Obligations that arise only on liquidation

Learning objectives

• Explain the exception for instruments that impose an obligation to deliver a pro rata share of net assets only on liquidation.L3
• Assess the classification of an instrument for which the issuer's obligation arises only on liquidation.L4

Normative references

• IAS 32 §16CSome instruments impose on the issuer an obligation to deliver a pro rata share of its net assets only on liquidation, liquidation being either certain to occur and outside its control (limited-life entity) or uncertain to occur but at the holder's option; as an exception to the definition of a financial liability, they are classified as equity if they have three features: entitlement to a pro rata share of net assets on liquidation, membership of the most subordinate class, and an identical obligation for all instruments in that class. Unlike para. 16A, no feature addresses the absence of any other contractual obligation or the basis of the expected cash flows.
• IAS 32 §16DAdditional condition of the liquidation exception, mirroring para. 16B: no other instrument or contract whose total cash flows are based substantially on profit or loss or net assets and that substantially restricts or fixes the residual return to the holders; the same rules apply to non-financial contracts on terms similar to those with a third party and to the inability to determine that the condition is met.

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

1 question

• Aster is a limited-life company with a term of twenty years. Its units oblige Aster to deliver to the holder a pro rata share of its net assets only on liquidation, at the end of the twenty years (case facts). Case assumption: the conditions of the exception provided for this type of instrument are met. How does Aster classify these units?L3