Accounting for corporate finance: liability and equity: derivatives not classified as equity
Exclusions from the meaning of equity instrument
A contract is not an equity instrument solely because it may result in the receipt or delivery of a company’s own shares or other equity instruments. CFM21100 gives an example of a non-derivative contract that is settled by delivering a variable number of the company’s own shares - this is a financial liability, not an equity instrument.
The same applies to a derivative contract. Suppose that a company enters into a contract under which it must deliver as many of its own shares as are equal in value to 100 ounces of gold. The value of such a contract will depend on the price of gold, not on the value of the company’s shares. The company must account for it as a derivative (in other words at fair value), not as an equity instrument.
Equally, a contract that will be settled by the company delivering or receiving a fixed number of its own equity instruments in exchange for a variable amount of cash or another financial asset is a financial asset or financial liability. An example is a contract for the company to deliver 100 of its own shares in return for an amount of cash calculated to equal the value of 100 ounces of gold. Again, this is a derivative whose underlying subject matter is gold.
A company might also enter into a contract, such as a forward purchase or an option, that will or might result in it buying its own shares for cash. It will have a financial liability for the present value of the redemption amount (for example, the forward repurchase amount or option exercise price).