Financial Instruments with Characteristics of Equity

Date recorded:

Obligations to redeem own equity instruments (Agenda Paper 5)

In June 2018, the IASB published Discussion Paper DP/2018/1 Financial Instruments with Characteristics of Equity. At this meeting, the staff asked the IASB for tentative decisions on proposed clarifications related to the accounting for obligations to redeem own equity instruments applying IAS 32.

Staff recommendation

The staff recommended that the IASB proposes clarifying amendments to IAS 32 with the following effects:

  • Paragraph 23 would also apply to an obligation to redeem own equity instruments that is settled in a variable number of another type of own equity instruments
  • On initial recognition of the obligation to redeem own equity instruments, the debit entry would be recognised against a component of equity other than non-controlling interests (NCI) (in the case of obligations involving NCI) or other than issued share capital (in the case of other obligations to purchase own shares) if the entity does not already have access to the returns associated with an ownership interest
  • On expiry of a written put option on own equity instruments, the financial liability would be reclassified to the same component of equity as that from which it was reclassified on initial recognition of the put option
  • On expiry of a written put option on own equity instruments, the cumulative amount in retained earnings related to the put option would be permitted to be reclassified to another component of equity but amounts previously recognised in profit or loss on remeasuring the financial liability would not reversed

The staff also recommended clarifying that written put options or forward purchase contracts on own equity instruments are presented gross rather than net, to:

  • Align with the accounting for other obligations that are conditional on events or choices that are beyond the entity’s control
  • Assist users of financial statements in assessing the entity’s exposure to liquidity risk. Settlement of the obligation reduces net assets by the gross amount of the cash outflow unlike other derivatives that result in the receipt of assets and not own shares

The staff will consider whether any additional disclosures are required for obligations to redeem own equity instruments in a future meeting along with other potential clarifications made to IAS 32 as part of this project.

The staff asked the IASB whether they agree with their recommendations.

IASB discussion

Overall, IASB members believe that the staff recommendations are in alignment with what the IASB have previously discussed.

One IASB member disagreed with the information provided in the paper on separate financial statements and noted that this goes beyond the scope of the project. The staff agreed that this does not fall within the scope of the project and whilst the paper commented on separate financial statements, it did not form part of the recommendations they had proposed.

Another IASB member noted that whilst he ‘does not disagree’ with the recommendations, it will be a significant shift to current practice. He, therefore asked the staff to ensure they explain the rationale for the amendments clearly in the exposure draft.

One IASB member agreed with the recommendation that when a written put option expires, the cumulative amount in retained earnings related to the put option is reclassified to another component of equity. However, the IASB member requested that when the staff look at disclosures they consider additional disclosures for this to explain movements in retained earnings.  

IASB members disagreed with the initial measurement and subsequent measurement elements on the paper. IASB members did not agree that the financial liability should be measured at the capped amount if the fair value of the liability is smaller than the capped amount. However, the staff confirmed that this is an existing principle within IAS 32. The staff confirmed that their recommendations do not relate to initial measurement and that subsequent measurement is in scope of IFRS 9, which does not form part of this project. As IASB members have highlighted this as an issue, the staff will consider how best to address this and potentially ask for feedback on this in the FICE exposure draft.

An IASB member disagreed that written put options and forwards should be presented gross. However, if users want to see potential cash outflow (i.e. a liability on the balance sheet) he disagreed that the debit would go to owners’ equity and should instead be recognised in NCI. The IASB and the staff discussed this further during the meeting but no conclusion was reached.

IASB decision

10 out of 11 voted in favour of the staff’s recommendations.

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