Financial instruments with characteristics of equity

Date recorded:

Key themes emerging from feedback (Agenda Paper 5)


In June 2018 the Board published the Discussion Paper Financial Instruments with Characteristics of Equity (DP) for comment by January 2019.

This paper presents the key themes emerging from feedback received on the DP.

Staff analysis

The staff have outlined the key themes from the feedback received which include the following:

1. Classification

  • There is general support for the timing feature but concerns were raised about the amount feature as it may be inconsistent with the revised version of the Conceptual Framework.
  • Questions were raised on the need for new terminologies and for clarity of certain terms such as ‘independent amount’ and ‘available economic resources’.
  • In relation to classification of derivatives on own equity there was agreement that they should continue to be classified in their entirety but there were concerns again on the amount feature which may not be a simplification of current requirements.

2. Presentation and disclosure

  • Mixed views were raised on the concept of separating financial liabilities and presenting through other comprehensive income (OCI) without recycling. The use of OCI was thought by some to be inconsistent with the Conceptual Framework.
  • There was broad disagreement on the proposed approach to presentation of equity instruments. Significant concerns were expressed on the proposed attribution which was viewed as too complex and costly to be operational and useful to users. There was still general agreement that information provided in this area should be improved.
  • There was general agreement for each of the proposals in relation to disclosure.
  • Investor feedback—General support; liabilities are sufficiently different in nature that separate presentation would result in useful information. Mixed views expressed on presenting income and expenses in OCI or profit or loss.

3. Contractual terms and interaction with other IFRS Standards

  • There was general agreement for the proposals on economic compulsion and the interaction with the law.

Staff have prepared a presentation with additional details in each of the areas noted above.

Staff recommendations

No staff recommendations were included in the paper as the Board is not being asked to make any decisions at this meeting.

Board discussion

The staff presented the slide deck included in the agenda paper.

As regards the feedback received from constituents on the overall approach, Board members acknowledged that they might have underestimated how big the need for changing IAS 32 Financial Instruments: Presentation is. One Board member emphasised that the fundamental principles of IAS 32 have to be changed, rather than changing single parts based on instruments in practice. Practice will always create new products and if IAS 32 does not have strong principles, the Board will always need to catch up with the newest developments.

The Chair said that the feedback has made it evident that the DP is difficult to understand, but that the concepts in the DP are good. He recommended that the staff make the principles more understandable and, by that, provide a timely solution to the diversity in practice. One Board member picked up on that and suggested to use terms that exist in the current version of IAS 32 to demonstrate that the IASB is not intending significant changes in practice. On the question of whether stakeholders preferred a mezzanine approach, the staff replied that most constituents expressed sympathy for a binary approach.

The Vice-Chair pointed out that the timing feature was generally well accepted by stakeholders, but that respondents struggled with the amount feature. It seems like liquidation seems to be an issue in that regard. Therefore, the Board needs to clarify what is meant by liquidation, given there are some entities that have not been designed to ever be liquidated.

There was no significant discussion around any other parts of the DP and the Board did not make any decisions.

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