Contingent redemption option in share investments

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DJP
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Contingent redemption option in share investments

Post by DJP »

Hello everyone,

Has anyone come across a share investment where the share gives the investor similar rights to ordinary shareholders in terms of access to variable returns and voting rights (providing the investor with significant influence), but the investor has the option to sell the shares back to the issuer in case of a genuine event outside the control of the issuer (e.g. exit of a key employee).

Since the instrument gives the investor significant influence, IAS 28 should apply. However, the issuer cannot avoid buying back the shares in case of an event which it cannot control. IFRS 9 para 2.1 (a) states that Entities shall also apply this Standard to derivatives on an interest in a subsidiary, associate or joint venture unless the derivative meets the definition of an equity instrument of the entity in IAS 32 Financial Instruments Presentation

Question is: how would you account for this contingent option in the accounts of the investor?

Thanks
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Marek Muc
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Re: Contingent redemption option in share investments

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to me it seems that this derivative should be recognised as a liability by the issuer (Example 6(c) to IAS 32), therefore the investor applies general IFRS 9 requirements, what do you think?
DJP
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Re: Contingent redemption option in share investments

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The question is about the accounting from an investor's point of view. Even if the instrument is classified as a liability on the issuer's side, the arrangement gives the investor significant influence over the entity with rights over its variable returns. We are then in the scope of IAS 28 and equity method applies. But on the other hand we have this "contingent put option" embedded in this arrangement that according to IFRS 9 paragraph 2.1 (a) should fall in the scope of IFRS 9. So... how to account for this? :roll:
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Marek Muc
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Re: Contingent redemption option in share investments

Post by Marek Muc »

I meant bifurcation, so you've got equity accounting for the investment, plus IFRS 9 accounting for the put option
What are the key terms of the option?
DJP
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Re: Contingent redemption option in share investments

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in case of a certain event (which is outside the control of the issuer), the investor can demand its money back. Basically the investor can sell the shares back to the investor if that event occurs. This event can be something like an unsuccessful IPO, the exit of a key employee, etc... (i.e. non-financial variables).
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Marek Muc
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Re: Contingent redemption option in share investments

Post by Marek Muc »

the exercise price is fixed?
DJP
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Re: Contingent redemption option in share investments

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Yup, same amount invested plus a fixed interest rate
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Marek Muc
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Re: Contingent redemption option in share investments

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I see, so as I wrote before, I would recognise and measure this option under IFRS 9 separately from equity accounting under IAS 28, does that make sense to you? What is your view?
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Re: Contingent redemption option in share investments

Post by DJP »

Yes, I think so too. Another question is how to value such options... But that's not an accounting question :)
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Marek Muc
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Re: Contingent redemption option in share investments

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Yep, valuation will be challenging if this is a private equity company...
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JRSB
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Re: Contingent redemption option in share investments

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I have seen that kind of thing and involves some sophisticated modelling of outcomes based on a close understanding of that particular company/arrangement.
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Marek Muc
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Re: Contingent redemption option in share investments

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and did you follow up to see how close was the valuation to actual outcome? :)
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JRSB
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Re: Contingent redemption option in share investments

Post by JRSB »

well the modelling values the option so nothing to measure against, unless I misunderstood the scenario.
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