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IAS 32 — Put options written over non-controlling interests

Date recorded:

Background

In May 2012, the IFRS Interpretations Committee published a draft Interpretation on the accounting for put options written by a parent on the shares of its subsidiary that are held by non-controlling interest shareholders.

The comment period ended on 1 October 2012. 68 comment letters were received. The comment letters were in response to the questions asked within the draft Interpretation which were on proposed scope, consensus and transition.

The Staff provided detail of the comment letters received by scope area.

Scope

Some respondents agreed with the proposed scope however the majority expressed the view that the scope was too narrow and should include:

  1. Forward contracts that oblige the parent to purchase shares of its subsidiary that are held by a non-controlling-interest shareholder for cash or another financial asset (NCI forwards); and
  2. Puts (and forwards) that oblige any entity in the consolidated group to purchase shares of a subsidiary that are held by a non-controlling interest shareholder for cash or another financial asset (e.g. one subsidiary in the consolidated group writes a put option that obliges it to purchase shares of a fellow subsidiary that are held by a non-controlling-interest shareholder).

Respondents said that the accounting for those contracts should be the same as the accounting for NCI puts— and expressed concern that excluding them from the scope could suggest that the Interpretations Committee thinks the accounting should be different.

A number of other scope concerns were noted which are summarised in the Staff paper.

Respondents generally agreed with the scope exclusion for NCI puts that were accounted for as contingent consideration in accordance with IFRS 3 (2004). They agreed that IFRS 3 (2008) provides the relevant measurement requirements for those contracts. However a few respondents noted that an explicit reference to the relevant paragraphs in IFRS 3 (2008) would be helpful. A few respondents asked the Interpretations Committee to clarify the accounting for NCI puts that were accounted for as contingent consideration after the application of IFRS 3 (2008).

Consensus

Responses to the consensus were mixed. Respondents expressed four primary views:

  1. The draft consensus provides the appropriate Interpretation of existing IFRS.
  2. The draft consensus reflects existing IFRS requirements; however, those requirements do not result in useful information.
  3. There is a conflict in IFRS and the draft consensus sets out only one possible Interpretation. Another Interpretation is that IFRS requires that subsequent changes in the measurement of an NCI put are recognised in equity.
  4. The correct Interpretation of IFRS depends on the facts and circumstances of the NCI put.

Transition

It was proposed that entities would be required to apply the draft Interpretation retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Almost all of the respondents agreed with the proposed transition requirements. Respondents agreed that entities would not face significant challenges or costs in applying the draft consensus, in particular because re-computations would not be necessary. However a few respondents suggested that the Interpretations Committee require retrospective application only from the beginning of the earliest comparative period presented because application to earlier periods would result only in a reclassification within equity.

Other comments

Many respondents said that either the Interpretations Committee or the IASB should address the accounting for NCI puts more comprehensively. They pointed out that other aspects of the accounting for NCI puts have resulted in diversity in practice most notably:

  1. Which component of equity should be debited when the grossed-up liability is initially recognised (i.e. whether the NCI balance should be derecognised);
  2. How to account for the premium received for an NCI put;
  3. Whether a portion of the subsidiary’s profit or loss should continue to be allocated to the non-controlling-interest shareholder after an NCI put is written;
  4. Whether any dividends paid to the non-controlling-interest shareholder after an NCI put is written are expenses or distributions; and
  5. How to account for the expiration or settlement of the NCI put.

Based upon the comment letter analysis the Staff presented recommendations to the Interpretations Committee as follows:

  1. The Interpretation should apply to NCI puts and NCI forwards that are written by any entity in the consolidated group.
  2. The Interpretation should confirm the draft consensus and thus clarify that changes in the measurement of the financial liability that is recognised for an NCI put (or an NCI forward, consistent with the our recommendation to widen the scope) must be recognised in P&L in accordance with IAS 39 and IFRS 9.
  3. The Interpretation should require retrospective application in accordance with IAS
  4. The Interpretations Committee should ask the IASB to re-consider in the near-term the requirements in paragraph 23 of IAS 32.

The Staff asked the Interpretations Committee whether they agreed with their recommendations.

The Interpretations Committee concluded that the draft Interpretation remains valid (with the scope extension proposed by the Staff) within the remits of the current literature but once more the Interpretations Committee recommended the IASB to modify IAS 32 so as to treat NCI puts as derivatives as an appropriate way to deal with such instruments in a relevant manner. So, the decision to move ahead or not with the Interpretation or another route will be decided by the IASB. The Interpretations Committee also proposed that when the IASB will be reconsidering IAS 32.23, it shall also look at whether the treatment of puts on own shares should also be changed. However, many Interpretation Committee members felt that even if the amendment is limited to NCI puts and does not expand to puts on own shares, this could also be appropriate (i.e. there should not be a presumption that puts on own shares and NCI puts must be treated similarly).

There was a statement by the ESMA’s representative that said that looking at the comment letters, the counterintuitive effect reported, the fact that only part of the issue would be addressed, they concluded that moving ahead with this ED might be detrimental whilst trying to reduce diversity.

As a result, they were ready to accept that the ED is not finalised as such and that the IASB considers further the Interpretation Committee’s proposals for IAS 32 modifications as a short-term solution for NCI puts.

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