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IAS 32 — Put options written over non-controlling interests

Date recorded:

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.

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