Financial Instruments with Characteristics of Equity (FICE) - 2023 Exposure Draft

• to clarify the underlying classification principles of IAS 32 to help companies distinguish between debt and equity;

• to require companies to disclose information to further explain the complexities of instruments that have both debt and equity features; and

• to issue new presentation requirements for amounts - including profit and total comprehensive income - attributable to ordinary shareholders separate to the amounts attributable to other holders of equity instruments.
  

• avoid classification changes that do not raise concerns in practice in order to avoid unintended consequences;

• consider whether a liability should be recognised for a Mandatory Tender Offer;

• discuss more comprehensively measurement issues of financial liabilities under the scope of IAS 32, such as those that arise from obligations to redeem own equity instruments and financial instruments with contingent settlement provision;

• reconsider the initial accounting within equity for written put options on non-controlling interest (NCI written put), as EFRAG disagrees with the IASB’s proposal to continue recognising non-controlling interest on initial recognition and considers that the debit entry should be against non-controlling interests;

• consider that many stakeholders disagree with presenting subsequent changes to the carrying amount of the financial liability in profit or loss;

• explore the alternative model to treat contracts which meet the definition of a derivative as a stand-alone derivative at fair value through profit or loss; and

• allow reclassification of 'passage-of-time changes'.

EFRAG also welcomed the proposed improvements to disclosures in IFRS 7, but expresses some concerns and suggestions in the following areas:

• disclosures on an entity’s contractual nature and priority on liquidation, especially on separation between subordinated and unsubordinated claims; and

• suggestion to provide disclosures on the effects of law on the classification as financial liabilities or equity instruments.

In addition, EFRAG supported the IASB proposals to separately present the amounts attributable to ordinary shareholders from other owners of the parent in the primary financial statements.

EFRAG's final comment letter

In its final comment letter, EFRAG appreciates the IASB's efforts and approach to addressing issues that arise in practice related to IAS 32 Financial Instruments: Presentation ('IAS 32') by clarifying some of the underlying principles in IAS 32 and adding application guidance to facilitate the consistent application of the principles.

EFRAG agrees with and welcomes many of the IASB's clarifications of the IAS 32 issues that arise in practice, particularly on the fixed-for-fixed condition, shareholder's discretion, presentation and transition requirements.

Nonetheless, EFRAG suggests that the IASB should pursue several improvements on the following requirements. In this regard, EFRAG:

• suggests that the IASB should discuss further measurement issues of financial liabilities with contingent settlement provisions under the scope of IAS 32;

• suggests that the IASB should allow reclassification if the terms and conditions become, or stop being, effective with the passage of time; and

• while agreeing with the disclosure proposals, suggests that the IASB should ensure that proposed disclosure requirements are clear, can be implemented by entities and ensuring an adequate cost-benefit balance, particularly on disclosures of terms and conditions related to priority on liquidation.

Furthermore, EFRAG disagrees with the topics on the effects of relevant laws and regulations and written put options on non-controlling interest and considers that there is a need for a more comprehensive discussion and outreach activities with constituents. EFRAG suggests that the IASB should:

• reconsider its proposals on the effects of relevant laws and regulations;

• reconsider the initial accounting within equity for written put options on non-controlling interest;

• discuss more comprehensively measurement issues of written put options on non-controlling interest; and

• further consider subsequent measurement of the redemption amount.

Therefore, EFRAG suggests that the IASB should separate the topics on the effects of relevant laws and regulations and written put options on non-controlling interest from the remaining topics in the ED and deal with them in a separate project. This is because EFRAG considers that the implementation of the other IASB proposals should not be delayed due to these two topics. Nevertheless, EFRAG highlights the urgency to find a solution for these two topics swiftly.

Moreover, before any of the IASB's proposals are finalised, EFRAG suggests testing these proposals and having outreaches with its constituents.

Survey results and feedback statement

​The Survey Results document provides an overview of European constituents’ views on the IASB’s Exposure Draft Financial Instruments with Characteristics of Equity (FICE) and these results were considered when finalising EFRAG’s Final Comment Letter.

The Feedback Statement summarises constituents' feedback to EFRAG with respect to the IASB’s Exposure Draft and explains how this feedback was considered in developing EFRAG’s Final Comment Letter.

The next IASB milestone is to decide project direction. Please refer to this EFRAG project page for the next steps of the project.