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IAS 32 — Classification of instruments when issuer has choice over how obligation is settled

Date recorded:

The Committee received a request to clarify the accounting for financial instruments that give the issuer the contractual right to choose the form of settlement. Specifically, the issuer can choose to deliver either cash or a fixed number of its own equity instruments.

The submitter asked whether all three of the described instruments would have the same accounting treatment:

  • Instrument 1 is puttable for cash by the holder but the issuer has a contractual right to choose instead to deliver a fixed number of its own ordinary shares instead of cash.
  • Instrument 2 is convetible by the holder into a fixed number of the issuer’s ordinary shares but the issuer has a contractual right to choose to pay cash instead of delivering its own shares.
  • Instrument 3 is puttable by the holder and, upon the holder’s exercise of that put, the issuer has the contractual right to choose to deliver either cash or a fixed number of its own ordinary shares.

The Staff had a proposal not to add the issue to the agenda on the basis that: ‘if the issuer has the contractual right to choose to settle a non-derivative financial instrument in cash or a fixed number of its own shares, that financial instrument would meet the definition of an equity instrument in IAS 32 as long as the value of the fixed number of the issuer’s shares did not exceed substantially the value of the cash’. In respect of the three described instruments, the Committee believed that ‘if the substance of particular financial instruments is the same, the issuer cannot achieve different classification results simply by describing those contractual arrangements differently’.

A Committee member pointed that when referring to the substance of the three instruments in the agenda decision, it should say ‘contractual substance’.

The Committee approved the agenda decision (as modified by the drafting comment).

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