IAS 32 and accounted for as a derivative, introducing significant profit or loss volatility for an instrument that would otherwise not be remeasured. One Committee member reminded the Committee that the original submission to the Committee was not to address the profit or loss volatility but the counterintuitive result from recognising the 'gross' liability which was difficult to explain to investors.

Another Committee member agreed that other financial contracts could have similar economic characteristics to written put options, but agreed that the scope exclusion recommendation represented an improvement to the current accounting and therefore supported it. He also mentioned that the analogising the discussion to other instruments would result in the same difficulties the FICE project has experienced and would stall this improvement from being made.

The Committee ultimately agreed to support the scope exclusion proposal. The staff will work on drafting the amendments to IAS 32 and the consequential amendments to IAS 27 and IAS 39 which will be distributed to the Committee. The staff will then schedule time on the Board's agenda to present the recommendation of the Committee.