Puttable instrument

A puttable instrument is a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder.


It should be noted that this definition does not capture instruments that are mandatorily redeemable on a set date or instruments that are redeemable on an event that is certain to happen. Examples of instruments that do and do not meet the definition of a puttable instrument:

Puttable instruments

Not puttable instruments

Instruments giving holder option to redeem

Instruments with a mandatory fixed redemption date

Instruments automatically put back to the issuer on

  • occurrence of an uncertain future event (e.g. change of control)
  • death of the holder
  • retirement of the holder

Instruments giving the issuer an option to redeem

Instruments redeemable on an event that is certain to happen

The conditions which must be met to achieve equity classification can be briefly summarised as follows (explanations in italics):

  1. the instrument entitles the holder to a pro-rata share of the entity’s net assets on liquidation. The rationale which underpins this condition is that an entitlement to a pro-rata share of the entity’s residual assets on liquidation is consistent with having a residual interest in the assets of an entity. If the holder of an instrument is not entitled to a pro-rata share of the residual assets (ie those assets that remain after all claims have been deducted) on liquidation then the condition is not met and it will not be possible to classify the instrument as equity.

  2. the instrument is part of a class of instruments that is subordinate to all other classes of instruments. Example: An investment fund has two classes of shares in issue: 1. A shares that are puttable instruments and 2. B shares which meet the normal criteria for equity classification. On liquidation, the A shareholders have a preferential right to the first CU 100,000 of residual assets and the B shareholders have a right to the remaining residual assets. The A shares cannot be classified as equity under the Amendments as they have priority over other claims to the assets of the entity on liquidation.

  3. all financial instruments in this most subordinate class have identical features. To apply this condition, an entity must first of all determine what is the most subordinate class of instruments. For this purpose the most subordinate class of instruments may consist of what are considered to be two or more separate types of instrument for company secretarial purposes.

  4. apart from the put feature, the instrument must not include any other contractual obligation to deliver cash or another financial asset to another entity. The requirement that a puttable instrument contains no other contractual obligation to deliver cash or another financial asset means that it will not be possible for an instrument containing another liability element in addition to the put feature to be classified as equity.

  5. the total expected cash flows attributable to the instrument over the life of the instrument are based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity over the life of the instrument. The cash flows attributable to an instrument include:
    1. the proceeds from the issue of the instrument,
    2. returns on the instrument during its life (for example dividend payments) and
    3. the amount payable by the entity upon the instrument holder putting the instrument back to the entity.

    The condition requires that the cash flows are substantially based on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity.

  6. the issuer must have no other financial instrument or contract that has

    1. total cash flows based substantially on the profit or loss, the change in the recognised net assets or the change in the fair value of the recognised and unrecognised net assets of the entity (excluding any effects of such instrument or contract) and

    2. the effect of substantially restricting or fixing the residual return to the puttable instrument holders.

      For the purposes of applying this condition, only the cash flows and the contractual terms and conditions of the instrument that relate to the instrument holder as an owner of the entity are considered. Non-financial contracts with the holder of the instrument that may arise where the holder of the instrument is, say, also an employee of the entity should be ignored (provided the cash flows and contractual terms of the transaction are similar to those of an equivalent contract that might occur between a non-instrument holder and the issuing entity).

Puttable instrument

General model of measurement of insurance contracts

Puttable instrument      Puttable instrument

Puttable instrument Puttable instrument  Puttable instrument  Puttable instrument  Puttable instrument

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