IAS 32 — Classification of instruments that mandatorily convert into a variable number of shares upon a ‘non-viability’ contingent event

Date recorded:

The Committee received a request to address the accounting of instruments that convert into a variable number of the issuer’s own shares if the issuer breaches a minimum regulatory requirement (‘non-viability’ event). Furthermore, payment of interest is entirely at the issuer’s discretion. The question was on how those instruments should be classified.

In July 2013 the IFRS IC tentatively decided not to add this issue to its agenda as it believed that the guidance in IAS 32 is clear. The comments received on this decision were mixed. Nonetheless, the staff recommended finalising the decision not to add this issue to the IFRS IC agenda.

The majority of the Committee supported view 1 in the agenda paper (i.e. the instrument is a liability in its entirety).

One Committee member, however, disagreed with this. She pointed out that the unit of account is unclear and that it might well be an equity instrument with an embedded derivative. She referred to IFRS 7.BC28 where it says that it is sometimes complicated to identify the unit of account. Also, the agenda decision might have consequences on the analysis of other instruments with embedded derivatives. It could be read that those instruments would need to be classified as a financial liability in their entirety. She also mentioned that according to IAS 1.74, a long-term financial liability is classified as current if (and only if) the breach has occurred. Applying this reasoning to the issue at hand, the clause should be ignored until the breach has actually occurred.

Some other Committee members shared the concerns and agreed that it is a broad issue.

The Chairman concluded that there was a consensus that there is a liability component to the instrument and that it is by far the largest component. The question is, if it is the only component that is measured or if there are other components to be measured. He further concluded that there is not enough support for the staff’s recommendation to finalise the agenda decision. Upon the question how the Committee wanted to proceed it was concluded that the issue is too broad to be solved on a Committee level.

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