Share capital issued to the government for promissory notes

Governments often capitalise a new DFI by subscribing for its full share capital on day one and settling it with promissory notes or capital commitment letters that the DFI draws as it needs cash over several years. The legal share capital may be SAR 3 billion while cash received is SAR 600 million. Whether the undrawn notes are presented as a financial asset or deducted from equity changes total assets and equity by billions, and with them leverage, capital adequacy and covenant ratios, and the DFI's apparent capacity to lend. IFRS has no paragraph that addresses this case directly, practice differs, and the answer depends heavily on the legal terms of the notes, so the policy must be reasoned, documented and consistently applied.

Are the shares legally issued and fully subscribed, with full voting and dividend rights, or only authorised and subscribed but unpaid? Is the note an unconditional, enforceable obligation of the government to pay fixed amounts on fixed or determinable dates, or does payment depend on future budget appropriations, ministerial approval or the DFI's own call at its discretion? Can the government defer or cancel drawdowns, and has it done so in the past? Is the note transferable or usable as collateral by the DFI? Does company law or the DFI's charter treat unpaid capital as a receivable or as uncalled capital? Is the note interest-bearing, and if not, is the drawdown period long enough for discounting to be material? How do the regulator and rating agencies treat undrawn capital?

1. Establish the legal facts: shares issued, rights attached, terms of the note or commitment, enforceability and any conditions on payment.
2. View A (deduction from equity): present the subscribed share capital in full and deduct the undrawn note as 'share capital not yet paid' within equity, so that equity increases only as cash is received; this reflects that the DFI has not yet received resources and that a claim on the owner for its own contribution is not an economic resource independent of the owner's decision.
3. View B (financial asset): if the note is an unconditional, enforceable contractual right to receive cash from the government on fixed or determinable dates, recognise it as a financial asset within IFRS 9 at fair value, with a corresponding credit to share capital (and any discount on a non-interest-bearing note reflected in the amount credited to equity), and measure it at amortised cost with an ECL assessment.
4. Where payment is conditional on future budget appropriations or the government's discretion, treat the undrawn amount as uncalled capital: recognise neither an asset nor equity for it, and disclose it.
5. Apply the chosen view consistently and recognise each drawdown as a cash receipt against the note or as an increase in paid-up capital.
6. Reflect the share issue for a note as a non-cash transaction in the statement of cash flows, and present cash drawdowns as financing inflows.

Under View A no measurement of the note is needed; equity is net of the undrawn amount. Under View B the note is measured initially at fair value: for a non-interest-bearing note drawn over several years, the present value of expected drawdowns at a rate appropriate to the government's credit risk and the currency, so equity is credited with less than the nominal capital; the discount then unwinds as interest income, and an ECL allowance is assessed (often small for a sovereign in its own currency, but not automatically nil). Under either view, drawdowns are measured at the cash received.

Disclose: (1) the accounting policy and the judgment made, including why the chosen view reflects the legal terms; (2) authorised, issued, subscribed and paid-up share capital, and the undrawn amount; (3) the terms of the promissory notes or commitments, including the drawdown schedule, conditions and whether the government can defer drawdowns; (4) movements in the note or in paid-up capital during the period; (5) the non-cash nature of the share issue in the statement of cash flows; (6) the government as parent and ultimate controlling party and the related balances; (7) capital management disclosures explaining how undrawn capital is treated in internal and regulatory capital measures.

• Recognising the full note as an asset without analysing whether the government's payment is unconditional
• deducting it from equity in one year and presenting it as an asset in the next without a change in terms
• presenting a non-interest-bearing multi-year note at its nominal amount
• showing the share issue as a cash inflow in the statement of cash flows
• treating capital received in later years as revenue or a government grant
• assuming the regulator's capital treatment determines the IFRS presentation
• not disclosing the undrawn amount and drawdown conditions at all