IFRIC 2
Published
Members' Shares in Co-operative Entities and Similar Instruments
Addresses the classification of members' shares in co-operative entities as equity or financial liabilities under IAS 32, particularly where shares are redeemable on demand.
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Conceptual Framework Linkage
Why a puttable instrument needs its own interpretation
IAS 32's liability/equity distinction turns on whether an entity has an unconditional right to avoid delivering cash. Co-operative members' shares are often redeemable ON DEMAND by the member – a feature that, applied literally, would push most co-operative capital into liability classification. IFRIC 2 works through the practical consequences of that logic for genuine mutual/co-operative structures.
Substance over the "share" label
IFRIC 2 reinforces that the LEGAL FORM of an instrument as a "share" does not override IAS 32's substance-based classification test. A redeemable-on-demand members' share behaves economically like a liability unless a genuine, unconditional restriction on redemption exists.
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Scope & Definitions
What IFRIC 2 covers
IFRIC 2 applies to financial instruments within the scope of IAS 32, including members' shares in co-operative entities, that give the holder the right to request redemption for cash or another financial asset.
TYPICAL ENTITIES IN SCOPE
Co-operative banks and credit unions Agricultural and consumer co-operatives Mutual insurance and building society-type entities
Key definitions
Members' shares
Instruments that establish membership in a co-operative entity, typically representing an interest in members' equity and sometimes redeemable on demand.
Redeemable on demand
A feature that entitles the holder to require the entity to redeem the instrument, at or before a specified time, for an amount of cash or another financial asset.
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The Default Classification
The starting point: liability, unless proven otherwise
Members' shares that are redeemable on demand are, by default, FINANCIAL LIABILITIES – the entity has a contractual obligation to deliver cash or another financial asset that it cannot avoid. IFRIC 2 then sets out the two narrow circumstances in which such shares can instead be classified, wholly or partly, as EQUITY.
✕ The mere fact that redemption is subject to co-operative bylaws, is at management's discretion in practice, or has historically never been exercised does NOT by itself change the default liability classification – only an unconditional, enforceable restriction does.
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Unconditional Right to Refuse Redemption
Path 1 to equity classification
If the entity has an UNCONDITIONAL right to refuse redemption of members' shares, those shares are equity. The right must be genuinely unconditional – a right that is conditional on, for example, maintaining minimum liquidity or regulatory capital is NOT unconditional for this purpose.
Worked example – a governing charter with discretion
Example: Board discretion clause
A co-operative's charter states the board "may, at its sole and unconditional discretion, decline any redemption request, without condition or limitation."
This is a genuine unconditional right to refuse. The members' shares are classified as EQUITY in their entirety.
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Prohibitions Imposed by Law, Regulation, or Charter
Path 2 to equity classification
Local law, regulation, or the entity's own governing charter can impose a PROHIBITION on redemption. To the extent such a prohibition exists, the shares subject to it are equity.
TWO FORMS OF PROHIBITION RECOGNISED
Unconditional prohibition – e.g. redemption is simply not permitted under the applicable law Conditional prohibition based on liquidity or a specified financial criterion
Worked example – liquidity-based statutory prohibition
Example: Regulatory minimum capital floor
Banking regulation prohibits a co-operative bank from redeeming members' shares if doing so would reduce regulatory capital below a mandated minimum. The co-operative currently holds capital of $12.0 million against a $10.0 million minimum.
Only $2.0 million of members' shares may be classified as a financial LIABILITY; the remaining shares up to the $10.0 million floor are effectively subject to the prohibition and classified as EQUITY.
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Partial Equity / Partial Liability Splits
Reassessed at every reporting date
Because a liquidity-based prohibition depends on a figure that moves – such as available regulatory capital or total members' shares outstanding – the SPLIT between the equity and liability portions is reassessed at each reporting date. A change in the amount subject to the prohibition results in a transfer between the liability and equity components, without gain or loss recognition on the transfer itself.
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Reclassification Triggers
Events that move the classification line
Trigger eventEffect
Amendment of the governing charter removing/adding an unconditional refusal rightReclassification between liability and equity from the date of the amendment
Change in the regulatory minimum capital thresholdReassessment of the liability/equity split at the reporting date the change takes effect
Member gives notice of resignation / redemption requestFrom the point the entity has a present obligation it cannot avoid, the corresponding amount is reclassified to liability
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Members' Shares Above a Fixed Amount
Where the charter caps redemption in monetary terms
Some governing charters prohibit redemption of members' shares beyond a specified NUMBER of shares or fixed MONETARY amount. The same logic as Section 5 applies: shares subject to the fixed prohibition are equity, and shares that could still be redeemed (i.e. below the cap) are liabilities.
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Disclosure
What IFRIC 2 layers onto IAS 32/IFRS 7
Basis for classifying members' shares as equity, liability, or split between the two Nature and terms of any redemption restrictions relied upon Amount and terms of any reclassification between components during the period
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Whether a stated refusal right is genuinely unconditional, or effectively conditional in substance Interpreting local co-operative law and regulatory capital requirements
SIGNIFICANT ESTIMATES
Amount of regulatory capital or liquidity headroom available for redemption at each reporting date
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IFRIC 2 vs US GAAP
Comparison – IFRIC 2 vs ASC 480 (Distinguishing Liabilities from Equity)
FeatureIFRIC 2 (IFRS)US GAAP (ASC 480)
Mandatorily/on-demand redeemable sharesLiability by default; equity carve-out availableGenerally classified as a liability, with a narrower set of exceptions
Co-operative-specific guidanceDedicated interpretation (IFRIC 2)No equivalent dedicated interpretation
Reassessment of the equity/liability splitRequired at each reporting date where criteria-basedGenerally reassessed only when triggering events occur
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Statement Mapping
Where every IFRIC 2 event lands
EventStatement(s) affectedNotes
Members' shares classified as liabilitySOFPPresented as a financial liability
Members' shares classified as equityEquityNo subsequent remeasurement through profit or loss
Reassessment of the liability/equity splitSOFP EquityTransfer between components; no gain or loss recognised
Interest/dividend on the liability-classified portionSOPLTreated as a finance cost
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Related Standards
Cross-reference map
StandardConnection
IAS 32Supplies the core liability/equity classification principle
IFRS 7Governs disclosure of the financial risk characteristics
IFRS 9Governs subsequent measurement of the liability-classified portion
Quick-reference glossary
Puttable instrument
A financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset.
Mutual entity
An entity, such as a co-operative, owned by its members/customers rather than by external investors, typically financed substantially through redeemable member capital.
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Glossary
Unconditional right to refuse
A contractual or charter-based right of the entity to decline a redemption request that is not subject to any condition, event, or criterion that could cause the right to lapse.
Liquidity-based prohibition
A restriction on redemption tied to a measurable financial criterion, such as a minimum capital or liquidity ratio.
Puttable instrument
A financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
Nov-2004
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 Committee.
May-2012
Annual Improvements to IFRSs 2009-2011 Cycle
Minor consequential amendment to IFRIC 2
May-2011
IFRS 13 Fair Value Measurement
Minor consequential amendment to IFRIC 2
Nov-2013
IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) and IFRS 9 Financial Instruments
Minor consequential amendment to IFRIC 2