8.1 Background
8.1.1 IFRS Guidance
Under IFRS Accounting Standards, an entity evaluates contracts on its own equity
(including equity features embedded in other contracts) in accordance with IAS
32 to determine whether they qualify for equity classification or must be
classified as assets or liabilities.
IAS 32 has a broader scope than does ASC 815-40. For example, IAS 32 contains
guidance on forward repurchase contracts and written put options on an
entity’s shares. Under U.S. GAAP, freestanding forward repurchase
contracts and freestanding written put options on an entity’s shares
are outside the scope of ASC 815-40. The discussion of key differences
below applies only to contracts within the scope of ASC 815-40, not to
freestanding forward purchase contracts or written put options on the
entity’s shares that are within the scope of ASC 480 (see Deloitte’s
Roadmap Distinguishing Liabilities From
Equity for a discussion of differences
between the guidance in IAS 32 and ASC 480 on such contracts).
8.1.2 Key Differences
The table below summarizes key differences between U.S. GAAP and IFRS Accounting
Standards in the accounting for contracts on own equity that are within the
scope of ASC 815-40. The table is followed by a detailed explanation of each
difference.
U.S. GAAP | IFRS Accounting Standards | |
|---|---|---|
Exercise contingencies | Exercise contingencies must be evaluated to determine whether they preclude equity classification. | Not addressed by IAS 32. In practice, exercise contingencies that would preclude
equity classification under U.S. GAAP may not do so
under IFRS Accounting Standards. |
Settlement amount | To qualify as equity, the contract must be a fixed-for-fixed forward or option on equity shares, or the only variables that can adjust the settlement amount are inputs to a fixed-for-fixed forward or option. | A contract must be fixed for fixed to qualify as equity. Unlike U.S. GAAP, IAS 32 does not provide detailed guidance on contracts with adjustment provisions (e.g., antidilution provisions). |
Strike price denominated in foreign currency | Preclude equity classification. | Preclude equity classification with one exception. Certain contracts offered on a pro rata basis to holders of the entity’s shares can qualify as equity even if the strike price is denominated in a foreign currency. |
Net cash settlement provisions | Do not preclude equity classification if the entity cannot be forced to net cash settle the contract. Contain detailed guidance on how to assess whether an entity is able to settle in shares (e.g., whether the entity has sufficient authorized and unissued shares available to share settle the contract). | Preclude equity classification. Unlike U.S. GAAP, IFRS Accounting Standards do
not contain detailed guidance on how to evaluate whether
an entity might be required to net cash settle a
contract that specifies share settlement. |
Net share settlement provisions | Do not preclude equity classification if the entity cannot be forced to net cash settle the contract. | Preclude equity classification. |
Settlement alternatives | Do not preclude equity classification if the entity cannot be forced to net cash settle the contract. | Preclude equity classification (unless all settlement alternatives are consistent with equity classification). |
Embedded equity-linked features that do not qualify as equity | Not separated as embedded derivatives if they do not have the net settlement
characteristic specified in the definition of a
derivative. | May have to be separated as embedded derivatives even if they do not have the
net settlement characteristic. |
Embedded equity-linked features that qualify as equity | Not separated from liabilities except in specified circumstances. | Separated from liabilities. |