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10.2 Contingent settlement provisions
Publication date: 13 Oct 2019
us IFRS & US GAAP guide
Contingent settlement provisions, such as provisions requiring redemption upon a change in control, result in financial liability classification under IFRS unless the contingency arises only upon liquidation or is not genuine.
Items classified as mezzanine equity under US GAAP are generally classified as financial liabilities under IFRS.
US GAAP
| IFRS
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A contingently redeemable financial instrument (e.g., one redeemable only if there is a change in control) is outside the scope of ASC 480 because its redemption is not unconditional. Any conditional provisions must be assessed to ensure that the contingency is substantive.
| IAS 32 notes that a financial instrument may require an entity to deliver cash or another financial asset in the event of the occurrence or nonoccurrence of uncertain future events beyond the control of both the issuer and the holder of the instrument. Contingencies may include linkages to such events as a change in control or to other matters such as a change in a stock market index, consumer price index, interest rates, or net income. |
For SEC-listed companies applying US GAAP, certain types of securities require classification as mezzanine equity on the balance sheet. Examples of items requiring mezzanine classification are instruments with contingent settlement provisions or puttable shares as discussed in the Puttable shares section.
Mezzanine classification is a US public company concept that is also encouraged (but not required) for private companies.
| If the contingency is outside of the issuer’s and holder’s control, the issuer of such an instrument does not have the unconditional right to avoid delivering cash or another financial asset. Therefore, except in limited circumstances (such as if the contingency is not genuine or if it is triggered only in the event of a liquidation of the issuer), instruments with contingent settlement provisions represent financial liabilities.
The guidance focuses on the issuer’s unconditional right to avoid settlement no matter whether the contingencies may or may not be triggered.
There is no concept of mezzanine classification under IFRS.
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