Financial Instruments with Characteristics of Equity
Where are we in the project?
On 28 February the IASB published a discussion paper Financial Instruments with Characteristics of Equity . The discussion paper was open for comment until 5 September 2008 .
View the Discussion Paper and Comment Letters
The discussion paper contained an IASB Invitation to Comment and the FASB Preliminary Views document.
The goal of the discussion paper was to solicit the views of interested parties on whether the proposals in the FASB document would be a suitable starting point for the IASB’s deliberations or whether there are alternative approaches.
In October 2008 the IASB discussed the comment letters received and which approach provided the best starting point. The IASB and FASB decided to begin future deliberations using the principles underlying the perpetual and basic ownership approaches.
Under the perpetual approach, an instrument would be classified as equity if it:
- lacks a settlement requirement and
- entitles the holder to a share of the entity’s net assets in liquidation.
Under the basic ownership approach, an instrument would be classified as equity if it:
- is the most subordinated claim and
- entitles the holder to a share of the entity’s net assets.
The boards acknowledged that they may decide to make exceptions to the basic principles as they continue to develop an approach to identify equity instruments.
This is a joint project with the FASB. The boards are working together to develop and publish an exposure draft.
Why are we undertaking this project?
Constituents have asked the IASB to simplify and improve the accounting for financial instruments. This is one of three long term project s on the IASB’s agenda to address issues related to financial instruments.
IAS 32 Financial Instruments: Presentation provides the relevant guidance for distinguishing between asset and liability instruments (non-equity instruments) and equity instruments.
In general, there are two broad classes of criticisms that arise from the distinction set out in IAS 32:
(a) how the principles in IAS 32 should be applied and
(b) whether application of those principles results in an appropriate distinction between equity instruments and non-equity instruments.
Project objectives
The objective of this project is to improve and simplify the financial reporting requirements for financial instruments with characteristics of equity. Specifically, this project is intended to:
- Develop a better distinction between equity and non-equity instruments
- Converge IFRS and US GAAP in this area
Is this project part of the Memorandum of Understanding?
Yes, this project forms part of the Memorandum of Understanding (‘MoU’) between the IASB and the FASB. The MOU sets out a Roadmap of Convergence between IFRSs and US GAAP.
One of the goals set out in the MoU is to have issued one or more due process documents relating to a proposed standard on the distinctions between financial liabilities and equity instruments by 2008.
This is a modified joint project on which the FASB took the lead for the research stage. In November 2007 the FASB issued a Preliminary Views document Financial Instruments with Characteristics of Equity. In February 2008 the IASB published a discussion paper that contained an IASB Invitation to Comment and the FASB document.
View the FASB project Web pages , including the FASB PV.
Related projects
In addition to this project, there are two other long-term projects on financial instruments:
There are other projects that are related to this project: