IASB Discussion Paper DP/2018/1 Financial Instruments with Characteristics of Equity

The International Accounting Standards Board (IASB) is seeking feedback on the topics explored in the Discussion Paper particularly on how companies issuing financial instruments should classify them in their financial statements. The objective of this Discussion Paper is to improve the information companies provide in their financial statements about financial instruments they have issued by:

  • investigating challenges with the classification of financial instruments applying IAS 32 Financial Instruments: Presentation and
  • considering how to address those challenges through clearer principles for classification and enhanced requirements for presentation and disclosure.

At present, IAS 32 sets out how the issuer should classify financial instruments as financial liabilities or equity instruments. It establishes principles for distinguishing financial liabilities from equity instruments. Although the requirements in IAS 32 have been applied well and their application have provided useful information to users, however, continuing financial innovation means that issuers find it challenging to use IAS 32 to classify some complex financial instruments that combine features of both liabilities and equity. Also, the reasons for particular classification outcomes when applying IAS 32 are not always clearly explained.

In responding to the challenges, the IASB proposes to limit unnecessary changes to classification outcomes of IAS 32 that are already well understood and considered to provide useful information. The IASB has sought to establish principles that would classify financial instruments by reference to the presence or absence of particular features. To establish those principles, the IASB’s preferred approach would classify a financial instrument as a financial liability if the instrument contains:

  • an unavoidable contractual obligation to transfer cash or another financial assets at a specified time other than at liquidation (the ‘timing’ feature); and/or
  • an unavoidable contractual obligation for an amount independent of the entity’s available economic resources (the ‘amount’ feature).

Financial instruments would be classified as equity instruments if they do not contain either of these two features.

The IASB’s preferred approach aims to provide clear classification requirements that can be applied consistently between issuers and that will result in consistent classification outcomes for different financial instruments with similar economic effects. 

To download the Discussion Paper, click here.

Invitation to comment

The Discussion Paper is open for comment until 16 November 2018.

You may provide your comments online or email us at technical@masb.org.my.