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ESMA answer to the EFRAG questionnaire on alternative accounting treatments for equity instruments

  • ESMA (European Securities and Markets Authority) (dark gray) Image

15 Jul 2019

The European Securities and Markets Authority (ESMA) has submitted to EFRAG its response to the current consultation, which addresses (potentially inappropriate) accounting requirements for equity and equity-type instruments that are held in a long-term business model. In the consultation, EFRAG seems to suggest that current measurement requirements under IFRS 9 might be inappropriate - a view that is not supported by ESMA.

In addition to the completed questionnaire, ESMA has included a cover letter that notes the following points:

  • Public financial disclosures should remain focused on depicting economic reality in a neutral way, while avoiding the possibility of giving rise to structuring opportunities.
  • The current provisions in IFRS 9 already cater for an adequate depiction of financial instruments. Particularly, the economic characteristics of equity instruments would generally not be adequately reflected by cost-based measurement, especially when current value information is reliable and available.
  • Concerns with respect to reported volatility are acknowledged, however, IFRS 9 provides an option to mitigate this volatility.
  • It is not yet possible to assess any potential effects of IFRS 9 on long-term investment decisions.
  • ESMA is not currently aware that the application of IFRS 9 has caused any obstacles to or provided disincentives to long-term investment decisions.
  • Elaborating an alternative accounting model for equity and equity-type instruments, in advance of having identifed evidence of any concrete issues regarding long-term investment arising from the application of IFRS 9, may result in a solution that may ultimately not be effective.

ESMA concludes:

In line with the above-mentioned considerations, at this stage, ESMA does not support any of the alternative accounting solutions illustrated in EFRAG's background document.

Please clickt to access the cover letter and completed questionnaire on the ESMA website.

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