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Discussion Paper on how to define equity instruments

Feb 28, 2008

The IASB has published for comment a Discussion Paper (DP) on financial instruments with characteristics of equity.

The DP has two parts – an Invitation to Comment and, as a separate document, the FASB's November 2007 Preliminary Views Financial Instruments with Characteristics of Equity. The IASB's Invitation to Comment includes background information and invites responses to the questions already included in the FASB document and to a number of additional questions raised by the IASB. IAS 32 is the current IASB standard that addresses the distinction between liabilities and equity.
The DP notes two broad types of problems with IAS 32 – uncertainties on how the principles in IAS 32 should be applied and, perhaps more significantly, whether application of those principles results in an appropriate distinction between equity instruments and non-equity instruments.

The FASB document describes three approaches to distinguish equity instruments and non-equity instruments – basic ownership, ownership-settlement, and reassessed expected outcomes. The FASB has reached a preliminary view that the basic ownership approach is the appropriate approach for determining which instruments should be classified as equity. The IASB has not deliberated any of the three approaches, or any other approaches, to distinguishing equity instruments and non-equity, and does not have a preliminary view.

The IASB's DP describes some implications of the three approaches in the FASB document for IFRSs. For instance:
  • Significantly fewer instruments would be classified as equity under the basic ownership approach than under IAS 32.
  • The ownership-settlement approach would be broadly consistent with the classifications achieved in IAS 32. However, under the ownership-settlement approach, more instruments would be separated into components and fewer derivative instruments would be classified as equity.
The goal of the Discussion Paper is to solicit views on whether FASB's proposals are a suitable starting point for the IASB's deliberations. If the project is added to the IASB's active agenda (it's currently on the research agenda), the IASB intends to undertake it jointly with the FASB. The IASB requests responses to the DP by 5 September 2008. Click for Press Release PDF 52k).