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IAS 32 — Debt to equity swaps

Date recorded:

The staff began the discussion by noting the increase in submissions related to current economic environment. The issue relates to a case when an entity issues its own equity instruments in settlement of debt in a restructuring.

The issues raised by the staff paper were analysed as the following four issues:

  • whether the issuing equity instruments is one form of consideration
  • whether the initial measurement of equity in the connect of the debt to equity swap is fair value
  • whether this fair value is determined as fair value of the extinguished liability or issued equity
  • whether any gain on extinguishing of liability is shall be reported in profit or loss.

The staff analysed the issues and noted that in their opinion issuing of the equity instruments is indeed one form of consideration and the new shares issued should be measured at the fair value of the liability extinguished with any difference between the carrying amount of the financial liability extinguished and its fair value recognised in profit or loss. Their analysis was based on the general principles of IFRS that equity is a residual and should be measured by the changes in assets and liabilities as stated in the Framework and IFRS 2 and on consistency with IFRIC 17.

The alternative opinion from the submission referred to paragraph 33 of IAS 32, according to which no gain or loss shall be recognised in profit or loss on purchase, sale, issue or cancellation of an entity's own equity instruments.

A significant majority of IFRIC members agreed with the results of the staff analysis, some, however, for different reasons. One IFRIC member thought of the swap as two transactions; modification of liability with its subsequent change to equity for the fair value; another based her analysis on the fact that debt and equity were substantially different instruments. Nonetheless, some IFRIC members noted that according to some literature the overall transaction can be also thought as equity transaction. Another speaker noted that this transaction cannot be thought as the transaction with shareholders in the capacity of owners as it is primarily a transaction with creditors, thus supporting the proposed accounting treatment.

Majority of the IFRIC members, nonetheless, noted, that the fair value of liability in the time of restructuring may be difficult to obtain. Therefore, they proposed an approach similar to US GAAP where fair value of either extinguished liability or fair value issued equity is used as measurement basis depending on the fact which is more reliable and more easily determinable.

After significant discussion the IFRIC members noted that even though they believe that the proposed view is the only acceptable interpretation given the current IFRS requirements, there is need for clarification of the requirements. After assessing the issue against the agenda criteria the IFRIC decided to take the issue on the agenda and develop and interpretation of the standard to make it clear that the proposed accounting treatment is the only solution. The IFRIC noted that it would aim to issue such an interpretation in early 2010. As such it asked its chairman to consider the possibility to have a video conference to facilitate drafting of the interpretation in August.

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