Financial Instruments with Characteristics of Equity (FICE)

Date recorded:

Cover note (Agenda Paper 5)

In June 2018, the IASB published Discussion Paper DP/2018/1 Financial Instruments with Characteristics of Equity. At this meeting, the staff asked the IASB for tentative decisions on the presentation of issued financial instruments applying IAS 32.

Presentation of equity instruments (Agenda Paper 5A)

Historically, a main concern raised by stakeholders is the limited information provided in the financial statements about equity instruments issued. Users of financial statements have asked for a clearer distinction of the distribution of profits amongst holders of different types of equity instruments so that they can understand the effect other classes of equity instruments have on ordinary shares.

Staff recommendation

The staff recommended that no changes are made to the presentation requirements in IAS 32 for equity instruments. The principles and requirements in IAS 1, including any decisions to be made as part of the IASB’s Primary Financial Statements (PFS) project provide an adequate basis for entities to determine whether to present any additional information about equity instruments. In addition, the staff are of the view that the disclosure proposals tentatively agreed to by the IASB on key terms and conditions and potential dilution are sufficient to meet the needs of users of financial statements for further information about equity instruments.

IASB discussion

Some IASB members noted that users have asked for a clear distinction with regard to distribution of profits. They are looking for accessibility, understandability and visibility over a narrow definition of equity. The information is within the statement of changes in equity (SOCIE) but the information needs to be more visible and research has noted that users find the SOCIE confusing.

In addition, IASB members noted that the paper focuses on disclosures which provide users with general principals on what they could do rather than requiring specific disclosures. Unless there are specific requirements, users are unlikely to disclose the information. Therefore, some IASB members believe more requirements should be developed and additional line items should be added.

Other IASB members agreed with the staff and noted that the relevant information was already required by the standards and potentially could be clarified or drawn out more.

The staff noted that the feedback to the DP is a few years old, and preceded the PFS project and tentative decisions that have been made in relation to disclosures relating to potential dilution, terms and conditions on debt and equity and obligations that arise on liquidation. The staff also discussed the PFS project that focuses on line items related to whether the primary statements provided an understandable overview of income and expenses or assets and liabilities. During that project, the IASB agreed to think carefully before adding any further required line items.

An IASB member noted that the PFS project focused in detail on the structure of the income statement rather than the balance sheet and that IAS 1 requires only two line items within equity. Therefore, the IASB member thinks that further amendments are required to IAS 1.

The staff asked IASB members what they think is required, i.e. specific lines on the balance sheet or an allocation of dividends to shareholder in the income statement. IASB members noted that they think there is a need for both.

The IASB did not vote on the staff recommendations. The staff will take away the feedback from the discussion and come back with further proposals.

Presentation of financial liabilities (Agenda Paper 5B)

Stakeholders have raised concerns relating to a subset of financial liabilities which are subsequently measured at fair value through profit or loss. Stakeholders have questioned the recognition of changes in the carrying amount of the financial liability in profit or loss when the financial liability contains a contractual obligation to pay the holder an amount based on the entity’s performance or changes in the entity’s net assets. It results in counter-intuitive accounting in profit or loss because gains are recognised when an entity performs poorly, and losses are recognised when an entity performs well.

Staff recommendation

The staff recommended that no changes are made to the presentation requirements in IAS 32 to specifically address financial liabilities containing contractual obligations to pay amounts based on the entity’s performance or changes in the entity’s net assets. The principles and requirements in IAS 1, including any decisions to be made as part of the PFS project provide an adequate basis for entities to determine whether to present particular types of financial liabilities and their associated gains or losses separately in the financial statements. However, the staff recommended entities with these types of financial liabilities measured at fair value through profit or loss be required to disclose the total gains or losses recognised in profit or loss in each reporting period that arise from remeasuring such financial liabilities. Therefore, entities would be required to disclose separately the amount of the net gains or losses on financial liabilities designated and/or mandatorily measured at fair value through profit or loss (applying IFRS 7) that relates to these types of financial liabilities. These disclosures, together with the proposed disclosures of key terms and conditions for financial liabilities with equity-like features, will address the information needs of users of financial statements.

IASB discussion

An IASB member challenged the staff on whether the recommendation by the staff is duplicating paragraph 41 in IAS 32 or is providing additional information. If it is providing more information, then refinements might be needed to paragraph 41 in IAS 32 to avoid any confusion.

IASB members noted that the discussion points raised in relation to Agenda Paper 5A also relate to this paper. They requested that the staff be careful with the use of the word ‘counterintuitive’ and if they plan to use the word, reflect this in the Basis for Conclusions and not in the main body of the standard.

IASB decision

All IASB members voted in favour of the staff’s recommendation that no changes should be made to the presentation requirements in IAS 32 to specifically address financial liabilities containing contractual obligations to pay amounts based on the entity’s performance or changes in the entity’s net assets.

11 out of 12 IASB members voted in favour of the staff’s recommendation that entities with these types of financial liabilities measured at fair value through profit or loss should be required to disclose the total gains or losses recognised in profit or loss in each reporting period that arise from remeasuring such financial liabilities.

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