On 29 November 2023, the International Accounting Standards Board (IASB) published Financial Instruments with Equity Characteristics – Proposed Amendments to IAS 32 Financial Instruments: Presentation, IFRS 7 Financial Instruments: Disclosure and IAS 1 Presentation of Financial Statements (Exposure Draft), which will be due until 29 March 2024.
The main revisions to the Exposure Draft include three aspects and cover three criteria.
Impact of relevant laws and regulations
When classifying a financial instrument (or part thereof) as a financial liability, financial asset or equity instrument, only contractual rights and obligations that are legally enforceable and in addition to those provided for in the relevant laws and regulations are considered. If a right or obligation arises from the relevant laws and regulations and will arise whether or not it is included in a contractual arrangement, the company should not take that right or obligation into account when classifying a financial instrument (or part thereof).
The "fixed-for-fixed" settlement of the enterprise's own equity instruments
To meet the need for a fixed exchange condition, the amount of the exchange consideration for each of the enterprise's own equity instruments must be denominated in the functional currency of the enterprise and be fixed (and will not change in any case) or only due to maintenance adjustments and changes over time.
If a derivative instrument allows a party to choose between two or more types of its own equity instruments for settlement, the enterprise should consider whether each class of its own equity instruments that it may deliver at the time of settlement satisfies the conditions for a fixed exchange of fixed trades. Such derivatives are equity instruments if and only if all available settlement methods satisfy the fixed-swap condition.
In the future, a contract that must be settled or can be settled with a fixed number of non-derivative equity instruments of one type of enterprise in exchange for a fixed number of other types of non-derivative equity instruments of another type of enterprise is an equity instrument.
The obligation to repurchase the enterprise's own equity instruments
At the time of the initial recognition of the obligation to repurchase the enterprise's own equity instruments, the initial amount of the financial liability will be deducted from the non-controlling interest or the equity component other than the issued share capital if the enterprise has not yet acquired the rights and returns related to the ownership of the equity instruments to which the obligation relates.
Enterprises should adopt the same approach for the initial and subsequent measurement of financial liabilities, i.e., the liabilities are measured at the present value of the resale amount, regardless of the likelihood and estimated timing of the exercise of the resale right by the counterparty. Any gain or loss on the remeasurement of financial liabilities is recognized in profit or loss.
Contingent billing terms apply
the initial and subsequent measurement of financial liabilities arising from contingent settlement clauses (or the liability component of composite financial instruments), without regard to the probability and estimated timing of the occurrence or non-occurrence of contingencies; Even if the initial book value of the equity component of the composite financial instrument is zero, payments at the discretion of the issuer should be recognized in the equity; "Liquidation" means the proceedings commenced after the permanent cessation of its operations; The assessment of whether a contract provision is "virtually unlikely" is to be judged on the basis of specific facts and circumstances, rather than solely on the probability or likelihood of a contingency occurring.
Shareholders have the right to make their own decisions
IASB clarifies that whether a company has the right to unconditionally refrain from handing over cash or other financial assets depends on the facts and circumstances that give rise to shareholders' discretion. Judgment is required to evaluate whether a shareholder decision is considered a corporate decision, and four factors need to be considered when evaluating whether a shareholder decision is considered a corporate decision.
Reclassification between financial liabilities and equity instruments
Add a general requirement prohibiting the reclassification of financial instruments after initial recognition, unless paragraph 16E of IAS 32 applies or the substance of the contractual arrangement changes as a result of a change in circumstances outside the contractual arrangement. It is expressly provided that if the substance of a contractual arrangement changes as a result of a change of circumstances outside the contractual arrangement, the enterprise shall reclassify the financial instruments using the future-applicable approach from the date of the change of circumstances.
The IASB proposes to improve the disclosure of information on the nature and priority of claims arising from the liquidation of a business due to financial liabilities and equity instruments within the scope of IAS 32; terms and conditions of the financial instrument; information about complex financial instruments; the potential dilution of the ownership structure of the Company by financial instruments issued at the reporting date that can be settled with common shares; Financial instruments that include the obligation to repurchase the enterprise's own equity instruments, etc.
IASB proposes to amend IAS 1 Presentation of Financial Statements (IAS 1) to show the amount attributable to ordinary shareholders (including total profit and comprehensive income) separately from the amount attributable to holders of other equity instruments.
The IASB will require companies to retroactively apply the revised IAS 32, IFRS 7 and IAS 1 by restating comparative information (full retrospective approach). However, in order to minimize costs, the IASB does not require a restatement of information for more than one comparison period, even if a company chooses or is required to present more than one comparison period in its financial statements.