Financial instruments with characteristics of equity

Date recorded:

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

This session marked the end of the technical deliberations of the Financial Instruments with Characteristics of Equity (FICE) project. The staff presented the following agenda papers:

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 February 2017, the Board tentatively decided to limit the equity/liability classification assessment to a consideration of the contractual terms of the financial instrument consistently with IAS 32 (i.e. non-contractual terms, e.g. legal and regulatory requirements, would not be considered in the classification assessment).

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 - Application of the Gamma approach to derivatives on ‘own equity’ – derivatives in foreign currency - Agenda paper 5B


This was a follow-up of the questions raised by the Board in its December 2016 meeting with regard to the classification of derivatives over own equity in a group scenario where the functional currency of the parent differs from that of the subsidiary. The Staff analysed two scenarios in this paper:

  1. A subsidiary issues a derivative on its own equity in its functional currency that is classified as equity in its own financial statements. Does the classification change on consolidation when the functional currency of the parent differs from that of the subsidiary?
  2. If one entity in a group (e.g. a parent) issues a derivative on equity instruments of another group entity (e.g. a subsidiary), then which entity’s functional currency should be the reference point in determining whether the derivative is denominated in a foreign currency for the purposes of classification in the consolidated financial statements?

Staff analysis

The Staff believed that the relevant functional currency is the functional currency of the entity whose equity instruments are being delivered for the purposes of classification in the consolidated financial statements (note that the analysis is based on the receipt of cash for the delivery of equity instruments, but it also applies to the opposite scenario). The Staff reasoned as follows:

  • The value of a derivative is the net of two amounts – the receivable leg (the cash/financial assets receivable) and the payable leg (the equity instruments to be delivered).
  • Under the Gamma approach, one of the criteria for classifying derivatives on own equity instruments as equity is that the value of the derivative must depend solely on the residual amount of the entity – this being the entity that will be issuing the equity instruments as they represent a claim on the residual amount of that specific entity.
  • Since the residual amount of an entity is measured in the functional currency of that entity, the cash receivable must also be in that same currency for the derivative to be solely dependent on the residual amount and not be subject to foreign currency fluctuations.

The above answers question 2. Applying this logic consistently to question 1, the Staff believed that the debt/equity classification would not change on consolidation regardless of the functional or presentation currency of the parent.


All Board members agreed with the Staff’s analysis.

One member asked the Staff to remove the reference to presentation currency as that has no relation to the functional currency and confuses the discussion. She also suggested more linkage between the functional currency, the primary economic environment and the entity’s residual value to strengthen the analysis.

Another member asked how the proposed attribution of profit or loss and OCI to equity derivative instruments would affect whether the translation difference is recognised in P/L or OCI. The Staff responded that the translation would not be affected and where the translation difference is recognised would simply follow the existing guidance in IAS 21.

Another Board member agreed with the Staff’s technical analysis but struggled with its interaction with the group being viewed as a single reporting entity and how to justify the change in classification of the instrument upon consolidation.

Financial Instruments with Characteristics of Equity research project - Summary of interactions with other IFRS Standards – Agenda paper 5C

Background and Staff analysis

This paper discussed the potential implications of the Gamma approach on other Standards and research projects. The major implications identified by the Staff were as follows:

  • The revised Conceptual Framework (CF). The most significant difference between the Gamma approach and the CF is that the former considers one additional feature for equity/liability classification purposes: whether the amount of the claim is independent of the entity’s economic resources. The CF also requires reclassification of OCI to P/L if this enhances the relevance or faithful representation of the information in the statement of profit or loss; however, the Gamma approach proposes no recycling of amounts recorded in OCI arising from the separate presentation of income and expenses that depend on the residual amount on the basis that this provides more relevant information.
  • IFRS 2, with regard to the classification of share-based payment transactions as equity-settled or cash-settled, as the distinction between equity and liability in IFRS 2 is consistent with that in the revised CF. Furthermore, the Gamma approach’s proposed attribution of total P/L and OCI to derivatives classified as equity (see AP 5C to the February 2017 Board meeting for illustrative examples) may be considered applicable to equity-settled share-based payments.
  • IAS 33. The biggest impact comes from the Gamma approach requiring an entity to 1) present separately income and expenses arising from obligations that are classified as liabilities but which depend solely on the residual amount; and 2) attribute total P/L and OCI to some classes of equity other than ordinary shares. These requirements will affect the numerator of the EPS and/or diluted EPS calculations.

The Staff intends to include a brief discussion of these impacts in the forthcoming discussion paper and will consider the next steps based on feedback on the DP.


The Board suggested adding the following points for discussion in the DP:

  • Revised CF: how the ‘having no practical ability to avoid the transfer of an economic resource’ notion in the revised CF’s definition of a liability interacts with the equity/liability classification under the Gamma approach;
  • IFRS 9: the scope of equity instruments eligible for having their fair value changes recognised in OCI is driven directly by the classification of the instrument under IAS 32. Any changes in classification from applying the Gamma approach will therefore have a knock-on effect.
  • IAS 33 basic EPS: to include a discussion and worked examples on whether and how attribution of P/L and OCI to equity derivatives would affect the calculation of basic EPS. A number of Board members thought that it would reduce the numerator in a way similar to the attribution of P/L to NCI; however, the Staff disagreed but wavered upon further elaboration. One Board member suggested that the DP clarify that any potential consequences would be dealt with as a consequential amendment to IAS 33 rather than as a fundamental standalone review of IAS 33 to pre-empt respondents from commenting on other IAS 33 issues.

One Board member also questioned at length as to whether the OCI arising from net investment hedges should not be subsequently reclassified to P/L in order to be consistent with the Gamma approach. The Gamma approach proposes no recycling of amounts recorded in OCI arising from the separate presentation of income and expenses that depend on the residual amount. In both cases, the OCI arises from an equity item. There was no appetite around the table to engage in the debate and the Staff and the Vice-Chair believed that this is out of the scope of the FICE project.

Financial Instruments with Characteristics of Equity research project - Due process and permission to ballot - Agenda paper 5D

The Staff sought the Board’s permission to ballot a discussion paper that will set out the Board’s preliminary views on the following, with a 180-day comment period:

  • (a) the challenges identified with regard to the classification of a financial instrument as equity or liability;
  • (b) the possible approaches to addressing those challenges; and
  • (c) the possible approach that can be selected and developed into a Standard-level solution.

The Staff expects to publish the DP towards the end of 2017.


The Board granted permission to ballot with a 180-day comment period.

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