06 July 2012

EFRAG draft comment letter on put options written on non-controlling interests

In May 2012, the IFRS Interpretations Committee (Interpretations Committee) issued Draft Interpretation DI/2012/2 'Put Options Written on Non-controlling Interests'. The Draft Interpretation addresses the subsequent measurement of put options written on shares held by non-controlling shareholders (‘NCI puts’) in the consolidated financial statements of the parent entity. The scope of the Draft Interpretation includes only NCI puts that oblige a parent entity to pay cash or another financial asset for the NCI shares which give rise to a financial liability as defined in IAS 32.

EFRAG agrees that diversity in practice exists in accounting for the subsequent measurement of the financial liability that is recognised in a parent entity’s consolidated financial statements for an NCI put. The diversity arises from a perceived inconsistency in existing IFRS guidance for measuring financial liabilities under IAS 32 and the accounting for transactions with owners in their capacity as owners under IFRS 10/IAS 27. Therefore, EFRAG supports the Interpretations Committee’s efforts to address the issue.

However, EFRAG has a number of significant concerns regarding the proposals and the use of Interpretation to resolve the issue, without addressing wider diversity in practice on accounting for NCI puts and transactions with NCI.

In EFRAG's view, the scope of the Draft Interpretation is too narrow, as it does not address all relevant aspects of accounting for derivatives written over non-controlling interests, including whether or not NCI should be derecognised when the financial liability for the NCI put is initially recognised, and accounting for similar transactions involving NCI. EFRAG believes that diversity in practice will continue, and further diversity might emerge, unless these related issues are also addressed in a manner consistent with existing IFRS.

Overall, EFRAG believes that the Draft Interpretation should address the complexity and broad range of issues arising from transactions with NCI, including NCI puts, in a manner that is consistent with the principles underlying IFRS 3, IFRS 10/IAS 27, IAS 32 and IFRIC 17, as this would result in a more robust and principles-based solution. These broader issues have been noted on multiple occasions by the Interpretations Committee and the IASB. If the Interpretations Committee is unable to develop such an interpretation, they should report back to the IASB who should consider prioritising their project on financial instruments with characteristics of equity, including a comprehensive review of the accounting for NCI puts and similar instruments, including aspects of initial and subsequent recognition in that project. EFRAG members have three distinct views and EFRAG invites constituents to comment on these. The three views are:

• that remeasurement in profit or loss is always appropriate (the approach taken by the IFRS Interpretations Committee);
• that remeasurement in profit or loss is not appropriate and that changes should be recognised in equity; and
• that remeasurement in profit or loss is appropriate in some circumstances.  

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