The discussion paper forms part of IASB’s efforts to address the application issues and other challenges related to IAS 32 Presentation and clarify its underlying principles in the process.

EFRAG considers that the application issues that arise with IAS 32 are pervasive enough to require standard-setting activity and welcomes the IASB’s efforts to respond to challenges in distinguishing financial liabilities from equity instruments.

While EFRAG notes that IASB’s preferred approach considers a number of its past requests, there are continuing reservations over some of the proposals.

Specifically, these include:

• the balance of costs and benefits of the information provided by attributing comprehensive income to subclasses of equity;
• separate presentation in the statement of financial position and statement of financial performance for partly independent derivatives;
• accounting for standalone derivatives to extinguish an equity instrument on a bases consistent with accounting for a compound instrument;
• the proposed removal of the foreign currency rights issue exemption; and
• classification changes for financial instruments that, to EFRAG’s knowledge, do not raise concerns in practice today.

More generally, EFRAG notes that the approach in the discussion paper introduces completely new terminology.

While it acknowledges that a better articulation of IAS 32’s underlying principles could be an effective way to improve the consistency, clarity and completeness of the requirements and would require new terminology, EFRAG points out that a new terminology would also require preparers and auditors to reconsider some past classification decisions.

EFRAG warns that this approach will also cause some disruption, create additional costs for preparers and risks the emergence of new issues and uncertainties. In EFRAG’s 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.

Finally, EFRAG considers that the IASB should further analyse the possibility of accounting for all standalone and embedded derivatives as derivative assets and liabilities under the scope of IFRS 9 Financial Instruments.

EFRAG is seeking comments on its draft response by a deadline of 3 December.

EFRAG’s draft response is here

Report by Pat Sweet