On 25 June, the IASB a published a discussion paper presenting its current thinking on the Financial Instruments with the Characteristics of Equity project (FICE).
Keywords: Mazars, Thailand, IFRS, FICE, IASB, IAS 32, OCI
23 August 2018
This project focuses on the distinction between debt and equity for financial instruments in the issuer’s accounts. The discussion paper is open for comments until 7 January 2019, and this feedback will help the Board to decide whether it should publish an exposure draft to amend or replace IAS 32 and/or non-mandatory application guidance.
The IASB would like to address the growing number of financial instruments that combine the characteristics of debt and equity, which are sometimes difficult to account for under IAS 32. The hope is that this discussion paper will enable it to tackle these particular problems without amending the classification of the majority of other, less complex, instruments. Some key principles therefore remain unchanged, such as the exclusion of economic compulsion from the analysis of the classification.
The Board’s preferred approach to classification depends on two new criteria:
- a timing feature: there is an unavoidable obligation to transfer economic resources at a specified time other than at liquidation;
- an amount feature: there is an obligation to transfer an amount independent of the entity’s available economic resources.
A financial instrument with either of these two characteristics would be classified as a financial liability. Only instruments with neither characteristic are classified as equity.
A financial instrument only presenting the timing feature would be classified in debt but gains would be accounted for in other comprehensive income (OCI) rather than in profit or loss.
The discussion paper also presents the application of this approach to derivatives on own equity (including puts on non-controlling interests) and to compound instruments.
The IASB also offers some new avenues of thought with respect to the impact of these instruments on the statement of financial position and the statement of comprehensive income, along with new disclosures to be provided in the notes.