Financial instruments with characteristics of equity

Date recorded:

Financial Instruments with Characteristics of Equity research project — Agenda paper 5

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

  1. Summary of discussions to date — Agenda paper 5A
  2. Presentation: Derivatives classified as liabilities — Agenda paper 5B
  3. Disclosure — Agenda paper 5C

The Board was 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 July 2016, the Board discussed the application of the Gamma approach to different types of derivatives, and whether derivatives should be split into components for classification.

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 — Presentation: Derivatives classified as liabilities — Agenda paper 5B


In the April 2016 meeting (agenda paper 5A), the Board agreed to the following with regard to the separate presentation of derivatives that are classified as liabilities under the Gamma approach in the statements of financial performance and financial position:

  1. Derivatives whose value is solely dependent on the residual amount but the form of settlement causes them to be classified as liabilities – separate presentation;
  2. Derivatives whose value is completely independent of the residual amount regardless of the form of settlement – do not separately present; and
  3. Derivatives whose value is neither completely independent nor solely dependent on the residual amount of economic resources – to be discussed in the current agenda paper.

Staff analysis

With regard to derivatives whose value is neither completely independent nor solely dependent on the residual amount, the Staff considers two approaches as to how the separate presentation should be made:

  1. Disaggregation approach: income and expenses arising from variables of a derivative that are independent of the residual amount would be presented separately from those arising from variables that represent the residual amount. The portion of income and expenses arising from changes in the residual amount would be separately presented, e.g. in OCI or a subcategory within profit or loss, whereas the balance would be presented as part of the entity’s performance in profit or loss.
  2. All-in or all-out approach: all income and expenses arising from such derivatives will either be separately presented or not be separately presented in their entirety based on the nature of the variable that is independent of the entity, by applying specific criteria. The Staff recommends limiting the all-in or all-out approach to foreign currency risk exposures using criteria that are similar to the assessment of whether an embedded foreign currency derivative is closely related to the host contract as are currently provided in IFRS 9.B4.3.8(d), as they consider that other types of risks are not practical/meaningful in the context of a derivative over own equity instruments.

While the Staff believes that the disaggregation approach is ideal as it shows the portion of income and expenses that is relevant to an entity’s performance in profit or loss while the portion that depends on residual amount is separately presented, it has the following main drawbacks:

  1. Practical difficulty in disaggregating the income and expenses accurately due to the interdependency of the variables that affect the value of derivatives;
  2. Conceptual challenges about what the calculated amounts represent due to the interdependency of the variables. The amounts calculated also depends on the methodology adopted for the computations which detracts from comparability across entities; and
  3. Inconsistency in the unit of account between classification, where a derivative is not split into subcomponents, and presentation.

In contrast, under the all-in or all-out approach, there is no need to disaggregate income and expenses or the carrying amount, therefore the amounts represent the effects of all the variables in the contract including interdependencies. Moreover, this approach is more consistent with the unit of account required by IFRS 9 for presentation when no subcategorization of a derivative is permitted. However, the shortfall with this approach is that changes that do not depend on the residual amount will sometimes be presented separately, albeit that this is mitigated by the stringent definition of the all-in or all-out criteria that allow separate presentation only in limited circumstances. Furthermore, the stringent criteria mean that some income and expenses that do depend on the residual amount will end up being presented in profit or loss should the criteria for separate classification not be met. The Staff also acknowledges that the proposed criteria are rules-based rather than principles-based.

The Staff believes that the all-in or all-out approach achieves the objective of the separate presentation requirement better than the disaggregation approach.

Staff recommendation

The Staff recommends proposing the following in the future Discussion Paper:

  1. to use the all-in or all-out approach with respect to derivatives on own equity that are neither completely independent nor solely dependent on residual amount, limiting the assessment criteria for separate presentation to foreign exchange variability as discussed above; and
  2. to use the Gamma approach to derivatives on own equity. The Staff further asks whether the Board would like to include a preliminary view in the Discussion Paper as to whether the separate presentation requirements will apply within profit or loss (using a subtotal), or in OCI.


The Board approved the Staff’s recommendations, with a preliminary view to include the separate presentation in OCI.

The Board had mixed views regarding the disaggregation and all-in or all-out approaches. Although they were generally inclined towards the all-in or all-out approach, some Board members cautioned against dismissing the disaggregation approach too soon. They asked the Staff to include a balanced analysis of the two approaches in the DP (rather than overplaying its disadvantages as was done in the agenda paper) and to solicit comments from respondents specifically on how they could potentially resolve those challenges. Some Board members also commented that the appropriateness of either approach would also depend on where the separate presentation would be included – if in profit or loss, there would be no major difference between the two approaches; however, the issue would be more prominent if the amount was presented in OCI.

With regard to the criteria for the all-in or all-out approach, a few members asked why foreign currency risk had been singled out as the differentiating criterion. The Staff responded that this was what they had heard from the market and that they would pose further questions in the DP regarding whether there are other variables that should also be considered. As regards the requirement that the foreign currency denomination is ‘imposed by market’, many Board members were concerned about its operation including how that phrase is to be interpreted and the extent of the imposition and economic compulsion. Furthermore, some members challenged the lack of principle underlying why foreign currency exposure imposed by a market should be presented differently from that arising from own choice because the entity is in the same economic position as regards the ultimate foreign currency exposure under both scenarios. The Board members suggested that if this distinction was mapped onto the criteria for separating a foreign currency embedded derivative, then this fact should be stated in the DP together with whether the Staff expected the same outcome under both set of criteria.

As regards the separate presentation in OCI, the Board asked the Staff to explore alternatives on how they could present the amount separately and whether it would be possible to recognise these amounts directly in equity. Using the all-in or all-out approach necessarily meant that there would be amounts sitting in OCI or profit or loss that did not belong there. If the amounts were to be included in profit or loss, some Board members noted that users would require a solution that is more radical than merely presenting the amount as a separate line item which would ultimately affect the bottom line. The Staff agreed but was reluctant to introduce a new subtotal as they did not want to venture into the issue of performance reporting. The Board also discussed whether there should be recycling of the amount recognised in OCI – as the amount arose from a debt transaction, some members believed that the amount should ultimately affect profit or loss.

Financial Instruments with Characteristics of Equity research project — Disclosure — Agenda paper 5C


This paper explores how disclosures might complement the Gamma approach and how to align disclosures of equity more closely with those of liabilities—IFRS has only limited disclosure requirements for equity instruments. The objective is not to simply add more disclosure, but to see whether and how existing disclosure requirements can be made more effective by removing, modifying or adding requirements.

Staff analysis

Disclosures to address information needs not met through classification and presentation

Priority of claims – the Staff noted that neither the classification nor presentation requirement provides information about the priority feature of claims, which IFRS does not currently require. This was identified as one of users’ information needs, to help assess how any potential shortfall, or excess, of economic resources, and returns on those economic resources, will be distributed amongst claims. The Staff believes that the proposed disclosure would provide information on entire financial instruments (as opposed to having information only in their bifurcated state), and that such disclosure could apply equally to liabilities and equity instruments, giving users the same information regardless of the classification of the instrument, thereby raising the quality of equity disclosures.

Potential dilution – for the purpose of the paper, the Staff defined dilution as any actual or potential increase in the number of issued ordinary shares, which is different from the IAS 33 definition. Research indicated that users want to know the extent to which ordinary shares have been, or will be, diluted by the issuance of additional ordinary shares. Such information is not required by current IFRS, for example in IAS 33 there is no disclosure around the total number of ordinary shares outstanding or potentially outstanding at the end of the period; and it does not require any specific disclosure about how many ordinary shares could potentially be issued if out-of-the-money instruments (which are excluded from diluted earnings per share as they are antidilutive) become in-the-money. The Staff believes that the proposed disclosure would help users assess the distribution of returns amongst claims against the entity. The Staff believes that this additional disclosure would impose little additional cost on preparers, because most of the relevant information is already required to calculate earnings per share and would be required for the classification and presentation requirements under Gamma.

Disclosures to improve users’ understanding of the information communicated through classification and presentation

In respect of derivative equity claims, the Staff believes that additional information could be provided on their fair value measurement as well as reasons for the change in fair value in order to help users understand the attribution of amounts to such claims. Currently such information is not required to be disclosed for equity instruments. As regards liabilities, the Staff believes that new disclosure about the terms and conditions that are relevant to determining the settlement amount of the liability, in particular for exposures to the entity’s ordinary share price, would meet the users’ needs previously identified.

Staff recommendation

The staff recommends including a discussion of the following potential disclosures in the future Discussion Paper, as well as the relationship between existing disclosures and the potential disclosures:

  1. the priority of claims on liquidation;
  2. potential dilution of ordinary shares; and
  3. additional information to support the presentation and classification requirements under the Gamma approach for equity instruments and financial liabilities.


The Board approved the Staff’s recommendations.

The discussion centred on the extent of disclosures needed. In respect of the proposed disclosure on priority, the Board asked the Staff to set an objective for the capitalisation table (table 1 in the agenda paper) which would then drive the focus on whether the figures disclosed should be fair value, carrying amount, amounts claimed, or other values. The Staff agreed to explore these items in the DP.

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