Feedback summary (Agenda Paper 5)
In November 2023, the IASB published Exposure Draft Financial Instruments with Characteristics of Equity (ED). This paper provided a high-level summary of the feedback and key themes emerging from comment letters and investor outreach activities. No decisions were made in this meeting.
There was general support for the efforts made by the IASB, including the intent and objective of the proposal, however there was disagreement on some proposals and concerns raised about the impact on specific instruments issued in some jurisdictions. There was a request for additional guidance and examples across all topics raised.
Effects of laws or regulations: The feedback was that the distinction between obligations created by laws/regulations and contracts is not black and white. Concerns were raised that this could result in significant disruption to practice, this could cause diversity across jurisdictions and potentially within the same consolidated group for similar instruments.
Fixed-for-fixed condition: There was general support for the preservation adjustments but some concerns around down-round adjustments and volume-weighted average price adjustments failing the fixed-for-fixed condition. There was general support for the passage of time adjustments but significant concerns about the criterion to require the adjustment to have the effect of fixing on initial recognition the amount of consideration per share in terms of present value, and adjustments linked to inflation and benchmark interest rate failing the fixed-for-fixed condition.
Obligations to purchase own equity instruments: Most feedback provided was in the context of non-controlling interest (NCI) puts exercisable at fair value or a proxy for fair value. The main concerns were around the ‘one size fits all’ approach due to diversity in practice, debiting parent equity on initial recognition because of double-counting on the balance sheet and remeasurement of the liability through the statement of profit or loss due to counterintuitive effects. There were mixed views on measurement.
Contingent settlement provisions: There is general support for aligning initial and subsequent measurement approaches and for the clarification that some financial instruments with contingent settlement provision are compound instruments. There was some misunderstanding about the scope of the proposals and disagreement about measurement deviating from IFRS 9.
Shareholder discretion: There was general support for the proposals. Concerns raised about how judgement should be applied, practical difficulty, potential inconsistency in application, unintended consequences and whether and how to reassess if factors evolve over time.
Reclassification: There was general support, but large disagreement with the proposal to prohibit reclassification from financial liability to equity due to the passage of time changes.
Disclosures: There was overall support for expanding the scope of IFRS 7, however concerns were raised about application challenges and operation burden for preparers.
Presentation of amounts attributable to ordinary shareholders: There was overall support for additional information, however there were mixed views on the presentation proposals.
Transition: There was general agreement with the retrospective application but concerns were raised about complexities and potential cost.
IASB discussion
IASB members noted that the summary of the feedback is consistent with conversations with stakeholders and there is a high level of disagreement with the proposals. The staff noted that they did expect resistance on the proposals as the issues were raised because diversity had developed in practice. Therefore, the proposals were expected to disrupt current market practice for many stakeholders.
The IASB’s focus will be on whether the proposals would provide more useful information and eradicate diversity in practise rather than whether they would disrupt current practice. The IASB will listen to stakeholder comments but is aware that there will be no universal agreeable solutions. In future meetings, the IASB will decide whether to move ahead with specific proposals (with potential amendments) or not to move forward with specific proposals.
In 2018, the IASB reconsidered the entirety of IAS 32, but was told that a more targeted approach would be preferred. Therefore, the IASB will not reconsider IAS 32 in its entirety in the near future.