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Financial instruments with characteristics of equity

Date recorded:

Attribution of profit or loss and other comprehensive income to derivative equity claims — Agenda paper 5

Recap

The Board considered in April 2016 potential approaches to the attribution of profit or loss and other comprehensive income to classes of equity claims other than ordinary shares. See Agenda Paper 5B of April 2016 for detailed background information. At that meeting the Board agreed to use the requirements in IAS 33 Earnings per Share for the attribution for non-derivative equity claims.

In April, the Board also discussed three approaches for derivative equity claims:

Approach A — No attribution for derivatives: Continue to provide information about the effect of derivative equity claims through diluted earnings per share and other disclosures.

Approach B — Full fair value approach: Attribute total profit or loss and other comprehensive income to derivatives based on changes in their fair value. Concerns were raised that this approach amplifies the consequences of partial recognition and mixed measurement.

Approach C — Modified fair value approach: Attribute total profit or loss and other comprehensive income to derivatives based on changes in the relative fair values of derivatives to ordinary shares.

The Board suggested an alternative way to calculate the attribution for derivatives and asked the staff to assess that approach along with those noted above, and recommend how to narrow the set of alternatives.   

In this meeting, the Board will continue those discussions and is being asked to give a preliminary view on which proposals to develop further.   

Staff analysis

The modified fair value approach (Approach C) analysed by the staff in April 2016 is based on period-end amounts. The staff was asked to consider the implications of using average relative fair value during the period of attribution. An example of this approach is presented as Approach D in this agenda paper.

The staff considers that approaches C and D alleviate the amplification of the consequences of partial recognition and mixed measurement inherent in the full fair value approach (Approach B).  However, approach C would be more costly to apply than Approach B. Approach C would provide new information that would supplement the diluted earnings per share calculation. However it would be difficult to justify the costs of calculating both the Approach D attribution and the diluted earnings per share given that they are very similar.

If the Board does not support approaches C or D, those approaches should not be discussed in detail in the Discussion Paper.

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