Financial instruments with characteristics of equity

Date recorded:

The purpose of this session is to continue discussions on the Financial Instruments with Characteristics of Equity (FICE) project. The staff will present the following agenda papers:

  • (a) Summary of discussions to date- Agenda paper 5A
  • (b) Exception in Paragraphs 16A – 16D of IAS 32 – Agenda paper 5B

The Board will be asked to comment on the staff analysis and their recommendations.

Financial Instruments with Characteristics of Equity research project - Summary of discussions to date - Agenda paper 5A


The research phase of this project involves evaluating potential ways to improve the classification of liabilities and equity, and the related presentation and disclosure requirements.

The Board has explored the features to distinguish liabilities and equity: (i) the type of economic resources required to settle the claim; (ii) the timing of the transfer; (iii) the amount required to be transferred; and (iv) the priority of the claim relative to other claims.

The Board has been developing an approach (labelled Gamma, see discussion in February 2016), which distinguishes claims based on a combination of these features and would lead to outcomes broadly aligned with IAS 32. In October 2016, the Board tentatively decided that economic incentives that might influence the issuer's decision to exercise its rights should not be considered when classifying a claim as either a liability or equity.

Appendix A summarises three approaches and Appendix B summarises classification outcomes for some simple instruments under the proposed approaches.

Financial Instruments with Characteristics of Equity research project - Exception in Paragraphs 16A – 16D of IAS 32 - Agenda paper 5B


This paper considers whether the exceptions set out in IAS 32.16A and 16B (as well as 16C and 16D) (the ‘Puttables Exception’) should be retained given the classification and presentation requirements of the Gamma approach.

Staff analysis

Alternative 1 – Removing the Puttables Exception

Under the Gamma approach, a claim will be classified as a liability if (i) it requires an entity to transfer economic resources at particular points in time other than at liquidation, (ii) for an amount that is not solely dependent on the residual amount. Accordingly, puttable instruments covered by IAS 32.16A and 16B would meet the definition of a liability under the Gamma approach because they can be put back to the issuing entity for economic resources at any time before liquidation. Furthermore, such instruments might not qualify for separate presentation under Gamma because IAS 32.16A(e) only requires the settlement amount of such instruments to have a substantial dependency on the key drivers of residual amount, whereas Gamma requires sole dependence on the residual amount for separate presentation.

The Staff further notes that the Gamma approach will address only some, but not all, of the concerns that led to the Puttables Exception in the first place.

The above analysis would apply equally to instruments covered by IAS 32.16C and 16D.

Alternative 2 – Retaining the Puttables Exception

Retaining the Puttables Exception would arguably address the concerns that led to their development in the first place. In addition, the Staff suggests keeping the related disclosure requirements in IAS 1.136A which address some of the shortcomings of the Puttables Exception, as well as to extend the IAS 1 disclosure requirements to instruments covered by IAS 32.16C and 16D.

Staff recommendation

The Staff intends to ask the Board whether it has any preference for retaining or removing the Puttables Exception. The Staff further recommends that the planned Discussion Paper ask the stakeholders about the prevalence of the application of the Puttables Exception in practice.

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