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10.8 Puttable shares/redeemable upon liquidation
Publication date: 14 Oct 2019
us IFRS & US GAAP guide
10.8.1 Puttable shares
Puttable shares are more likely to be classified as financial liabilities under IFRS.
The potential need to classify certain interests in open-ended mutual funds, unit trusts, partnerships, and the like as liabilities under IFRS could lead to situations where some entities have no equity capital in their financial statements.
US GAAP
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IFRS
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Puttable shares
The redemption of puttable shares is conditional upon the holder exercising the put option. This contingency removes puttable shares from the scope of instruments that ASC 480 requires to be classified as a financial liability.
As discussed for contingently redeemable instruments, SEC registrants would classify these instruments as “mezzanine.” Such classification is encouraged, but not required, for private companies.
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Puttable shares
Puttable instruments generally are classified as financial liabilities because the issuer does not have the unconditional right to avoid delivering cash or other financial assets. Under IFRS, the legal form of an instrument (i.e., debt or equity) does not necessarily influence the classification of a particular instrument.
Under this principle, IFRS may require certain interests in open-ended mutual funds, unit trusts, partnerships, and the like to be classified as liabilities (because holders can require cash settlement). This could lead to situations where some entities have no equity capital in their financial statements.
However, an entity is required to classify puttable instruments as equity when they have particular features and meet certain specific conditions in IAS 32. This exemption does not apply to puttable instruments issued by a subsidiary. Even if the puttable instruments are classified as equity in the financial statements of the issuing subsidiary, they are always shown as financial liabilities in the consolidated financial statements of the parent.
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10.8.2 Redeemable upon liquidation
Differences with respect to the presentation of these financial instruments issued by a subsidiary in the parent’s consolidated financial statements can drive substantially different results.
US GAAP
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IFRS
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Redeemable upon liquidation
ASC 480 scopes out instruments that are redeemable only upon liquidation. Therefore, such instruments may achieve equity classification for finite-lived entities.
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Redeemable upon liquidation
For instruments issued out of finite-lived entities that are redeemable upon liquidation, equity classification is appropriate only if certain conditions are met.
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In classifying these financial instruments issued by a subsidiary in a parent’s consolidated financial statements, US GAAP scopes out mandatorily redeemable noncontrolling interests from ASC 480; the result is that the redeemable noncontrolling interests issued by a subsidiary are not financial liabilities in the parent’s consolidated financial statements.
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However, when classifying redeemable financial instruments issued by a subsidiary (either puttable or redeemable upon liquidation) in the parent’s consolidated accounts, equity classification at the subsidiary level is not extended to the parent’s classification of the redeemable noncontrolling interests in the consolidated financial statements, as the same instrument would not meet the specific IAS 32 criteria from the parent’s perspective.
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