International Accounting Standard (IAS) 32, Financial Instruments: Presentation, requires a financial instrument to be classified as a liability if the holder of that instrument can require the issuer to redeem it for cash. Many instruments, including some ordinary shares and partnership interests, include provisions that allow the holder to “put” the instrument (to require the issuer to redeem it) for cash. Such instruments, which would otherwise be considered as equity, must be classified as liabilities under the provisions of IAS 32.
The International Accounting Standards Board (IASB) believes that there are many legitimate reasons for put features that should not necessarily cause the related instruments to be classified as liabilities. Therefore the IASB has amended IAS 32 to require the following types of financial instruments to be classified as equity rather than as liabilities, provided they have particular features and meet specific conditions:
- Puttable financial instruments (for example, some shares issued by co-operative entities)
- Instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation (for example, some partnership interests and some shares issued by limited-life entities).
Additional disclosures are required about the instruments affected by the amendments. The amendments are set out in Amendments to IAS 32, “Financial Instruments: Presentation” and IAS 1, “Presentation of Financial Statements” – Puttable Financial Instruments and Obligations Arising on Liquidation.
The amendments are effective for annual periods beginning on or after January 1, 2009, with earlier adoption permitted. If entities adopt the amendments for a period beginning before January 1, 2009, consequential amendments to IFRS 7, Financial Instruments: Disclosures; IAS 39, Financial Instruments: Recognition and Measurement; and IFRIC 2, Members’ Shares in Co-operative Entities and Similar Instruments, should be adopted from the same earlier date. Also, the fact that the amendments have been adopted in advance of their effective date should be disclosed. In the absence of specific transitional provisions, the amendments should be applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.
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