Financial Reporting Council Supports IFRIC Draft Interpretations Related to Put Options

FRC’s new chairman, Roger Marshall recently stated that the Financial Reporting Council supports the interpretation related draft on ‘Put Options Written on Non-controlling Interests’ broadly. The draft was released by the International Financial Reporting Standards Interpretations Committee.

In the month of May, the International Accounting Standards Board and the IASB committee released a proposed guide and requested the public to comment on the guidance pertaining to accounting of a put related option that was written by a parent company on its subsidiary’s shares, which were held by an interest shareholder.

In his letter to IASB’s Michael Stewart, Marshall stated that the Financial Reporting Council is supportive of the draft interpretations as it offers clarification in accounting practice. He further mentioned that the FRC also agrees to the fact that a put related option, which is written over Non-Controlling Interest, must be measured at a fair price through loss and profit as per the International Accounting Standard 39 Financial Instruments: Recognition and Measurement.

On matters pertaining to Non-Controlling Interest forwards, Marshall stated that the Financial Reporting Council is of the opinion that the interpretation’s scope must get an extension to incorporate Non-Controlling Interest forwards.

Marshall also clarified that even though he was of the impression that the draft interpretation offered a solution for a short-term basis, the initial recognition process of derivatives over own equity needs to be reviewed completely.

On the issue pertaining to International Accounting Standard 32 Financial Instruments: Presentation is concerned, Marshall pointed out that the FRC is of the opinion that transparent principles for classifying debt equity must be established.

The put option is essentially a contract, which provides the option holder with the right to sell off a specific asset to option writer, at a specific price and within a specific time.

In case the parent company is duty bound to buy shares from its subsidiary by paying cash or in exchange for a financial asset, then the parent company should recognize a finance related liability in its financial statement for the existing value of the option exercise value. The International Financial Reporting Standards Interpretations Committee was requested to measure the finance related liability subsequently as diversity’s existence can only in practice.