We appreciate the IASB’s efforts to address a specific issue related to the equity classification for derivative contracts on an entity’s own equity. IAS 32 Financial Instruments: Presentation (paragraph 16) provides that a derivative is an equity instrument only if it will be settled by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments (the “fixed for fixed” criterion). We believe that the “fixed for fixed” criterion is a bright line rule that lacks a clear conceptual basis. Additionally, the application of the “fixed for fixed” criterion has caused numerous issues in practice which are not limited to the application of the “fixed-for-fixed” criterion to rights issues with an exercise price denominated in a foreign currency (i.e., not the reporting entity’s functional currency).

As such, we are concerned that the IASB is dealing with rights issues in isolation. Modifying the “fixed for fixed” criterion only for rights issued pro-rata to all existing owners of the same class of equity instruments to acquire a fixed number of an entity’s own equity instruments for a fixed amount of any foreign currency would create inconsistencies with other derivatives that do not meet the “fixed for fixed” criterion when their exercise price or forward price is denominated in a foreign currency.

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