Transition – Retractable or mandatorily redeemable shares and financial instruments originated or exchanged in a related party transaction

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[Section « Financial instruments that no longer exist at the date the amendments are applied for the first time » has been updated on April 1, 2020.]

Updated: April 29, 2020 folllowing the one year deferral, to January 1, 2021, of the effective date of the modifications that were supposed to apply for years beginning on or after January 1, 2020. Early adoption of the modifications continues to be permitted.

Application starting January 1, 2021

The amendments to accounting standards for private enterprises (ASPE), issued in December 2018, regarding retractable or mandatorily redeemable shares issued in a tax planning arrangement (ROMRS) and financial instruments originated or exchanged in a related party transaction apply to annual financial statements relating to fiscal years beginning on or after January 1, 2021. Earlier application is permitted. 

To learn more, read our articles:

The following is an overview of the transitional provisions for the initial application of the amendments and the relief available.

retractable or mandatorily redeemable shares

The changes made to the exception in paragraph .23 of Section 3856, Financial instruments, which allows to classify certain ROMRS as equity, will have significant impacts. The following relief has therefore been provided to facilitate the transition.

1) Retrospective application with or without restatement of the comparative period

An enterprise shall apply the amendments retrospectively. However, it has the choice to present the impacts of the amendments either:

  • at the beginning of the earliest period presented (on January 1, 2020*); or
  • at the beginning of the fiscal year in which the amendments are first applied (on January 1, 2021*).
The enterprise may choose not to restate the comparative period.

2) Shares issued before January 1, 2018

When an enterprise applies the amendments for the first time, it may choose to present the ROMRS issued before January 1, 2018 as a financial liability or in a separate line in the equity section of the balance sheet if the following conditions are met:

 Condition 1 – Control: At the date of initial application (on January 1, 2021*), control of the enterprise that issued the ROMRS is held by the party that owns the shares in the arrangement at that date.

The enterprise is not required to assess whether control was held by that shareholder at the time the ROMRS were issued or whether it has retained control since then. This relief is particularly relevant when ROMRS were issued many years ago.

 Condition 2 – Redemption arrangement: No other written or oral arrangement exists, such as a redemption schedule, that gives the holder of the shares the contractual right to require the enterprise to redeem the shares within a fixed or determinable period.

The enterprise is not required to verify the existence of a redemption schedule since the issuance of the ROMRS, for example if a schedule was abandoned prior to the first application of the amendments.

 Condition 3 – Consideration: Not applicable

There is no third condition to be met on initial application of the amendments. The enterprise is not required to ensure that when issuing ROMRS it has only exchanged its own shares (for example, common shares exchanged for retractable preferred shares) or that it has received no consideration. ROMRS issued as part of a tax rollover could therefore be classified as equity if they meet the other two relaxed conditions.  

ROMRS issued before January 1, 2018 for which the two conditions are not met must be classified as a financial liability and measured at their redemption amount.

The transitional provisions facilitate initial application of the amendments compared to full retrospective application of the three conditions in paragraph 3856.23 and the requirement to reclassify the shares as a liability at the date on which the conditions are no longer met.

ROMRS issued on or after January 1, 2018 must meet the three conditions set out in paragraph 3856.23 to be presented within equity. 

3) Extinguished shares

When an enterprise chooses to apply the amendments at the beginning of the earliest period presented (on January 1, 2020*), it is not required to make retrospective adjustments in respect of ROMRS that were extinguished prior to the beginning of the fiscal year in which the amendments are first applied (before January 1, 2021*).

The enterprise is not required to conclude whether the ROMRS meet the conditions for classification as equity if they were redeemed or cancelled before the date of first application of the amendments.

Financial instruments originated or exchanged in a related party transaction

The changes made to Section 3856 regarding the recognition of a financial asset originated or acquired or a financial liability issued or assumed in a related party transaction shall be applied retrospectively, except in the cases outlined below. Relief has been provided to facilitate the transition.

1) Financial instruments that exist at the date the amendments are applied for the first time

Financial instruments originated or exchanged in a related party transaction that exist at the date the amendments are applied for the first time (on January 1, 2021*) must be measured as follows as at the beginning of the earliest comparative period (on January 1, 2020*):

  • A financial instrument that has repayment terms: The instrument is measured at cost, determined using its undiscounted cash flows, excluding interest and dividend payments, less any impairment, as at the beginning of the earliest comparative period (on January 1, 2020*).

  • A financial instrument that does not have repayment terms: The instrument is measured at cost, deemed to be the carrying amount of the instrument in the financial statements of the enterprise, less any impairment, at the beginning of the earliest comparative period (on January 1, 2020*). (Remember that a loan described as being “without terms of repayment” does in fact have repayment terms, i.e. it is payable on demand.)
The measurement is based on the carrying amount in the financial statements. The enterprise is not required to remeasure a financial instrument that does not have repayment terms based on the consideration transferred in the original transaction. This could have been impractical when the transaction was concluded several years earlier, for example in the case of a portfolio investment in common shares (not quoted in an active market) acquired in exchange for land 20 years ago.
  • An investment in debt or equity instruments that are quoted in an active market, a debt instrument where inputs significant to the determination of its fair value are observable or a derivative contract: The instrument is measured at fair value at the beginning of the earliest comparative period (on January 1, 2020*).

2) Financial instruments that no longer exist at the date the amendments are applied for the first time

For financial instruments exchanged in a related party transaction that do not exist at the date the amendments are applied for the first time (on January 1, 2021*), an enterprise need not restate the instrument as at the beginning of the earliest comparative period (on January 1, 2020*).

The enterprise is not required to retrospectively apply the amendments to financial instruments exchanged in a related party transaction that do not exist on the date the amendments are first applied.

Be alert

This article provides an overview of some requirements, and does not address all topics, all aspects of the topics covered, or the particular circumstances facing any one enterprise. Be vigilant and refer to the up-to-date original documents before making a decision. 

Other resources

* For an enterprise with a year-end of December 31, assuming that it does not early apply the changes and presents a year for comparative purposes in its financial statements.

The Professional Practice, Assurance and Financial Accounting team
ORDRE DES COMPTABLES PROFESSIONNELS AGRÉÉS DU QUÉBEC

 
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