Financial instruments with characteristics of equity

Date recorded:

Project Plan (Agenda Paper 5)


At the September 2019 Board meeting, the Board tentatively decided to focus on addressing practice issues by clarifying some underlying principles in IAS 32 and adding application guidance to help with the consistent application of the principles.

Staff analysis

The staff would like the Board to deliberate the following areas:

  • A) Overall objectives of the clarifying amendments to IAS 32: the objectives should include addressing known practice issues, improving the financial information provided in the financial statements about the financial instruments issued by the entity, limiting changes to classification outcomes, clarifying interactions between the requirements within IAS 32, finalising the amendments in a timely manner and develop an efficient transition approach.
  • B) Project plan—classification: project plan should address the issues that have a widespread effect, areas where financial reporting can be improved and resolved without fundamentally rewriting IAS 32 or amending other standards.
  • C) Project plan—presentation and disclosure: the starting point for clarifying the presentation and disclosure of IAS 32 should be the proposals in the 2018 Discussion Paper (DP), taking into account the feedback received.
  • D) Indicative project timeline: throughout Q4 2019, the staff propose to perform research and outreach. In 2020, the staff will develop proposals based on the 2018 DP. Lastly, the staff will circle back to disclosure in the light of any classification decisions made, perform an overall consistency check and finalise reclassification and other issues in H1 2021.

Staff question

Does the Board have any questions or comments on the project plan and the indicative timeline?

Board discussion

Board members mentioned that the staff should be clear as to the scenario considered when evaluating the effect of laws and regulation on the classification of financial instruments. For example, one of the scenarios could be a financial instrument contract with laws that exist separately to the contract, or a financial instrument contract with existing laws repeated in the contract or lastly, a contract where laws specify the enforceability. Board members further suggested that ambiguity in drafting of the contract which causes the contract not to be enforceable should not be in the scope of the project. Board members said the staff should clarify whether it is aiming to address the accounting treatment on derecognition of the equity instrument in the project, because there is currently no clear guidance, or whether the staff is aiming to address the situation where there has been no change in the contractual terms of the arrangement but there has been a change in circumstances (i.e. change in functional currency of the entity and the impact on derivative instruments). The staff confirmed that both scenarios were considered to be within scope of this project. The Board recommended that the objectives of the project could be restructured to include an overarching objective and the steps to meet those objectives to enable the staff to assess at a later stage whether those objectives have been met. A Board member suggested that not only compound instruments should be considered, but the issues described may also affect hybrid instruments and therefore hybrid instruments should also be considered. The Board recommended that any anticipated changes should be communicated early to the public.

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