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Financial instruments with characteristics of equity

Date recorded:

Project proposal — moving the project to the standard-setting programme (Agenda Paper 5)

Background

The purpose of this paper was to ask the Board whether it agrees with the staff recommendation to move the FICE project from the research programme to the standard-setting programme, as it is not possible to issue an Exposure Draft for a research project. If the Board decides to move it to the standard-setting programme, they need to decide whether to set up a consultative group for the project.

In 2014, the Board decided to explore how to distinguish liabilities from equity as part of a FICE project. The objective of the project was to investigate application challenges with the classification of financial instruments applying IAS 32 and to consider how to address those challenges through clearer principles for classification and enhanced requirements for presentation and disclosure. The Board have since tentatively decided on potential clarification to the underlying principle for classifying derivatives on own equity using a foundation principle and an adjustment principle. The staff have also performed research and outreach with investors and stakeholders.

The staff believe that the project has met the criteria required to be added to the standard-setting programme. They do not believe a dedicated consultative group is needed as the staff can undertake targeted outreach where detailed specialist knowledge is required.

Staff recommendation

The staff recommended that the Board:

  • (a) moves the FICE project to its standard-setting programme; and
  • (b) continues using the expertise of existing advisory bodies instead of establishing a dedicated consultative group for the project.

Board discussion

There was some discussion around the staff’s wording that as a result of this project classification of liabilities and equity would change. Board members did not disagree, but suggested to word this more carefully by saying that the principles will change and as a result of this, classification of some instruments may change. This was to avoid the impression that this was a narrow-scope project focusing on changing the classification for some instruments. It was suggested that much engagement with shareholders was needed to get to know as many transactions as possible, so that there will not be a flood of comment letters stating that the principles do not work with particular instruments.

Board decision

All of the 12 Board members present supported the staff recommendation. One Board member was absent.

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