The unconditional right to avoid delivery

Learning objectives

• Explain why the absence of an unconditional right to avoid delivering cash leads to classification as a liability.L2
• Analyse whether a right to refuse redemption is unconditional and what it implies for classification.L3

Normative references

• IAS 32 §25When an instrument requires the delivery of cash or another financial asset (or a settlement that would make it a liability) depending on the occurrence or non-occurrence of uncertain future events beyond the control of both the issuer and the holder (a share price index, consumer price index, interest rate, taxation requirements, or the issuer's revenue, net income or debt-to-equity ratio), the issuer does not have the unconditional right to avoid delivery and the instrument is a financial liability, except in three cases: the part of the provision that could require such settlement is not genuine; settlement can be required only on liquidation of the issuer; or the instrument meets the conditions in paras 16A and 16B.

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

5 questions

• Hélix SA issues securities that the contract obliges it to redeem in cash if the national stock index falls by 30% in a year. The event is outside the control of both Hélix and the holders, and the contract contains no clause allowing it to refuse this redemption (case facts). How does it classify these securities at issue?L2
• A reviewer comments on the classification of redeemable shares issued by entities. Which of the reviewer's statements is wrong?L3
• Two co-operatives issue members' shares that each member may ask to have redeemed. Co-operative Verger: its statutes allow the board to refuse any redemption, at its discretion and without condition. Co-operative Sillon: its statutes allow the board to refuse redemption only when its liquidity ratio falls below a set threshold (case facts). Write a short note that classifies the shares of each co-operative and justifies the difference, distinguishing rule, case facts and professional judgement.L3
• The Brande co-operative issues members' shares that each member may ask to have redeemed. Its statutes prohibit redemption when its liquidity ratio is below 8%; outside that situation, redemptions are due (case facts). How does Brande classify these shares?L3
• A colleague at Fjord SA proposes applying right now, to classify an instrument with a contingent settlement provision, a clarification contained in the November 2023 exposure draft of the FICE project, which would lead to a different classification. Case fact: no final amendment to IAS 32 has been published to date. Which answer is correct?L3