March 28, 2024
Andreas Barckow
Chair, International Accounting Standards Board
Columbus Building
7 Westferry Circus
Canary Wharf
London, United Kingdom
E14 4HD
Sent via email to [email protected]
RE: Exposure Draft — Financial Instruments with Characteristics of Equity
Proposed amendments to IAS 32, IFRS 7 and IAS 1
IASB/ED/2023/5
Dear Mr. Barckow:
The Virginia Society of CPAs (VSCPA) Accounting & Auditing Advisory Committee (Committee) has reviewed the Exposure Draft — Financial Instruments with Characteristics of Equity (Proposed amendments to IAS 32, IFRS 7 and IASB 1) [ED] issued by the International Accounting Standards Board (IASB). The VSCPA is the leading professional association in Virginia dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. The VSCPA membership consists of nearly 13,000 individual members who actively work in public accounting, private industry, government, and education.
The Committee supports the objective to clarify the requirements of IAS 32 in order to reduce diversity in practice and address identified practice issues. However, the Committee has summarized the following four points that should be considered prior to finalizing the proposed changes to the requirements.
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The effects of relevant laws or regulations
The Committee recommends that the IASB not proceed with the proposed changes. Rather, an “all-inclusive” approach in which all rights and obligations are considered regardless of their origins, i.e., contractual obligations or laws & regulations. The existing required disclosures of IFRS 7 appear adequate to address any incremental value to the stakeholders.
The focus on contractual terms that are incremental to laws & regulations could lead to further inconsistency. The distinction between which rights or obligations are created by laws & regulations or by contractual terms is frequently not straightforward and would require additional legal consultations across differing legal frameworks. For example, some jurisdictions follow a common law framework while others follow a civil legal framework. This distinction would require additional effort and costs with unknown or little benefits and could lead to further inconsistencies given the level of legal and financial judgements involved. -
Settlement in an entity’s own equity instruments
The Committee generally agrees with the proposed changes to clarify whether the fixed-for-fixed condition in paragraph 16(b)(ii) is met. However, further clarification should be made in paragraph 22B.
The application of the proposed amendments in paragraph 22B could result in entities with shares denominated in multiple currencies classifying a contract as a liability, rather than equity, if the instrument exchanges a fixed number of shares for a fixed consideration and the denomination of the shares and consideration are in the same currency, which differs from the entity’s functional currency. -
Contingent settlement provisions
The Committee agrees that the proposed clarifications to paragraph 11 and 25 and the addition of paragraph 32A will improve consistency in practice. However, the Committee disagrees with the proposed measurement model; specifically, paragraph 25A which requires entities to disregard the expected timing and probability of the occurrence of the contingent events. It appears more appropriate to use the IFRS 9 measurement criteria for both the initial and subsequent measurements.
The addition of paragraph 25A requires entities to ignore the probability and estimated timing of occurrence of or non-occurrence of uncertain future events or circumstances when determining the initial and subsequent measurement of the financial liability arising from the contingent settlement provision. This would result in inconsistency in practice as well as the overstatement of liabilities associated with contingent settlement provisions.
The Committee is also unsure as to why the measurement criteria from IFRS 9 would not be appropriate for these purposes. -
Reclassification of liabilities and equity instruments
The Committee generally supports the proposed amendments to the reclassification of financial liabilities and equity when the substance of the contractual agreement changes due to changes external to the contractual agreement. However, the proposal should also require reclassification from financial liabilities to equity when the liability feature of an instrument has expired, such as when a conversion ratio that failed the fixed-for-fixed condition at initial recognition subsequently meets the criteria of the applicable contractual terms. The continued recognition of a financial liability when it no longer meets the definition of a financial liability does not appear appropriate and is inconsistent with IAS32 paragraph 16E and IFRS 9 paragraph 3.3.1.
The Board should also consider a clarification of AG35A(a). A change in functional currency would not necessarily result in a change in the substance of the contractual arrangement and potential re-classification, for example, if the currency denomination of the shares and the cash consideration remained the same.
The Committee has no additional comments on the ED at this time.
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The VSCPA appreciates the opportunity to respond to this update. Please direct any questions or concerns to VSCPA Vice President, Advocacy & Pipeline Emily Walker, CAE, at [email protected] or (804) 612- 9428.
Sincerely,
Zach Borgerding, CPA
Chair 2023-2024
VSCPA Accounting & Auditing Advisory Committee
VSCPA Accounting & Auditing Advisory Committee 2023-2024
Zach Borgerding, CPA — Chair
Michael Phillips, CPA — Vice Chair
David Allen, CPA
Scott Davis, CPA
Joshua Keene, CPA
Nick Kinsler, CPA
Daniel Martin, CPA
Brian Minor, CPA
Elisa Obillo, CPA
Krisia Raya, CPA
Charles Valadez, CPA
Natalya Yashina, CPA