puttable instruments

[raghu_aca2001]

can some one explain in simple words what is puttable instruments with examples. Thank you

[JakobLavrod]

I have limited experience of these myself, but as I understand it, is is a financial instrument which enable the lender to at any time terminate the instrument and receive compensation, typically connected to the par value. In the retail financial space where I work, these instruments are for quite obvious reasons very rare, as a borrower you can easily suffer liquidity problem if you can be forced to pay back at any time. Would be interesting to hear if someone else had meet these in their line of work.

[Leo]

A basic loan agreement with a redemption clause which allows a lender to reclaim payment back from the borrower at anytime, does it make it a puttable instrument?

[Marek Muc]

https://ifrscommunity.com/knowledge-bas ... nstruments

[JakobLavrod]

Thank you Marek! When reading the text, it is not obvious to me why puttable instruments fail SPPI however. Maybe a silly question, but in what way is a puttable instrument different from for example a bank deposit which can be withdrawn at will?

[Marek Muc]

1. This distinction is relevant for issuers only (so SPPI test isn't applicable).
2. The idea here isn't to pinpoint every puttable instrument, but rather to identify certain puttable instruments that can be classified as equity once they meet the criteria outlined in IAS 32.16A+.

So yeah, a bank deposit is a puttable instrument, but it doesn't meet the criteria specified in IAS 32.16A+ and is, therefore, classified as a liability under the overall guidelines of IAS 32.

[Ketan Marwah]

When reading the text, it is not obvious to me why puttable instruments fail SPPI.

Hi Jakob,

It comes across as a bit of a strict view adopted in IFRS 9 that for holders, puttable instruments do not pass the SPPI test especially after considering views such as the join submission from Insurance Europe and European Insurance CFO Forum to IFRS 9 Post Implementation Review Request.

https://cfoforum.eu/letters/Joint-CFO-F ... 220112.pdf

[JakobLavrod]

Thank you Ketan Marwah for the interesting reference. To me, it seems like the issue with investment funds are more that they are not really SPPI at their core, then that it is an issue with the puttable feature. Would investment funds without a puttable feature be SPPI?

[Ketan Marwah]

Open-ended funds with redeemable units are typically set up in a way that the fund units usually do not meet the SPPI criterion.
In very exceptional circumstances, a closed-ended fund might be set up in a way that the units in substance meet the SPPI criterion. This might be the case if:
 the investment fund has a limited life, without any option to extend the life of the fund or any early redemption option;
 the investment fund invests only once, at inception, in instruments that have the same maturity as the fund itself, and the investments are held until maturity;
 the investments of the fund, all of which meet the SPPI criterion, are not sold or transferred in any other way during the life of the fund to realise fair value gains or losses; and
 the fund distributes all of its free liquidity during the life of the fund and at maturity, and no reinvestments are made of any kind.
In that case, even though the fund still legally pays back the next asset value at wind up, the economic substance of the fund is that of a debt instrument that meets the SPPI criterion.

[JakobLavrod]

I see, thank you Ketan Marwah for highlighting this example

[Marek Muc]

Thanks Ketan for this interesting reference! I'd add that investment funds usually don't pass the SPPI test mainly because their returns are affected by how the underlying assets perform. For instance, investors might get back less than what they originally put in (i.e. the principal), and that's not even considering any interest.