EFRAG comments on the IFRIC's D25 Extinguishing Financial Liabilities with Equity Instruments
24 August 2009
EFRAG thinks that the equity instruments issued should be measured at the fair value of the financial liability extinguished.
IFRIC D25 provides guidance on how an issuer of debt should account for a debt for equity swap; in other words, when a debtor and creditor renegotiate the terms of a financial liability with the result that the liability is fully or partially extinguished by the debtor issuing equity instruments to the creditor.
EFRAG agrees that existing IFRS lack sufficient guidance on such transactions and that as a result there is diversity in practice. EFRAG supports the IFRIC in its efforts to develop interpretive guidance on such transactions.
EFRAG broadly agrees with the draft consensus, with one exception. EFRAG thinks that theoretically, in order to be consistent with the Framework, the equity instruments issued should be measured at the fair value of the financial liability extinguished. Therefore we have suggested drafting changes to paragraph 5 of the consensus.
EFRAG has two detailed concerns regarding the proposals.
· The first relates to the implications that paragraph 49 of IAS 39 Financial Instruments: Recognition and Measurement relating to the measurement of financial liabilities with demand features. We think that the interpretation should make the applicability of this paragraph clear.
· The treatment of some common control transactions where the relative ownership of debt and equity remains the same before and after the conversion and the possible cost/benefit implications of this draft interpretation on such transactions, especially where a 100 per cent ownership is involved.
Certain drafting suggestions primarily relating to the Basis for Conclusions were made.
© EFRAG - European Financial Reporting Advisory Group
