This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

IAS 27 — Put options written over non-controlling interests

Date recorded:

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.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.