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FRSC Adopts Amendments on Puttable Financial Instruments

The Financial Reporting Standards Council (FRSC) has approved the adoption of Amendments to IAS 32, Financial Instruments: Presentation, and IAS 1, Presentation of Financial Statements (revised 2007) – Puttable Financial Instruments and Obligations Arising on Liquidation, issued by the International Accounting Standards Board (IASB). The Amendments, which will become part of PAS 32, Financial Instruments: Presentation, and PAS 1, Presentation of Financial Statements (revised 2007), are intended to improve the accounting for particular types of financial instruments that have characteristics similar to ordinary or common shares but are at present classified as financial liabilities.

IAS 32 requires a financial instrument to be classified as a liability if the holder of that instrument can require the issuer to redeem it for cash. This principle works well in most situations. However, many financial instruments that would usually be considered equity, including some ordinary or common shares and partnership interests, allow the holder to ‘put’ the instrument (to require the issuer to redeem it for cash). Currently these financial instruments are considered liabilities, rather than equity.

The amendments to IAS 32 address this issue and provide that puttable financial instruments will be presented as equity only if all of the following criteria are met:
 
  1. the holder is entitled to a pro-rata share of the entity’s net assets on liquidation;
  2. the instrument is in the class of instruments that is the most subordinate and all instruments in that class have identical features;
  3. the instrument has no other characteristics that would meet the definition of a financial liability; and
  4. the total expected cash flows attributable to the instrument over its life are based substantially on the profit or loss, the change in the recognized net assets or the change in the fair value of the recognized and unrecognized net assets of the entity (excluding any effects of the instrument itself). Profit or loss or change in recognized net assets for this purpose is as measured in accordance with relevant IFRSs.
In addition to the criteria set out above, the entity must have no other instrument that has terms equivalent to (d) above and that has the effect of substantially restricting or fixing the residual return to the holders of the puttable financial instruments.

Additional disclosures are required about the instruments affected by the amendments.

The amendments will apply for annual periods beginning on or after January 1, 2009, with earlier application permitted. If an entity applies these amendments for a period beginning before January 1, 2009 it shall disclose that fact and apply the related amendments to PAS 39, Financial Instruments: Recognition and Measurement, PFRS 7 Financial Instruments: Disclosures, and Philippine Interpretation IFRIC–2, Members’ Shares in Co-operative Entities and Similar Instruments, at the same time.

The Amendments to PAS 32 and PAS 1 (revised 2007) have been forwarded to the Board of Accountancy and Professional Regulation Commission for approval.