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IAS 32 — Written put option over NCI

Date recorded:

This was a new request. 

The Interpretations Committee received a request regarding how an entity should account for a written put option over non-controlling interests (“NCI put”) in its consolidated financial statements. The NCI put has a strike price that will, or may, be settled by the exchange of a variable number of the parent’s own equity instruments.

The question relates to whether the parent should account for the NCI put as a financial liability for the present value of the option’s strike price on a gross basis, or as a derivative liability on a net basis.

The submitter identified the three following views on this issue.

View 1: Account for the NCI puts as a financial liability on a gross basis

The non-controlling interest shareholder has a right to receive what, from its perspective, is a financial asset. Also, an obligation to deliver a variable number of equity instruments based on the fair value of the entity’s own equity instruments does not meet the definition of equity, and should be accounted for as if the contractual right or obligation is settled in cash. Furthermore, an entity’s contractual obligation to purchase its own equity instruments gives rise to a financial liability for the present value of the redemption amount even if the obligation to purchase is conditional on the counterparty exercising a right to redeem.

View 2: Account for the NCI puts as a derivative financial liability on a net basis

From the reporting entity’s perspective, the obligation is to deliver its own equity instruments (and not cash or another financial asset). Accordingly, the requirements of IAS 32 for derivatives on own equity instruments apply. The value of the put changes in response to the changes in, at least, the value of the shares of the subsidiary, requires no or only a small initial net investment and is settled at a future date.

View 3: Account for the NCI puts applying an appropriate accounting policy

Under this view, Views 1 and 2 would both be acceptable and judgement should be applied when determining an appropriate accounting policy.

The Interpretations Committee has discussed similar matters on several other occasions, since 2006, although the fact patterns generally specific that the NCI puts are cash settled.  On those earlier occasions the Interpretations Committee referred the matter to the Board with a recommendation to reconsider the requirements in IAS 32. In the Committee’s view, an entity would provide better information if NCI puts were measured on a net basis at fair value and the Board should address all derivatives written on an entity’s own equity, including NCI puts, more comprehensively.

The staff believed there is a risk that the scope of this issue would quickly be expanded to a broader range of similar arrangements that contain an obligation to deliver a variable number of equity instruments. They also thought the issue cannot be resolved efficiently within the confines of existing IFRS Standards and the Conceptual Framework. They recommended that the issue would be better considered within the FICE project, which will consider derivatives on an entity’s own equity comprehensively, including cash-settled and equity-settled NCI puts. Therefore, the issue should not be added to the Committee’s agenda.

Decision

The Interpretations Committee approved the staff recommendation to issue a [tentative] agenda decision.  

Discussion

There was agreement that the core issue was not NCI puts; rather it was put options to pay a variable amount of the entity’s owned shares. There was agreement that the issue was broader than the particular case presented in the fact pattern. The staff reminded the Committee that similar issues had been brought to the Committee in the past. In all cases they were referred to the Board.

 

The staff also clarified that this agenda decision combined two issues discussed in the March 2016 meeting. The staff noted that they did not perform a technical analysis as to how the transaction should be recorded (either gross or net).

 

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