Amendment to FRS 25 - Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation
Comments from ACCA
October 2006
ACCA is pleased to comment on the above exposure draft (ED) of amendments to IAS32 Financial instruments: presentation and IAS1 presentation of financial statements. The ED was considered by ACCA's Financial Reporting Committee and I am writing to give you their views.
We do not support the proposed amendments being implemented.
We broadly support the alternative views put in paragraphs AV1 to AV5 of the ED. In particular we think this ED represents a departure from a principles-based standard to a rules-based exception. There does not seem a compelling case for existing definition of liabilities to be adjusted in this instance of financial instruments puttable at fair value. There appears to be a separate 'modified joint' project with FASB which is considering the distinction between equity and liabilities. This issue should be considered in that context.
Were the general definition of liabilities to be adjusted in this direction, as might be possible as part of that project or of the revision of the conceptual framework, we are not sure that the requirement of redemption at fair value would be the critical feature. For example a right to be paid a pro-rata share of net assets might be sufficient.
In the revisions to the conceptual framework, the designated class of users of financial statements is proposed to be extended to lenders as well as equity investors. The reclassification of these instruments as equity seems more driven by the investors' point of view (the share in the residue of net assets) than that of a lender who might view these as subordinated liabilities where there is an obligation for them to be redeemed.
In terms of the urgency of the issue, we note that a number of entities that have financial instruments with characteristics very comparable to equity, have been able to adapt the presentation in the financial statements to distinguish rather different categories of financial instruments.
If despite the above views, the amendments are made then we would support the proposed disclosure requirements and transitional provisions.