At its March 2008 meeting, the Australian Accounting Standards Board (AASB) adopted the International Accounting Standards Board’s (IASB’s) amending standard.

Amendments were made to IAS 32 Financial instruments: presentation and IAS 1 Presentation of financial statements — puttable financial instruments and obligations arising on liquidation.

This will enable some specific financial instruments (e.g. ordinary shares and partnership interests that allow the holder to ‘put’ the instrument for cash redemption from the issuer), which are in substance ‘equity’, to be classified as such.

Without the amendments, IAS 32 classifies these financial instruments as liabilities because the holder of such instruments can require cash redemption from the issuer, notwithstanding where such instruments are residual interest in the net assets. Consequently, such instruments are an entity’s equity.

The adoption by the AASB will permit some puttable financial instruments, and financial instruments that entitle the holder to a pro rata share of the net assets of the entity only on liquidation, to be classified as equity.

The amendment creates an exception to the definition and principle enshrined in paragraphs 11 and IN6 of IAS 32, which classifies a financial instrument either as a liability or an equity.

The IASB recognises that the principle classifies financial instruments appropriately in most situations. However, a key element of the principle states that if the financial instrument includes a contractual obligation to deliver cash to the holder, it shall be classified as a liability.

Consequently, based on the definition and principle in IAS 32, the above two types of financial instruments are liabilities.

These instruments also meet the framework’s definition of liability being a present obligation of the entity arising from a past event, and the settlement is expected to result in an outflow of resources.

Resulting from the revised IAS 32, additional disclosures are required for puttable financial instruments classified as equity. Some of the required disclosures are:

• summary data about the amount classified as equity
• objective, policies and processes for managing its obligation to repurchase the instruments
• the expected cash outflow on redemption of that class of financial instruments
• information about how the expected cash outflow on redemption was determined

Such disclosures are not normally required for equity items, but the obligations are also not a usual feature of equity.

The amendments will apply for annual periods beginning on or after 1 January 2009, with earlier application permitted.

Further information

• view Submission to the IASB on exposure draft IASs 32 and 1
• read the AASB’s amending standards and action alerts
• read the IASB’s amending standards and media releases