International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 689
4.5.8 ‘Change
of
control’, ‘taxation change’ and ‘regulatory
change’ clauses ..................................................................................... 3511
4.6
Puttable instruments and instruments repayable only on liquidation ...... 3511
4.6.1
The issue ............................................................................................... 3511
4.6.2 Puttable
instruments
..........................................................................
3513
4.6.3
Instruments entitling the holder to a pro rata share of net
assets only on liquidation .................................................................. 3514
4.6.4
Clarification of the exemptions in 4.6.2 and 4.6.3 above ........... 3516
4.6.4.A
Instruments issued by a subsidiary ............................. 3516
4.6.4.B
Relative subordination of the instrument ................. 3516
4.6.4.C Meaning
of
‘identical features’ .................................... 3517
4.6.4.D
No obligation to deliver cash or another
financial asset .................................................................. 3518
4.6.4.E Instruments that substantially fix or restrict the
residual return to the holder of an instrument ........ 3518
4.6.4.F Transactions
entered into by an instrument
holder other than as owner of the entity .................. 3519
4.6.5
Reclassification of puttable instruments and instruments
imposing an obligation only on liquidation ................................... 3519
4.6.6 IFRIC
2
................................................................................................
3520
4.7
Perpetual debt ..................................................................................................... 3521
4.8
Differences of classification between consolidated and single entity
financial statements ........................................................................................... 3522
4.8.1
Consolidated financial statements ................................................. 3522
4.8.2
Single entity financial statements ................................................... 3522
4.9
Reclassification of instruments ....................................................................... 3523
4.9.1
Change of terms ................................................................................. 3524
4.9.1.A
Equity instrument to financial liability ..................... 3524
4.9.1.B
Financial liability to equity instrument ..................... 3525
4.9.2
Change of circumstances ................................................................. 3525
4.9.2.A
Arguments against reclassification ............................ 3526
4.9.2.B Arguments
for
reclassification
....................................
3526
Financial instruments: Financial liabilities and equity 3485
5 CONTRACTS SETTLED BY DELIVERY OF THE ENTITY’S OWN EQUITY
INSTRUMENTS............................................................................................. 3527
5.1
Contracts accounted for as equity instruments ........................................... 3529
5.1.1
Comparison with IFRS 2 – Share-based Payment ..................... 3529
5.1.2
Number of equity instruments issued adjusted for capital
restructuring or other event ............................................................ 3530
5.1.3
Stepped up exercise price ............................................................... 3532
5.1.4
Exchange of fixed amounts of equity (equity for equity) .......... 3532
5.2
Contracts accounted for as financial assets or financial liabilities ........... 3532
5.2.1
Variable number of equity instruments ......................................... 3532
5.2.2
Fixed number of equity instruments for variable
consideration ....................................................................................... 3533
5.2.3
Fixed amount of cash (or other financial assets)
denominated in a currency other than the entity’s
functional currency ............................................................................ 3533
5.2.3.A
Rights issues with a price fixed in a currency
other than the entity’s functional currency ............. 3534
5.2.4
Instrument with equity settlement alternative of
significantly higher value than cash settlement alternative ....... 3535
5.2.5
Fixed number of equity instruments with variable value .......... 3536
5.2.6
Fixed amount of cash determined by reference to share
price ...................................................................................................... 3536
5.2.7 Net-settled
contracts
over own equity ......................................... 3536
5.2.8
Derivative financial instruments with settlement options ........ 3536
5.3
Liabilities arising from gross-settled contracts for the purchase of
the entity’s own equity instruments ................................................................ 3537
5.3.1
Contracts to purchase own equity during ‘closed’ or
‘prohibited’ periods ........................................................................... 3538
5.3.2
Contracts to acquire non-controlling interests ........................... 3539
5.3.2.A
Put options over non-controlling interests –
Interpretations Committee and IASB
developments ................................................................ 3539
5.4
Gross-settled contracts for the sale or issue of the entity’s own
equity instruments ............................................................................................. 3539
6 COMPOUND FINANCIAL INSTRUMENTS .................................................... 3541
6.1
Background .......................................................................................................... 3541
6.1.1
Treatment by holder and issuer contrasted ................................. 3542
6.2
Initial recognition – ‘split accounting’ ........................................................... 3542
6.2.1
Accounting for the equity component .......................................... 3544
6.2.2
Temporary differences arising from split accounting ................ 3545
6.3
Conversion, early repurchase and modification ......................................... 3545
6.3.1
Conversion at maturity ..................................................................... 3545
3486 Chapter 43
6.3.2 Conversion
before
maturity
3545
6.3.2.A
‘Fixed stated principal’ of a bond .............................. 3545
6.3.2.B Accounting
treatment
..................................................
3546
6.3.2.C
Treatment of embedded derivatives on
conversion ....................................................................... 3547
6.3.3
Early redemption or repurchase ..................................................... 3547
6.3.3.A
Early repurchase through negotiation with
bondholders .................................................................... 3547
6.3.3.B
Early repurchase through exercising an
embedded call option .................................................. 3549
6.3.4
Modification ....................................................................................... 3550
6.4
The components of a compound instrument .............................................. 3550
6.4.1
Determining the components of a compound instrument ........ 3550
6.4.2
Compound instruments with embedded derivatives ................. 3552
6.4.2.A
Issuer call option – ‘closely related’ embedded
derivatives ...................................................................... 3552
6.4.2.B
Issuer call option – ‘not closely related’
embedded derivatives ................................................... 3553
6.5
Other issues ......................................................................................................... 3554
6.6
Common forms of convertible bonds ............................................................ 3554
6.6.1
Functional currency bond convertible into a fixed number
of shares ............................................................................................... 3554
6.6.2 Contingent
convertible
bond
..........................................................
3554
6.6.3 Mandatorily
convertible
bond
........................................................
3554
6.6.3.A
Bond which is mandatorily convertible into a
variable number of shares with an option for
the issuer to settle early for a maximum
number of shares ............................................................ 3555
6.6.3.B
Bond which is mandatorily convertible into a
variable number of shares upon a contingent
‘non-viability’ event ...................................................... 3557
6.6.4
Foreign currency convertible bond ............................................... 3559
6.6.4.A
Instrument issued by foreign subsidiary
convertible into equity of parent ............................... 3560
6.6.5
Convertibles with cash settlement at the option of the
issuer ..................................................................................................... 3561
6.6.6
Bond convertible into fixed percentage of equity ...................... 3562
6.6.7
Convertible bonds with down round or ratchet features .......... 3562
7 SETTLEMENT OF FINANCIAL LIABILITY WITH EQUITY INSTRUMENT ... 3563
7.1
Scope and effective date of IFRIC 19 ............................................................ 3563
7.2 Requirements
of IFRIC 19 ............................................................................... 3563
7.3
Debt for equity swaps with shareholders ..................................................... 3564
Financial instruments: Financial liabilities and equity 3487
8 INTEREST, DIVIDENDS, GAINS AND LOSSES .............................................. 3564
8.1
Transaction costs of equity transactions ....................................................... 3565
8.2
Tax effects of equity transactions ................................................................... 3567
9 TREASURY SHARES ..................................................................................... 3567
9.1
Transactions in own shares not at fair value ................................................ 3568
9.2
IFRS 17 treasury share election ....................................................................... 3569
10 ‘HEDGING’ OF INSTRUMENTS CLASSIFIED AS EQUITY ............................ 3570
11 DERIVATIVES OVER OWN EQUITY INSTRUMENTS ................................... 3570
11.1
Forward contracts .............................................................................................. 3571
11.1.1
Forward purchase ............................................................................... 3571
11.1.2 Forward
sale ........................................................................................ 3573
11.1.3 ‘Back-to-back’
forward contracts ................................................... 3576
11.2 Call options .......................................................................................................... 3576
11.2.1
Purchased call option ........................................................................ 3576
11.2.2 Written
call
option ............................................................................. 3579
11.3 Put options ........................................................................................................... 3581
11.3.1
Purchased put option ......................................................................... 3581
11.3.2
Written put option ............................................................................. 3583
12 POSSIBLE FUTURE DEVELOPMENTS .......................................................... 3586
List of examples
Example 43.1:
Change of control ............................................................................... 3501
Example 43.2:
Share issue payable in fixed instalments ...................................... 3540
Example 43.3:
Right to call for additional equity capital ...................................... 3540
Example 43.4:
Convertible bond – basic ‘split accounting’ ................................. 3543
Example 43.5:
Early repurchase of convertible instrument ................................ 3548
Example 43.6:
Modification of the terms of a bond to induce early
conversion ........................................................................................... 3550
Example 43.7:
Analysis of compound financial instrument into
components ........................................................................................ 3550
Example 43.8:
Convertible bond – split accounting with multiple
embedded derivative features......................................................... 3552
Example 43.9:
Foreign currency denomina
ted equity instrument with
issuer’s redemption right ................................................................... 3553
Example 43.10:
Mandatorily convertible bond classified as equity ...................... 3555
Example 43.11:
Mandatorily convertible bond classified as a compound
instrument ............................................................................................ 3555
3488 Chapter 43
Example 43.12:
Convertible bond mandatorily convertible upon ‘non-
viability’ event .................................................................................... 3558
Example 43.13:
Convertible bond issued by a subsidiary with a functional
currency different to that of the parent ......................................... 3561
Example 43.14:
Convertible bond with ratchet feature ......................................... 3562
Example 43.15:
Discharge of liability for fresh issue of equity ............................. 3563
Example 43.16:
Forward purchase of shares ............................................................. 3571
Example 43.17:
Forward sale of shares ....................................................................... 3574
Example 43.18:
‘Back-to-back’ forward contracts ................................................... 3576
Example 43.19:
Purchased call option on own shares ............................................. 3577
Example 43.20:
Written call option on own shares .................................................. 3579
Example 43.21:
Purchased put option on own shares ............................................. 3581
Example 43.22:
Written put option on own shares ................................................. 3584
3489
Chapter 43
Financial instruments:
Financial liabilities
and equity
1 INTRODUCTION
1.1 Background
The accounting treatment of liabilities (such as loans or bonds) and equity instruments
(such as shares, stock or warrants) by their issuer was not historically regarded as
presenting significant problems. Essentially the accounting was dictated by the legal
form of the instrument, since the traditional distinction between equity and liabilities is
clear. The issue of equity creates an ownership interest in a company, remunerated by
dividends, which are accounted for as a distribution of retained profit, not a charge