IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments
The Interpretations Committee issued IFRIC 19 Extinguishing Financial Liabilities with Equity on 26 November 2009.
In the current environment, some entities are renegotiating the terms of financial liabilities with their creditors. In some circumstances, the creditor agrees to accept an entity�s shares or other equity instruments to settle the financial liability fully or partially (sometimes referred to as a �debt for equity swap�). IFRIC 19 provides guidance on how an entity should account for such transactions in accordance with IAS 39 Financial Instruments: Recognition and Measurement and IAS 32 Financial Instruments: Presentation.
Reasons for IFRIC 19
The Interpretations Committee was informed that there was diversity in practice in how entities measure the equity instruments issued in a debt for equity swap. Some recognise the equity instruments at the carrying amount of the financial liability and do not recognise any gain or loss in profit or loss. Others recognise the equity instruments at the fair value of either the equity instruments issued or the financial liability extinguished and recognise a difference between that amount and the carrying amount of the financial liability in profit or loss.
Scope of IFRIC 19
IFRIC 19 addresses the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor to extinguish all or part of the financial liability. It does not address the accounting by the creditor.
IFRIC 19 does not apply to transactions when:
- the creditor is also a direct or indirect shareholder, and is acting in its capacity as a direct or indirect existing shareholder, or
- the creditor and the entity are controlled by the same party or parties before and after the transaction and the substance of the transaction includes an equity distribution by or contribution to the entity, or
- the extinguishment of the financial liability by issuing equity shares is in accordance with the original terms of the liability
Impact of IFRIC 19
IFRIC 19 will standardise practice among debtors applying IFRSs to a debt for equity swap. It clarifies that the entity�s equity instruments issued to a creditor are part of the consideration paid to extinguish the financial liability.
IFRIC 19 requires that the equity instruments issued are measured at their fair value. If their fair value cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. IFRIC 19 states that any difference between the carrying amount of the financial liability extinguished and the initial measurement amount of the equity instruments issued is included in the entity�s profit or loss for the period. As a result, IFRIC 19 will impact entities that have previously recognised the equity instruments issued in a debt for equity swap at the carrying amount of the financial liability.
IFRIC 19 also applies to partial extinguishments of the financial liability by the issue of equity instruments to the creditor and the modification of the terms of the financial liability that remains outstanding.
IFRIC 19 is effective for annual periods beginning on or after 1 July 2010 with earlier application permitted. Recognising that entities would face practical difficulties in determining the fair value of the equity instruments previously issued, retrospective application is required only from the beginning of the earliest comparative period presented.