Earnings Per Share - Financial Instruments and Other Contracts that May Be Settled in Shares
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 33, Earnings Per Share
ISSUE
There are various forms of financial instruments or other contracts that may be settled by a reporting enterprise either by payment of financial assets or by payment in the form of a transfer of ordinary shares of the reporting enterprise to the holder. In some cases, the manner of settlement is chosen by the issuer of the financial instrument and in other cases the manner of settlement is chosen by the holder of the financial instrument. An example of this type of instrument is a contractual obligation of the reporting enterprise that may be settled by payment of cash or issuance of ordinary shares of the reporting enterprise.
The issue is whether financial instruments or other contracts that may be settled by payment of financial assets or issuance of ordinary shares of the reporting enterprise, at the option of the issuer or the holder, are potential ordinary shares under FRS 33.
This Interpretation addresses contracts that specify such alternative settlement methods in their terms.
CONSENSUS
4.
All financial instruments or other contracts that may result in the issuance of ordinary shares of the reporting enterprise to the holder of the financial instrument or other contract, at the option of the issuer or the holder, are potential ordinary shares of the enterprise.
BASIS FOR CONCLUSIONS
5.
FRS 33.6 states that a potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares. In accordance with FRS 33.24, if a potential ordinary share is dilutive (that is, its conversion to ordinary shares would decrease net profit per share from continuing ordinary operations) then its dilutive effect is included in calculating diluted earnings per share. FRS 33 provides guidance for determining whether a potential ordinary share is dilutive, and if it is dilutive, calculating its dilutive effect.
6.
The words "may entitle" in the definition of a potential ordinary share implies that if it is possible that the holder will receive ordinary shares, regardless of whether it is the holder's choice or the issuer's choice, the contract is considered to be a potential ordinary share. An intended manner of settlement, or policy or past pattern of choosing a particular settlement method, does not overcome the possibility that the holder may be entitled to receive ordinary shares under the terms of the financial instrument or other contract. This is consistent with FRS 33.33, which requires an enterprise to assume the exercise of dilutive options and other dilutive potential ordinary shares.
7.
While all liabilities could potentially be settled in shares by future agreement of the parties, the scope of this Interpretation does not extend beyond contracts that specify alternative settlement methods in their terms.
Effective Date: INT FRS 24 comes into effect on 1 February 2003. Comparative information presented and disclosed in financial statements under FRS 33.47-33.52 should be restated for the effect of applying this INT FRS.
