Classification of Instruments Denominated in a Foreign Currency

Date recorded:

At its April 2005 meeting, the IFRIC addressed the issue of the classification of the conversion option in a convertible bond that is denominated in a foreign currency (ta currency other than the functional currency of the entity issuing the bond).

The IFRIC concluded that although this matter is not addressed directly in IAS 32, it is clear that when the question is considered in conjunction with guidance in other Standards, particularly IAS 39, any obligation denominated in a foreign currency represents a variable amount of cash. Consequently, the IFRIC decided that contracts (including the conversion option in a convertible bond) that will be settled by an entity delivering a fixed number of its own equity instruments in exchange for a fixed amount of foreign currency should be classified as a liability.

The Board discussed whether a short-term solution to this issue is the best way to proceed. The Board voted (12/2) not to proceed with this project.

The Chairman indicated that there would be no further short-term fixes to IAS 32 or IAS 39. Instead the Board would focus on the long-term project to address the flaws currently present in those standards by considering the broader issues of financial instruments accounting. The only short-term project items to be considered any further are those that are already on the agenda of the Board or IFRIC, or those that may arise and present 'fatal-flaw' type issues widely affecting the entities applying IFRS.

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