22 June 2006

IASB proposals to improve the financial reporting of particular financial instruments

The IASB published for public comment proposals to improve the financial reporting of particular types of financial instruments that have characteristics similar to ordinary shares but are at present classified as financial liabilities. The proposals, which respond to requests from entities around the world, are set out in an Exposure Draft of proposed amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements.

IAS 32 requires an instrument to be classified as a liability if the holder of that instrument can require the issuer to redeem it for cash. However, many instruments that would usually be considered equity include provisions that allow the holder to ‘put’ the instrument for cash. The instruments are therefore considered liabilities, rather than equity, under the existing provisions of IAS 32.

Under the proposed amendments, the following types of financial instruments would be classified as equity, provided that specified criteria are met:

ordinary shares that are puttable to (ie redeemable from) the issuer at fair value;

ordinary shares of limited life entities; and

partners’ interests in a partnership that must liquidate upon exit of a partner (eg on retirement or death).

From 3 July 2006 the text of the Exposure Draft will be available freely from the IASB’s Website.

Deadline for comments is 23 October 2006.

Press release

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