Financial Instruments with Characteristics of Equity (FICE) - 2015 IASB Research Project
- Discussion paper consultation
- Filipe Alves, Fredré Ferreira, Vincent Papa
The IASB's research project on Financial Instruments with Characteristics of Equity (FICE) is a new round of a long debate on how to distinguish liabilities from equity instruments. The IASB has finalised its discussions on this project and issued a Discussion Paper on 28 June 2018. The Discussion Paper is open for comment until 7 January 2019.
EFRAG Draft Comment Letter
On 28 August, EFRAG published its draft comment letter in response to the IASB's Discussion Paper 2018/1 Financial Instruments with Characteristics of Equity (the 'DP'). EFRAG considered that the application issues that arise with IAS 32 are pervasive enough to require standard-setting activity and welcomed the IASB’s efforts to respond to challenges in distinguishing financial liabilities from equity instruments.
EFRAG also welcomed the fact that the IASB’s preferred approach considers a number of EFRAG’s past requests. However, EFRAG had reservations over some of the proposals in the DP, including:
the balance of costs and benefits of the information provided by attributing comprehensive income to subclasses of equity;
separate presentation in the statement of financial position and statement of financial performance for partly independent derivatives;
accounting for standalone derivatives to extinguish an equity instrument on a bases consistent with accounting for a compound instrument;
the proposed removal of the foreign currency rights issue exemption; and
classification changes for financial instruments that, to EFRAG’s knowledge, do not raise concerns in practice today.
More generally, EFRAG noted that the approach in the DP introduced completely new terminology. In EFRAG’s view a careful weighing of the potential benefits of a better articulation of the principles in IAS 32 against the potential risks of unnecessary disruption and unintended consequences was essential.
Finally, EFRAG considered that the IASB should further analyse the possibility of accounting for all standalone and embedded derivatives as derivative assets and liabilities under the scope of IFRS 9 Financial Instruments.
EFRAG organised a number of outreach activities and surveys (here) to collect the views of European stakeholders.
EFRAG also issued two bulletins (here) to help constituents better understand the IASB’s Discussion Paper Financial Instruments with Characteristics of Equity and participate in the debate on it.
EFRAG Final Comment Letter
On 1 February 2019, EFRAG publishes its comment letter in response to the IASB's Discussion Paper 2018/1 Financial Instruments with Characteristics of Equity which welcomes the IASB's efforts to address the issues that arise with IAS 32 Financial Instruments: Presentation but suggests the IASB to focus at this stage on targeted improvements to IAS 32.
EFRAG acknowledges the various challenges that arise from the application of IAS 32 Financial Instruments: Presentation, including the risk of inconsistent application in some areas and the limitations in the information provided to users of financial statements. EFRAG also appreciates the IASB's efforts to address the identified challenges by developing proposals relating to classification, presentation and disclosure.
EFRAG does not support the IASB's preferred approach to classification as a way forward to address the identified challenges as it introduces completely new terminology (which is likely to cause some disruption), it uses an amount feature on liquidation for classification purposes (which is inconsistent with the going concern principle) and any benefits of the preferred approach to classification are unlikely to outweigh the associated costs.
Presentation and Disclosures
EFRAG acknowledges the inherent limitations of any binary debt-equity split and welcomes the IASB's efforts to improve the presentation and disclosure requirements to provide additional information to users. Nonetheless, EFRAG does not support the proposed attribution of total comprehensive income to subclasses of equity and suggests that the IASB instead considers targeted improvements to IAS 33 Earnings per Share. EFRAG is also not convinced that expanding the use of OCI for financial liabilities with equity-like returns is the most appropriate way forward and suggests that the IASB instead considers enhanced disclosures.
As a way forward
At this stage, EFRAG suggests that the IASB focuses on targeted improvements to current requirements in IAS 32 and other standards (including IAS 33), particularly on improvements to disclosure requirements and the classification guidance on complex instruments with contingent settlement provisions.
EFRAG also suggests that some of the proposed supporting guidance could usefully be incorporated into IAS 32 as it could help address challenges identified in the application of IAS 32 in areas such as the fixed-for-fixed condition and the role of economic compulsion when the entity has alternative settlement options without replacing IAS 32 or introducing completely new terminology.
EFRAG acknowledges that some constituents are calling for a more conceptual and less rule-based approach to distinguishing debt from equity. However, at this stage EFRAG has not identified any consensus among those constituents on how to achieve this in a reasonable timeframe. Therefore, developing a more conceptual and less rule-based approach is going to be very challenging and any alternative that results in widespread classification changes is likely to prove controversial (as with previous approaches discussed by the IASB and EFRAG).
Accordingly, EFRAG suggests that the IASB reconsiders whether to continue a comprehensive FICE project (e.g. as part of its next agenda consultation) which would consider, in a longer term, the different approaches referred by the respondents to the DP.
01/02/2019 - EFRAG Comment Letter on the IASB DP/2018/01 on the distinction between liabilities and equity
EFRAG has published its comment letter in response to the IASB's Discussion Paper 2018/1 Financial Instruments with Characteristics of Equity (the 'DP') which welcomes the IASB's efforts to address the issues that arise from IAS 32 Financial Instruments: Presentation but suggests the IASB to focus at this stage on targeted improvements to IAS 32.
22/11/2018 - Reminder: Debt or equity? Impact assessment surveys
EFRAG has extended the deadline until 30 November 2018 for its user and preparer surveys seeking views on the likely impact of the proposals of the IASB Discussion Paper Financial Instruments with Characteristics of Equity on the distinction between debt and equity.
01/11/2018 - A clearer picture on FICE
EFRAG has issued two bulletins to help constituents better understand the IASB’s Discussion Paper Financial Instruments with Characteristics of Equity and participate in the debate on it.
24/10/2018 - Debt or Equity? - Impact assessment surveys
EFRAG seeks feedback from preparers and users of financial statements to assess the impact of the IASB’s Discussion Paper Financial Instruments with Characteristics of Equity on distinction between debt and equity.
EFRAG invites you to complete the appropriate survey by 26 November 2018. Your participation will help enrich the quality and representativeness of the overall findings.
26/09/2018 - FICE consultation update
Get up to speed with EFRAG's draft comment letter on FICE in the latest EFRAG video.
28/08/2018 - EFRAG Draft Comment Letter on the IASB DP/2018/01 on the distinction between liabilities and equity
EFRAG has published its draft comment letter in response to the IASB's Discussion Paper 2018/1 Financial Instruments with Characteristics of Equity (the 'DP') and seeks constituents' views on the proposals. Comments on the draft comment letter are requested by 3 December 2018, by close of business.