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HMRC internal manual

Corporate Finance Manual

Accounting for corporate finance: liability and equity: derivatives classified as equity

Transactions in own equity: derivatives

A contract for the future delivery of shares may be classified as equity, but only if the contract is settled by the company delivering (or, more rarely, receiving) a fixed number of its own equity instruments in exchange for a fixed amount of cash or some other financial asset.

An example is a warrant over the company’s own shares. The warrant gives the counterparty a right to buy, or subscribe for, a fixed number of the company’s own shares for a fixed price. From the issuer’s perspective, this is an equity instrument. The fair value of the contract will depend on the current value of the company’s own shares. (It may also vary with other factors, such as interest rates, but provided this does not affect the amount of cash or other financial assets to be paid or received, or the number of equity instruments to be received or delivered on settlement of the contract, it does not preclude the contract from being an equity instrument.)

Where a derivative is classified as equity, any consideration received, such as a premium received for a written option or warrant on the company’s own shares, is added directly to equity. Any consideration paid, for example a premium paid for a purchased option, is deducted directly from equity. Changes in the fair value of an equity instrument are not recognised in the financial statements.

Except in limited circumstances, employee share options and similar schemes (whose treatment is dealt with in IFRS 2 or section 26 of FRS 102) are excluded from the scope of IAS 32 and IAS 39 and Section 11 and 12 of FRS 102 respectively (see CFM21140).