News type icon

23/08/2018 - 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.


​In its Draft Comment Letter, EFRAG welcomes the Discussion Paper and the IASB’s efforts to address the application issues and other challenges related to IAS 32 and clarify its underlying principles in the process.

EFRAG considers that the application issues that arise with IAS 32 are pervasive enough to require standard-setting activity and welcomes the IASB’s efforts to respond to challenges in distinguishing financial liabilities from equity instruments.

EFRAG also welcomes the fact that the IASB’s preferred approach considers a number of EFRAG’s past requests. However, EFRAG has 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 notes that the approach in the DP introduces completely new terminology. EFRAG acknowledges that a better articulation of IAS 32’s underlying principles could be an effective way to improve the consistency, clarity and completeness of the requirements and would require new terminology. However, new terminology would also require preparers and auditors to reconsider some past classification decisions. Accordingly, this approach, while addressing various interpretive issues, will also cause some disruption, create additional costs for preparers and risks the emergence of new issues and uncertainties. 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 is essential.

Finally, EFRAG considers 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.

During its consultation period, EFRAG will reach out to national standard setters, users of financial statements, preparers, regulators, business associations and other accounting experts. Please be attentive to future announcements.

EFRAG's draft comment letter can be found here.