IAS 32 — Debt to equity swaps

Date recorded:

The IFRIC deliberated comment letters received to D25 Extinguishing Financial Liabilities with Equity Instruments. Most constituents agreed with the basic feature of D25 – that issuance of an entity's equity instruments was consideration paid and that the extinguishment should be determined at fair value, with any difference between the carrying value of the financial liability and its fair value at extinguishment being recognised as profit or loss.

On the other hand, most constituents disagreed with the requirement to measure debt-for-equity swaps at the fair value of equity or fair value of the liability, whichever is more reliably determinable. Constituents felt that a preferred measurement basis should be specified to avoid an 'accounting choice' developing in practice. The IFRIC agreed to provide guidance on a preferred measurement basis.

Two IFRIC members expressed their concerns that a preferred measurement basis might not capture the variety of situations for these transactions. Nevertheless, most of IFRIC members held their views that equity better represented consideration paid in the transaction. Therefore, the IFRIC decided that fair value of the equity instruments issued should be the preferred measurement basis.

The IFRIC also agreed that if the debt-for-equity swap is measured using fair value of the financial liability extinguished, paragraph 49 of IAS 39 should not apply to its measurement, especially in the context of covenant violation. The IFRIC reached that conclusion as it believed that repayment on demand was not part of the original contractual terms and that the provision was non-substantive (the entity cannot pay it on demand).

The IFRIC also agreed that all the measurement should be applied at the transaction date, and transaction date should be defined with reference to IFRS 3 Business Combinations.

Regarding the scope, the IFRIC decided that the Interpretation should not apply to those debt-for-equity swaps where conversion terms were included in the initial contract of the liability extinguished (as there is no change of contractual terms). The scope exclusion for common control transaction proved to be more controversial. While some IFRIC members believed that common control transactions should be excluded from the scope of D25 as they represented a different economic substance, other IFRIC members noted that such an approach was not justified on the level of the reporting entity (separate financial statements).

Finally, the IFRIC agreed that common control transaction should be excluded from the scope of D25 if there is indication that the economic substance of the transaction is that of equity contribution. The Basis for Conclusions will indicate that capital contributions are accounted separately if reliably determinable.

The IFRIC also decided to provide additional guidance on how the Interpretation should be applied to partial extinguishments. The IFRIC noted that in that case the entity should assess whether some of the consideration paid relates to a modification of the part of the liability extinguished. If it does, the entity should allocate the consideration paid between the part of the liability extinguished and the part of the liability that remained outstanding. The IFRIC decided not to provide any further specific guidance on that allocation.

The IFRIC also confirmed the transition requirement proposed in D25 – retrospective application. Further, the Interpretation should be effective for annual periods beginning on or after 1 April 2010, with earlier application permitted.

Finally, the IFRIC approved the consensus and asked the Board to approve the Interpretation at its November meeting.

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