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Comments from ACCA
16 May 2008

Puttable financial instruments and obligations arising on liquidation

ACCA is pleased to have this opportunity to comment on the Exposure Draft (ED) of proposed amendments to FRS25 relating to the above subject. The ED was considered at a recent meeting of the ACCA's Financial Reporting Committee and I am writing to give you their views.

General comments

While we understand the need for the IASB to have considered these amendments given that the previous requirements of IAS32 (and FRS25) could lead to counter-intuitive results, we believe that it would have been more appropriate to consider this issue in the context of the recently issued IASB discussion paper, Financial instruments with characteristics of equity .

We believe that the proposals in the ED will not improve the presentation of financial statements for entities in the UK, especially for those that operate in the funds industry or that operate as limited liability partnerships (LLPs). However, as a matter of principle we believe that consistency with IFRS is paramount and that individual, jurisdictional divergence should be avoided. Where it is felt that changes to IFRS are required, the Board should press the IASB to make such changes.

We therefore do agree with the Board's proposals to amend FRS25 to keep it in line with IAS32.

Specific questions raised by ASB

Q1 Do you consider that the proposals will improve the accounting for the instruments within the scope of the proposed amendment?

We appreciate that the extant requirements of FRS25 can lead to counter-intuitive results. This may be the case where liquidation is certain or at the option of the holder, and instruments that represent the last residual interests in the entity may be recognised as financial liabilities even when they have characteristics similar to equity. In this respect, we understand the IASB's reasons for amending IAS32 as providing a ‘short-term, limited scope amendment' designed to avoid such anomalous results.

We agree that this guidance will provide prescriptive clarity to the issue of accounting for the instruments within the scope of the amendments. However, we note that a number of entities (particularly in the funds industry) that have financial instruments with characteristics very comparable to equity, have in any case been able to adapt the presentation in the financial statements to distinguish rather different categories of financial instruments. We therefore believe that the proposed amendments are unlikely to improve the accounting for such instruments in these cases, and are likely to result in some similar financial instruments (shares) being classified as equity and some as liabilities, without necessarily providing a more faithful representation in the financial statements.

Nonetheless we strongly believe that UK standards should remain consistent with IFRS and that this factor outweighs any concerns regarding the proposed amendments.

Q2 Are you aware of any unintended consequences or problems that may arise as a result of the proposed amendments for UK entities?

As mentioned in our response to Question 1, the proposed amendments are likely to have an impact on the funds industry. We believe that there will be similar repercussions in the UK for entities that currently operate through LLPs. The revised standard could have the unintended result of classifying one class as equity and the other as debt and requiring a careful analysis to do so.

Q3 Are you aware of any other conflicts with other FRSs that should be addressed at the same time as those stated in the ED?

We are not aware of any conflicts with other FRSs as a result of the proposed amendments in the exposure draft, other than those stated by the Board in paragraph 16.

Q4 Do you agree that the benefits of the proposed amendment would outweigh any costs involved? If not, why not? It would be helpful if any significant costs that would arise on implementation of the proposal could be identified and quantified.

For some of the entities that have been highlighted above, which have multiple unit classes, there are likely to be additional costs in analysing the different features of puttable instruments as set out in the ED (paragraph 16A).

Again, echoing our response to Question 1, we believe that whilst the amendments do offer prescriptive clarity to the presentation requirements of FRS25, we believe that in practice many entities are already distinguishing between quasi-equity instruments in their financial statements and the accounting is not significantly enhanced by the proposals in the ED.

However, we reinforce our view that the importance of consistency with IFRS through adoption of these amendments to FRS25 does outweigh the additional costs of having to re-examine the rights and features of these instruments.

Q5 In line with the IASB's implementation date, the ASB is proposing that the [draft] amendments to FRS25 be effective for accounting periods beginning on or after 1 January 2009 and it is permitting early adoption? Do you agree with the proposed effective date?

We agree that the proposed amendment date be kept in line with the IASB implementation date, and that early adoption be permitted.

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