Measurement of equity instruments and separated hybrid instruments

The Board discussed several aspects of the measurement requirements for freestanding equity instruments and equity hybrids (that is, instruments that are separated into an equity component and a liability or asset component). The following decisions were, unless otherwise noted, agreed without significant detailed discussion.

Transaction costs

The Board agreed that transaction costs or fees incurred to issue freestanding equity instruments and equity hybrids should be expensed immediately.

One Board member was concerned that this principle is contrary to the notion of 'cost' in IAS 16. For example: an item of property, plant and equipment was acquired in exchange for shares (value 100) and additional costs of 10. If the 10 was related to the issue of the shares, it would be expensed; if it was directly attributable to bringing the asset to the location or condition necessary to use it, it would be included in the cost of the asset. No other Board members were concerned about this difference. In the example, the 10 was not a transaction with shareholders in their capacity as shareholders and should therefore be excluded from equity.

Initial measurement of freestanding equity instruments

The Board agreed that freestanding equity instruments should be measured initially at their transaction prices.

Separation of equity hybrids (that is, IAS 32 'compound instruments')

The Board agreed that the separated components of an equity hybrid should be measured as follows: first, the liability (or asset) component should be measured at the fair value as if it were a freestanding liability (or asset); second, the remainder of the transaction price for the hybrid instrument should be allocated to the equity component.

Subsequent measurement

The Board agreed that equity instruments and separated components that the entity cannot be required to redeem should not be remeasured. The Board agreed that at each reporting date, equity instruments and separated equity components with redemption requirements should be remeasured at current redemption value. (Current redemption value is a defined term: it is the amount that would result from applying the redemption formula as if redemption was required at the measurement date.) Changes in current redemption value should be recorded as a transfer between retained earnings and the redeemable equity instruments or components.

The Board also agreed that the liability or asset component of a separated instrument should be subsequently remeasured as if it were a freestanding instrument.

Measurement of liability and asset instruments

The Board discussed how instruments classified as a liability (or asset) under the IASB's classification approach would be measured using the current measurement requirements in IFRS and US GAAP.

Board members were uncomfortable with the staff recommendations, which they thought would be open to abuse, in particular the ease with which a liability could be structured to achieve equity classification. Some Board members would prefer to account for the instruments 'net', while others preferred the current IAS 39 requirements. Staff noted that the FASB's current view is to report the position 'net'.

A bare majority of the Board (8 in favour) agreed that physically settled forward contracts and written put options on an entity's own equity instruments should be (a) reported on a net basis and (b) measured consistently with the financial instruments recognition and measurement project's conclusions.