Financial Instruments with Characteristics of Equity (FICE) - 2018 IASB Discussion Paper

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.

To help European stakeholders to better understand the IASB discussion on FICE and EFRAG initial views on them, EFRAG also launched a video (here) and an webinar (here).

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.

Classification

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.

On 20 February 2019, EFRAG has published its feedback statement on the IASB's DP Financial Instruments with Characteristics of Equity and a video where Andrew Watchman, EFRAG TEG Chairman and CEO, explains how the comments received were considered by EFRAG during its technical discussions.

In December 2020 to agreed to move the Financial Instruments with Characteristics of Equity project from the research programme to the standard-setting programme.​ More information can be found here​.