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IAS 32 — Classification of rights and options

Date recorded:

The staff presented two additional issues occurring lately to the IFRIC.

Rights issues denominated in a foreign currency

One related to a current issue around the world related to classification of rights issues. The staff noted that based on the current IFRS requirements and based on the previous conclusion of IFRIC if the exercise price of the right was fixed in a foreign currency, the entity would have not received a fixed amount for the issue of the shares. Thus the instrument does not fulfil the criteria of equity instrument and must be classified as liability in its entirety according to IAS 32.

In the current economic environment, contrary to the previous periods, the issue has become much more widespread. As more and more companies issue rights in more than one currency (e.g. when listed in more than one jurisdiction or based on regulatory requirements) application of this requirement leads to counterintuitive results, creating a huge practical issue. While the rights are outstanding the changes in entity's own share price are reflected in profit or loss.

The IFRIC noted that in 2005 it proposed an amendment of IAS 32 to the Board on a broader fixed to fixed issue. The Board decided not to amend the standard at that time as piecemeal changes to an already complex standard would create additional complexity just as the standard was issued. Moreover, at the time neither the Board nor IFRIC believed that the issue can lead to significant diversity in practice. However, the effects of the financial crisis and increased volatility in share prices as well as FX rates have led to exacerbation of the issue in practice.

A Board observer noted that this result was not intended by the Board and in his opinion the current treatment contradicts the rationale behind the current standard. He agreed that as the practice developed this issue it has to be urgently addressed.

After a short discussion the IFRIC decided to refer the issue to the Board to take immediate action as the results from current requirements are clearly not in accordance with the economics of the underlying transactions. As the IFRIC members believe it is a very narrow issue that can be addressed speedily, the issue could be discussed on the upcoming July Board meeting.

Conversion options

The second issue related to a collar on conversion options. The submission related to a financial instrument that will or may be converted into a number of the entity's own equity instruments subject of a collar. After a brief discussion the IFRIC noted that there are not sufficient principles in the current IFRSs to develop an interpretation on this issue as in the practice there is wide diversity in the issued instruments with similar features. Therefore, it decided to direct the query to the liabilities and equity technical team as part of the project in this area.

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