• Stephan Lego-Deiber, Partner |

In its September 2017 update, the IFRS Interpretations Committee (IFRIC) published its view on when to classify particular investments as equity under IFRS 9.

The IFRIC received a letter asking in which cases particular financial instruments would be eligible for the presentation election described in paragraph 4.1.4 of IFRS 9. This paragraph allows the holder to classify particular investments as equity, in other words permitting him/her to ascribe variations in fair value to “other comprehensive income” instead of to “profit and loss.” The question regarded whether instruments meeting the exception criteria as stated under IAS 32.16A-16D (IAS 32 Financial Instruments: Presentation) would be eligible for this classification.

In its response, the IFRIC took the following aspects into consideration:

  • Equity is defined as “any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities” (IAS 32.11).
  • Financial liabilities as defined under IAS 32 can be exceptionally classified as equity if they meet certain criteria:
    • They are puttable instruments (IAS 32.16A and 16B).
    • Instruments, or components of instruments, that oblige the entity to deliver a pro rata share of the net assets of the entity to another party do so only upon liquidation (IAS 32.16C and 16D).

The IFRIC also refers to the IASB’s explanation in IFRS 9 BC5.21, which says that the instruments in question do not meet the definition of an equity instrument as per IAS 32.11. These financial liabilities mentioned above, even though exceptionally meeting the criteria as per IAS 32 solely for presentation purposes, are not eligible to be classified as equity instruments in light of IFRS 9.

As a result, given that the IFRIC is convinced that IFRS 9 provides sufficient guidance on the classification of these instruments, it has not put this issue on its standard-setting agenda.

If you would like to learn more about the decision made by the committee, please click here to read the full paper.

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