Fixed-for-fixed: the own-shares test

Learning objectives

• Explain the fixed-for-fixed condition for a contract settled in the issuer's own equity instruments.L2
• Determine whether a contract settled in own equity instruments is an equity instrument or a liability under the fixed-for-fixed condition.L3

Normative references

• IAS 32 §16An issued instrument is an equity instrument, rather than a financial liability, if, and only if, two conditions are met: (a) it includes no contractual obligation to deliver cash or another financial asset, or to exchange financial assets or liabilities under conditions that are potentially unfavourable to the issuer; (b) if it will or may be settled in own equity instruments, it is a non-derivative that includes no obligation to deliver a variable number of own equity instruments, or a derivative that will be settled only by exchanging a fixed amount of cash or another financial asset for a fixed number of own equity instruments (with the same exception as in para. 11 for rights offered pro rata). By way of exception, an instrument that meets the definition of a financial liability is classified as equity if it has all the features and meets the conditions in paras 16A and 16B or paras 16C and 16D.
• IAS 32 §22Except as stated in para. 22A, a contract that will be settled by receiving or delivering a fixed number of own equity instruments in exchange for a fixed amount of cash or another financial asset is an equity instrument (the 'fixed-for-fixed' condition); changes in fair value arising from variations in market interest rates that do not affect the amount or the number of instruments do not prevent this; any consideration received or paid is added directly to or deducted directly from equity, and changes in the fair value of the equity instrument are not recognised. Para. 22A overrides this conclusion when the instruments to be delivered are themselves instruments classified as equity under the exceptions in paras 16A to 16D.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• Iris SA, whose functional currency is the euro, issues a warrant to an investor: if the holder exercises it, Iris will deliver 10,000 of its own shares against a payment of 120,000 euros. The number of shares and the price are fixed in the contract and do not vary; settlement is by physical delivery (case facts). How does Iris classify this warrant?L2
• An analyst comments on the fixed-for-fixed condition applicable to contracts settled in the issuer's own equity instruments. Which of the analyst's statements is wrong?L3
• Which statements about the fixed-for-fixed condition are correct? Several answers are possible.L2