Accounting Standards

Operating Leases - Incentives

Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items.

Reference: FRS 32, Financial Instruments: Disclosure and Presentation

1. An enterprise may hold its own equity instruments, often referred to as "treasury shares". Depending on the jurisdiction, such treasury shares may be acquired and held by the issuing enterprise itself or by its subsidiaries.


2. The issues are:
   
   1. how treasury shares should be presented in the issuing enterprise's balance sheet; and
      
      
   2. how the difference between the purchase cost and the consideration received should be presented in the financial statements when treasury shares are subsequently sold or issued.
   
   
3. This Interpretation applies to presentation in the balance sheet of all instruments of the issuing enterprise which are:
   
   1. classified as equity under FRS 32;
      
      
   2. acquired and held by the issuing enterprise itself or by its consolidated subsidiaries; and
      
      
   3. legally available for re-issue or re-sale, even if the enterprise intends to cancel them.

   FRS 32 does not apply to employers' obligations under employee stock option and stock purchase plans. Additionally, FRS 19 does not specify recognition and measurement requirements for equity compensation benefits. Accordingly, this Interpretation does not address recognition or measurement requirements for compensation benefits related to the issuance or sale of treasury shares in connection with such plans.

Treasury shares should be presented in the balance sheet as a deduction from equity. The acquisition of treasury shares should be presented in the financial statements as a change in equity.

FRS 32.A8 makes clear that any change in equity recorded by the enterprise from re-acquiring and cancelling its own equity instruments represents a transfer between those holders of equity instruments who have given up their equity interest and those who continue to hold an equity interest, rather than a gain or loss by the enterprise. By analogy, the acquisition and subsequent resale by an enterprise of its own equity instruments gives rise to neither gain nor loss to the enterprise.

FRS 1.74(a)(vi) requires that an enterprise should disclose, either on the face of the balance sheet or in the notes, for each class of share capital, shares held by the enterprise itself or by subsidiaries or associates of the enterprise. This requirement includes the disclosure of the effects of treasury shares on all categories of equity. The acquisition cost of treasury shares held by the enterprise itself or by its consolidated subsidiaries may be presented in the balance sheet or the notes in one of several ways, including for example:

1. the total costs may be shown as a one-line adjustment of equity;
   
   
2. the par value, if any, may be shown as a deduction from share capital, with adjustment of premiums or discounts against other categories of equity; or
   
   
3. each category of equity may be adjusted.

Effective Date: INT FRS 16 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40.