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Financial instruments with characteristics of equity (FICE)

Date recorded:

Disclosures—priority on liquidation (Agenda Paper 5)

At the April 2021 meeting, the Board asked for clarification on some aspects of the disclosure proposals including information on an entity’s ‘capital structure’ (i.e. the nature and priority of claims against the entity) and information on terms and conditions about the priority on liquidation for particular types of financial instruments. In this paper, the staff proposed updated wording for the objective and a revised scope and clarification of what information should be provided.

The key changes made by the staff were to remove the reference to ‘capital structure’ as this is not defined in IFRS Standards and rephrase the objective to be specific about the information the disclosure requirement is aimed at (i.e. to provide information about the nature and priorities of claims against an entity that arise from financial instruments). In addition, staff amended the scope to include all financial liabilities and equity instruments that are within scope of IAS 32.

Staff recommendation

The staff recommended two sets of disclosure requirements to be incorporated into IFRS 7, which should be presented in the notes. Any quantitative information would be based on the carrying amounts of the financial instruments at the reporting date with an indication of which line item in the statement of financial position the financial instruments are included in, if not otherwise clear:

To provide information about the nature and priority of claims against an entity that arise from financial instruments, the staff recommended the Board requires:

  • The disclosures to apply to all financial liabilities and equity instruments that are within the scope of IAS 32
  • An entity to categorise its claims that are financial instruments in a way that reflects differences in their nature and priority, and at a minimum, distinguish between:
    • Secured and unsecured financial instruments
    • Contractually subordinated and unsubordinated financial instruments
    • Those issued/owed by the parent and those issued/owed by subsidiaries

To provide information about the risks and returns of particular instruments in the event the entity is liquidated, the staff recommended the Board requires:

  • Disclosure to apply to all financial instruments with characteristics of both debt and equity (including compound instruments) except for standalone derivative instruments
  • Disclosure of the following information together with disclosures on terms and conditions of financial instruments:
    • Terms and conditions that indicate priority on liquidation
    • Terms and conditions that could lead to changes in priority on liquidation
    • If applicable, a description of multiple levels of contractual subordination that exist within a particular type of financial instrument (for example, if some subordinated liabilities are contractually subordinated to other subordinated liabilities)
    • Narrative disclosures when there is significant uncertainty about the application of relevant laws or regulations that could affect how priority will be determined on liquidation
    • Details of intragroup arrangements such as guarantees that may affect their priority on liquidation (for example, which entities are providing and receiving guarantees)

The staff asked the Board whether they agree with their recommendations.

Board Discussion

Board members overall supported the staff proposal and believed the staff have addressed the concerns raised at the April 2021 Board meeting.

One Board member requested clarity on what additional quantitative information is required, to which the staff confirmed it would only be the carrying amount of the financial instrument at the reporting date. The same Board member asked whether intercompany items were required in the disclosure, to which the staff confirmed that no disclosure would be required at an individual subsidiary level and it would be post group intercompany elimination.

One Board member raised a concern regarding the usefulness of showing the split of financial instruments in two categories (i.e. parent and all subsidiaries), with no detail regarding which subsidiary. However, he would like to see the feedback from the comment letters to see if others had similar concerns.

The Board suggested the staff be more specific in their communication of the requirements to ensure it is clear what information is required and not required. For example, the notion of subordination in a group context could be more complex, however the disclosure requirements are not expecting that level of complexity and the disclosures simply require the entity to aggregate financial instruments that are subordinate and those that are unsubordinated on a group basis. In addition, wording like ‘indicate’ and ‘describe’ do provide enough detail to preparers as to what is required. 

For financial institutions, the focus on ‘priority at liquidation’ is not relevant as there will be a resolution prior to that. Hence a Board member asked whether the staff have considered adjusting the threshold for financial institutions. The staff confirmed it did not necessarily mean on liquidation, but when the break-up process commences. It was suggested for the staff to look at a sample of contractual documents to see if alternative wording should be used in place of liquidation in order to get the right information or alternatively avoid using the wording ‘on liquidation’ in the requirements and require preparers to disclose the threshold or trigger for the information they are disclosing which may be on resolution or on liquidation.

Board voting

12 Board members voted in favour of the staff’s recommendation.

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