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EFRAG publishes comment letter on financial instruments with characteristics of equity

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

04 Feb 2019

The European Financial Reporting Advisory Group (EFRAG) has issued a final comment letter on the IASB discussion paper DP/2018/1, 'Financial Instruments with Characteristics of Equity'.

The IASB published its DP for comment on 28 June 2018 and EFRAG published its draft comment letter in August 2018.

EFRAG acknowledges the various challenges that arise from the application of IAS 32 Financial Instruments: Presentation and appreciates the IASB’s efforts to address the identified challenges by developing proposals relating to classification, presentation and disclosure.

EFRAG’s views include:

  • Classification – EFRAG “does not support” the IASB’s preferred approach to classification as a way forward to address the identified challenges and considers that any benefits of the IASB’s approach to classification are unlikely to outweigh the associated costs. However, although, EFRAG does not support the IASB’s preferred approach to classification in general, it suggests that some of the proposed supporting guidance could be incorporated into IAS 32 to help address challenges identified in the application of IAS 32.
  • Presentation and disclosure – EFRAG welcomes the IASB’s efforts to improve the presentation and disclosure requirements to provide additional information to users. However, although EFRAG welcomes the IASB’s efforts to address concerns of some stakeholders that the current accounting requirements lead to “counterintuitive outcomes when applied to liabilities with an equity-like return”, it is “not convinced that expanding the use of Other Comprehensive Income is the most appropriate way to address those concerns” and instead suggests enhanced disclosures.

As a way forward, EFRAG “suggests that the IASB focuses on targeted improvements to current requirements in IAS 32 and other standards”. Specifically, EFRAG indicates that the IASB should “pursue improvements to disclosure requirements and the classification guidance on complex instruments with contingent settlement provisions, including those that are mandatorily convertible or written down on a ‘non viability’ event”. EFRAG notes that the solutions identified in the discussion paper “could be a good basis for further discussions” and suggests ways that IAS 32 could be improved drawing on the work in developing the discussion paper.

If the IASB pursues targeted improvements to IAS 32 in the shorter term, EFRAG suggests that the IASB might then wish to reconsider whether to continue a more comprehensive FICE project in the longer term.   

A press release and the full comment letter are available on the EFRAG website.

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