Deloitte comment letter on the IASB's discussion paper on financial instruments with characteristics of equity

Published on: 17 Dec, 2018

We have responded to the IASB's discussion paper Financial Instruments with Characteristics of Equity that was published in June 2018.

We welcome the DP given the importance of the liability and equity distinction in financial reporting and the IASB’s acknowledgement of the interpretative issues that have arisen in applying IAS 32 Financial Instruments: Presentation.

We welcome the fact that the DP considers both classification and disclosure. The latter is an area that needs strengthening given that the advances in financial engineering have led to numerous instruments that are classified as equity but have very different rights to cash flows (during their life and at liquidation) and different degrees of dilution of current shareholders. Users of financial statements often lack information as to the terms of such instruments and how different equity instruments contribute to the capital structure of the entity.

We do not support the preferred classification approach in the DP. In our view, many of the difficulties in applying IAS 32 arise from applying the fixed-for-fixed rule, difficulties which we think will be replicated in the new ‘amount’ criteria in the proposed definition of a liability. This leads us to question more broadly whether contracts for the future receipt or delivery of equity instruments should be equity prior to the delivery or receipt of the equity instruments. We do not believe they should. We believe financial

performance should be attributed to those holders of equity instruments that currently own a residual interest in the entity, not to those that hold instruments which may result in them being owners in the future. We acknowledge this is a departure from the classification model in the DP and in IAS 32 but we believe it has conceptual merit and would greatly reduce the amount of interpretative problems that arise with IAS 32, which we fear will still arise if the DP is finalised as a standard.

Further, we disagree that amounts due at liquidation are financial liabilities prior to liquidation. Like in IAS 32, we believe that such amounts should not be recognised as financial liabilities prior to liquidation as the financial statements are not prepared on a break-up basis, but on a going concern one. We disagree with this not only on conceptual grounds but also on the grounds that it will introduce complexity for subsequent measurement and will not be auditable.

We note the DP carries over the requirements in IAS 32 that future acquisitions of equity should be recognised as a gross financial liability with a debit in equity. We do not support this. In our view asset/equity and liability/equity exchanges should be classified on the same basis and so we do not support the notional grossing up of each of the legs of an arrangement that may result in the future purchase of equity.

Download the full comment letter below.


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