11.3 Obligations to Repurchase Shares
11.3.1 Forward Purchase Contracts on an Entity’s Own Equity
Under U.S. GAAP, a forward purchase contract on an entity’s own shares that is
within the scope of ASC 480 is classified as a
liability. If the forward contract requires
physical settlement by repurchase of a fixed
number of shares for cash, the contract is
measured at the present value of the amount to be
paid at settlement or settlement value (see
Section 5.3.1). If the forward
contract will be net share settled or net cash
settled (or either party has the ability to elect
net-cash or net-share settlement), however, the
contract is accounted for at fair value, with
changes in fair value recognized in earnings (see
Sections 5.3.2 and 6.3).
Under IFRS Accounting Standards, paragraph 23 of IAS 32 requires a physically
settled forward-purchase contract on an entity’s
own shares to be accounted for as a liability at
the present value of the redemption amount. This
treatment applies if the issuer could be required
to settle the contract by a gross exchange of cash
for shares even if the holder has the right to
elect net-cash or net-share settlement (i.e., it
applies when the holder has the choice of settling
the contract gross by the exchange of either cash
or another financial asset for shares). Such
treatment differs from the guidance in ASC 480
under which fair value accounting is required when
an ASC 480 liability may be net share settled or
net cash settled. Therefore, under IAS 32, the
class of instruments measured at the present value
of the redemption amount is broader.
11.3.2 Written Put Options on an Entity’s Own Equity
Under U.S. GAAP, a written put option on an entity’s own shares is accounted for
as a liability at fair value, with changes in fair
value recognized in earnings (see Sections
5.3.1 and 6.3).
Under IFRS Accounting Standards, paragraph 23 of IAS 32 requires a physically
settled written put option on an entity’s own shares to be accounted for in a
manner similar to a physically settled forward-purchase contract on the entity’s
own equity (see Section
11.3.1); that is, as a liability at the present value of the
redemption amount. This treatment applies if the issuer could be required to
settle the contract by a gross exchange of cash for shares even if the holder
has the right to elect net-cash or net-share settlement (i.e., it applies when
the holder has the choice of settling the contract gross by the exchange of
either cash or another financial asset for shares).