The European Association of Cooperative Banks (EACB) gladly takes the opportunity to comment on the Discussion Paper Financial Instruments with Characteristics of Equity (‘FICE’), issued by the IASB on 28th June 2018 (the DP).
The EACB welcomes the IASB’s efforts to address the current application issues and other challenges related to IAS 32 Financial Instruments: Presentation.
In relation to the DP, the EACB welcomes in particular that the IASB’s preferred approach:
- retains the use of a binary split between liabilities and claims on equity;
- defines equity as ‘the residual interest in the assets of the entity after deducting all of its liabilities’;
- makes a shift to analyse the classification of financial liabilities and equity instruments from the perspective of the issuer.
On the other hand, EACB notes that the approach in the DP introduces completely new terminology. Such new terminology would require preparers and auditors to reconsider a wide range of past classification decisions. Accordingly, this approach, while addressing various interpretative issues, will also cause some disruption, create additional costs for preparers and bears risks for the emergence of new issues and uncertainties. In our 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 is essential.
The members of the EACB have doubts regarding the advantages of a move to a new approach. To address the need for information on hybrid financial instruments, we believe that it would be appropriate to supplement the existing requirements of IAS 32, for example to provide information on ranking, dependency on the payment of business factors or write-down (bail-in instruments). However, an extension of the identification and presentation rules should be done with extreme care. Finally, it should be underlined that IFRIC 2 does not cover the second new criteria of the preferred approach.