Liabilities and Equity
This project is part of the Memorandum of Understanding between the FASB and the IASB. On 30 November 2007, the FASB published for comment a preliminary views document. The document can be downloaded from the FASB's Website.
This session was split in two parts:
- The Board's strategy for the project
- An education session conducted by FASB staff members on the preliminary views document issued by the FASB
The staff informed the Board that it plans to present a comprehensive analysis of the differences between the FASB's preliminary views and the current approach under IFRSs as set out in IAS 32 at the Board meeting in January or February (including a draft IASB Discussion Paper (DP) inviting comment on FASB's preliminary views). Staff noted that if the Board does issue amendments to IAS 32 regarding instruments puttable at fair value, that would be included in the analysis. The focus will be on the 'basic ownership' and 'ownership-settlement' approaches. The next step would be the publication of the IASB DP in March 2008. The DP would incorporate FASB's preliminary views document, possibly with additional material or questions, and invite public comments.
The Board agreed to the proposed schedule.
This was an education session and accordingly no decisions were made. The full presentation can be downloaded from the IASB's Website (Agenda Paper 4B).
The main topics of the presentation were:
- The FASB's preference is a basic ownership approach. A basic ownership instrument is the most subordinate class of claims that provides for a share of the assets after all other claims are satisfied - settlement would not be relevant for classification. In this approach (like in the other approaches) equity is defined first - liabilities are the residual. The FASB staff highlighted the reduction of accounting arbitrage opportunities and its simplicity as the main advantages of this approach. Additionally, substance and linkage tests would be reduced. The major disadvantages are the greater impact on the income statement and the changes in accounting for convertible debt (especially compared to the current IAS 32 model) and stock options.
- The ownership-settlement approach seems less favourable, but still a feasible approach.
- The reassessed expected outcomes approach was found to be complex and hard to communicate to constituents. The FASB staff made clear that they would prefer not to analyse this approach any further as none of the FASB members voted in favour of it.
The Board discussed some types of instruments, especially those with put features, in the light of the previous discussions it had on the proposed puttable instruments amendments to IAS 32. Also, it discussed some types of preference shares. The FASB staff noted that the preliminary views document is not supposed to be close to a standard but more a discussion of the broader principles from which a standard could be developed.
One participant mentioned the possible impact of the equity definition on distributable profits if distributable profits are based on equity as measured in accordance with IFRSs.
Some Board members raised concerns that the proposed approach to distinguish liabilities and equity will not be in line with the current IASB Framework and asked if the FASB and IASB staff are communicating with the Framework's project team. It was noted that staff must ensure that both projects are aligned so that the liabilities/equity project does not present outcomes that contradict the results from the Framework project.