The International Accounting Standards Board (IASB) has published a discussion paper on how companies issuing financial instruments should classify them in their financial statements.
IAS 32 Financial Instruments: Presentation currently sets out how companies should distinguish financial liabilities from equity instruments. The distinction between the two is important because the classification of the instruments affects how a company’s financial position and performance are depicted.
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While IAS 32 works well for most financial instruments, continuing financial innovation means that it can be difficult for some companies to classify complex financial instruments which combine some features of both debt–liabilities–and ordinary shares–equity instruments.
Challenge in classifying these instruments can result in diverse accounting in practice. This in turn can make it difficult for investors to assess and compare companies’ financial position and performance.
The IASB has proposed an approach that would:
- 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.
By taking this approach the IASB intends to provide investors with more comparable information about financial instruments issued by companies.
IASB chair Hans Hoogervorst 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.”
The IASB has called for feedback on its proposed approach to help it develop a solution and is open for comments until 7 January 2019.
