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Financial instruments with characteristics of equity

Date recorded:

Identifying the challenges and setting out an approach

The Technical Manager introduced the agenda paper, explaining that the current project objective is to assist the Board in deciding whether this research project should be added to the IASB’s standard-setting agenda. The agenda paper analysed the IASB agenda criteria and how this project met those. The agenda paper preliminarily examined the scope of the project (i.e., types of transactions, jurisdictions, prevalence). It also considered how issues could be addressed. The analysis was based on two instruments that had been identified as challenging by the IFRS Interpretations Committee.

One Board member highlighted two issues with the agenda papers. The first issue was that the last paragraph of the accompanying agenda paper (Agenda Paper 5B) could be read in a way that suggested the elimination of IAS 32 without replacement as a potential, albeit unlikely, outcome. He expressed strong concerns about this wording. The second issue was that the limitations of IAS 32 needed to be considered, especially the fact that IAS 32 had a binary distinction. On that issue, he proposed considering the introduction of a third category, between equity and liability. Furthermore, he proposed considering including probability as a factor in the debt/equity distinction.

The Technical Manager replied that the staff had suggested amending or replacing IAS 32 but had not considered eliminating the Standard without replacement. On the other issue, he said that it would be challenging to define several classes of equity.

One Board member did not believe that a radical change was necessary. She agreed that there were issues that needed to be addressed but she did not see the need for new concepts. She said that often IAS 32 was clear as to the accounting treatment but constituents had issues with the consequences.

A Board member said that the key issue was to have a measurable and presentable item in a subcategory of equity. The Vice-Chairman said that the Discussion Paper (DP) on the Conceptual Framework had suggested several categories of equity. He believed this approach might be worth pursuing.

One Board member said that the issue with the 2008 DP on financial instruments with characteristics of equity was that it had focused on classification (i.e., it was balance sheet focused).

A Board member said that the agenda paper was very helpful in showing constituents that the project addressed certain issues rather than starting from the beginning. She said that to her the key issue was the friction between the Conceptual Framework and IAS 32 and that this should be addressed.

A fellow Board member suggested focusing on information needs of stakeholders.

One Board member asked whether the project would be linked to the research project on performance reporting. The Technical Manager acknowledged the interaction of the projects and said that they would be linked to a certain extent.

The Chairman concluded that the Board agreed with the current direction of the project.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.