IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments
Table of Contents
Members’ Shares in Co-operative Entities
and Similar Instruments
In November 2004 the International Accounting Standards Board issued IFRIC 2 Members’
Shares in Co-operative Entities and Similar Instruments. It was developed by the Interpretations
Other Standards have made minor consequential amendments to IFRIC 2. They include
Annual Improvements to IFRSs 2009–2011 Cycle (issued May 2012), IFRS 13 Fair Value
Measurement (issued May 2011), IFRS 9 Financial Instruments (Hedge Accounting and
amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013) and IFRS 9 Financial
Instruments (issued July 2014).
IFRIC Interpretation 2 Members’ Shares in Co-operative Entities and Similar Instruments
(IFRIC 2) is set out in paragraphs 1–19 and the Appendix. IFRIC 2 is accompanied by a
Basis for Conclusions. The scope and authority of Interpretations are set out in the
Preface to IFRS Standards.
IFRIC Interpretation 2
Members’ Shares in Co-operative Entities and Similar
• IFRS 9 Financial Instruments
• IFRS 13 Fair Value Measurement
• IAS 32 Financial Instruments: Disclosure and Presentation (as revised in 2003)1
Co-operatives and other similar entities are formed by groups of persons to
meet common economic or social needs. National laws typically define a
co-operative as a society endeavoring to promote its members’ economic
advancement by way of a joint business operation (the principle of self-help).
Members’ interests in a co-operative are often characterized as members’
shares, units or the like, and are referred to below as ‘members’ shares’.
IAS 32 establishes principles for the classification of financial instruments as
financial liabilities or equity. In particular, those principles apply to the
classification of puttable instruments that allow the holder to put those
instruments to the issuer for cash or another financial instrument.
The application of those principles to members’ shares in co-operative entities
and similar instruments is difficult. Some of the International Accounting
Standards Board’s constituents have asked for help in understanding how the
principles in IAS 32 apply to members’ shares and similar instruments that
have certain features, and the circumstances in which those features affect
the classification as liabilities or equity.
This Interpretation applies to financial instruments within the scope
of IAS 32, including financial instruments issued to members of co-operative
entities that evidence the members’ ownership interest in the entity.
This Interpretation does not apply to financial instruments that will or may be
settled in the entity’s own equity instruments.
Many financial instruments, including members’ shares, have characteristics
of equity, including voting rights and rights to participate in dividend
distributions. Some financial instruments give the holder the right to request
redemption for cash or another financial asset, but may include or be subject to limits on whether the financial instruments will be redeemed. How should
those redemption terms be evaluated in determining whether the financial
instruments should be classified as liabilities or equity?
The contractual right of the holder of a financial instrument (including
members’ shares in co-operative entities) to request redemption does not, in
itself, require that financial instrument to be classified as a financial liability.
Rather, the entity must consider all of the terms and conditions of the
financial instrument in determining its classification as a financial liability or
equity. Those terms and conditions include relevant local laws, regulations
and the entity’s governing charter in effect at the date of classification, but
not expected future amendments to those laws, regulations or charter.
Members’ shares that would be classified as equity if the members did not
have a right to request redemption are equity if either of the conditions
described in paragraphs 7 and 8 is present or the members’ shares have all the
features and meet the conditions in paragraphs 16A and 16B or paragraphs
16C and 16D of IAS 32. Demand deposits, including current accounts, deposit
accounts and similar contracts that arise when members act as customers are
financial liabilities of the entity.
Members’ shares are equity if the entity has an unconditional right to refuse
redemption of the members’ shares.
Local law, regulation or the entity’s governing charter can impose various
types of prohibitions on the redemption of members’ shares, eg unconditional
prohibitions or prohibitions based on liquidity criteria. If redemption is
unconditionally prohibited by local law, regulation or the entity’s governing
charter, members’ shares are equity. However, provisions in local law,
regulation or the entity’s governing charter that prohibit redemption only if
conditions—such as liquidity constraints—are met (or are not met) do not
result in members’ shares being equity.
An unconditional prohibition may be absolute, in that all redemptions are
prohibited. An unconditional prohibition may be partial, in that it prohibits
redemption of members’ shares if redemption would cause the number of
members’ shares or amount of paid-in capital from members’ shares to fall
below a specified level. Members’ shares in excess of the prohibition against
redemption are liabilities, unless the entity has the unconditional right to
refuse redemption as described in paragraph 7 or the members’ shares have
all the features and meet the conditions in paragraphs 16A and 16B or
paragraphs 16C and 16D of IAS 32. In some cases, the number of shares or the
amount of paid-in capital subject to a redemption prohibition may change
from time to time. Such a change in the redemption prohibition leads to a
transfer between financial liabilities and equity.
At initial recognition, the entity shall measure its financial liability for
redemption at fair value. In the case of members’ shares with a redemption
feature, the entity measures the fair value of the financial liability for
redemption at no less than the maximum amount payable under the
redemption provisions of its governing charter or applicable law discounted
from the first date that the amount could be required to be paid (see
As required by paragraph 35 of IAS 32, distributions to holders of equity
instruments are recognized directly in equity. Interest, dividends and other
returns relating to financial instruments classified as financial liabilities are
expenses, regardless of whether those amounts paid are legally characterized
as dividends, interest or otherwise.
The Appendix, which is an integral part of the consensus, provides examples
of the application of this consensus.
When a change in the redemption prohibition leads to a transfer between
financial liabilities and equity, the entity shall disclose separately the amount,
timing and reason for the transfer.
The effective date and transition requirements of this Interpretation are the
same as those for IAS 32 (as revised in 2003). An entity shall apply this
Interpretation for annual periods beginning on or after 1 January 2005. If an
entity applies this Interpretation for a period beginning before 1 January 2005,
it shall disclose that fact. This Interpretation shall be applied retrospectively.
An entity shall apply the amendments in paragraphs 6, 9, A1 and A12 for
annual periods beginning on or after 1 January 2009. If an entity
applies Puttable Financial Instruments and Obligations Arising on
Liquidation (Amendments to IAS 32 and IAS 1), issued in February 2008, for an
earlier period, the amendments in paragraphs 6, 9, A1 and A12 shall be
applied for that earlier period.
IFRS 13, issued in May 2011, amended paragraph A8. An entity shall apply
that amendment when it applies IFRS 13.
Annual Improvements 2009–2011 Cycle, issued in May 2012, amended
paragraph 11. An entity shall apply that amendment retrospectively in
accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors for annual periods beginning on or after 1 January 2013. If an entity
applies that amendment to IAS 32 as a part of the Annual Improvements
2009–2011 Cycle (issued in May 2012) for an earlier period, the amendment in
paragraph 11 shall be applied for that earlier period.
IFRS 9, as issued in July 2014, amended paragraphs A8 and A10 and deleted
paragraphs 15 and 18. An entity shall apply those amendments when it
applies IFRS 9.
Examples of application of the consensus
This appendix is an integral part of the Interpretation.
This appendix sets out seven examples of the application of the IFRIC
consensus. The examples do not constitute an exhaustive list; other fact
patterns are possible. Each example assumes that there are no conditions
other than those set out in the facts of the example that would require the
financial instrument to be classified as a financial liability and that the
financial instrument does not have all the features or does not meet the
conditions in paragraphs 16A and 16B or paragraphs 16C and 16D of IAS 32.
Unconditional right to refuse redemption (paragraph 7)
The entity’s charter states that redemptions are made at the sole discretion of
the entity. The charter does not provide further elaboration or limitation on
that discretion. In its history, the entity has never refused to redeem
members’ shares, although the governing board has the right to do so.
The entity has the unconditional right to refuse redemption and the members’
shares are equity. IAS 32 establishes principles for classification that are based
on the terms of the financial instrument and notes that a history of, or
intention to make, discretionary payments does not trigger liability
classification. Paragraph AG26 of IAS 32 states:
When preference shares are non-redeemable, the appropriate classification is
determined by the other rights that attach to them. Classification is based on an
assessment of the substance of the contractual arrangements and the definitions
of a financial liability and an equity instrument. When distributions to holders
of the preference shares, whether cumulative or non-cumulative, are at the
discretion of the issuer, the shares are equity instruments. The classification of a
preference share as an equity instrument or a financial liability is not affected
by, for example:
(a) a history of making distributions;
(b) an intention to make distributions in the future;
(c) a possible negative impact on the price of ordinary shares of the issuer if
distributions are not made (because of restrictions on paying dividends
on the ordinary shares if dividends are not paid on the preference
(d) the amount of the issuer’s reserves;
(e) an issuer’s expectation of a profit or loss for a period; or
(f) an ability or inability of the issuer to influence the amount of its profit
or loss for the period.
The entity’s charter states that redemptions are made at the sole discretion of
the entity. However, the charter further states that approval of a redemption
request is automatic unless the entity is unable to make payments without
violating local regulations regarding liquidity or reserves.
The entity does not have the unconditional right to refuse redemption and the
members’ shares are a financial liability. The restrictions described above are
based on the entity’s ability to settle its liability. They restrict redemptions
only if the liquidity or reserve requirements are not met and then only until
such time as they are met. Hence, they do not, under the principles
established in IAS 32, result in the classification of the financial instrument as
equity. Paragraph AG25 of IAS 32 states:
Preference shares may be issued with various rights. In determining whether a
preference share is a financial liability or an equity instrument, an issuer
assesses the particular rights attaching to the share to determine whether it
exhibits the fundamental characteristic of a financial liability. For example, a
preference share that provides for redemption on a specific date or at the option
of the holder contains a financial liability because the issuer has an obligation to
transfer financial assets to the holder of the share. The potential inability of an
issuer to satisfy an obligation to redeem a preference share when contractually required to
do so, whether because of a lack of funds, a statutory restriction or insufficient profits or
reserves, does not negate the obligation. [Emphasis added]
Prohibitions against redemption (paragraphs 8 and 9)
A co-operative entity has issued shares to its members at different dates and
for different amounts in the past as follows:
(a) 1 January 20X1 100,000 shares at CU10 each (CU1,000,000);
(b) 1 January 20X2 100,000 shares at CU20 each (a further CU2,000,000, so
that the total for shares issued is CU3,000,000).
Shares are redeemable on demand at the amount for which they were issued.
The entity’s charter states that cumulative redemptions cannot exceed
20 per cent of the highest number of its members’ shares ever outstanding. At
31 December 20X2 the entity has 200,000 of outstanding shares, which is the
highest number of members’ shares ever outstanding and no shares have been
redeemed in the past. On 1 January 20X3 the entity amends its governing
charter and increases the permitted level of cumulative redemptions to
25 per cent of the highest number of its members’ shares ever outstanding.
Before the governing charter is amended
Members’ shares in excess of the prohibition against redemption are financial
liabilities. The co-operative entity measures this financial liability at fair value
at initial recognition. Because these shares are redeemable on demand, the co-
operative entity measures the fair value of such financial liabilities in
accordance with paragraph 47 of IFRS 13: ‘The fair value of a financial liability
with a demand feature (eg a demand deposit) is not less than the amount
payable on demand …’. Accordingly, the co-operative entity classifies as
financial liabilities the maximum amount payable on demand under the
On 1 January 20X1 the maximum amount payable under the redemption
provisions is 20,000 shares at CU10 each and accordingly the entity classifies
CU200,000 as financial liability and CU800,000 as equity. However, on
1 January 20X2 because of the new issue of shares at CU20, the maximum
amount payable under the redemption provisions increases to 40,000 shares at
CU20 each. The issue of additional shares at CU20 creates a new liability that
is measured on initial recognition at fair value. The liability after these shares
have been issued is 20 per cent of the total shares in issue (200,000), measured
at CU20, or CU800,000. This requires recognition of an additional liability of
CU600,000. In this example no gain or loss is recognized. Accordingly the
entity now classifies CU800,000 as financial liabilities and CU2,200,000 as
equity. This example assumes these amounts are not changed between
1 January 20X1 and 31 December 20X2.
After the governing charter is amended
Following the change in its governing charter the co-operative entity can now
be required to redeem a maximum of 25 per cent of its outstanding shares or
a maximum of 50,000 shares at CU20 each. Accordingly, on 1 January 20X3
the co-operative entity classifies as financial liabilities an amount of
CU1,000,000 being the maximum amount payable on demand under the
redemption provisions, as determined in accordance with paragraph 47 of
IFRS 13. It therefore transfers on 1 January 20X3 from equity to financial
liabilities an amount of CU200,000, leaving CU2,000,000 classified as equity. In
this example the entity does not recognize a gain or loss on the transfer.
Local law governing the operations of co-operatives, or the terms of the
entity’s governing charter, prohibit an entity from redeeming members’
shares if, by redeeming them, it would reduce paid-in capital from members’
shares below 75 per cent of the highest amount of paid-in capital from
members’ shares. The highest amount for a particular co-operative is CU1,000,000. At the end of the reporting period the balance of paid-in capital
In this case, CU750,000 would be classified as equity and CU150,000 would be
classified as financial liabilities. In addition to the paragraphs already cited,
paragraph 18(b) of IAS 32 states in part:
… a financial instrument that gives the holder the right to put it back to the
issuer for cash or another financial asset (a ‘puttable instrument’) is a financial
liability, except for those instruments classified as equity instruments in
accordance with paragraphs 16A and 16B or paragraphs 16C and 16D. The
financial instrument is a financial liability even when the amount of cash or
other financial assets is determined on the basis of an index or other item that
has the potential to increase or decrease. The existence of an option for the
holder to put the instrument back to the issuer for cash or another financial
asset means that the puttable instrument meets the definition of a financial
liability, except for those instruments classified as equity instruments in
accordance with paragraphs 16A and 16B or paragraphs 16C and 16D.
The redemption prohibition described in this example is different from the
restrictions described in paragraphs 19 and AG25 of IAS 32. Those restrictions
are limitations on the ability of the entity to pay the amount due on a
financial liability, ie they prevent payment of the liability only if specified
conditions are met. In contrast, this example describes an unconditional
prohibition on redemptions beyond a specified amount, regardless of the
entity’s ability to redeem members’ shares (eg given its cash resources, profits
or distributable reserves). In effect, the prohibition against redemption
prevents the entity from incurring any financial liability to redeem more than
a specified amount of paid-in capital. Therefore, the portion of shares subject
to the redemption prohibition is not a financial liability. While each
member’s shares may be redeemable individually, a portion of the total shares
outstanding is not redeemable in any circumstances other than liquidation of
The facts of this example are as stated in example 4. In addition, at the end of
the reporting period, liquidity requirements imposed in the local jurisdiction
prevent the entity from redeeming any members’ shares unless its holdings of
cash and short-term investments are greater than a specified amount. The
effect of these liquidity requirements at the end of the reporting period is that
the entity cannot pay more than CU50,000 to redeem the members’ shares.
As in example 4, the entity classifies CU750,000 as equity and CU150,000 as a
financial liability. This is because the amount classified as a liability is based
on the entity’s unconditional right to refuse redemption and not on
conditional restrictions that prevent redemption only if liquidity or other conditions are not met and then only until such time as they are met.
The provisions of paragraphs 19 and AG25 of IAS 32 apply in this case.
The entity’s governing charter prohibits it from redeeming members’ shares,
except to the extent of proceeds received from the issue of additional
members’ shares to new or existing members during the preceding three
years. Proceeds from issuing members’ shares must be applied to redeem
shares for which members have requested redemption. During the three
preceding years, the proceeds from issuing members’ shares have been
CU12,000 and no member’s shares have been redeemed.
The entity classifies CU12,000 of the members’ shares as financial liabilities.
Consistently with the conclusions described in example 4, members’ shares
subject to an unconditional prohibition against redemption are not financial
liabilities. Such an unconditional prohibition applies to an amount equal to
the proceeds of shares issued before the preceding three years, and
accordingly, this amount is classified as equity. However, an amount equal to
the proceeds from any shares issued in the preceding three years is not subject
to an unconditional prohibition on redemption. Accordingly, proceeds from
the issue of members’ shares in the preceding three years give rise to financial
liabilities until they are no longer available for redemption of members’
shares. As a result the entity has a financial liability equal to the proceeds of
shares issued during the three preceding years, net of any redemptions during
The entity is a co-operative bank. Local law governing the operations of
co-operative banks state that at least 50 per cent of the entity’s total
‘outstanding liabilities’ (a term defined in the regulations to include members’
share accounts) has to be in the form of members’ paid-in capital. The effect of
the regulation is that if all of a co-operative’s outstanding liabilities are in the
form of members’ shares, it is able to redeem them all. On 31 December 20X1
the entity has total outstanding liabilities of CU200,000, of which CU125,000
represent members’ share accounts. The terms of the members’ share
accounts permit the holder to redeem them on demand and there are no
limitations on redemption in the entity’s charter.
In this example members’ shares are classified as financial liabilities.
The redemption prohibition is similar to the restrictions described in
paragraphs 19 and AG25 of IAS 32. The restriction is a conditional limitation
on the ability of the entity to pay the amount due on a financial liability, ie they prevent payment of the liability only if specified conditions are met.
More specifically, the entity could be required to redeem the entire amount of
members’ shares (CU125,000) if it repaid all of its other liabilities (CU75,000).
Consequently, the prohibition against redemption does not prevent the entity
from incurring a financial liability to redeem more than a specified number of
members’ shares or amount of paid-in capital. It allows the entity only to
defer redemption until a condition is met, ie the repayment of other liabilities.
Members’ shares in this example are not subject to an unconditional
prohibition against redemption and are therefore classified as financial