The Board discussed sweep issues identified by the Board and external reviewers in the review process of the pre-ballot draft of proposed amendments to IAS 33 Earnings per Share. The pre-ballot draft was not included in the observer notes for this meeting.

Scope of IAS 33

Puttable financial instruments

In February 2008 the Board amended IAS 32 Financial Instruments: Presentation to include an exception that instruments that meet the definition of a financial liability should be classified as equity instruments if they have all the features and meet the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D of that standard.

Some external reviewers noted that paragraph 96C of IAS 32 Financial Instruments: Presentation treats puttable instruments classified as equity under the amendment as equity only in IAS 1, IAS 32, IAS 39 and IFRS 7. Consequently, the exception does not apply to IAS 33 and those instruments would not be treated as ordinary shares in the EPS calculation.

The Board agreed to amend paragraph 96C of IAS 32 to include IAS 33 in the exception. The Board noted that this amendment will align the EPS calculation with the accounting treatment for those instruments.

In addition the Board deliberated how IAS 33 would apply to an instrument that meets the definition of a financial liability but is required to be classified to equity in accordance with the exception in IAS 32 at some point after initial recognition.

The Board agreed to the staff analysis that by extending the scope of IAS 32 to IAS 33, the standard would provide principles for instruments that (1) meet the definition of a participating instrument or are (2) measured at fair value through profit or loss. Consequently, the Board decided that no amendment to the pre-ballot draft is necessary in this respect.

EPS calculation for options, warrants and their equivalents

Forward contracts to sell an entity's own shares

Some external reviewers asked for clarification of the EPS treatment of forward contracts to sell an entity's own shares. The Board decided to include guidance in the amendment on the dilutive impact of forward sales of shares classified as equity stating that the treasury stock method should be applied to these contracts.

Proceeds - Carrying amount of liability

Some external reviewers questioned whether guidance is needed on what is deemed proceeds in the instance when the instrument is a financial liability that is an option, warrant, or equivalent. If options, warrants, and their equivalents are classified as liabilities, they would always be measured at fair value through profit or loss, and no denominator adjustment of the diluted EPS calculation is necessary. Therefore, reviewers questioned whether the proposal to define the proceeds from the assumed exercise of options, warrant, and their equivalents is necessary.

The Board agreed with those review comments and decided to delete the paragraph on items to be included in proceeds from the exercise of options, warrants, and their equivalents in paragraph 46 of the pre-ballot draft, as those paragraphs were unnecessary.

Proceeds - Deferred taxes

Some reviewers stated that the wording in the pre-ballot draft (paragraph 47A of current IAS 33) could be interpreted in a way that IAS 33 prohibits the inclusion in the assumed proceeds of tax benefits that would be credited to equity upon exercise of share options to which IFRS 2 Share-based Payment applies.

The Board was of the view that the wording in IAS 33 was never intended to prohibit an entity from including those tax benefits in the proceeds from the assumed exercise of employee options. Consequently, the Board decided to amend the pre-ballot draft to state that the proceeds from the assumed exercise of employee options include tax benefits that are credited to equity upon exercise of the option.

EPS calculation for gross physically settled forward contracts to buy an entity's own shares

Forward purchase contracts with and without remittance of dividends

Paragraph 23 of IAS 32 states that a 'contract that contains an obligation for an entity to purchase its own equity instruments for cash or another financial asset gives rise to a financial liability for the present value of the redemption amount'.

Some external reviewers questioned whether the pre-ballot draft would achieve convergence with US GAAP regarding forward purchase contracts without remittance of dividends because:

• the wording in paragraph A33 is not clear on whether the Board believes that the gross physically settled forward purchase contract or the ordinary shares subject to the contract meet the definition of a participating instrument;
• not all gross physically settled forward contracts to buy an entity's own shares are participating instruments.

In this context the staff noted that the pre-ballot draft also requires forward purchase contracts with remittance of dividends to be accounted for in the same way as those without remittance of dividends. The staff pointed out that when dividends are remitted back, the liability that has been reclassified from equity no longer meets the definition of a participating instrument. Consequently, the staff suggested that for such contracts the denominator should be reduced but that the Application Guidance of the pre-ballot draft should not be applied.

Debate continued about what the accounting should be when a forward contract/written put to buy equity is in the money, that is, when the strike price recognised as a financial liability is in excess of the fair value of the share to be acquired. The staff agreed to look into this issue and will revert back to the Board offline.

Mandatorily redeemable shares

The staff noted that the accounting treatment of mandatorily redeemable ordinary shares in accordance with paragraph 18a of IAS 32 is similar to the accounting treatment of gross physically settled forward contracts to buy an entity's own shares and that therefore the same EPS treatment should apply.

The Board agreed and asked the staff to amend the pre-ballot draft accordingly.

Contracts that may be settled in ordinary shares or cash

Some external reviewers questioned whether the requirements for the diluted EPS calculation of contracts that may be settled in ordinary shares or cash are necessary since they could not think of an instrument to which those requirements would apply. These reviewers were of the view that either an entity would measure a financial instrument with settlement options either at fair value through profit or loss, and therefore no denominator adjustment would be required, or the instrument would meet the definition of a participating instrument, and the application guidance in paragraphs A25 to A30 of the pre-ballot draft would apply.

The Board agreed and asked the staff to delete the respective guidance from the pre-ballot draft.

Effective date and transition guidance

The Board decided that early adoption of the proposed amendments to IAS 33 should not be permitted since early adoption may impair performance comparisons between entities in the same reporting period that prepare financial statements in accordance with IFRSs. Also, not permitting early adoption would be consistent with the equivalent FASB amendment. The Board also decided that no additional transitional provisions are necessary.

Introduction of a comprehensive earnings per share measure

The Board discussed whether, following the 2007 amendments to IAS 1 Presentation of Financial Statements, the ED should encourage the disclosure off 'Comprehensive Earnings per Share' in addition to EPS. One Board member noted that such a statement is unnecessary since an entity is not precluded from providing this additional information on a voluntary basis. The Board decided not to include the statement in the ED.