Comparing the two exceptions

Learning objectives

• Distinguish the conditions of the puttable instruments exception from those of the liquidation exception, in particular the absence of any other unfavourable obligation.L3
• Justify, based on the IASB's explanation, why the condition in para. 16A(d) has no equivalent in para. 16C.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 §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.

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

2 questions

• Among the conditions of the exception for instruments puttable by the holder, which one has no equivalent in the exception for instruments that oblige delivery of a pro rata share of net assets only on liquidation?L3
• The Opale fund issues two classes of units: class A, redeemable at the holder's option, and class B, with no redemption option. On liquidation, class A ranks last, at the same rank as class B, and no other class is more subordinated (case facts). A colleague argues that class A's redemption option makes it less subordinated than class B and therefore rules out the exception. Which answer is consistent with the explanation the Committee gave in 2009 (background, not a rule)?L4