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Liability and Equity

Date recorded:

Project proposal

The Board discussed the latest project plan for the Liabilities and Equity project and its interaction with other projects, in particular the steps contemplated with respect to issuing the forthcoming FASB Preliminary Views document as an IASB Discussion Paper.

The staff noted that it intended to discuss with the IASB three models for distinguishing liabilities and equity in the FASB Preliminary Views document as well as a model being developed under the auspices of the European Financial Reporting Advisory Group. Other sessions would allow for a discussion of the FASB's Preliminary Views and associated Invitation to Comment.

Board members asked whether the EFRAG model was a new approach or a variant of one of the FASB models. It was suggested that it was a variant of the 'ownership/settlement' model. Board members suggested that it would be highly beneficial to the IASB, FASB and the EFRAG working group if the EFRAG model was discussed before the FASB finalised their Preliminary Views document. The Board asked the staff to suggest that the item be added to the April IASB/FASB joint meeting agenda, provided that the EFRAG working group had completed their work.

Interaction with the conceptual framework project

The Board also noted that there was a potential overlap between the Liabilities and Equity project and the definitions part of the conceptual framework project. Board members noted that the Boards' current efforts in the conceptual framework project had been focussed on the definition of an asset; it was almost assumed that the Liabilities and Equity project would address the conceptual issues. It was noted that the staff summary (Observer Note 12B) was a very good summary of why the Liabilities and Equity project was the appropriate context in which to consider the conceptual issues involved.

Overview of IAS 32

The Board discussed a memorandum prepared by the staff that summarised and illustrated the difficulties in applying the current distinction between liabilities and equity in IAS 32 Financial Instruments: Presentation. The paper addressed issues such as the tension between legal form and economic substance, the overlapping nature of many hybrid instruments and the challenge faced by the IASB in developing further guidance, given the diversity of opinion about what constitutes 'equity'.

The Board commended the staff's work, but asked that before issuing the summary in final form, the staff should include arguments refuting commonly-presented 'problems' (such as 'economic compulsion'). In addition, the Board suggested other issues for inclusion and discussion.

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