Financial instruments with characteristics of equity

Date recorded:

Project Direction (Agenda Paper 5)


At the June and July 2019 Board meetings, the Board discussed feedback received on the Discussion Paper Financial Instruments with Characteristics of Equity (the DP). At this meeting, the staff set out alternatives the Board could choose for the direction of the project, and explains what each alternative would entail, advantages and disadvantages of these alternatives and indicative timelines.

Staff analysis

The staff developed the following five alternatives for the direction of the project:

Alternative A—fundamental review to develop a new approach to distinguish financial liabilities from equity instruments. The Board would have the flexibility in deciding what the starting point should be.

Alternative B—the Board’s preferred approach set out in the DP with some modifications and refinements. Under this alternative, the classification principles would be articulated using the timing and the amount features proposed in the DP subject to some clarifications or modifications.

Alternative C—clarifying amendments to IAS 32, which would focus on addressing practice issues by clarifying particular underlying principles in IAS 32. This is the option the staff support on the basis that IAS 32 is not broken and works well for most financial instruments. There are several areas of practice that are challenging that have led to accounting diversity, which the IFRS Interpretations Committee has not been able to address this diversity using IAS 32. The staff think that focusing on improvements to the main areas that have given rise to accounting diversity and practice challenges is the best way forward. They would focus on issues that can be resolved efficiently and effectively, limiting changes to other areas of IAS 32 and address only those issues that are within the scope of IAS 32 (to avoid scope creep and to ensure the project proceeds quickly). The improvements would be based on principles rather than introducing rules or exceptions.

Alternative D—narrow-scope amendments to IAS 32 such as adding or modifying requirements for specific fact patterns or specific features of financial instruments. The staff expect this alternative would add application guidance to IAS 32 and introduce exceptions if necessary but would not clarify the underlying principles.

Alternative E—a disclosure-only project as a separate project. This alternative would involve refining the disclosure proposals in the DP assuming classification requirements remain unchanged from IAS 32.

Staff recommendation

The staff recommend the Board pursue Alternative C.

Board discussion

Board members questioned whether the purpose of the paper is to clarify the existing classification of financial instruments that contain contingent settlement provisions or whether it is aimed at reconsidering the existing guidance on this topic as the latter would significantly increase the scope of the project. The staff have confirmed the objective is to clarify existing classification of financial instruments. The staff said that a change in classification outcome is a cost of implementing Alternative B. Board members requested the staff separate those changes in classification outcome that occur as a result of changing the intended classification for a class of instruments because of a particular characteristic, and those where the change in classification outcome is a result of clarification of issues which resolves diversity in practice. The latter should not be considered as a disadvantage. Board members recommended that the staff make use of the principles developed in the DP to clarify existing principles and provide additional guidance though use of supporting examples. Board members also recommended that Alternative C should be tested with a range of contractual terms to determine whether the new proposal would work in practice. Board members further suggested to improve the disclosure guidance as part of Alternative C. The staff confirmed that this would be considered as part of Alternative C. Board members highlighted that throughout this process, the staff should consider whether genuine progress is being made under Alternative C and consider another course of action, such as exploring other alternatives, if this is not the case. The staff agreed that the decision made by the Board on this paper would be used as a starting point but this would be a dynamic process and other alternatives may be considered. Lastly, Board members recommended that any clarification of amendments to IAS 32 should consider and withstand future issues.

Board decision

All Board members agreed with the staff’s recommendation.

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