1. Recognition, Impairment, Derecognition

1.3. Distinction between financial debt and equity

Any financial debt issue that could be classified in equity must be the subject of a technical memo approved by the Consolidation Department and Corporate Finance and by the Statutory Auditors.

Equity instruments

(IAS 32, par 16)

When an issuer applies the definitions in paragraph 11 to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument is an equity instrument if, and only if, both conditions (a) and (b) below are met.

1. 1. The instrument includes no contractual obligation:
      1. to deliver cash or another financial asset to another entity; or
      2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer.
   2. If the instrument will or may be settled in the issuer’s own equity instruments, it is:
      1. a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or
      2. a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. For this purpose the issuer’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the issuer’s own equity instruments.

A contractual obligation, including one arising from a derivative financial instrument, that will or may result in the future receipt or delivery of the issuer’s own equity instruments, but does not meet conditions (a) and (b) above, is not an equity instrument.

Financial instruments with equity and debt components

Where a financial instrument issued by a company has, in substance, both debt and equity components, these two components must be recognised separately in the balance sheet at the date of issue.

For example, a Convertible Bond comprises a debt portion and an option over shares in the issuing company.

At the date of initial recognition, the procedure for separating the two components is as follows:

• Measurement of the debt component (easier component to measure);
• Measurement of the "equity" component as the difference between the value of the hybrid instrument and the value of the debt component;
• The issue expenses are allocated to the debt and equity components pro-rata to their values.

Subsequent measurement:

• The equity component is definitively frozen in equity;
• The debt component is measured using the amortized cost method.