IFRS 4 and IAS 32 — Scope issue for investments in REITs

Date recorded:

A request was submitted to the IFRIC to seek guidance on the liability/equity classification of financial instruments with specific features issued by Real Estate Investment Trusts (REITs). The staff provided background information on the nature of REITs. Staff noted that because a REIT has a contractual obligation to distribute 90% of distributable profit, some believe that there is a guaranteed benefit (as defined in IFRS 4) and, therefore, these investments should be accounted in accordance with IFRS 4.

Several members expressed their surprise that the staff could consider these investments to be guaranteed benefits. One member suggested that if this was true, all financial liabilities will be regarded as guaranteed benefits and accounted for under IFRS 4. Another member pointed out that although paragraph 35 of IFRS 4 refers to 'financial instruments', it should be read as 'insurance contracts'. The IFRIC agreed that investments in REITs should be accounted for in accordance with the requirements of IAS 32 with regards to compound instruments.

The IFRIC agreed not to add the matter to its agenda but proposed a significant redraft of the agenda decision to remove any reference to IFRS 4 and to refer only to IAS 32.

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