Dear Editor:

If a supplier agrees to settle after three months with a fixed number of the company's shares, but the settlement price will be determined based on the market price at that time (i.e., a variable), should this arrangement be classified as an equity-settled share-based payment or a financial liability?

Analysis of the Issue

According to IAS 32 Financial Instruments: Presentation, the core distinction between a financial liability and an equity instrument lies in whether the issuer has a contractual obligation to deliver cash or another financial asset, or whether it may settle with a variable number of its own equity instruments.

In this case, your company will deliver a fixed number of shares (e.g., 10,000 shares) to the supplier, but the fair value of those shares will fluctuate with the market price at the settlement date. Therefore, the economic value actually delivered by your company is not fixed but varies with the share price.

Key Judgment Criteria

  • Nature of the Contractual Obligation:Does your company have an unconditional obligation to avoid delivering cash or another financial asset? If the delivery of shares is the only settlement method and the number of shares is fixed, it may not constitute a financial liability.
  • Number and Value of Shares:IAS 32 paragraph 16 states that if a fixed amount of cash or another financial asset is exchanged for a fixed number of the entity's own equity instruments, it is an equity instrument; conversely, if the settlement amount or number is variable, it may be classified as a financial liability.
  • Applicability of Share-Based Payment Standards:IFRS 2 Share-based Payment distinguishes between equity-settled and cash-settled transactions. If goods or services provided by the supplier are settled with equity instruments and the fair value of the equity instruments at grant date can be reliably determined, it is typically equity-settled. However, if the settlement terms include a variable number or variable consideration, reassessment may be required.

Preliminary Conclusion

Since your company delivers a fixed number of shares but the settlement value varies with future market prices, this arrangement is more likely to meet the definition of a financial liability, because your company cannot avoid an outflow of cash (or delivery of variable value) due to share price fluctuations. However, if the arrangement is a share-based payment and meets the conditions for equity settlement, an exception may apply. A comprehensive judgment is needed based on the contract terms and the interaction between IFRS 2 and IAS 32.

It is recommended to consult a professional accountant and review the contract details to determine the final classification.