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IAS 39 — Classification of a hybrid financial instrument by the holder

Date recorded:

The Committee received a request to clarify the classification by the holder of a hybrid financial instrument with a revolving maturity option, an early settlement option and a suspension of interest payments option (all at the option of the issuer).  Specifically, the submitter raised the question of whether the host of such a financial instrument should be classified by the holder as an equity, or as a debt instrument under IAS 39 'Financial Instruments: Recognition and Measurement'.

The Committee discussed this issue in March 2014 and tentatively decided not to add the issue to its agenda because the issue was not widespread, the financial instrument described in the submission was specific, and IFRS 9 'Financial Instruments' would resolve the question of whether the instrument should be classified before or after identifying the embedded derivatives, because it would not require bifurcation for hybrid contracts with financial asset hosts and a holder would be required to classify the instrument as a whole.

The purpose of this paper was to provide an analysis of the comment letters received on the tentative agenda decision and to ask whether the Committee agreed with the staff recommendation that it should finalise the agenda decision.

The Project Manager introduced the paper and asked the Committee members whether they had any comments on the paper and whether they agreed with the staff recommendation in the paper.

One of the IASB members present commented that instead of stating that IFRS 9 would not require bifurcation, that it would be more appropriate to say that IFRS 9 would prohibit bifurcation.

A Committee member noted that hybrid instruments were very complex and that there was a lot of disagreement around how these should be dealt with, and added that in his jurisdiction restatements had been asked for by the local regulator in this area.  He noted that, although the submission was narrow, hybrid instruments should be addressed, perhaps through an interpretation to assist users/preparers/auditors/regulators to deal properly with these types of instruments – based on the complexity of the instruments and the fact that they are a widespread issue in many jurisdictions.

Another Committee member agreed that the item should not be added to the Committee’s agenda as it was a very specific issue that would be resolved by IFRS 9.

Another Committee member noted that he agreed not to add the issue to the Committee’s agenda; however, he believed the reference to IFRS 9 should be completely removed because the Committee’s decision was based on the reasons set out in paragraphs 1 and 2 of the proposed final agenda decision, not because IFRS 9 would address the issue.

Another Committee member agreed that the reference to IFRS 9 should be removed from the agenda decision, and noted that she did not believe that IFRS 9 resolved the issue adding that IFRS 9 did not give an answer as to what to do first and how to do it, it just ignored it.  She noted that she did not agree that the issue was not widespread, and observed that while the particular instrument in the submission was not widespread, the issues that it highlighted were widespread.  She further noted that it was odd that the Committee had said that it was not going to take the issue onto its agenda because the issue was too wide, and then to note in the rejection notice that it was being rejected because the issue was too narrow.  She noted that her preference would have been for the Committee to take the issue on given people would be using IAS 32/39 prior to adoption of IFRS 9 (applicable for annual periods beginning on or after January 1, 2018), which made the issue still relevant in the shorter term.

Another Committee member also observed that preparers would still have a number of reports to issue before they adopted IFRS 9 (and that, even though early adoption is available, the majority of people would not early adopt), and that using IFRS 9 as a reason for rejecting the issue was not an appropriate answer.

One of the IASB members present noted that by the time this agenda decision would be published, IFRS 9 would be out and early adoption would be permitted, and for those who early adopted the issue was not such a problem; however, he added that for those who do not early adopt, it provides some guidance.

A further Committee member agreed that the Committee should finalise the agenda decision.  He noted that the particular fact pattern was too narrow, but that the broader issue about holder’s classification was too wide.  He noted that it would be helpful to retain the reference to IFRS 9, if it could be made clear the extent to which IFRS 9 did and did not address the issue, as the submission raised questions about the interaction between bifurcation and classification by the holder, including whether or not the holder classified symmetrically with the issuer, and that while IFRS 9 did not address the symmetry issue, it did make redundant the question of bifurcation.

In bringing the discussion to a close, the Chairman asked the Committee members whether they agreed with the decision for this issue not to be taken on the Committee’s agenda, with the rationale being that the specific fact pattern submitted was far too narrow.  Eleven Committee members agreed with this proposal.

The Chairman further asked the Committee whether they agreed with the proposal to delete the reference to IFRS 9 in the agenda decision.  Eleven Committee members agreed with this proposal.

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