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Agenda ref
12B
STAFF PAPER
October 2021
IASB
®
meeting
Project
Accounting for Warrants that are Classified as Financial
Liabilities on Initial Recognition (IAS 32)
Paper topic
Finalisation of agenda decision
CONTACT(S)
Angie Ah Kun
aahkun@ifrs.org
Riana Wiesner
This paper has been prepared for discussion at a public meeting of the International Accounting Standards
Board (Board) and does not represent the views of the Board or any individual member of the Board.
Comments on the application of IFRS
®
Standards do not purport to set out acceptable or unacceptable
application of IFRS Standards. Technical decisions are made in public and reported in IASB
®
Update.
Introduction and purpose
1. At its September 2021 meeting, the IFRS Interpretations Committee (Committee)
decided not to add a standard-setting project to the work plan in response to a
submission about whether, applying IAS 32 Financial Instruments: Presentation,
an issuer reclassifies a derivative financial liability to equity after initial
recognition in particular circumstances. The Committee instead decided to finalise
an agenda decision.
2. The purpose of this meeting is to ask Board members whether they object to the
agenda decision, as required by paragraph 8.7 of the IFRS Foundation Due
Process Handbook.
Background
3. The submission described a warrant that provides the holder with the right to buy
a fixed number of equity instruments of the issuer of the warrant for an exercise
price that will be fixed at a future date. At initial recognition, because of the
variability in the exercise price, the issuer in applying paragraph 16 of IAS 32
classifies the warrants as financial liabilities. This is because for a derivative
financial instrument to be classified as equity, it must be settled by the issuer
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exchanging a fixed amount of cash or another financial asset for a fixed number of
its own equity instruments (‘fixed-for-fixed condition’).
4. The submission asked whether the issuer reclassifies the warrant as an equity
instrument following the fixing of the warrant’s exercise price after initial
recognition as specified in the contract, given that the fixed-for-fixed condition
would at that stage be met.
5. In March 2021, the Committee discussed the submission and decided to publish a
tentative agenda decision, having observed that:
(a) IAS 32 contains no general requirements for reclassifying financial
liabilities and equity instruments after initial recognition when the
instrument’s contractual terms are unchanged;
(b) similar questions about reclassification arise in other circumstances;
and
(c) reclassification by the issuer has been identified as one of the practice
issues the Board will consider as part of its Financial Instruments with
Characteristics of Equity (FICE) project.
6. Accordingly, the Committee concluded that the matter described in the request is,
in isolation, too narrow for the Board or the Committee to address in a cost-
effective manner and recommended that the Board consider the matter as part of
its broader discussions on the FICE project.
Overview of the feedback on the tentative agenda decision
7. The Committee received 8 comment letters on its tentative agenda decision by the
comment letter deadline of 24 May 2021.
8. Six respondents agreed with the Committee’s decision not to add a standard-
setting project to the work plan broadly for the reasons set out in the tentative
agenda decision.
9. Two respondents agreed with the decision not to address the specific fact pattern
in isolation and, instead, consider the matter as part of the broader discussions on
the FICE project. However, they were of the view that the requirements in IAS 32
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are sufficient to address the fact pattern described in the submission. These
respondents suggested that the agenda decision focus on paragraphs 16E-16F of
IAS 32 to support a conclusion that IFRS Standards are sufficient to address the
matter submitted.
10. The Committee considered this feedback at its September meeting
1
. Having done
so, the Committee confirmed the analysis and observations in the tentative agenda
decision, making no changes to the wording of the tentative agenda decision.
11. Twelve of 13 Committee members voted to finalise the agenda decision.
12. Appendix A to this paper includes the wording of the agenda decision, approved
by the Committee.
Questions for the Board
The staff would like to ask the Board the following questions.
Questions for the Board
Do Board members object to the Committee’s
(a) decision that a standard-setting project should not be added to the work plan; and
(b) conclusion that the agenda decision does not add or change requirements in
IFRS Standards?
1
Agenda Paper 3 to the Committee’s September 2021 meeting analyses comments received.
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Appendix AThe Agenda Decision
A1. The Agenda Decision below was approved by the Committee at its September
2021 meeting.
Accounting for Warrants that are Classified as Financial Liabilities on Initial
Recognition (IAS 32 Financial Instruments: Presentation)
The Committee received a request about the application of IAS 32 in relation to the
reclassification of warrants. Specifically, the request described a warrant that provides
the holder with the right to buy a fixed number of equity instruments of the issuer of
the warrant for an exercise price that will be fixed at a future date. At initial
recognition, because of the variability in the exercise price, the issuer in applying
paragraph 16 of IAS 32 classifies these instruments as financial liabilities. This is
because for a derivative financial instrument to be classified as equity, it must be
settled by the issuer exchanging a fixed amount of cash or another financial asset for a
fixed number of its own equity instruments (‘fixed-for-fixed condition’). The request
asked whether the issuer reclassifies the warrant as an equity instrument following the
fixing of the warrant’s exercise price after initial recognition as specified in the
contract, given that the fixed-for-fixed condition would at that stage be met.
The Committee observed that IAS 32 contains no general requirements for
reclassifying financial liabilities and equity instruments after initial recognition when
the instrument’s contractual terms are unchanged. The Committee acknowledged that
similar questions about reclassification arise in other circumstances. Reclassification
by the issuer has been identified as one of the practice issues the Board will consider
addressing in its Financial Instruments with Characteristics of Equity (FICE) project.
The Committee concluded that the matter described in the request is, in isolation, too
narrow for the Board or the Committee to address in a cost-effective manner. Instead,
the Board should consider the matter as part of its broader discussions on the FICE
project. For these reasons, the Committee decided not to add a standard-setting project
to the work plan.
