Fixed-for-fixed test – Financial Reporting Module 6

Fixed for fixed test

As we head towards the business end of the CPA semester, there are some niggling questions which our KnowledgEquity students come up against time and time again. In Module 6: Financial Instruments (from Financial Reporting)  we encounter the fixed-for-fixed test. What does it mean? How does it work?

A fixed-for-fixed test considers options which allows an entity to settle a financial asset or liability with the entity’s own shares. It is basically a ‘share-based payment’ as you would cover in Module 1 but IFRS 2 does not apply because this is a financial instrument and so it would be scoped into IFRS 9.


For example, if Entity A has a financial liability of $20,000 and there is an agreement to settle this with 100 shares in the Entity A, then this is fixed.
The financial liability dollar amount is fixed (i.e. $20,000) and the settlement of this would be a fixed number of shares (100).
Thus, it would pass the fixed-for-fixed test.

What if?

If the agreement stipulates that Entity A will settle the $20,000 financial liability with a varying number of shares, so that the FV of the shares issued upon settlement is $20,000.
This example would fail the fixed-for-fixed test.
If the FV of the shares increase, then there would be less shares issued when the financial liability is settled.
If the FV of the shares decrease, the entity would need to issue more shares to settle the $20,000 liability.
In this example, the liability amount is fixed (i.e. $20,000) but the number of shares that would need to be issued to settle that liability would vary depending on the FV of the shares upon settlement.
So, the fixed-for-fixed test would fail.

It is important to note that the fixed-for-fixed test looks at the QUANTITY of the shares and not the price of the shares. It compares this with the DOLLAR amount of the financial asset or liability.
It is not comparing the dollar of the shares against the dollar of the financial asset or liability. Rather it is the quantity of shares against the dollar value of financial asset or liability.

Even though the price of the shares may vary, if the number of the equity instruments issued is fixed and the financial liability or financial asset dollar amount is fixed, the fixed-for-fixed test would be satisfied.


Theashen Vandiar with nameTo learn more and get access to support resources for your CPA, check out KnowledgEquity’s Financial Reporting Support for your CPA courses. You can try our CPA Assist for Financial Reporting which includes 10 hours of free content, there are short explanatory videos, module quizzes, webinars and flowcharts to help you embed your knowledge and be able to understand the subject. Plus in our paid courses, you can access all the resources, including practice exams (marked) and an exam preparation webinar – learn more here, Financial Reporting courses. Once you have concepts like these embedded in your knowledge data bank, you will be ready to take on your CPA exam!

Theashen Vandiar






April 11, 2017

3 responses on "Fixed-for-fixed test - Financial Reporting Module 6"

  1. Looks good, can I suggest that another sentence explaining the implications of the test on whether these arrangements are seen either as a liability or equity would be great? Thanks Greg.

  2. Thanks Greg 🙂
    Yes, that is a good suggestion. It links to the blog on classification of redeemable preference shares (i.e. who is actually carrying the risks and rewards…what is the substance of the transaction/instrument)

  3. Thanks Theashen, helpful as always!

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