Background

The project on financial instruments with characteristics of equity was originally commenced as a joint IASB-FASB project addressing the distinction between liabilities and equity. The joint project saw a discussion paper discussion paper Financial Instruments with Characteristics of Equity published in February 2008, however, during their joint meeting in November 2010, the IASB and FASB decided to defer further work on this project. In December 2012, as part of its response to the Agenda consultation 2011, the IASB formally reactivated this project as an IASB-only research project. Board discussions were taken up in October 2014. In March 2017, the first phase of deliberations was concluded. A discussion paper DP/2018/1 Financial Instruments with Characteristics of Equity was published on 28 June 2018.

The objective of the project is to improve the information that companies provide in their financial statements about financial instruments they have issued, by:

• investigating challenges with the classification of financial instruments when a company applies IAS 32 Financial Instruments: Presentation; and
• considering how to address those challenges through clearer principles for classification and enhanced requirements for presentation and disclosure.

Suggested changes

The proposed amendments in exposure draft IASB/ED/2023/5 Financial Instruments with Characteristics of Equity (Proposed amendments to IAS 32, IFRS 7 and IAS 1) are:

• The effects of relevant laws or regulations on the classification of financial instruments:
  The IASB proposes to clarify that only contractual rights and obligations that are enforceable by laws or regulations and are in addition to those created by relevant laws or regulations are considered in classifying a financial instrument or its component parts. Moreover, a contractual right or obligation that is not solely created by laws or regulations, but is in addition to a right or obligation created by relevant laws or regulations shall be considered in its entirety in classifying the financial instrument or its component parts;
• The ‘fixed-for-fixed’ condition for classifying a derivative that will or may be settled in an issuer’s own equity instrument:
  The IASB proposes in respect of the fixed-for-fixed condition and when it is met that the amount of consideration to be exchanged for each of an entity’s own equity instruments is required to be denominated in the entity’s functional currency, and either is fixed or variable solely because of preservation adjustments or passage-of-time adjustments. The IASB also proposes clarifications on derivatives that give one party a choice of settlement between two or more classes of an entity’s own equity instruments and on contracts that will or may be settled by the exchange of a fixed number of one class of an entity’s own non-derivative equity instruments for a fixed number of another class of its own non-derivative equity instruments;
• The requirements for classifying financial instruments containing an obligation for an entity to purchase its own equity instruments:
  IAS 32 requires an entity to recognise a financial liability at the present value of the redemption amount (including when a variable number of another class of the entity’s own equity instruments is delivered). The IASB proposes to clarify which component of equity this amount is (not) removed from and how to measure the financial liability at the present value of the redemption amount through profit or loss. The IASB also proposes to clarify how an entity would apply the requirements if a contract containing an obligation for the entity to purchase its own equity instruments expired without delivery. Another clarification relates to the gross presentation of written put options and forward purchase contracts on an entity’s own equity instruments that are gross physically settled;
• The requirements for classifying financial instruments with contingent settlement provisions:
  The IASB proposes to clarify that some financial instruments with contingent settlement provisions are compound financial instruments with liability and equity components. The IASB also proposes that payments at the issuer’s discretion are recognised in equity even if the equity component of a compound financial instrument has an initial carrying amount of zero. In addition, the IASB proposes to clarify the term ‘liquidation’ and the term ‘not genuine’;
• The effect of shareholder discretion on the classification of financial instruments:
  The IASB proposes to clarify that whether an entity has an unconditional right to avoid delivering cash or another financial asset (or otherwise to settle a financial instrument in such a way that it would be a financial liability) depends on the facts and circumstances in which shareholder discretion arises. Judgement is required to assess whether shareholder decisions are treated as entity decisions. The IASB also proposes to describe the factors an entity is required to consider in making that assessment; and
• The circumstances in which a financial instrument (or a component of it) is reclassified as a financial liability or an equity instrument after initial recognition:
  The IASB proposes to add a general requirement that prohibits the reclassification of a financial instrument after initial recognition, unless paragraph 16E applies (reclassification of puttable instruments and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation) or the substance of the contractual arrangement changes because of a change in circumstances external to the contractual arrangement. The IASB proposes requirements on how to account for such reclassifications.

The IASB proposes amendments to the objective and scope of IFRS 7 Financial Instruments: Disclosures in respect of equity instruments and other amendments to the Standard to improve the information disclosed.

The IASB also proposes amendments to IAS 1 Presentation of Financial Statements to require an entity to present additional information about amounts attributable to ordinary shareholders. These proposed amendments affect an entity’s statement of financial position, statement(s) of financial performance and statement of changes in equity. The IASB proposes that the amendments would apply retrospectively subject to specific transition reliefs.

Moreover, the IASB proposes amendments to the draft Accounting Standard Subsidiaries without Public Accountability: Disclosures (Subsidiaries Standard), which will be issued before the proposals in the ED are finalised. It will permit eligible subsidiaries to apply the recognition, measurement and presentation requirements in IFRS Accounting Standards with reduced disclosures

Comments on the proposed changes are requested by 29 March 2024.

Effective date

The IASB will decide on the effective date for the proposed amendments after exposure. The IASB proposes to require an entity to apply the amendments retrospectively. Earlier application would be permitted.

Additional information

Please click for:

• IASB press release
• Access to the exposure draft on the IFRS Foundation website
• Snapshot offering an overview of the proposals
• Short video with IASB member Zach Gast explaining the proposals
• Our related Need to know publication
• Our UK Accounting Plus project page on Financial instruments with characteristics of equity