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IFRIC 2 – Members’ Shares in Co-operative Entities and Similar Instruments

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Scope of IFRIC 2

This Interpretation and its requirements are basically applicable to all the financial instruments that fall within the scope of IAS 32, and also to all the financial instruments that are issued by the co-operative entity to its members, which basically reflects the ownership share of the members in the legal entity. However, the Interpretation and its requirements cannot be applied with regards to the financial instruments that will or that may be settled in the entity’s own equity instruments.


Many of the financial instruments, also including the shares of the members, possess the characteristics of equity and include rights like right to vote and to participate in event of distribution of dividends. Some of these instruments also provide its holders with the right to request redemption with regard to the instrument it holds either for cash or for another instrument of the same kind, but it may include or be subject to certain kinds of restrictions with regards to its redemption. The Interpretation basically provides guidance about how the terms of redemption with regards to these instruments should be assessed, so that to decide on whether to classify these instruments as part of equity or liabilities.


1. The right to redeem the financial instruments and also similar kind of instruments, possessed by the holder of these kind of instruments, solely on its own does not necessarily a financial instrument to be constituted and be classified as a financial liability. The entity should also take into consideration of all the relevant terms and conditions with regards to determining whether a financial instrument should be classified as part of equity or financial liability. The terms and conditions basically include relevant local laws and regulations and the governing charter relating to the entity that is in work at the date of classification of the instruments, but does not include the amendments with regard to these laws and regulations and the entity’s charter in the future.

2. The stake of a Member in a Co-operative entity or in any similar kind of entity would be considered as part of equity if members does not have an option to request for redemption are equity if either one of the conditions mentioned in the paragraphs 3 and 4 exists or the member’s shares possesses all of the features and meets all the conditions mentioned in 16A and 16B paragraphs or in 16C and 16D paragraphs of IAS 32. Current accounts, demand deposits, also including deposit accounts and similar type of contracts which basically arises when members act as customers, then in that scenario the contracts are treated as financial liability by the entity.

3. Shares of Members will be classified and treated as equity if the entity is empowered with an unconditional right to refuse the request of the member with regards to the redemption of its shares.

4. The local laws and regulations or entity’s charter of governance can enforce different types of prohibitions with regards to the redemption rights attached with the members’ shares. If prohibition which is of unconditional nature enforced either by the local laws and regulations or the entity’s charter of governance and is attached with the redemption rights associated with the shares of the members then in that case those shares will be categorized as equity. If the local laws and regulations or entity’s charter of governance prohibits the members to redeem its shares only if the liquidity criteria is met then in that case these shares will not be recognized as equity.

5. If a prohibition of unconditional nature is absolute, then that means that all kinds of redemption rights are prohibited. If an unconditional prohibition is not absolute but partial, then in that case only the redemption of the members’ shares are prohibited if the redemption would lead to a decrease in either the number of the shares or the amount of paid-in capital from the shares to fall beyond a specified level. All of the members’ shares that are above the level of prohibition against redemption will be classified by the entity as liabilities unless and until the entity possesses an unconditional right to reject redemption as described above in paragraph 3 or the shares which the members hold possesses the features and fulfills all the conditions mentioned in the paragraphs 16A & 16B or 16C & 16D of IAS 32.

6. In some situations, the number of shares members hold or the amount with respect to the paid-in capital which is subject to a prohibition in relation to its redemption may change with the passage of time. A change or variation like this with regards to prohibition in relation to the redemption rights will lead to a transfer to be taken place between equity and a financial liability.

7. The entity’s financial liability with regards to instruments that can be redeemed should initially be measured at fair value. With regards to the members’ shares that possess the feature of redemption, the fair value of the financial liability with reference to these types of shares will be measured at the maximum amount the entity can pay as per the provisions relating to redemption mentioned in either the entity’s governing charter or relevant laws and regulations applicable to the entity.

8. As per IAS 32 the distributions made to the equity instrument holders are recognized directly as equity. Dividends, Interest and all the other returns related to financial instruments that are categorized as financial liabilities will all be treated as expenses.


When a variation in prohibition with regards to redemption, results in a transfer to be take place among a financial liability and equity, then the entity is required to separately the amount of transfer, the time at which transfer took place and the reason behind the transfer.

Effective date

a) This interpretation shall be applied to accounting periods starting from or after January 1, 2005.
b) If any entity wants to apply the Interpretation to an accounting period starting before 1 January 2005, then in that case the entity shall disclose this fact.
c) The Interpretation and its requirements should retrospectively be applied.
d) Amendments due to the issuance of IFRS 9 in October 2009.
e) Amendments due to the issuance of IFRS 13 in May 2011.

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