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The IASB discussion paper comprises a FASB Preliminary Views document “Financial Instruments with Characteristics of Equity” and an IASB Invitation to Comment. The IASB has still to decide whether to add a project on the equity versus liability classification to its work programme.
The FASB document discusses three approaches to distinguishing equity from liabilities. In contrast to current IAS 32, which defines an equity instrument as a financial instrument that is not a financial asset or a financial liability, all three approaches propose a stand-alone definition of equity.
EFRAG criticizes that the paper lacks a discussion as to the purpose of distinguishing between equity and liability. The paper talks a lot about the classification approach needing to be simple but this is not an end itself, EFRAG states.
EFRAG also underlines that a good case could be made for resolving most of the issues at the conceptual level before progressing further with this project. Finally, it is essential that whichever approach is eventually chosen works for both separate financial statements and consolidated financial statements without the need for additional, arbitrary rules, EFRAG says. That is not the case with either the basic ownership approach or the ownership-settlement approach as currently written up.
Comments on the draft comment letter are invited by