Proposed amendments to IAS 32 on instruments containing obligations for an entity to redeem its own equity instruments

Keywords: Mazars, Thailand, IFRS, IASB,FICE, IAS 32, Financial instruments

The IASB has been looking at the accounting treatment of financial instruments containing obligations for an entity to redeem its own equity instruments, particularly written put options on non-controlling interests.

This month, it tentatively decided to make amendments to IAS 32 as detailed below.

Clarification of the scope of paragraph 23 of IAS 32

Paragraph 23 states that a contract that contains an obligation for an entity to redeem its own equity instruments for cash gives rise to financial liability for the present value of the purchase price. The proposed amendment would clarify that a financial liability should also be recognised when the purchase of own equity instruments is to be settled in a variable number of different equity instruments (e.g. delivery of a variable number of shares in the parent company to purchase shares in a subsidiary).

This clarification would change current practice by entities who have assumed that, since the standards are silent on this specific topic, they have a choice of accounting method, and therefore do not necessarily need to recognise a financial liability if the purchase of own equity instruments is to be settled in this way.

Initial recognition of a liability representing an obligation to redeem an entity’s own equity instruments

The IASB has proposed the following clarifications on the initial recognition of the obligation:

• if the obligation involves non-controlling interests, and the entity does not already have access to the risks and benefits associated with the shares, the liability is recognised against a component of equity other than non-controlling interests;
• otherwise, the liability is recognised against a component of equity other than issued share capital.

Where non-controlling interests are involved, the proposed clarification would change the very frequent current practice of entities that anticipate the eventual purchase and recognise the liability as if the option had been exercised, i.e. recognise it against non-controlling interests first, and against group equity only to the extent the amount exceeds the value of non-controlling interests.

Accounting for the expiry of a written put option on an entity’s own equity instruments

The IASB has proposed the following clarifications on the accounting treatment for the expiry of a written put option on an entity’s own equity instruments:

• the liability is cancelled by reclassifying it to the same component of equity as that from which it was reclassified on initial recognition of the put option;
• the cumulative amount in retained earnings related to remeasuring the liability may be reclassified to another component of equity, but may not be reversed in profit or loss.

The IASB is also proposing to clarify that written put options and forward purchase contracts on an entity’s own equity instruments must be presented gross, in order to:

• ensure the accounting treatment is consistent with that used for other obligations that are conditional on events or decisions that are beyond the entity’s control;
• help users of financial statements to understand the impact of these transactions on the entity’s exposure to liquidity risk.

Tentative decisions to be confirmed in a future exposure draft

As noted previously, the proposed amendments to IAS 32 set out above are at this stage only tentative decisions by the IASB.

It remains to be seen whether the Board will confirm them in the future exposure draft to be published as part of the FICE project. This exposure draft is included in the IASB’s work plan, but no date has been set as yet.