The Board published the exposure draft Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation in June 2006. The comment period ended in October 2006. An analysis of the 87 comment letters received was presented to the Board in January, and since then the Board has deliberated the issues raised by respondents.
At this meeting the Board considered a modified approach to identifying whether puttable financial instruments are the residual interest in an entity and therefore should be classified as equity under the proposed amendment. The modified approach assesses whether the class of puttable instruments is the residual interest in the entity. The approach in the exposure draft assessed whether the individual puttable instrument is a residual interest in the entity. Consideration of the class of puttable instruments as a whole eliminates the need for the criteria in the exposure draft that each puttable instrument should be issued and redeemed at the fair value of the pro-rata share of the net assets of the entity.
The Board tentatively decided to make two changes to the criterion in the exposure draft that the puttable financial instrument�s right to a pro rata share of the net assets of the entity is neither limited nor guaranteed, to any extent, before or at liquidation. The first change would require the total cash flows over the life of the puttable instruments to be based substantially on the earnings or change in net assets of the entity. The second change would ensure that no other contract represents the residual interest in the entity.
The Board directed the staff to draft the proposed amendment based on this revised approach, also the Board decided to hold a public round-table discussion in November to discuss the revised approach.
The Board redeliberated several other issues, and tentatively decided that:
- � the accounting for mandatory dividends will not be addressed in the proposed amendment.
- derivatives on puttable instruments and instruments with an obligation arising on the liquidation of an entity will not be classified as equity in the proposed amendment
- puttable instruments that are mandatorily redeemable on death or retirement will be within the scope of the proposed amendment.
- the proposed amendment will have an effective date of 1 January 2009, with early adoption permitted.