The Accounting Standards Board (ASB) has published a Financial Reporting Exposure Draft (FRED) proposing an amendment to FRS 25 (IAS 32) ‘Financial Instruments: Presentation’. The proposed amendment requires a rights issue involving the exchange of a fixed number of an entity’s own equity instruments for a fixed amount of cash denominated in a foreign currency to be classified as an equity instrument.
The proposed amendment follows the issue of ‘Classification of Rights Issues -Amendment to IAS 32’ published by the International Accounting Standards Board (IASB) in October 2009. The IASB amendment was issued in response to a practical problem highlighted as a result of the global financial crisis. During the crisis there has been an increase in the number of entities using rights issues to raise capital. If these rights issues are denominated in a foreign currency, then under the current rules in FRS 25 they are classified as derivative liabilities.
The proposals state that if a fixed number of rights, options or warrants are issued pro rata to an entity’s existing shareholders for a fixed amount of foreign currency, these should be classified as equity regardless of the currency in which the exercise price is denominated. The rationale is that the proposed amendment better reflects the substance of the rights issue, which is a transaction with shareholders in their capacity as owners.
The FRED proposes parallel amendments to FRS 25 with the objective of ensuring that FRS 25 remains fully converged with IAS 32.
The comment period for the FRED closes on 15 December 2009.
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