The press release quotes the following statement by the banks, who are recognised for their vital role in fostering global economic development:

We welcome global initiatives to introduce sustainability reporting standards that complement existing financial reporting standards, and we support transparency and comparability of sustainability-focused disclosure, including the work of ISSB and the use of ISSB Standards by certain jurisdictions.

The IFRS Foundation expressed their gratitude for the continued collaboration with the multilateral development bank community towards shaping the introduction of global sustainability disclosure standards. The support of the community was instrumental in the prior introduction of IFRS Accounting Standards in regions such as Africa, South America, Eastern Europe and South East Asia.

For more information, see the press release on the IFRS Foundation website.

Background

The project on financial instruments with characteristics of equity was originally commenced as a joint IASB-FASB project addressing the distinction between liabilities and equity. The joint project saw a discussion paper discussion paper Financial Instruments with Characteristics of Equity published in February 2008, however, during their joint meeting in November 2010, the IASB and FASB decided to defer further work on this project. In December 2012, as part of its response to the Agenda consultation 2011, the IASB formally reactivated this project as an IASB-only research project. Board discussions were taken up in October 2014. In March 2017, the first phase of deliberations was concluded. A discussion paper DP/2018/1 Financial Instruments with Characteristics of Equity was published on 28 June 2018.

The objective of the project is to improve the information that companies provide in their financial statements about financial instruments they have issued, by:

• investigating challenges with the classification of financial instruments when a company applies IAS 32 Financial Instruments: Presentation; and
• considering how to address those challenges through clearer principles for classification and enhanced requirements for presentation and disclosure.

Suggested changes

The proposed amendments in exposure draft IASB/ED/2023/5 Financial Instruments with Characteristics of Equity (Proposed amendments to IAS 32, IFRS 7 and IAS 1) are:

• The effects of relevant laws or regulations on the classification of financial instruments:
  The IASB proposes to clarify that only contractual rights and obligations that are enforceable by laws or regulations and are in addition to those created by relevant laws or regulations are considered in classifying a financial instrument or its component parts. Moreover, a contractual right or obligation that is not solely created by laws or regulations, but is in addition to a right or obligation created by relevant laws or regulations shall be considered in its entirety in classifying the financial instrument or its component parts;
• The ‘fixed-for-fixed’ condition for classifying a derivative that will or may be settled in an issuer’s own equity instrument:
  The IASB proposes in respect of the fixed-for-fixed condition and when it is met that the amount of consideration to be exchanged for each of an entity’s own equity instruments is required to be denominated in the entity’s functional currency, and either is fixed or variable solely because of preservation adjustments or passage-of-time adjustments. The IASB also proposes clarifications on derivatives that give one party a choice of settlement between two or more classes of an entity’s own equity instruments and on contracts that will or may be settled by the exchange of a fixed number of one class of an entity’s own non-derivative equity instruments for a fixed number of another class of its own non-derivative equity instruments;
• The requirements for classifying financial instruments containing an obligation for an entity to purchase its own equity instruments:
  IAS 32 requires an entity to recognise a financial liability at the present value of the redemption amount (including when a variable number of another class of the entity’s own equity instruments is delivered). The IASB proposes to clarify which component of equity this amount is (not) removed from and how to measure the financial liability at the present value of the redemption amount through profit or loss. The IASB also proposes to clarify how an entity would apply the requirements if a contract containing an obligation for the entity to purchase its own equity instruments expired without delivery. Another clarification relates to the gross presentation of written put options and forward purchase contracts on an entity’s own equity instruments that are gross physically settled;
• The requirements for classifying financial instruments with contingent settlement provisions:
  The IASB proposes to clarify that some financial instruments with contingent settlement provisions are compound financial instruments with liability and equity components. The IASB also proposes that payments at the issuer’s discretion are recognised in equity even if the equity component of a compound financial instrument has an initial carrying amount of zero. In addition, the IASB proposes to clarify the term ‘liquidation’ and the term ‘not genuine’;
• The effect of shareholder discretion on the classification of financial instruments:
  The IASB proposes to clarify that whether an entity has an unconditional right to avoid delivering cash or another financial asset (or otherwise to settle a financial instrument in such a way that it would be a financial liability) depends on the facts and circumstances in which shareholder discretion arises. Judgement is required to assess whether shareholder decisions are treated as entity decisions. The IASB also proposes to describe the factors an entity is required to consider in making that assessment; and
• The circumstances in which a financial instrument (or a component of it) is reclassified as a financial liability or an equity instrument after initial recognition:
  The IASB proposes to add a general requirement that prohibits the reclassification of a financial instrument after initial recognition, unless paragraph 16E applies (reclassification of puttable instruments and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation) or the substance of the contractual arrangement changes because of a change in circumstances external to the contractual arrangement. The IASB proposes requirements on how to account for such reclassifications.

The IASB proposes amendments to the objective and scope of IFRS 7 Financial Instruments: Disclosures in respect of equity instruments and other amendments to the Standard to improve the information disclosed.

The IASB also proposes amendments to IAS 1 Presentation of Financial Statements to require an entity to present additional information about amounts attributable to ordinary shareholders. These proposed amendments affect an entity’s statement of financial position, statement(s) of financial performance and statement of changes in equity. The IASB proposes that the amendments would apply retrospectively subject to specific transition reliefs.

Moreover, the IASB proposes amendments to the draft Accounting Standard Subsidiaries without Public Accountability: Disclosures (Subsidiaries Standard), which will be issued before the proposals in the ED are finalised. It will permit eligible subsidiaries to apply the recognition, measurement and presentation requirements in IFRS Accounting Standards with reduced disclosures

Comments on the proposed changes are requested by 29 March 2024.

Effective date

The IASB will decide on the effective date for the proposed amendments after exposure. The IASB proposes to require an entity to apply the amendments retrospectively. Earlier application would be permitted.

Additional information

Please click for:

• IASB press release
• Access to the exposure draft on the IFRS Foundation website
• Snapshot offering an overview of the proposals
• Short video with IASB member Zach Gast explaining the proposals
• iGAAP in Focus newsletter
• Our IAS Plus project page on Financial instruments with characteristics of equity

The study Intended and Unintended Consequences of IFRS 15 adoption focused on addressing the following broad research questions:

• How do regulatory changes impact financial reporting in terms of the relevance and usefulness of the information produced for users?
• To what extent have management control systems changed as a result of the IFRS 15 implementation and thereby affected the decision-making process of entities?

The findings of the study shed light on the costs (both one-off and ongoing costs) faced by preparers as well as the benefits (for both preparers and users) of implementing the standard.

Please click to access the study on the EFRAG website.

Key proposals in IFRS Accounting Taxonomy — Proposed Update 2 include:

• Enhanced comparison of narrative information.
• Financial instruments based on common reporting practice.
• General improvements.
• Technology update.

Comments on the proposals are requested by 5 January 2024. For more information, see the press release on the IFRS Foundation’s website.

The guide summarises recent key developments in corporate reporting, with respect to trends in sustainability reporting and sustainability-related financial reporting. It has been updated following the developments in mandatory and voluntary reporting standards and frameworks, including the International Sustainability Standards Board (ISSB) and the Taskforce on Nature-related Financial Disclosures (TNFD).

Please click to download Navigating the Reporting Landscape from the A4S website.

Par­tic­i­pants at the meeting, which was chaired by IASB member Tadeu Cendon, were introduced to and discussed the prospective IFRS Accounting Standards (1) IFRS 18 Presentation and Disclosures in Financial Statements and (2) Subsidiaries without Public Accountability: Disclosures. In addition, members were provided an overview of the IASB’s tentative decisions on the equity method project and updated on the IASB technical work, hyperinflation, business combinations under common control, and application issues in Zimbabwe and Namibia.

Please click for access to the full report on the IFRS Foundation's website.

Initial consideration:

IAS 37 Provisions, Contingent Liabilities and Contingent Assets—Climate-related Commitment: The IFRS IC received a submission asking its views on how IAS 37 applies to climate-related commitments to a fact pattern where an entity manufacturer of household products publicly states a net-zero transition commitment. The manufacturer published a detailed plan for the modification of the manufacturing method to achieve 60% reduction in emissions in nine years and to buy carbon credits to offset its remaining emissions after those nine years. The submitter asked i) whether the public statement of a net zero transition commitment creates a constructive obligation as defined in IAS 37; ii) whether a constructive obligation created by a net zero transition commitment meets the criteria in IAS 37 for recognising a provision; and iii) if a provision is recognised, whether the expenditure required to settle it recognised is as an asset or as an expense when the provision is recognised.

IFRS 8 Operating Segments—Disclosure of Revenues and Expenses for Reportable Segments: The IFRS IC received a submission asking about the application of IFRS 8:23 which requires an entity to report a measure of profit or loss for each reportable segment and to disclose specified amounts for each reportable segment. The submitter said it observes diversity in its jurisdiction in the application of two aspects of IFRS 8:23: (a) how to read the requirement for an entity to disclose the specified amounts applying IFRS 8:23(a)-(i) for each reportable segment; and (b) how to determine ‘material items’ applying IFRS 8:23(f). The staff believes that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine the accounting treatment or disclosure requirements for the above submission. The staff recommends not to add a standard-setting project to the work plan and instead to publish tentative agenda decisions.

Finalisation of agenda decision:

IAS 27 Separate Financial Statements—Merger between a Parent and Its Subsidiary in the Separate Financial Statements: In its June 2023 meeting, the IFRS IC discussed a submission about how an entity applies IAS 27 to account for a merger with its subsidiary (which contains a business) in its separate financial statements and whether the merger should be accounted for as a business combination applying IFRS 3 or whether the parent entity should recognise the subsidiary’s assets and liabilities at their previous carrying amounts (carrying amount method). In the meeting, the IFRS IC members generally agreed with the staff’s analysis. The respondents to the agenda decision provided comments on different perspectives of the agenda decision. The staff recommends that the agenda decision be finalised, with some proposed changes.

IFRS IC input to IASB projects:

Climate-related and Other Uncertainties in the Financial Statements: In its September 2023 meeting, the IASB discussed potential actions it could take to help address concerns about reporting the effects of climate-related risks in financial statements. The IASB decided to consult the IFRS IC on how entities apply the requirements in IAS 36 in measuring value in use when an asset is subject to highly variable future cash flows over an extended time horizon. The IASB seeks input from the IFRS IC on the concerns identified in respect of lack of compliance due to misunderstanding of the requirements, limitations of the requirements and insufficiently clear requirements in IFRS Accounting Standards.

Provisions—Targeted Improvements: The IASB is conducting a project to make three targeted improvements to IAS 37. The IASB seeks IFRS IC input on one of the proposed improvements with respect to: i) initial suggestions for possible amendments to the requirements and illustrative examples supporting the ‘present obligation’ recognition criterion in IAS 37; and ii) whether to add to IAS 37 application requirements specifying when an entity has a present obligation for costs payable if a measure of its activity—for example, its revenue or carbon emissions—exceeds a specified threshold.

Power Purchase Agreements: In July 2023, the IASB added a project to its work plan to research whether narrow-scope amendments to IFRS 9 could be made to better reflect how financial statements are affected by Power Purchase Agreements (PPAs). The project team has conducted further research on the prevalence of PPAs and how to restrict the scope of any potential standard-setting solution to limit the risk of unintended consequences for other contracts or transactions to purchase non-financial items. The IASB seeks IFRS IC members’ input into the additional research performed.

The full agenda for the meeting and our comprehensive pre-meeting summaries can be found here.

The topics discussed at the meeting included:

• IASB and ISSB update
• Post-implementation Review of IFRS 15
• Climate Related and Other Uncertainties in the Financial Statements
• Equity Method

The meeting summary is available on the IFRS Foundation’s website.

The webcast gives an overview of the new standard and explains why the IASB developed it, who are the subsidiaries eligible to apply the new standard and the benefits it will bring to subsidiaries and their parent companies, as well as the users of financial statements.

Further webcasts in the series will explain the expected effects of the future standard.

Please click to access the webcast (9 minutes) on the IFRS Foundation website.

The introduction to the guidance notes:

With the introduction of mandatory climate-related disclosures climate reporting entities will need to help users understand whether, how, and to what extent, climate-related matters are reflected in an entity's financial statements. Financial statements and climate-related disclosures supplement and complement each other and together should present a coherent picture.

The publication analyses the coherence between financial statements and climate-related disclosures in three broad chapters:

1. Impact of climate-related matters in financial statements
2. Coherence between financial statements and climate-related disclosures
3. Differences between financial statements and climate-related disclosures

It also offers an appendix on the coherence principle.

The guidance follows similar publications by the AASB (2018/2019) and the IASB (2020/2023).

Please click to download Climate-related matters in financial statements on the XRB website.