| 22.3 | Equity is the residual interest in the assets of an entity after deducting all its liabilities. Equity includes investments by the owners of the entity, plus additions to those investments earned through profitable operations and retained for use in the entity's operations, minus reductions to owners' investments as a result of unprofitable operations and distributions to owners. |
| A financial liability is any liability that is: |
| (a) | a contractual obligation: |
| (i) | to deliver cash or another financial asset to another entity; or |
| (ii) | to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or |
| (b) | a contract that will or may be settled in the entity's own equity instruments and is: |
| (i) | a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity's own equity instruments; or |
| (ii) | a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments. For this purpose the entity's own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity's own equity instruments. [AMD 460] |
| 22.3A | A financial instrument, where the issuer does not have the unconditional right to avoid settling in cash or by delivery of another financial asset (or otherwise to settle it in such a way that it would be a financial liability) and where settlement is dependent on the occurrence or non-occurrence of uncertain future events beyond the control of the issuer and the holder, is a financial liability of the issuer unless: |
| (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; |
| (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; or |
| (c) | the instrument has all the features and meets the conditions in paragraph 22.4. |
| 22.4 | Some financial instruments that meet the definition of a liability are classified as equity because they represent the residual interest in the net assets of the entity: |
| (a) | A puttable instrument is a financial instrument that gives the holder the right to sell that instrument back to the issuer for cash or another financial asset or is automatically redeemed or repurchased by the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder. A puttable instrument that has all of the following features is classified as an equity instrument: |
| (i) | It entitles the holder to a pro rata share of the entity's net assets in the event of the entity's liquidation. The entity's net assets are those assets that remain after deducting all other claims on its assets. |
| (ii) | The instrument is in the class of instruments that is subordinate to all other classes of instruments. |
| (iii) | All financial instruments in the class of instruments that is subordinate to all other classes of instruments have identical features. |
| (iv) | Apart from the contractual obligation for the issuer to repurchase or redeem the instrument for cash or another financial asset, the instrument does not include any contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity, and it is not a contract that will or may be settled in the entity's own equity instruments as set out in paragraph 22.3(b) of the definition of a financial liability. |
| (v) | The total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity over the life of the instrument (excluding any effects of the instrument). |
| (b) | Instruments, or components of instruments, that are subordinate to all other classes of instruments are classified as equity if they impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation. |
| 22.5 | The following are examples of instruments that are either classified as liabilities or equity: |
| (a) | An instrument of the type described in paragraph 22.4(b) is classified as a liability if the distribution of net assets on liquidation is subject to a maximum amount (a ceiling). For example, if on liquidation the holders of the instrument receive a pro rata share of the net assets, but this amount is limited to a ceiling and the excess net assets are distributed to a charity organisation or the government, the instrument is not classified as equity. |
| (b) | A puttable instrument is classified as equity if, when the put option is exercised, the holder receives a pro rata share of the net assets of the entity determined by: |
| (i) | dividing the entity's net assets on liquidation into units of equal amounts; and |
| (ii) | multiplying that amount by the number of the units held by the financial instrument holder. |
| However, if the holder is entitled to an amount measured on some other basis the instrument is classified as a liability. |
| (c) | An instrument is classified as a liability if it obliges the entity to make payments to the holder before liquidation, such as a mandatory dividend. |
| (d) | A puttable instrument that is classified as equity in a subsidiary's financial statements is classified as a liability in the consolidated financial statements. |
| (e) | A preference share that provides for mandatory redemption by the issuer for a fixed or determinable amount at a fixed or determinable future date, or gives the holder the right to require the issuer to redeem the instrument at or after a particular date for a fixed or determinable amount, is a financial liability. |
| 22.6 | Members' shares in co-operative entities and similar instruments are equity if: |
| (a) | the entity has an unconditional right to refuse redemption of the members' shares; or |
| (b) | redemption is unconditionally prohibited by local law, regulation or the entity's governing charter. |
| AMD 460 Amendment Paragraph 22.3(b) amended by Amendments to FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland – Triennial review 2017 – Incremental improvements and clarifications (issued December 2017) Effective date 01/01/2019 Previous text (b) a contract that will or may be settled in the entity's own equity instruments and: (i) under which the entity is or may be obliged to deliver a variable number of the entity's own equity instruments; or (ii) which will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments. For this purpose the entity's own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity's own equity instruments. |
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