Go To List of Issues on the Agenda of the Interpretations Committee

Issue Description:

Accounting for Put Options Written over Non-controlling Interests.

Discussion at the May 2010 Interpretations Committee meeting

The Committee started its discussion on the request for additional guidance how an entity should account for changes in carrying amount of financial liability for a put option, written to a non-controlling interest shareholder (NCI put), in the consolidated financial statement of a parent. The staff clarified that there is a potential conflict between IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement on one side and guidance in IAS 27 Consolidated and Separate Financial Statements on the other side.

As the IFRIC considered the issue in the connect of the pre-2008 amendments guidance in IAS 27 and IFRS 3, the Committee focused on the NCI puts arising after application fo the IAS 27 (2008) and IFRS 3 (2008).

During the discussion, a majority of the Committee members preliminary supported the view that changes in the carrying amount of the NCI puts should be recognised in profit or loss in accordance with IAS 39, whereas a minority of Committee members preferred to recognise them in equity (either as NCI or as a separate component of equity). The Committee members saw the issue as cash of two major concepts - the single economic entity concept and the derivatives theory. In their view reconciliation of these two issues was very difficult. Some Committee members supported their views by analogy to IFRS 3 and consistency with the treatment of put on majority interests. Others would distinguish between stand-alone put on NCI that are traded and the NCI puts that need to be settles on a gross basis.

The Committee members noted that there is diversity in practice related to this issue and referred to views expressed by some regulators. They also noted that several linked issues need to be addressed as part of this issue, in particular the question from which component of equity shall the entity reclassify the NCI put liability.

The staff also explained that the Financial Statements with Characteristics of Equity project was not likely to address the issue in their amendments to IAS 32.

Without reaching any consensus, the Committee decided to deliberate the issue further based on additional staff analysis. On that basis the Committee decided to add this project to its agenda. Several Committee members underlined that it would be very important to contain the scope of this project in order for the Committee to come to a consensus on a timely basis. The Chairman clarified that the project might lead to an interpretation or to an interpretation accompanied by a recommendation to the Board to propose amendments to the IFRSs. From a procedural standpoint, the latter would require a positive Board vote before being issued.

Discussion at the July 2010 Interpretations Committee meeting

The staff proposed that the Committee address initially two broad scoping questions: identifying which components of the accounting for put options written over non-controlling interests (NCI), and which put options written over NCI should be within the scope of the proposed interpretation.

For simplicity reasons, the staff suggested to exclude put options issued in a business combination from the analysis. Once the principles of the interpretation have been agreed, the scope of the interpretation will be broaden to include these as well. The Committee were supportive of the approach to be adopted by the staff and requested them to proceed with their analysis.

Initial Recognition

The Committee held a long and ultimately inconclusive debate on the initial recognition of puts written over non-controlling interests.

The Committee was asked to consider whether the credit entry should be to recognise a financial liability that is initially measured at fair value. The Committee unanimously agreed with the proposal, however, one member questioned whether the problem can be resolved by changing the requirements of IAS 32.23 (which requires gross recognition of the financial liability) can be amended as an annual improvement to exclude transactions between owners. The questions on what the debit and credit entries are can be avoided by accounting for the derivative on a net basis. Although this suggestion enticed a few nervous giggles from the Committee members, several members were sympathetic to the suggestion and could see the merit of the suggestion.

The Chairman again reminded the Committee that if they want to make progress on the matter, they should focus their efforts on solutions that are achievable within its mandate.

More divergent views were expressed when asked to consider where the debit entry should be recognised:

• against NCI, as the put option provides the parent in substance with a present ownership interest in the shares held by the NCI shareholder (view A);
• as a reclassification of NCI from equity to a financial liability, with NCI being reduced to zero and any difference recognised as an adjusting entry to the parent’s equity (view B); and
• as a reclassification of the financial liability to the NCI component of equity, up to the carrying amount of the NCI with any excess over the carrying amount recognised in the parent’s equity. This will result in NCI continuing to be recognised but classified as a financial liability.

The Committee considered these alternatives in the context of two scenarios: (1) the parent, in substance, acquires present access to economic benefits associated with ownership, and (2) the parent does not, in substance, acquire present access to economic benefits.

With regards to the first scenario, the Committee unanimously agreed that NCI should be reduced to zero and no longer be recognised, with any difference being recognised in controlling interest equity.

The Committee was however split as to whether the debit entry in the second scenario should go to NCI or not.

A Committee member felt that IAS 27.BC11 leads to the derecognition of the NCI, but could accept the staff recommendation on recognising it in controlling interest equity. Another Committee member that reluctantly supported view C, noted that part of the debit entry relates to the price paid for the put option and that eliminating NCI in total does not seem the right thing to do.

Several Committee members were uncomfortable with double accounting as a consequence of the accounting mechanisms of the transactions.

There was some support for seeing the matter as a reclassification of NCI from equity to a financial liability. Supporters of this view believe that the nature of NCI has been changed as a result of the put and that parent has an obligation in respect of it. They concluded that the debit entry would always go to NCI.

Following a prolonged discussion on the matter, the Committee appeared to be unable to reach an agreement on the matter. The Chairman presented 2 approaches for consideration:

1. exclude the initial recognition of the debit entry from the proposed interpretation; or
2. consider the matter once more at the September meeting in order to give the staff more time to do more research and consider the comments made by the Committee so far.

Several Committee members indicated their support for reconsidering the matter at the September meeting. In their opinion, excluding the debit entry from the scope of the interpretation would result in a meaningless and of any use by constituents.

The Chairman requested the staff to continue their analysis and bring the matter back to the September meeting for further consideration.

Subsequent measurement – NCI put financial liability

Acknowledging that they had not concluded on the appropriate initial recognition, the Committee turned its attention to the subsequent measurement of the instrument. It assumed that, on initial recognition, a financial liability would be recognised for the fair value (present value of the redemption amount) of the NCI put and that this financial liability is reclassified from equity. The staff noted that constituents’ views differed on how subsequent changes in the carrying amount of the NCI put financial liability should be recognised in the financial statements, however the staff was firmly of the view that, in common with most financial instruments, all changes in the carrying amount of the NCI put financial liability should be recognised in profit or loss.

A minority of the Committee preferred an ‘equity view’ because they considered that it was inappropriate to recognise changes in the carrying amount of the NCI put financial liability in profit or loss when the risks and rewards of ownership of the underlying shares have not transferred to the parent.

A majority of the Committee supported recognising all changes in carrying amount in profit and loss. Several of those Committee members supporting this view thought that this conclusion was unavoidable having classified the NCI put as a financial liability.

At the conclusion of the debate, the Chairman asked how many of Committee would object to profit and loss treatment: two members were opposed.

A Committee member suggested that, in the event that the Committee was unable to conclude on the initial recognition issue, it might be possible to issue an Interpretation on this issue.

Discussion at the September 2010 Interpretations Committee meeting

The Committee continued its deliberations on the accounting for put options over non-controlling interest. The Chairman summarised the Committee’s discussions as being unable to reach a consensus as to whether or not IAS 39 is the appropriate Standard to apply and whether or not changes in the fair value of the liability should be recognised in profit or loss.

Some Committee members suggested that this matter be referred to the Board to be incorporated with the FICE project and any changes being made to IAS 32. As the matter is on the agenda for the September Board meeting, it will the perfect time to point out this apparent inconsistency between IAS 27 and IAS 32 to the Board and communicate the Committee’s discussions and thoughts on the matter. The other Committee members agreed with the recommendation to remove this item from the Committee’s agenda as it is unlikely that the Committee will reach a consensus in a timely manner.

Several Committee members were uncomfortable with the underlying message being communicated by the proposed wording of the tentative agenda decision. Some members were also concerned with specifically saying that IAS 39 should be applied, while others were uncomfortable being silent on which IFRS to apply.

A Committee member recommended keeping the wording of the tentative agenda decision neutral and rather require entities to disclose the treatment applied. Another Committee member recalled that the Committee was in favour of applying IAS 39, however some difficulty is created by this approach and therein lies the inability to reach a consensus.

The Chairman asked the staff to revise the wording of the tentative agenda decision to include reference to IAS 32 and 39 and explain the difficulties with the consequences of that, and hence the Committee is unable to reach a timely consensus.

[3 September 2010]

The staff tabled the revised wording of the tentative agenda decision not to continue work on the matter and referring it to the Board for consideration. Subject to drafting suggestions, the Committee approved the revised wording.

Discussion at the September 2010 IASB Meeting

The IASB discussed the recommendations of the IFRS Interpretation Committee regarding the accounting for changes in the carrying amount of a financial liability for a put option, written over shares held by a non-controlling shareholder ('NCI put'). The IFRS Interpretation Committee concluded that financial liability recognised for a NCI put shall be subsequently measured in accordance with IAS 39 and changes in the carrying amount of financial liabilities should recognised in profit or loss. However, the Committee noted that additional accounting concerns exist relating to the accounting for NCI puts, mainly related to net presentation of the NCI put as well as the rationale for recognising changes in profit or loss when they relate to NCI. Consequently, the Interpretation Committee referred the issues to the Board to be considered more broadly as part of the Financial Instruments with Characteristics of Equity (FICE) project. Additionally, the Committee did not want to issue guidance that might be contradicting the conclusion that might be reached in the FICE project.

One IASB member asked will be the guidance in the interim period until the FICE project is finalised and effective. No conclusion has been reached. The Board proceed to discuss the status of the broader FICE project (click here for that discussion).

Discussion at the January 2011 Interpretations Committee meeting

The primary issue discussed by the Committee relates to the accounting for the subsequent measurement of the NCI put prior to exercise or lapse. The financial liability recognised for an NCI put with a variable exercise price is updated at each reporting date to reflect current estimates of the exercise price. There is agreement over the need to remeasure the financial liability at each reporting date; the issue leading to diversity in practice is whether that remeasurement should be recognised (a) in profit or loss; or (b) in equity.

The staff from the Financial Instruments with Characteristics of Equity (FICE) project provided a short summary of the project, commenting that reporting the change in earnings would be consistent with the treatment of any other type of derivative. The staff from the FICE project expressed a concern around putting the change through equity since neither US GAAP nor IFRS follow that treatment unless the change is relating to a derivative that is classified in equity. It is likely to be two years until the FICE project will be completed. It was therefore suggested that the Committee might be able to deal with this matter on a timelier basis.

One of the Committee members is currently researching the impact that amending IAS 32 would have, and how extensive these amendments would need to be. The impact of an amendment in IAS 39 to clarify that the NCI put should be accounted for in equity would be less extensive, and is also being considered.

The Committee was unable to reach a consensus as to what current IFRSs require. It was suggested that if the Committee decides on the net approach, then perhaps NCI puts should simply be scoped out of IAS 39 and net accounting be mandated. The staff of the FICE thought that ringfencing would be a good idea if it was considered achievable.

It was tentatively agreed to continue researching this matter. The staff plans to bring papers to the March 2011 Committee meeting with detailed proposals for a short-term solution.

Discussion at the March 2011 Interpretations Committee meeting

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.

Discussion at September 2011 IASB Meeting

The IASB, upon recommendation from the IFRS Interpretations Committee, discussed a possible scope exclusion to IAS 32 for put options written over the non-controlling interest 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.

There was rigorous discussion among the Board members, including whether the Board should address such issues on a piecemeal or narrow scope versus holistic basis (e.g., as part of the financial instruments/equity project), whether the entry should actually go to profit or loss or equity, and concerns that the possible scope exclusion was a short term rather than long term solution.

The Board voted not to amend the scope of IAS 32 to exclude these put options over non-controlling interests. The Board, however 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 Interpretations Committee on whether they wanted to be involved in further considering this issue.

Discussion at November 2011 Interpretations Committee Meeting

At the IASB's September 2011 board meeting, considering a recommendation by the Committee, the IASB discussed a possible scope exclusion to IAS 32 Financial Instruments: Presentation for put options written over the non-controlling interest in the consolidated financial statements of a group. The objective of the scope exclusion was to address a potential inconsistency between the requirements of IAS 32, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments for measuring financial liabilities and the requirements in IAS 27 Consolidated and Separate Financial Statements and IFRS 10 Consolidated Financial Statements 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 IASB voted not to amend the scope of IAS 32 to exclude these put options over non-controlling interests. However, the IASB expressed support for considering addressing the potential inconsistency; not by changing the measurement basis of the non-controlling interest, but by clarifying the accounting for subsequent changes in the measurement of such puts. The IASB asked the staff to obtain feedback from the Committee on how they wish to be involved in further considering this issue.

As part of the Committee's November 2011 meeting, the Committee considered their potential involvement in this project. Many Committee members expressed a preference not to be involved in the project, as they expressed concern that no viable conclusion would be reached given the significant amount of time that had been spent to date evaluating this issue, while others believed the scope of the IASB's intended project was too restrictive to advance the issues appropriately.

However, when put to a vote, the Committee decided that they would like to be involved with this issue in the future. The Committee requested that specific feedback be garnered from the IASB as to the anticipated scope of the project. The staff noted that they would be requesting feedback on the scope of the project during the IASB's November 2011 board meeting.

Discussion at November 2011 IASB Meeting

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.

Discussion at January 2012 Interpretations Committee Meeting

Throughout 2010 and 2011, the Committee considered a request for guidance on how an entity should account for changes in the carrying amount of a financial liability for a put option, written over shares held by a non-controlling interest shareholder (NCI put), in the consolidated financial statements of a parent entity. The request is the result of perceived diversity in accounting for the subsequent measurement of the financial liability that is recognised for those NCI puts. The issue arises because of potential inconsistencies between the requirements for measuring financial liabilities and the requirements for accounting for transactions with owners in their capacity as owners, whereby some believe that subsequent changes in the liability that is recognised for the NCI put should be recognised in profit or loss while others believe the change in the liability should be recognised in equity.

Given that the IASB rejected the Committee's initial recommendation for a possible scope exclusion to IAS 32 Financial Instruments: Presentation for put options written over the non-controlling interest in the consolidated financial statements of a group, the Committee considered possible paths forward on this project.

The Committee was directed by the IASB to specifically consider whether changes in the measurement of the NCI put should be recognised in profit or loss or equity and whether the scope of the recognition decision should be applied only to NCI puts or extended to include both NCI puts and NCI forwards. While the Committee was asked to consider these two focused questions, they quickly expanded the scope of the discussion by considering broader concerns surrounding the project including the counterintuitive result of recognising a 'gross' liability when reflecting subsequent changes in the liability in profit or loss (as opposed to reflection on a 'net' basis), the treatment of the purchase of a NCI put with variable consideration and the timing of transaction recognition; acknowledging that these were the same concerns expressed when they made their initial recommendation to the IASB to exclude from the scope of IAS 32 put options written over the non-controlling interest in the consolidated financial statements of a group.

One Committee member expressed a preference that application guidance be drafted which specifies that paragraph 30 of IAS 27 Consolidated and Separate Financial Statements does not apply to NCI puts because the change in ownership interest has not yet occurred. Put another way, only transactions with owners are recognised in equity, and remeasuring an NCI put is not a transaction with an owner (thus should be reflected in profit or loss). Paragraph 30 in IAS 27 is describing a circumstance in which the controlling shareholder's and the non-controlling interest shareholder's relative ownership of the subsidiary changes, and this is not the case when the NCI put is remeasured. This was seen as a clarification of the literature for subsequent measurement (to avoid diversity), albeit without addressing some of the larger issues in the Committee's minds.

Many Committee members supported the view expressed by this Committee member. However, other Committee members continued to express concerns over the scope of this decision in resolving underlying concerns previously discussed by the Committee.

When put to a vote, the Committee elected to move forward with the application guidance proposal. However, the Committee asked the staff to consider certain issues offline including any potential knock-on implication to the consolidation analysis, specific principle concerns raised by Committee members (including accounting for the premium on warrants, accounting for the debit side of the transaction in IAS 32 and when to derecognise the non-controlling interest) and whether the above application guidance recommendation should be included in the body of IAS 27 as an amendment or interpretation or as application guidance.