Instruments puttable by the holder: the exception

Learning objectives

• Explain that a puttable instrument is, in principle, a liability and may, by way of exception, be classified as equity if cumulative conditions are met.L3
• Assess whether the cumulative conditions of the exception are met for a given instrument (subordination, no other unfavourable obligation).L4

Normative references

• IAS 32 §16AA puttable instrument includes an obligation to repurchase or redeem it for cash or another financial asset; as an exception to the definition of a financial liability, it is classified as equity if it has all the following features: (a) it entitles the holder to a pro rata share of net assets in the event of liquidation; (b) it is in the class of instruments that is subordinate to all other classes (no priority on liquidation, no prior conversion required); (c) all instruments in that class have identical features; (d) apart from the repurchase obligation, it includes no other contractual obligation to deliver cash or another financial asset or to exchange under potentially unfavourable conditions, and is not a contract settled in own equity instruments as described in (b) of the definition of a financial liability; (e) the expected cash flows over its life are based substantially on profit or loss, the change in recognised net assets or the change in the fair value of recognised and unrecognised net assets.
• IAS 32 §16BAdditional condition of the puttable instruments exception: the issuer must have no other financial instrument or contract whose total cash flows are based substantially on the entity's profit or loss or net assets and that has the effect of substantially restricting or fixing the residual return to the holders; non-financial contracts with a holder on terms similar to those with a non-instrument holder are not considered; if the entity cannot determine that this condition is met, the instrument is not classified as equity.

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

1 question

• The Cèdre fund issues units that the holder can put back to the fund for cash. The units belong to the most subordinated class of instruments, but the contract also obliges Cèdre to pay each year a fixed income of 3% of nominal value, independent of the fund's results (case facts). How does Cèdre classify these units?L3