(e) an issuer's expectation of a profit or loss for a period; or
(f) an ability or inability of the issuer to influence the amount of its profit or loss for the period.
Example 2
Facts
A4
The entity's charter states that redemptions are made at the sole discretion of the entity. However, the charter further states that approval of a redemption request is automatic unless the entity is unable to make payments without violating local regulations regarding liquidity or reserves.
Classification
A5
The entity does not have the unconditional right to refuse redemption and the members' shares are a financial liability. The restrictions described above are based on the entity's ability to settle its liability. They restrict redemptions only if the liquidity or reserve requirements are not met and then only until such time as they are met. Hence, they do not, under the principles established in IAS 32, result in the classification of the financial instrument as equity. Paragraph AG25 of IAS 32 states:
Preference shares may be issued with various rights. In determining whether a preference share is a financial liability or an equity instrument, an issuer assesses the particular rights attaching to the share to determine whether it exhibits the fundamental characteristic of a financial liability. For example, a preference share that provides for redemption on a specific date or at the option of the holder contains a financial liability because the issuer has an obligation to transfer financial assets to the holder of the share.
The potential inability of an issuer to satisfy an obligation to redeem a preference share when contractually required to do so, whether because of a lack of funds, a statutory restriction or insufficient profits or reserves, does not negate the obligation.
[Emphasis added]
PROHIBITIONS AGAINST REDEMPTION (paragraphs 8 and 9)
Example 3
Facts
A6
A cooperative entity has issued shares to its members at different dates and for different amounts in the past as follows:
(a) 1 January 20X1 100 000 shares at CU10 each (CU1 000 000);
(b) 1 January 20X2 100 000 shares at CU20 each (a further CU2 000 000, so that the total for shares issued is CU3 000 000).
Shares are redeemable on demand at the amount for which they were issued.
A7
The entity's charter states that cumulative redemptions cannot exceed 20 per cent of the highest number of its members' shares ever outstanding. At 31 December 20X2 the entity has 200 000 of outstanding shares, which is the highest number of members' shares ever outstanding and no shares have been redeemed in the past. On 1 January 20X3 the entity amends its governing charter and increases the permitted level of cumulative redemptions to 25 per cent of the highest number of its members' shares ever outstanding.
Classification
Before the governing charter is amended
A8
Feedback