Overview
The Accounting Standards Board (AcSB) has revised the reporting standards in regards
to the classification of retractable or mandatorily redeemable shares (ROMRS) issued in a tax
planning arrangement. These amendments were made to Section 3856 Financial Instruments,
which essentially require that most of these ROMRS to be reclassified from equity to liabilities
and recognized at their redemption amount effective for fiscal years beginning on or after
January 1, 2021.  As a result, this reclassification may be associated with significant changes to balance sheet items and which may significantly affect your company’s financial position.

What are Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement?

Retractable or mandatorily redeemable shares (ROMRS) normally hold the following
properties:

• Holder of the shares can redeem the shares at their discretion at a price equal to the fair
• market value of the common shares exchanged
• Shares have voting rights on all matters associated with modifying attributes related to
• those shares
• No share transfer restrictions
• Shares have priority on distribution and liquidation
• Shares issued in relation to a tax planning arrangement

Exceptions to Classification as a Liability
Similar to most regulations, these new standards also have a few exceptions. For ROMRS to continue to be classified as equity, all of the following criteria must be satisfied:
    1. Retention of control of the enterprise
    2. No other consideration besides shares exchanged
    3. No formal redemption arrangement in place

If the above conditions are not met, then the ROMRS must be classified as a liability at the full
redemption value.

Presentation and Disclosure of ROMRS Classified as Equity
For ROMRS that are eligible to be classified as equity, these shares are presented at par,
stated, or assigned value and are presented separately on the equity section of the balance
sheet. In addition, the following information must be disclosed:

• The total redemption value for each class of ROMRS
• Description of details that gave rise to the ROMRS
• Aggregate redemption value for all classes of ROMRS outstanding on the statement of   financial position

Presentation and Disclosure of ROMRS Classified as a Liability
For ROMRS that are classified as a liability, they are presented as a separate component on the balance sheet apart from any other liabilities. Normally, ROMRS are classified as current liabilities unless any alternative arrangements state otherwise, which may require these shares to be classified as long-term liabilities. Moreover, the following disclosures are required:

• Description of details that gave rise to the ROMRS
• when the effect of classifying the ROMRS as a financial liability is recorded as a separate component of equity, the fact that the balance of the separate component of equity will be charged to retained earnings when the shares are redeemed
• when the effect of classifying the ROMRS as a financial liability is recorded in retained earnings, the value charged to retained earnings for all classes of shares is disclosed on the face of the statement of financial position

Reclassification of ROMRS from Equity to Liability
If it is required for your company to reclassify ROMRS as a liability, there are two
options to do so:
    1. Apply at the beginning of the earliest period presented
    2. Apply at the beginning of the fiscal year in which the amendments are first applied

Impact of the New Reporting Standards
The new amendments to the reporting requirements for ROMRS may have concerning
impacts to your company’s financial position. The most prominent impact is the change to
financial ratios as a result of the changes in presentation of balance sheet items, which may
affect debt covenants or banking agreements. Therefore, it is critical that you speak with your
accountant to obtain the most accurate and updated advice to obtain a comprehensive
understanding of how these changes may impact your company.