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Elements of equity
Increases in equity result from:
| a) |
the issue of equity instruments; |
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| b) |
contributions from owners; |
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| c) |
net profits; and |
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| d) |
fair value adjustments that have a positive
impact on equity. |
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Decreases in equity result from:
| a) |
distributions to owners; |
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| b) |
the repurchase of an entity's shares; |
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| c) |
net losses; and |
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| d) |
fair value adjustments that have a negative
impact on equity. |
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Initial recognition
Equity instruments
Equity instruments include an entity's issued shares,
and options and warrants held by external parties
to purchase those shares [IAS39R.2(e)]. IFRS specifically
define equity instruments as any contract that evidences
a residual interest in an entity's assets after deducting
its liabilities [IAS32R.11]. An equity instrument,
in contrast with a financial liability, does not give
rise to a contractual obligation on the issuer's part
to deliver cash or another financial asset or to exchange
another financial instrument under conditions that
are potentially unfavourable [IAS32R.15-18].
An obligation to deliver an entity's own equity
instruments is an equity instrument, if the holder
is exposed to equity risk, for example where an
obligation is settled according to the number of
shares rather than their value
[IAS32R.21-24] .
The manner of an instrument's settlement may not
be clear at the time of issue, but contingent on
the outcome of uncertain future events, beyond the
issuer's control. The issuer should classify these
instruments as equity instruments if [IAS32R.25]
:
| a) |
the part of the contingent settlement provision
that could require settlement in cash or another
financial asset (or otherwise in such a way
that it would be a financial liability) is not
genuine; or |
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| b) |
the issuer can be required to settle the obligation
in cash or another financial asset (or otherwise
to settle it in such a way that it would be
a financial liability) only in the event of
liquidation of the issuer . |
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Classification of financial instruments as financial
liabilities or equity instruments is complex, and
certain instruments may have the characteristics
of both [IAS32R.28-32].
Contributions from owners
Contributions to an entity from its owners are usually
made in the form of cash, in consideration for shares
issued by the entity. Contributions by a parent
to a subsidiary may however take other forms, such
as the contribution of non-monetary assets, for
example property, plant and equipment or another
entity, or the provision of services or interest-free
loans. Contributions from the owner that increase
its investment in the entity should be distinguished
from transfers that arise from trading activities
in the normal course of business [IAS1R.96-98] .
IFRS do not provide conceptual guidance about the
nature and characteristics of contributions from
owners. Contributions from owners are usually economic
benefits, given to a subsidiary by a parent or shareholder,
that are non-reciprocal in nature. Non-reciprocal
transfers are assets or services given, or liabilities
forgiven, without the transferee being obliged to
give something of benefit in exchange. A reciprocal
transfer such as the sale of goods and services
usually gives rise to a present obligation on the
part of the transferee to provide a benefit in return
for the benefit received. Reciprocal transfers usually
result from trading activities.
Distributions to owners
Distributions by an entity to its owners are usually
made in the form of dividends or a return of capital,
for example a share buyback. Distributions to owners
are made at the discretion of an entity's directors
and are often influenced by legal requirements.
Like contributions, distributions by a subsidiary
to its parent may take other forms. The principles
of reciprocity, outlined above, should be applied
to determine whether the transfer is a distribution
that the subsidiary should recognise as a reduction
of equity, or one that represents the cost of trading
activities.
Reserves
The creation and use of reserves is often influenced
by legal as well as accounting requirements. Legal
requirements may restrict an entity's ability to
make distributions from specific reserves to its
owners [F.66].
Reserves will usually include: retained earnings;
asset revaluation reserve; fair value reserve arising
from the effect of adopting new IFRS and the subsequent
remeasurement of certain financial instruments,
and a foreign currency translation reserve .
Measurement
Initial measurement of equity instruments reflects
the net proceeds from issue, defined as the fair
value of the consideration received, net of the
costs of the equity transaction. Equity instruments
are not re-measured following initial recognition
[F.67].
The measurement of reserves is the result of the
re-measurement of assets and liabilities and an
entity's retained earnings [F.67].
Presentation and disclosure
Specific guidance is given throughout IFRS about the
presentation and disclosure of specific classes of
equity.
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