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The IFRIC published in August 2009 an invitation to comment on a draft interpretation relating to transactions where equity instruments are issued to extinguish financial liabilities. IFRIC D25 provides guidance on how an issuer of debt should account for a debt for equity swap; in other words, when a debtor and creditor renegotiate the terms of a financial liability with the result that the liability is fully or partially extinguished by the debtor issuing equity instruments to the creditor.
EFRAG agrees that existing IFRS lack sufficient guidance on such transactions and that as a result there is diversity in practice. We support the IFRIC in its efforts to develop interpretive guidance on such transactions.
IFRIC D25 proposes that:
· if a debtor issues equity instruments to a creditor to extinguish all or part of a financial liability, the issue of equity instruments is the consideration paid for the purposes of IFRS (IAS 39 paragraph 41);
· the equity instruments issued shall be measured at the fair value of the financial liability settled or the fair value of the equity instruments issued, whichever is more reliably measurable;
· any gain or loss resulting from the transaction (being the difference between the carrying amount of the extinguished part of the financial liability (or the extinguished financial liability) and the amount of the equity instruments issued to extinguish that part of the financial liability (or that financial liability)) shall be presented as a separate line item in either the statement of comprehensive income or the separate income statement (if presented) or the notes;
· if only part of the financial liability is extinguished by the issue of equity instruments, the terms of the financial liability that remains outstanding shall be assessed to determine whether they have been changed substantially. Under existing IFRS, an entity is required to account for a substantial change in the terms as an extinguishment of the original liability and the recognition of a new liability; and
· entities should apply this interpretation retrospectively from the earliest comparative period presented.
We broadly agree with the draft consensus, with one exception. We think that theoretically, in order to be consistent with the Framework, the equity instruments issued should be measured at the fair value of the financial liability extinguished. Therefore we have suggested drafting changes to paragraph 5 of the consensus.
We do have two detailed concerns regarding the proposals.
· The first relates to the implications that paragraph 49 of IAS 39 Financial Instruments: Recognition and Measurement relating to the measurement of financial liabilities with demand features. We think that the interpretation should make the applicability of this paragraph clear.
· We are concerned about the treatment of some common control transactions where the relative ownership of debt and equity remains the same before and after the conversion, and the possible cost/benefit implications of this draft interpretation on such transactions especially where there is a 100 percent ownership involved.
Certain drafting suggestions primarily relating to the Basis for Conclusions were made. |
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