Conceptual framework — Definition of equity and distinction between liabilities and equity instruments
The Staff summarised the main changes since the previous draft:
- description of previous debt / equity approaches was expanded;
- changed the labels of two approaches as ‘narrow equity’ (vs. one-step approach) and ‘pure cash’ (vs. two-step approach); and
- moved examples into the Appendix.
and explained that the objective of the discussion was not to re-debate the draft but to get an overall agreement.
There did not seem to be any major concerns from the Board members; most of the comments related to the wording and structure of the proposed DP.
One of the Board members queried the phrase ‘wealth transfer’ in paragraph 14(c)(iii).
Another Board member suggested include a paragraph explaining the main difference in the outcomes from the two proposed approaches.
Another Board member raised a concern about the labelling for the ‘secondary equity claim’ as it implied that the instrument should be classified as equity.
In terms of structure, one Board member suggested that it might be easier for respondents if the Board’s questions are integrated in the text (vs. a list at the end).
In terms of the proposals’ practical applications, one Board member wondered whether the Board at this stage should start considering which instruments were going to be equity or liability. For example, preference shares with dividend. This was not necessarily something for the Conceptual Framework and would be addressed in the future at the standard’s level, but the DP should start building in the implications. Perhaps include some of the examples back in the DP.
A Board member raised a question about the terminology in paragraph 10 of the agenda paper (10E(a)) that talks about ‘measures of equity instrument’ as equity instruments are not remeasured. It was decided that the best term would be ‘allocations’ (vs. measures).
Another Board member would like to change the new labels for two approaches again: ‘pure cash’ should be replaced with ‘economic resources’ and ‘narrow equity’ with ‘subordinated’.
It was also noted that the structure of Appendixes A and B was difficult to follow; therefore it needed restructuring; some examples will be potentially removed.
The Staff will revisit the paper’s terminology and structure based on the feedback from the discussion.