15/01/2024 - EFRAG’s draft comment letter on the IASB’s ED Financial Instruments with Characteristics of Equity and invitation to participate in online survey and extensive field-test

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

EFRAG suggests that the IASB should:

• 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 welcomes 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 supports 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 draft comment letter can be found here. The deadline for comments is 20 March 2024.

Field-testing the ED proposals

EFRAG highlights the importance of assessing, through fieldwork and outreach events, the likely effects of the changes proposed by the IASB. Therefore, in close coordination with European National Standard Setters, EFRAG is conducting field-testing of the IASB's proposals that are included in the ED.

Purpose and nature of the field-testing

The purpose of the field-testing is to assess whether there are any unintended consequences arising from the IASB's proposals, the potential changes to the classification of the financial instruments under the scope of IAS 32, and the costs and benefits of the IASB proposals, including those arising from the proposed disclosures. The results will be incorporated in EFRAG's final comment letter.

EFRAG will be conducting both:

• an extensive field-test

• to provide information on the effects of the application of the IASB proposals on classification, presentation, disclosures and transition on an entity's existing financial instruments; and

• to identify potential implementation and application concerns, to determine whether there is a need for additional guidance, and to estimate the efforts required to implement and apply the proposals; and

• an online survey - more qualitative in nature - for those entities that are not able to perform the extensive field-test.

How and when will the field-testing be conducted?

Entities can indicate their interest to participate in the extensive field-test at: fice@efrag.org by 23 January 2024.

Those that intend to participate in the online survey do not need to register beforehand.

For the extensive field-test, participants will be asked to run a simulation exercise by applying the IASB proposals and comparing the results with current accounting (where applicable) and assessing potential implementation and application concerns. The EFRAG Secretariat will closely communicate with field-testing participants during the whole process. The findings of the participants will be discussed in a workshop in March 2024. The workshop will be run by the EFRAG Secretariat in cooperation with the representatives of the European National Standard Setters.

For the online survey, participants will be asked questions which are more qualitative in nature of the impact of the IASB proposals including any potential implementation and application concerns.

Both, the extensive field-test and the online survey will be conducted from February to early March 2024.

All EU corporates, banks or insurers applying IFRS Accounting Standards are welcome to participate.

If you would like to receive more information about the field-testing, please contact fice@efrag.org.