The International Accounting Standards Board has published a set of proposals on the classification of rights issues to clarify their accounting treatment when they are in a currency other than the issuer’s.

Current practice appears to require such issues to be accounted for as derivative liabilities. The proposals state that if the rights are issued pro rata to an entity’s existing shareholders for a fixed amount of currency, they should be classified as equity regardless of the currency in which the exercise price is denominated.

Many rights issues are denominated in currencies other than the functional currency of the issuer, and the global financial crisis has led to an increase in the number of such issues as entities seek to raise additional capital. The IASB has therefore accelerated its work on this aspect of its comprehensive response to the crisis. The proposals are set out in an exposure draft of an amendment to IAS 32, “Financial Instruments: Presentation,” which is open for comment for 30 days and if adopted will apply retrospectively.

“The IASB continues to give priority to its work related to the global financial crisis,” said IASB Chairman Sir David Tweedie in a statement. “In this case, the IASB has moved swiftly to address a potential inconsistency in the way that rights issues have been accounted for when they are offered in currencies other than the entity’s functional currency.”

The proposals in the exposure draft “Classification of Rights Issues” are open for comment until Sept. 7, 2009. After considering the comments, the IASB plans to issue the final amendment before the end of 2009, with early application permitted. The exposure draft is available in the “Open for Comment” section of www.iasb.org.

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