Puttable Financial Instruments and Obligations Arising on Liquidation

Date recorded:

The purpose of this session was to discuss with the Board issues that arose during the roundtables on the staff draft on puttable instruments and to summarise significant drafting changes. The discussions were based on a pre-ballot draft that was not available to the public.

In the first part of the session the following issues were discussed:

  • Financial instruments that include other contractual obligations Constituents questioned why paragraphs 16A and 16C of the staff draft were different, especially with respect to the condition in 16A(d) that the instrument 'must not include any other contractual obligation to deliver cash' whilst paragraph 16C does not include that condition. The staff noted that believes that it is appropriate to have different conditions, but changed the title of the section containing 16C to 'components of instruments' to clarify that such instruments can have other contractual obligations that would need to be separated. The Board agreed. Another issue was if mandatory dividends and partnership remuneration meet the definition of a contractual obligation. The Board agreed in September 2007 not to deal with this issue and decided not to revise its decision.


  • An instrument holder in the role of owner and non-owner Constituents described situations where part of the remuneration is for services and hence they do not compensate the holder for the role as owner, but this would not automatically lead to liability treatment of the whole instrument and analysed separately. The Board agreed this is correct, but as suggested by one Board member this must be ring-fenced to avoid abuse, i.e. prohibit excessive 'service remuneration'. The draft will be amended to make clear that this remuneration must be an appropriate return for the services provided.


  • The meaning of 'fixed', 'guaranteed' or 'restricted' to describe an instrument's return The staff draft caused some confusion with regard to the meaning of 'fixed', 'guaranteed' or 'restricted' return. As a result the last sentence of paragraph 16A(e) has been removed in the pre-ballot draft. The Board agreed to the deletion.


  • Interaction of the proposed amendment and the requirements in IFRS 2 Share-based Payment Constituents also asked about the interaction of IFRS 2 and the proposed amendment. There might be situations where the provisions in IAS 32 lead to an equity balance sheet presentation while they would be a liability in accordance with IFRS 2. Some Board members expressed concerns about the apparent conflict with the Framework of the proposed amendments. After being reminded by the Chairmen of the Board that this was not meant to be a major project the Board members agreed to the revised wording in the ballot draft.


  • The proposed disclosure requirements The staff was split on the disclosure of the fair value of those instruments. One Board member said from the perspective of users this information is useful. The Board agreed to keep this disclosure requirement. Additionally, it was agreed to include a consequential amendment to IFRS 7 Financial Instruments: Disclosure to make clear that the instruments captured by the IAS 32 amendment are scoped out of IFRS 7.


  • Application of the proposed amendment's requirements to specific mutual fund structures The staff asked the Board if they have any questions on the application of the amendments to mutual funds. The Board decided not to address this issue specifically.


  • Whether it is appropriate to analogise to the exception in the proposed amendment The staff asked the Board if the standard text should contain guidance that the exceptions resulting from the amendment shall not be analogised. Some Board members questioned if such an amendment should better be made to IAS 8 as it seems to be a principle that exceptions should not be analogised. It was noted that this is more than a minor amendment. Nevertheless that clarification should be included within this amendment due to the dynamics in the structuring industry. The Board agreed.


  • Amend the draft to deal with situations in which significant amount of the profit is distributed via rebate (not mentioned in the Agenda Paper) This was an additional item brought up by the staff with regard to rebates being granted to owners. It was suggested amending the application guidance to make clear the Boards intentions. The Board agreed. After this, the staff presented to the Board significant drafting changes made to the published staff draft. The Board accepted all changes made.

Staff then asked if the Basis for Conclusions should contain a cost-benefit analysis. Staff noted it is standard procedure to include such an analysis. The Board agreed.

The Chairman then took an indicative vote. Two Board members indicated they would dissent.

The staff informed the Board they will circulate a ballot draft and if that is accepted a Near-final Draft will be published in the subscribers' area of the IASB's website by 24th of December latest.

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