The Accounting Standards Board (ASB) has today published a Financial Reporting Exposure Draft (FRED) proposing an amendment to FRS 25 (IAS 32) ‘Financial Instruments: Presentation‘. The proposed amendment requires a rights issue involving the exchange of a fixed number of an entity’s own equity instruments for a fixed amount of cash denominated in a foreign currency to be classified as an equity instrument.

The proposed amendment follows the issue of ‘Classification of Rights Issues – Amendment to IAS 32’ published by the International Accounting Standards Board (IASB) in October 2009. The IASB amendment was issued in response to a practical problem highlighted as a result of the global financial crisis. During the crisis there has been an increase in the number of entities using rights issues to raise capital. If these rights issues are denominated in a foreign currency, then under the current rules in FRS 25 they are classified as derivative liabilities. The proposals state that if a fixed number of rights, options or warrants are issued pro rata to an entity’s existing shareholders for a fixed amount of foreign currency, these should be classified as equity regardless of the currency in which the exercise price is denominated. The rationale is that the proposed amendment better reflects the substance of the rights issue, which is a transaction with shareholders in their capacity as owners.

The FRED proposes parallel amendments to FRS 25 with the objective of ensuring that FRS 25 remains fully converged with IAS 32.

The comment period for the FRED closes on 15 December 2009.

1. The ASB is an operating body of the Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the ASB, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy Discipline and Investigation Board) and by the FRC Board. The Committee on Corporate Governance assists the Board in its work on corporate governance.
2. The main role of the ASB is to issue accounting standards. The ASB collaborates with accounting standard-setters from other countries and the International Accounting Standards Board (IASB) both in order to influence the development of international standards and in order to ensure that its standards are developed with due regard to international developments.
3. The ASB has ten Board members, of whom two (the Chairman and the Technical Director) are full-time, and the remainder, who have a variety of experiences as preparers, auditors and users of financial reports, are part-time.
4. The FRED can be downloaded, free of charge, from the ASB’s website at http://www.frc.org.uk/asb/publications/documents.cfm?cat=3. Hard copies of the FRED can be obtained at a cost of £10.00 (post-free) from FRC Publications, 145 London Road, Kingston Upon Thames, Surrey, KT2 6SR (020 8247 1274). Web: www.frcpublications.com.
5. The IASB amendments can be obtained from the IASCF Publications Department – e-mail: publications@iasb.org. Website: www.iasb.org.
6. Press enquiries should be directed to Ian Mackintosh (Chairman) on 020 7492 2434, David Loweth (Technical Director) on 020 7492 2420 or Deepa Raval (Project Director) on 020 7492 2424.