Classification of Rights Issues (proposed amendment to IAS 32)

Date recorded:

Staff presented an analysis of comments received on the exposure draft Classification of Rights Issues: proposed amendment to IAS 32 issued in August 2009. The Board discussed the comments, made certain decisions, and directed the staff to proceed to preparing a ballot draft of final amendments to IAS 32.



The Board considered the suggestion made by several respondents to expand the scope of the ED to include equity warrants and convertible debt instruments issued in a foreign currency.

The Board decided not to expand the scope of the amendments to include convertible debt instruments issued in a foreign currency. In doing so, the Board also clarified that to be within the scope of the proposed amendment, the underlying instrument (the instrument on which the rights are offered) must be an equity instrument in its entirety and that conversion features in financial liabilities are not 'equity instruments'. Warrants for an entity's own equity would be within the scope.


Clarification of the term 'rights issues'

The Board agreed that the term 'rights issue' should be clarified in the context of the amendments to include 'rights, warrants, options or similar instruments provided to owners on a pro-rata basis'.

Several Board members were concerned that the amendment was not conceptually based-and called into question whether the 'pro-rata' component of the rights issue was critical. To some, whether a right was distributed on a pro-rata basis was irrelevant to whether an instrument was a liability; others were worried that without it, strain would be put on the 'fixed for fixed' criteria in IAS 32.11. The chairman of the meeting noted forcefully that the consideration of 'fixed for fixed' belonged in the project on Financial Instruments with Characteristics of Equity.


Pro-rata as a key concept

The Board agreed that pro-rata should be emphasised. The basis for conclusions would clarify that the amendment is an exception to the 'fixed for fixed' exception because of the embedded foreign currency features. In addition, the basis for conclusions would emphasise that the primary focus of the amendments was transactions with existing owners acting in their capacity as owners.

Continuing the previous discussion, the Board challenged the proposed changes, especially in the context of shareholders in jurisdictions in which equity holders would be unable to take up the rights and whether this would taint or even negate the notion of pro-rata to all shareholders.

In response to Board members' questions the staff confirmed that, in the case in which a class of equity instruments was denominated in more than one currency (say euro and US dollar) and the rights were offered pro-rata to only the US dollar-denominated shareholders, the rights issue would fall outside the proposed amendment.


Existing owners of the same class of equity

The Board agreed that the amendment should continue to require that the rights issue be made to all existing owners of a class of non-derivative equity instruments and that it should not require that the rights issue be made to all existing owners of non-derivative equity instruments of the entity.

One Board member wanted the amendment to be restricted such that the rights had to be offered to all shareholders of the most residual class of equity only. Others commented that in many multinational companies, there are often more than one class of common shares and that such a restriction might be a 'null set'. However, the staff did admit that by allowing rights to be offered 'by class', diluting other classes of equity was a possibility.



The Board agreed that this amendment should be issued even though the Board is discussing related matters in the Financial Instruments with the Characteristics of Equity project.



The Board agreed that the triggers for re-exposure were not met.


Effective date

The Board agreed that the amendment should be effective for annual financial periods beginning on or after 1 February 2010, with earlier application permissible. The Board considered whether it should not require application from 1 January 2010, but noted that it was unlikely that the amendments could be issued in time to allow the 90-day minimum lead time required for endorsement or incorporation in the legal framework required in several IFRS jurisdictions.


Indications of dissent

Mr Smith indicated that he would dissent from the amendments on the basis that he considers the scope to be too broad (he would restrict the amendment to rights issues offered pro-rata to the most subordinated class of equity).


Next steps

The Board agreed that the staff should proceed to prepare a ballot draft of amendments to IAS 32 based on the Board's decisions.

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