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IFRSs and other news
Amendment
to IAS 32
departs from principles
IASB acts to correct counter-intuitive results but departs from principles
In February 2008 the IASB issued an amendment to IAS 32 "Financial Instruments: Presentation" addressing particular types of financial instrument. Its effect will be to change the classification of limited types of instrument from liability to equity.
Prior to the amendment, IAS 32 required any financial instruments that the holder can require the issuer to redeem to be classified as a liability. This principle works well in most situations. However, some entities such as partnerships and co-operatives typically issue only puttable instruments. These instruments may be redeemed for a proportionate share of the entity's net assets and are often subordinated to other claims on the entity's assets. Economically, these seem equity-like and the amendment aims to reflect this. Equity classification is however subject to a number of strict criteria ¡V a careful evaluation of each instrument's terms will be necessary.
The amendment also addresses instruments that impose on the entity an obligation to deliver a pro-rata share of the net assets of the entity only on its liquidation.
| Counter-intuitive
outcomes |
| The existing requirements of IAS 32 can lead to counter-intuitive outcomes for puttable instruments ¡V for instance, strong financial performance by the issuer can increase the value of such an instrument so that reported liabilities and finance costs also increase. In this sense, the amendment provides relief, as such instruments will be classified as equity provided they have particular features and meet specific conditions. However these conditions essentially amount to a list of rules that is both narrowly focused and complex, and represent a departure from the principles-based standards that IFRS purports to aspire to. Our concern is that a rules-based approach is not the right direction for the future development of the Standard, and we therefore encourage the IASB to bear this in mind as it considers how to revise the Standard in light of its Discussion Paper on how to improve and simplify the current requirements. |
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