Amendments to Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement

In 2018, new accounting standards for private enterprises (ASPE) were issued under Section 3856 Financial Instruments relating to the classification and measurement of retractable or mandatorily redeemable shares (ROMRS) issued in a tax planning arrangement.

These amendments are effective for fiscal years beginning on or after January 1, 2021.

What does this mean?

The amendments impact how and if ROMRS issued in a tax planning arrangement can be classified as equity. This change could lead to significant changes to liabilities and equity on the financial statements and impact financial ratios and/or covenants.  We recommend reviewing the status of your ROMRS as soon as possible and consider whether you will need to renegotiate covenants with your lenders.

ROMRS must be classified a financial liability and presented separately on the balance sheet at their redemption amount unless all of the following conditions are met:

• The shareholder(s) receiving the ROMRS retain(s) control of the enterprise;
• The enterprise only exchanges of one class of share(s) for another class(es) of shares; and
• There is no redemption arrangement.

Upon adoption of this amendment, for any ROMRS to be classified as liability, the resulting adjustment will be recognized in either retained earnings or as a separate component of equity (ASPE section 3251).

Private businesses with ROMRS that meet the conditions listed above can opt to treat them as a financial liability.  However, once ROMRS are classified as a financial liability, they cannot be subsequently reclassified to equity.

If you have any questions or need further information, please feel free to reach out to the Fuller Landau team.