HKFRS News 

In this newsletter, we look at the following topic:
  
HKAS 32 from the issuer's perspective (Part I) - What is meant by 'fixed for fixed' in the determination of an equity instrument?
 
In May 2004, the Hong Kong Institute of Certified Public Accountants (HKICPA) published HKAS 32 Financial Instruments: Presentation and Disclosure, as amended by HKFRS 7 Financial Instruments: Disclosures.  The standard establishes principles for presenting instruments as either financial liabilities, equity instruments or compound financial instruments (i.e. an instrument with both a liability component and an equity component).  This issue in particular, will look at what is meant by 'fixed for fixed' in the determination of an equity instrument.
 
This series of frequently asked questions is published in response to issues faced in practice when applying the principles of HKAS 32.  The distinction between the definition of a financial liability and an equity instrument is not necessarily intuitive and may not reflect the economic substance of a particular instrument.  However, no one wants inadvertent debt.  We highlight some of the more common financial instrument terms and conditions and explain how they affect the classification of an instrument through the application of the principles in HKAS 32:

• Foreign currency convertible bonds
   
• Foreign currency convertible bonds issued by the subsidiary convertible into the shares of the parent
   
• Bermudian options with fixed but different strike prices
   
• Change in conversion ratio upon a bonus issue
   
• Change in conversion ratio upon a rights issue
   
• Contracts to exchange a fixed number of equity instruments for a specified minority interest
   
• Contingent conversion bond
   
• Call options where the underlying is an exchange ratio
   
• Instruments that are settled in a variable number of shares but subject to a cap
   
• Instruments that are settled in a fixed number of shares except where the share price is in a specific range

Note: HKFRS has converged with IFRS effective from 1 January 2005.  Contents contained in this newsletter are relevant to both HKFRS preparers and IFRS preparers.