At its meeting on April 21-23, 2020, the IASB continued its discussions on how to clarify the principles for classifying financial instruments settled in an entity’s own equity instruments. The Board tentatively decided, as a foundation principle, that for a derivative on own equity to meet the fixed-for-fixed condition in IAS 32, the number of functional currency units to be exchanged with each underlying equity instrument must be fixed or only vary with: (a) allowable preservation adjustments; or (b) allowable passage of time adjustments.

The Board also tentatively decided to classify as equity a contract that can be settled by exchanging a fixed number of non-derivative own equity instruments with a fixed number of another type of non-derivative own equity instruments. The Board tentatively decided, as an adjustment principle, that an entity would be required to classify derivatives on own equity as equity instruments if preservation adjustments require the entity to preserve the relative economic interests of future shareholders to an equal or a lesser extent than those of the existing shareholders.

The Board also tentatively decided that an entity would be required to classify derivatives on own equity as equity instruments if passage of time adjustments: (a) are pre-determined and vary only with the passage of time; and (b) fix the number of functional currency units per underlying equity instrument in terms of a present value.

At a future Board meeting, the Board will begin its discussions on other topics included in the project plan discussed at the October 2019 Board meeting.

Review the IASB Update and podcast on the Board's Web site.