IFRS 9 Financial Instruments — Financial assets eligible for the OCI presentation election - Agenda Paper 2

Background

This was a new issue. The IC received a question on whether a financial instrument, classified as equity by the issuer in accordance with IAS 32.16A-16D, is eligible for FVTOCI classification in terms of IFRS 9.4.1.4.

Staff analysis

The Staff made reference to the following relevant guidance in IAS 32 and IFRS 9:

• IAS 32 contains an exception whereby an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the features and meets the conditions in IAS 32.16A, 16B, 16C or 16D.
• IFRS 9.4.1.4 allows an entity to make an irrevocable election on the initial recognition of an equity instrument that is neither held for trading nor contingent consideration arising from a business combination to present subsequent fair value changes in OCI.
• IFRS 9.BC5.21 states that the term ‘equity instrument’ used in paragraph 4.1.4 is as defined in IAS 32 and that puttable instruments that are classified as equity in certain circumstances do not meet the definition of an equity instrument.

In light of the above, the Staff believe that it is clear that the financial instruments described in IAS 32.16A-16D are financial liabilities and are not equity instruments as defined. Accordingly, such financial instruments are not eligible for the OCI presentation election in terms of IFRS 9.4.1.4.

Staff recommendation

The Staff recommend that the IC not add this issue to its agenda, because the requirements in IFRS 9 provide an adequate basis for the classification of such instruments.

Discussions

The IC agreed with the Staff’s recommendation.

The IC believed that IFRS 9.BC5.21 is clear that the financial instruments under consideration categorically meet the definition of financial liabilities and that they are merely classified as equity for presentation purposes. A couple of IC members also noted that this is not a new issue. From the issuer’s perspective, this issue affects the determination of earnings for the purposes of the earnings per share calculation and the determination of whether a share-based payment arrangement involving such financial instruments should be accounted for as equity-settled or cash-settled. These IC members believed that the conclusion reached here has wider application than just IFRS 9.

One member disagreed with the Staff as he believed that once an instrument meets the criteria in IAS 32.16A-D, that instrument should be regarded as an equity instrument for all intent and purposes.

IFRS Interpretations Committee Work in Progress – Agenda paper 3

The Staff are currently in the process of analysing the following matters:

• IFRS 3: Transaction price allocation – the acquisition of a group of assets including both financial instruments and non-financial items;
• IFRS 9: Dual currency bonds – whether a dual currency bond meets the solely payments of principal and interest condition in IFRS 9;
• IAS 28: Associates and common control – the acquisition of an interest in an associate or a joint venture under common control; and
• IAS 37: Onerous contract costs – costs included in determining whether a contract is onerous.

Discussion

There was no discussion on this paper.