IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

(d) A sold (written) call option that allows the holder to purchase a fixed number of ordinary shares

from Entity A for a fixed amount of cash should be classified as equity. As discussed later in

this chapter, a contract that will or may be settled in own equity is classified as equity if it pro–

vides for the exchange of a fixed number of own equity instruments for a fixed amount of cash.

3.1.4 Interpretati on 2,

Members ' Sha res in Coop erative Entities and Similar Instruments ,

of the

Intern ational Financial Report ing Interpretations Committee (IFRIC) addresses the applicat ion of

lAS 32' s classification requi rement s to financial instrument s issued to members of coopera tive en–

tities that evidence the members' ownership inte rests in the entity ("members' shares"). In some

cases, such shares give the member the right to request redemption for cash or another financial

asset. In such cases, IFRIC Interpretation 2 clarifies that members' shares are equity if

(a) The entity has an unconditional right to refuse redemptio n of the members' shares ; or

(b) Redemption is unconditionally proh ibited by local law, regulation , or the entity's govern-

ing charter.

3.1.5 If an unconditional proh ibition is partia l (e.g., redempti on of memb ers' shares is proh ibited

if redemption would cause the numb er of members' shares or amount of paid-in capital from mem–

bers' sha res to fall below a specified level), members' shares in exces s of the proh ibiti on agai nst

redemption are liabilities, unless the entity has the unconditional right to refuse redemption.

Example

A cooperative bank has issued members ' shares that give members the right to vote and participate

in dividend distributions. Members also have the right to request redemption of the shares fo r cash.

The charter of the cooperative bank states that the entity has the right to refu se redemption at its

sale discretion, but the entity has never refu sed

redeem members ' shares in the past. Neverthe–

less, the members ' shares are equity because the entity has the unconditional right to refu se re–

demption.

3.1.6 In February 2008 , IASB publi shed an amendment to lAS 32 to make a limited exce ption to

the pri nci ple that instruments that contai n an obligation to deliver cash or other financia l assets al–

ways should be classi fied as financial liabilities. Th is excep tion app lies to instruments that repre –

sent the residual interest in the net assets of the entity and that meet certain specified conditions.

Under this except ion, some puttable financial instruments and some financial instruments that im–

pose on the entity an obligation to deli ver to another party a pro rata share of the net assets of the

entity only on liquidation are classified as equity.

3.2 Split Accounting for Compound Instruments

3.2.1 Sometimes issued nonderivative financia l instruments contain both liabili ty and equity ele–

men ts. In other words, one component of the instrument mee ts the definition of a financia l liab ility

and ano ther component of the instrument meets the definiti on of an equity instrument. Such in–

strume nts are refe rred to as compound instrume nts. The approach to accounting for compound

instrume nts is to apply split accounting, that is, to present the liability and equity elements

separate ly. lAS 32 provides this principle: The issuer of a nonderivative financial instrument shall

eva luate the terms of the financial instrument to determine whether it contains both a liability and

an equity component. Such component s shall be classified separately as financial liabiliti es,

financial assets, or equity instruments.

Example

To illustrate. a bond that

convertible into a fi xed number of ordinary shares of the issuer

compound instrument. From the perspective of the issuer. a convertible bond has two components:

(

1) An obligation

pay interest and principal payments on the bond as long as it

not con–

verted. This component meets the defin ition of a finan cial liability. because the issuer has

an obligation to pay cash.

(2) A sold (written) call option that grants the holder the right to convert the bond into a fix ed

number of ordinary shares of the entity. This component meets the defin ition of an equity

instrument.