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The latter should be only considered in the new version of the Standard when the application of the general principles results in a classification which does not reflect the economic substance of the instrument.
Having said that, ESBG believes that the principles identified by the IASB are not always clear to apply to some instruments, therefore ESBG questions whether the DP introduces excessive complexity. If the IASB were not able to define a set of solid principles to distinguish between liabilities and equity, then ESBG would be more in favour of making limited changes to current IAS 32. This is in order to avoid new uncertainties in the classification between liabilities and equity and unintended accounting consequences.
ESBG also questions the fact that the DP does not specifically address interaction between 'contractual rights and obligations' and 'regulatory and legal' requirements which may impact the treatment of particular instruments (e.g. bail-in instruments). ESBG may agree that the classification should be focused on the contractual terms of a financial instrument (consistently with IAS 32 and IFRS 9); however we also note that in IFRS 17 Insurance Contracts specific legal issues are considered in the standard.
In ESBG´s view, there are still uncertainties on contingent convertible instruments (CoCos) which, upon a trigger event, may be mandatorily convertible into a variable number of own shares or there may be a mandatory write-down, which could also be at the discretion of the regulator. In this sense, ESBG would expect sufficient guidance to permit an understanding of how these instruments will be classified under the IASB preferred approach.