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22.1.1 Extract from FRS 102 – Section 22.1-22.2.
22.2 Classification of an instrument as liability or equity.
22.2.1 Extract from FRS 102 – Section 22.3.
22.2.2.1 Definition of financial liability.
22.2.2.2 Definition of equity.
22.2.3 Accounting treatment of instruments classified as debt
22.2.5 Treatment of dividend on instruments classified as equity.
22.2.6 Examples illustrating whether an instrument meets the definition of debt or equity.
22.2.6.1 Redeemable preference shares at option of the holder with mandatory coupon.
22.2.6.2 Non-redeemable preference shares with mandatory coupon at market rate.
22.2.6.4 Shares/loan notes redeemable at the option of the holder
22.2.6.5 Non-redeemable preference shares with discretionary dividend.
22.2.6.6 Redeemable preference shares at option of issuer with discretionary dividend.
22.2.6.7 Redeemable preference shares at option of issuer with mandatory.
22.2.6.9.1 Treatment of difference between present value ad actual amount subscribed for
22.2.6.13 Fixed for fixed arrangement
22.2.6.14 Equity issued in return for a forward contract to issue foreign currency.
22.3.2.2 Contingency element is not genuine.
22.3.2.3 contingency occurring on liquidation.
22.3.2.5 Examples of uncertain future/changed events outside the control of the issuer
22.3.2.6 Example of instruments to be classified as a debt or equity.
22.4 Original issue of shares or other equity instruments.
22.4.1 Extract from FRS 102 – Section 22.7-22.10.
22.4.2 OmniPro comment – Accounting treatment
22.4.2.4 Examples of share issues – accounting treatment
22.5 Exercise of options, rights and warrants.
22.5.1 Extract from FRS 102 – Section 22.11.
22.6 Capitalisation or bonus issues of shares and share splits.
22.6.1 Extract from FRS 102 – Section 22.12.
22.7.1 Extract from FRS 102 – Section 22.13-22.15.
22.7.2.1 Determining the split of debt and equity.
22.7.2.2 Treatment of transaction cost
22.7.2.3 Subsequent revisions.
22.7.2.4 Accounting for the liability.
22.7.2.5 Examples of compound financial instruments.
22.7.2.6 Compound Financial instrument example.
22.7.2.7 Accounting for the convertible option once exercised or option to exercise is not taken.
22.7.2.8 Allocation of transaction costs.
22.8.1 Extract from FRS 102 – Section 22.17-22.18.
22.8.2.1 Distribution of shares classified in equity.
22.8.2.2 Distributions on shares classified as debt (i.e. On shares classified on debt)
22.8.2.3 Disclosure of fair value of non-cash distributions.
22.9 Non-controlling interest and transactions in shares of a consolidated subsidiary.
22.9.1 Extract from FRS 102 – Section 22.19.
22.9.2.2 Accounting for acquiring a further controlling interest
22.9.2.3 Accounting for disposals of controlling interests but controlling interest retained.
22.10.1.1 Statement of changes in equity.
22.10.1.2 Accounting Policies.
22.10.1.3 Note to the financial statements.
22.10.1.4 Notes in relation to dividends
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The below extracts and guidance is applicable for periods beginning before 1 January 2019 and are based on the September 2015 version of FRS 102. For periods beginning on or after 1 January 2019, the March 2018 version of FRS 102 applies which incorporates the changes made by the Triennial review of FRS 102. Note the March 2018 version of FRS 102 can be voluntarily applies for periods beginning before 1 January 2019. For the extracts from the March 2018 version of FRS 102 and the related guidance please click on the following link. For details of a summary of the main changes as a result of the triennial review please see the following link.
22.1 Scope
Section 22 deals with the classification of financial instruments as either debt or equity, accounting for compound instruments and purchase of own shares. The key thing to consider is the substance of the transaction when determining whether shares issued should be classed as debt or equity.
22.1.1 Extract from FRS 102 – Section 22.1-22.2
22.1 This section establishes principles for classifying financial instruments as either liabilities or equity and deals with the accounting for compound financial instruments. It also addresses the issue of equity instruments and distributions to individuals or other parties acting in their capacity as investors in equity instruments (i.e. in their capacity as owners) and the accounting for purchases of own equity. This section also deals with the accounting for non-controlling interests in consolidated financial statements. Section 26 Share-based Payment addresses accounting for a transaction in which the entity receives goods or services (including employee services) as consideration for its equity instruments (including shares or share options) from employees and other vendors acting in their capacity as vendors of goods and services.
22.2 This section shall be applied to all types of financial instruments except:
(a) Investments in subsidiaries, associates and joint ventures that are accounted for in accordance with Section 9 Consolidated and Separate Financial Statements, Section 14 Investments in Associates or Section 15 Investments in Joint Ventures.
(b) Employers’ rights and obligations under employee benefit plans, to which Section 28 Employee Benefits applies.
(c) Contracts for contingent consideration in a business combination (see Section 19 Business Combinations and Goodwill). This exemption applies only to the acquirer.
(d) Financial instruments, contracts and obligations under share-based payment transactions to which Section 26 applies, except that paragraphs 22.3 to 22.6 shall be applied to treasury shares issued, purchased, sold, transferred or cancelled in connection with employee share option plans, employee share purchase plans, and all other share-based payment arrangements.
(e) Insurance contracts (including reinsurance contracts) that an entity issues and reinsurance contracts that it holds (see FRS 103 Insurance Contracts).
(f) Financial instruments with a discretionary participation feature that an entity issues (see FRS 103).
(g) Financial guarantee contracts (see Section 21 Provisions and Contingencies).
A reporting entity that issues the financial instruments set out in (e) and (f) or holds the financial instruments set out (e) is required by paragraph 1.6 to apply FRS 103 to those financial instruments.
22.1.2 OmniPro comment
The scope of Section 22 is very wide and incorporates all financial instruments other than those dealt with in other sections as detailed in Section 22.2 of FRS 102.
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Examples
Example 1: Redeemable preference shares at option of the holder with mandatory coupon.
Example 2: Non-redeemable preference shares with mandatory coupon at market rate.
Example 4: Shares redeemable at the option of the holder
Example 5: Non-redeemable preference shares with discretionary dividend.
Example 6: Redeemable preference shares at option of issuer with discretionary dividend.
Example 7: Redeemable preference shares at option of issuer with mandatory dividend.
Example 13: Fixed for fixed arrangement
Example 13A: Application of Section 22.3(b)(ii) of FRS 102.
Example 13B: Future contingency amount
Example 13C: Future contingency.
Example 14: Accounting treatment on original issue of shares.
Example 15: Accounting treatment on original issue of shares – left as unpaid.
Example 16: Capitalisation/bonus issue.
Example 17: Accounting treatment for a compound financial instrument
Example 18: compound instrument where conversion is chosen.
Example 19: compound instrument where conversion is chosen.
Example 20: Accounting for transaction costs in acquiring a compound financial instrument
Example 21: Acquiring a further controlling interest
Example 22: Acquiring a further controlling interest
Example 23: Disposing of controlling interest but controlling interest retained.
Example 24: Extract of Statement of Changes in Equity from financial statements.
Example 25: Extract from accounting policies note.
Example 26: Extract from notes to the financial statements – liability
Example 27: Extract from notes to the financial statements – share capital
Example 28: Extract from notes to the financial statements – dividends on equity shares.
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