IAS 32 – Classification of an instrument that is mandatorily convertible into a variable number of shares, subject to a cap and a floor

Date recorded:

In January 2014, the Committee discussed how to account for a particular mandatorily convertible financial instrument in accordance with IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement. The financial instrument has a stated maturity date and at maturity the issuer must deliver a variable number of its own equity instruments to equal a fixed cash amount – subject to a cap and a floor, which limit and guarantee, respectively, the number of equity instruments to be delivered. 

The Committee considered that, based on its analysis of existing IFRS requirements, an Interpretation was not necessary and consequently, tentatively decided not to add the issue to its agenda.

A tentative agenda decision was published, and after considering the comments received on the tentative agenda decision, the staff recommended that the Committee should finalise its decision not to add this issue to its agenda, and proposed wording for the final agenda decision.


A Committee member noted that she did not disagree with the proposed agenda decision, but noted that there was considerable diversity in practice. She noted that research had been performed (in the banking industry) with respect to this issue over the past few years, and a number of examples had been identified where people had come to different conclusions, and it seemed to be accepted that there were alternative views, which was evidence that IAS 32 was subjective and that there were various interpretations available. She noted her concern that the agenda decision would change practice in a number of areas, and that the agenda decision did not consider that fact.

Another Committee member noted that he agreed with the answer arrived at by the staff. However, he noted that the paper stated that the instrument as a whole met the definition of a liability, but that IAS 32 required an entity to classify an instrument or its components based on the definition, and that the agenda decision did not address the question of whether the instrument had more than one component for the purposes of classification, which was key to the issue. 

The staff member responded, and noted that the previous agenda decision talked about the instrument; however, the language had been changed to talk about the obligation in the updated agenda decision. He noted that the obligation that was the subject of the decision was the obligation to deliver a variable number of shares, subject to a cap and a floor, and it was that obligation in its entirety that meets the definition of a liability. He noted that there may be other features to the instrument that might be components, but that in itself was not a component because it met the definition of a liability.

The Committee member questioned whether this was the right way to look at the issue, and noted that the agenda decision appeared to be jumping the first step.

Another Committee member noted that he agreed with the agenda decision, but observed that the agenda decision did not clearly distinguish why the obligation was not subdivided (as raised by the previous Committee member). He noted that there was an important concept that appeared to be missing from the agenda decision, which was that the contractual substance was that there was a single obligation to deliver a variable number of shares, and added that this concept was critical to saying why the obligation was not subdivided, and suggested that the concept was added to the agenda decision as it would help to clarify not only why the obligation was a liability in its entirety, but also why it was not subdivided.

Another Committee member noted that the focus in IAS 32 was on the settlement, and in this case there was just an obligation that was going to be settled in a variable number of shares and if that fact was clear in the agenda decision, that would support why it was not subdivided, and added that he agreed with the staff conclusion. 

Another Committee member noted that he believed the proposed agenda decision wording lacked two things - the process/thinking behind the conclusion and the reasons linked back to the standard for the conclusion. He noted that the agenda decision made the statement that “…the issuer’s obligation to deliver a variable number of the entity’s own equity instruments is a non-derivative that meets the definition of a financial liability… in its entirety”, but did not explain why this was the first step that would be taken. He noted that more of the analysis in the agenda paper needed to be built into the agenda decision to explain the thinking and rationale. He also commented that one of the issues raised in the non-viability clause issue was how IAS 32 was supposed to be read – in paragraph order or if an entity should go straight to compound instrument accounting if elements of equity could be identified – and noted elements of that discussion applied in this discussion also. He noted that it could be argued that an entity looked for the components first, and then looked at how these should be accounted for under IAS 32. He noted that what was proposed in this agenda decision was that an entity looked at its obligation, determined that it was a liability in its entirety, and therefore, as there was no equity component, there was no need to go to paragraph 28. He noted that this was one interpretation of IAS 32 (amongst others) and that that logic needed to be reflected in the agenda decision.

In concluding the discussion, the Chairman proposed that the agenda decision was to be updated to reflect the comments expressed by Committee members in the discussion.

The Committee members agreed with the proposal put forward by the Chairman, and in response to the Chairman asking for Committee members to assist the staff in making the necessary amendments to the agenda decision, three Committee members volunteered to assist.

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