(a) Cash for cash ('net cash settlement')
IE3. In this subsection, the forward purchase contract on the entity's own shares will be settled net in cash, ie there is no receipt or delivery of the entity's own shares upon settlement of the forward contract.
On 1 February 2002, Entity A enters into a contract with Entity B to receive the fair value of 1,000 of Entity A's own outstanding ordinary shares as of 31 January 2003 in exchange for a payment of CU104,000 in cash (ie CU104 per share) on 31 January 2003. The contract will be settled net in cash. Entity A records the following journal entries.

Illustrative Examples
These examples accompany, but are not part of, IAS 32.
Accounting for Contracts on Equity Instruments of an Entity
IE1. The following examples[1] illustrate the application of paragraphs 15-27 and IAS 39 to the accounting for contracts on an entity's own equity instruments.
Example 1: Forward to buy shares
IE2. This example illustrates the journal entries for forward purchase contracts on an entity's own shares that will be settled (a) net in cash, (b) net in shares or (c) by delivering cash in exchange for shares. It also discusses the effect of settlement options (see (d) below). To simplify the illustration, it is assumed that no dividends are paid on the underlying shares (ie the 'carry return' is zero) so that the present value of the forward price equals the spot price when the fair value of the forward contract is zero. The fair value of the forward has been computed as the difference between the market share price and the present value of the fixed forward price.
Assumptions:
Contract date    1 February 2002
Maturity date    31 January 2003
Market price per share on 1 February 2002    CU100
Market price per share on 31 December 2002    CU110
Market price per share on 31 January 2003    CU106
Fixed forward price to be paid on 31 January 2003    CU104
Present value of forward price on 1 February 2002    CU100
Number of shares under forward contract    1,000
Fair value of forward on 1 February 2002    CU0
Fair value of forward on 31 December 2002    CU6,300
Fair value of forward on 31 January 2003    CU2,000

DO3. Mr Leisenring also objects to the conclusion that a purchased put or call option on a fixed number of an issuer's equity instruments is not an asset. The rights created by these contracts meet the definition of an asset and should be accounted for as assets and not as a reduction in equity. These contracts also meet the definition of derivatives that should be accounted for as such consistently with IAS 39.

Dissenting Opinion
Dissent of James J Leisenring
DO1. Mr Leisenring dissents from IAS 32 because, in his view, the conclusions about the accounting for forward purchase contracts and written put options on an issuer's equity instruments that require physical settlement in exchange for cash are inappropriate. IAS 32 requires a forward purchase contract to be recognised as though the future transaction had already occurred. Similarly it requires a written put option to be accounted for as though the option had already been exercised. Both of these contracts result in combining the separate forward contract and the written put option with outstanding shares to create a synthetic liability.
DO2. Recording a liability for the present value of the fixed forward price as a result of a forward contract is inconsistent with the accounting for other forward contracts. Recording a liability for the present value of the strike price of an option results in recording a liability that is inconsistent with the Framework as there is no present obligation for the strike price. In both instances the shares considered to be subject to the contracts are outstanding, have the same rights as any other shares and should be accounted for as outstanding. The forward and option contracts meet the definition of a derivative and should be accounted for as derivatives rather than create an exception to the accounting required by IAS 39. Similarly, if the redemption feature is embedded in the equity instrument (for example, a redeemable preference share) rather than being a free-standing derivative contract, the redemption feature should be accounted for as a derivative.

(i) The Standard has clarified that the disclosure proposals in the Exposure Draft relating to when fair value is estimated using a valuation technique did not require disclosure of sensitivity to all valuation assumptions not supported by observable market prices. Rather, the sensitivity disclosure is required only if:
(i) the fair value is sensitive to a particular assumption;
(ii) reasonably possible alternatives for that assumption would result in a significantly different result; and
(iii) that assumption is not supported by observable market prices or rates.
(j) For financial liabilities designated as at fair value through profit or loss, the Standard requires disclosure of the amount of the change in fair value that is not attributable to changes in a benchmark interest rate. This disclosure gives an indication of how much of the change in fair value is caused by changes in the credit risk of the liability.

(e) The Exposure Draft proposed that a derivative contract that contains an option as to how it is settled meets the definition of an equity instrument if the entity had all of the following: (i) an unconditional right and ability to settle the contract gross; (ii) an established practice of such settlement; and (iii) the intention to settle the contract gross. These conditions have not been carried forward into the Standard. Rather, a derivative with settlement options is classified as a financial asset or a financial liability unless all the settlement alternatives would result in equity classification.
(f) The Standard provides explicit guidance on accounting for the repurchase of a convertible instrument.
(g) The Standard provides explicit guidance on accounting for the amendment of the terms of a convertible instrument to induce early conversion.
(h) The Exposure Draft proposed that a financial instrument that is an equity instrument of a subsidiary should be eliminated on consolidation when held by the parent, or presented in the consolidated balance sheet within equity when not held by the parent (as a minority interest separate from the equity of the parent). The Standard requires all terms and conditions agreed between members of the group and the holders of the instrument to be considered when determining if the group as a whole has an obligation that would give rise to a financial liability. To the extent there is such an obligation, the instrument (or component of the instrument that is subject to the obligation) is a financial liability in consolidated financial statements.

Defaults and Breaches (paragraph 94(j))
BC48. The revised Standard requires disclosures of defaults in the payment of principal and interest, breaches of sinking fund or redemption provisions on loans payable, and any other breaches when those breaches can permit the lender to demand repayment of loans payable. Such disclosures provide relevant information about the entity's creditworthiness and its prospects of obtaining future loans.
Summary of Changes from the Exposure Draft
BC49. The main changes from the Exposure Draft's proposals are as follows:
(a) The Exposure Draft proposed to define a financial liability as a contractual obligation to deliver cash or another financial asset to another entity or to exchange financial instruments with another entity under conditions that are potentially unfavourable. The definition in the Standard has been expanded to include some contracts that will or may be settled in the entity's own equity instruments. The Standard's definition of a financial asset has been similarly expanded.
(b) The Exposure Draft proposed that a financial instrument that gives the holder the right to put it back to the entity for cash or another financial asset is a financial liability. The Standard retains this conclusion, but provides additional guidance and illustrative examples to assist entities that, as a result of this requirement, either have no equity as defined in IAS 32 or whose share capital is not equity as defined in IAS 32.
(c) The Standard retains and clarifies the proposal in the Exposure Draft that terms and conditions of a financial instrument may indirectly create an obligation.
(d) The Exposure Draft proposed to incorporate in IAS 32 the conclusion previously in SIC-5 Classification of Financial Instruments - Contingent Settlement Provisions. This is that a financial instrument for which the manner of settlement depends on the occurrence or non-occurrence of uncertain future events or on the outcome of uncertain circumstances that are beyond the control of both the issuer and the holder is a financial liability. The Standard clarifies this conclusion by requiring contingent settlement provisions that apply only in the event of liquidation of an entity or are not genuine to be ignored.

BC46. The Board noted that the issue arises because of the change in the credit risk of the liability, rather than that of the entity. It agreed that requiring disclosure of the change in fair value of the financial liability that is caused by changes in the liability's credit risk would help alleviate the concerns expressed. However, the Board noted that providing this disclosure would often not be practicable because it may not be possible to separate and measure reliably that part of the change in fair value. Therefore, it decided to require disclosure of the change in fair value of the financial liability that is not attributable to changes in a benchmark interest rate. The Board believes this is a reasonable proxy for the change in fair value that is attributable to changes in the liability's credit risk, in particular when such changes are large, and will provide users with information with which to understand the profit or loss effect of such a change in credit risk.
BC47. The Board concluded that when an entity has designated a financial liability as at fair value through profit or loss, disclosure should be given of the difference between the carrying amount and the amount the entity would contractually be required to pay at maturity to the holders of the liability (see paragraph 94(f)(ii)). The fair value may differ significantly from the settlement amount, in particular for financial liabilities with a long duration when an entity has experienced a significant deterioration in creditworthiness since their issue.

BC44. The revisions to IAS 39 include the ability for entities to designate a non-derivative financial liability as held at fair value through profit or loss. Paragraph 94(f)(i) requires disclosure of the change in fair value of such a financial liability that is not attributable to changes in a benchmark interest rate. The Board considered this disclosure in its deliberations on the fair value measurement of financial liabilities and whether changes in the credit risk of a liability should be included in its fair value measurement when the fair value option is used in IAS 39. The Board agreed that such changes should be included (ie the fair value of financial liabilities is not adjusted to exclude the effect of changes in the credit quality of the liability). Its reasons for this decision are set out in the Basis for Conclusions on IAS 39, paragraphs BC87-BC92.
BC45. The Board considered comments received on the Exposure Draft of proposed amendments to IAS 39 that argued that the fair value of financial liabilities should exclude the effects of an entity's credit risk. Such comments noted that (a) recognising a gain or loss when there is a change in an entity's own creditworthiness results in potentially misleading information; and (b) users may misinterpret the profit or loss effects of changes in credit risk, especially in the absence of disclosures.

BC41. Under the approach in paragraph BC25, the joint value attributable to the interdependence between multiple embedded derivative features is included in the liability component. A numerical example is set out as Illustrative Example 10.
BC42. Even though this approach is consistent with the definition of equity as a residual interest, the Board recognises that the allocation of the joint value to either the liability component or the equity component is arbitrary because it is, by its nature, joint. Therefore, the Board concluded that disclosure of the existence of issued compound financial instruments with multiple embedded derivative features that have interdependent values and the effective yield on the liability component is important. Such disclosure highlights the impact of multiple embedded derivative features on the amounts reported as liabilities and equity and interest expense for the issuer of a compound financial instrument.
Financial Assets and Financial Liabilities at Fair Value Through Profit or Loss (paragraphs 94(e), 94(f) and AG40)
BC43. The revised Standard requires disclosure of the carrying amounts of financial assets and financial liabilities that are classified as held for trading and those designated by the entity upon initial recognition as financial assets and financial liabilities at fair value through profit or loss. The Board concluded that an indication of the extent to which an entity designates financial assets and financial liabilities at fair value through profit or loss is useful to users because there are no restrictions on the items that can be so designated and because these items do not meet the definition of held for trading.