The six-month consultation period aims to address current problems when the issuers of financial instruments have to distinguish between financial liabilities and equity instruments under IAS 32 Financial Instruments: Presentation.

Going forward, the IASB will review feedback before deciding whether to proceed with an exposure draft with proposals to amend or replace IAS 32, or may decide to issue non-mandatory guidance, possibly to be available in 2019.

That distinction is important because the classification of the instruments affects how a company's financial position and performance are depicted.

Currently investors complain that it is difficult to differentiate between performance of various types of financial instrument as there is limited disclosure, and that which is available, lacks detail.

The IASB said the plan is to improve the information companies provide in their financial statements about financial instruments they have issued, by reviewing the classification of financial instruments applying IAS 32.

It will also develop clearer principles for classification and enhanced requirements for presentation and disclosure

Although IAS 32 works well for most financial instruments, the rapidly changing financial market with multiple types of loan and equity means that the standard is not keeping up with newest products.

IASB accepts that companies can have difficulties when it comes to classifying some complex financial instruments that combine some features of both debt – liabilities, and ordinary shares -equity instruments.

This can result in diverse accounting in practice, which can make it difficult for investors to assess and compare companies' financial position and performance. In addition, investors have been calling for better information, particularly about equity instruments.

The IASB has responded to feedback from investors and is now proposing the following approach:

provide a clear rationale for why a financial instrument would be classified as either a liability or equity without fundamentally changing the existing classification outcomes of IAS 32; and

enhance the information provided through presentation and disclosure.

This approach would provide investors with more in-depth and comparable information about financial instruments issued by companies based on a set of up-to-date, clear principles.

Hans Hoogervorst, chair of the IASB, said: ‘Our approach aims to meet the needs of both investors and companies by providing investors with better information and companies that issue financial instruments with clearer guidance on how to account for those instruments.’

This project does not address other accounting requirements for financial instruments, such as recognition and measurement requirements in IFRS 9 Financial Instruments or disclosure requirements in IFRS 7 Financial Instruments: Disclosures. 

The closing date for comment is 7 January 2019.

The 150-page IASB discussion paper, Financial Instruments with Characteristics of Equity

Overview: 16-page summary of the IASB discussion paper on IAS 21

Report by Sara White