The Board continued its discussion of a draft ED of proposed amendments to IAS 32 Financial Instruments: Presentation.

Sweep issues arising from the pre-ballot draft

A formula to determine fair value of financial instruments puttable at fair value by an entity that is not publicly accountable

The Board had previously allowed use of a formula to estimate fair value of financial instruments puttable at fair value upon issuance, redemption or repurchase of the instruments, provided that the formula is intended to approximate fair value. A national standard-setter had requested clarification about whether an instrument's pro rata share of the entity at book value qualifies as a formula.

The Board agreed that an amendment setting out that using the pro rata share of net assets of the entity at book value is not considered to be a formula that approximates fair value, except in rare cases when there is no material difference.

Appropriate guidance for determining fair value

A national standard-setter had requested that the exception in subparagraph 46(c) of IAS 39 be included in reference to guidance on determining fair value in the proposed amendments to IAS 32. This would imply that non-public entities would be allowed to redeem or repurchase puttable instruments at the instrument's cost and to classify these as equity.

The Board agreed that such a reference as the sub paragraph is only relevant for the measurement of the equity instruments of other entities, and not for when an entity measures its own equity instruments.

The issue price of an ordinary share puttable at fair value issued upon conversion of a convertible bond

The staff had been asked to consider whether the price of an ordinary share puttable at fair value issued upon conversion of a convertible debt instrument is considered to be at fair value. If not, the shares will not qualify for equity classification.

The staff identified two issues. The first issue was that this scenario would create an option embedded in the convertible bond that would have to be separated and accounted for as a derivative that meets the definition of a financial liability. The second issue the staff identified was that financial instruments puttable at fair value would only be considered issued at fair value if the fair value of the consideration received equals the fair value of the instruments issued (and thereby be qualified for equity classification).

The Board decided that the staff should draft application guidance for this issue.

Analysis of benefits and costs

The Board decided that they would consider this analysis at a later meeting.

Transition and effective date

The Board decided: on three staff proposals:

• The ED should not specify a proposed effective date. This issue will be left open for the moment.
• Early adoption will be permitted.
• The amendments will be applied retrospectively for both first time adopters as well as current users of IFRS.
• The Board agreed to provide an exemption from applying the requirement of IAS 32 retrospectively for compound financial instruments. Because the proposal was to apply the amendments retrospectively, a compound instrument with an obligation for a pro rata share of net assets arising on liquidation would have to be separated into a liability and an equity component from the instrument's inception (ref to point c) under sweep issues). At the date of application it could be that the liability component (the derivative) no longer is outstanding, that is, separation would have no benefit. This is the exact same reason there already is an exemption for applying the requirements in IAS 32 retrospectively for compound financial instruments under IFRS 1.