Rajesh Dhawan

Right Issue:-

A rights issue is basically when a company offers existing shareholders a right to purchase additional shares of the company at a given price, which is at a discount to the prevailing market price of the stock, to make the offer enticing for the shareholder and to ensure that the rights offer is fully subscribed to. In case of a rights issue, a shareholder has the option of applying for additional shares also i.e. over and above what he is entitled to. Thus, assuming that some of the shareholders do not exercise their right, the shareholders who have applied for additional shares are allotted the same.

IAS 32 Implication:-

According to IAS 32 Financial Instruments: Presentation, a financial instrument can only be classified as equity if, inter alia, it involves the exchange of a fixed amount of cash for a fixed number of shares. The IFRIC decided in June 2005 that, in the context of convertible bonds, an amount denominated in a currency other than the entity’s functional currency is not considered to be fixed for this purpose. Therefore, a contract to issue shares in exchange for cash in a foreign currency cannot be considered as equity. It follows that a foreign currency rights issue must be classified as a derivative at inception and any subsequent changes in the fair value of the derivative must be recognised in profit or loss until the rights are exercised and the shares are issued.

Extract from Financials:-

HSBC Holding PLC

On 2 March 2009, HSBC Holdings announced its proposal to raise £12.5 billion (US$17.8 billion), net of expenses, by way of a fully underwritten rights issue. Under the proposal, HSBC offered its shareholders the opportunity to acquire 5 new ordinary shares for every 12 ordinary shares at a price of 254 pence per new ordinary share. For shareholders on the Hong Kong and Bermuda Overseas Branch Registers this offer was expressed in Hong Kong dollars and US Dollars respectively, fixed at published exchange rates on 27 February 2009. The proposal was subject to authorisation by the shareholders which was obtained at a general meeting held on 19 March 2009. The offer period commenced on 20 March 2009 and closed for acceptance on 3 April 2009. Dealing in the new shares began on 6 April 2009.

Accounting treatment under IFRSs

Although HSBC Holdings’ functional currency is the US dollar, the rights issue was substantially denominated in currencies other than US dollars, principally in sterling and Hong Kong dollars. Accordingly, under the requirements of IAS 32 paragraph 16(b)(ii), HSBC was not able to demonstrate that it was issuing a fixed number of shares for a fixed amount of cash, and would therefore be prohibited under IAS 32 from accounting for the offer of rights in shareholders’ equity. Under IAS 32, therefore, the offer of rights would be treated as a derivative financial liability.

As a derivative financial liability, under IAS 39 the liability would have been measured at its fair value at inception of the offer on 20 March 2009, which is substantially the difference between the share price at that date and the issue price of 254 pence per new ordinary share. The corresponding entry on inception would have been made to shareholders’ equity. Subsequently, the liability would have been re-measured at fair value with movements in fair value recognised in the income statement until the exercise of the rights, which were exercised by 3 April 2009. On the exercise of rights the liability would have been credited to shareholders’ equity. If this accounting treatment was adopted by HSBC, a loss of US$4.7 billion would have been recognised in the income statement, which was primarily due to an increase in HSBC’s share price between 20 March 2009 and 3 April 2009. There would have been no impact on the Group’s or HSBC Holdings’ shareholders’ equity or HSBC Holdings’ distributable reserves.

Standard Chartered PLC

On 26 November 2008, the Company invited shareholders to participate in a 30 for 91 rights issue of 470,014,830 shares at 390 pence each. The Company’s functional currency is denominated in US dollars, whilst the capital raised through the rights issue was sterling based. The Company was not therefore able to assert that it was delivering a fixed number of shares for a fixed amount of US dollar proceeds. As such, under IAS 32, the rights issue is an option, which is classified as a financial liability and not as a component of equity. As the option was out-of-the-money at inception, an initial liability was established based on the difference between the share price when the documents were posted (as this created the legal obligation on the Company) and the rights price, with a corresponding charge to equity.

The option was fair valued through the income statement from this date until the rights issue closed for registration on 17 December 2008. This generated a gain of $233 million. The net liability on settlement was credited to equity following its realisation by issuing shares of the Company. As a result, there is no overall impact on the Group or Company’s shareholders’ equity or the Company’s distributable reserves


In July 2009, the IFRIC received a request to consider the treatment of foreign currency rights issues and, due to the decision taken in 2005, the matter was referred to the IASB. In response, the IASB has issued an Amendment to IAS 32, proposing limited changes to the definition of a financial liability.

The Amendment alters the definition of a financial liability in IAS 32 to classify rights issues and certain options or warrants (together, here termed rights) as equity instruments. This is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, in order to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency.

By changing the definition of a liability, these rights are no longer considered derivative instruments. Their fair value adjustments will no longer impact profit or loss.

When finalising the Amendment, the IASB extended its scope to include financial instruments, such as options or warrants which are, in substance, rights issues (provided all the Amendment’s criteria are met). However, the IASB decided not to address foreign currency convertible bonds, as they are not included within the Amendment’s limited scope.

The Amendment is effective for annual periods beginning on or after 1 February 2010. Early application is permitted. The Amendment, once effective, is to be applied retrospectively.


The Amendment will provide relief to entities that issue rights (fixed in a currency other than their functional currency), from treating the rights as derivatives with fair value changes recorded in profit or loss.

Rights issued in foreign currencies that were previously accounted for as derivatives will now be classified as equity instruments. Application of the change will result in the reversal of profits or losses previously recognised, as application of the change will be retrospective. Additionally, the impact on previously reported results would be a reclassification in equity.

Note:- For more information one can visit https://internationalfinancialreportingstandard.wordpress.com/.

(Author can be reached @ [email protected])

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One Comment

  1. M Srinivas Kumar says:

    Good explanation Suraj but would have appreciated more corresponding Journal entries were shown.


    M.Srinivas Kumar

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September 2021