Consultation: IASB/ ED/2023/5 Financial Instruments with Characteristics of Equity

ACCA welcomes the opportunity to provide views in response to the IASB’s exposure draft (ED) for Financial Instruments with Characteristics of Equity that aims to improve the requirements for classifying financial instruments with ‘debt-like and equity‑like characteristics’ and to improve the information an entity provides on such instruments.

This was done with the assistance of ACCA’s Global Forum for Corporate Reporting. Our general comments on the respective topics are as follows:

The effects of relevant laws or regulations.

There is scope to improve the proposed approach to consider laws and regulations. On one hand, considering only contractual rights and obligations that are enforceable by laws or regulations when classifying a financial instrument is sensible. But we have concerns that the sole focus on contractual obligations seems too narrow, and risks not considering the substance of the transaction. Separating a contractual obligation from

the relevant laws or regulations may be complex and risk introducing new application challenges. We believe that interactions with legal obligations should be considered.

We suggest the IASB considers another approach that will be closer to the Conceptual Framework (2018) in determining financial liabilities and so distinguishing them from equity. We also suggest the IASB clarify if, and how an entity should account for future changes in relevant laws or regulations. See the details in our comments to question 1.

Settlement in an entity’s own equity instruments

We welcome the proposals that clarify circumstances that meet the fixed-for-fixed condition including permissible adjustments and the treatment of share-for-share exchange arrangements.

We also suggest some changes to improve understanding of the different accounting treatment for an entity’s own equity instruments and the derivatives (rights, options and warrants) that it offers pro rata to all existing owners of the same class of its own non-derivative equity instruments. See the details in our comments to question 2.

Obligations to purchase an entity’s own equity instruments

We disagree with the proposed approach to measure the financial liability arising from an entity’s obligation to purchase its own equity instruments. While we acknowledge there are merits to the proposed approach, there are some significant concerns that need to be addressed by the IASB.

As for the proposed approach to remove the initial amount of the financial liability from a component of equity, we suggest the IASB consider the accounting treatment for circumstances where an entity has accumulated losses and does not have other components of equity besides issued share capital or non-controlling interests. See the details in our comments to question 3.

Contingent settlement provisions

We agree with the proposals that clarified:

  • the term ‘liquidation’,
  • that some financial instruments with contingent settlement provisions may be compound financial instruments with liability and equity components, and
  • that payments at the issuer’s discretion are recognised in equity even if the equitycomponent of a compound financial instrument has an initial carrying amount of zero.

We also agree with maintaining a principles-based approach and requiring the use of judgement in assessing whether a contingent settlement provision is genuine.

We, however, disagree with the proposed measurement approach. While there are merits to the proposed approach to measure the financial liability arising from a contingent settlement provision, we have some significant concerns that need to be addressed by the IASB. See the details in our comments to question 4.

Shareholder discretion

We support the proposed objective and the proposed factors for assessing whether shareholders are making individual decisions as investors (ie for their own interest) or making decisions for the entity. However, we suggest making the principle more definitive. Also, the concept of “interdependencies between shareholder decision-making rights” may not be easily understood and would require some examples to support understanding and application. See the details in our comments to question 5.

Reclassification of financial liabilities and equity instruments

We welcome the proposed clarification that generally prohibits the reclassification of a financial liability or an equity instrument after initial recognition, unless a change in circumstances external to the contractual arrangement occurs that changes the substance of the contractual arrangement. We believe the proposed approach would disincentivise opportunistic structuring to achieve a particular classification outcome at
initial recognition, and also save preparers from reassessing the classification of each financial instrument at each reporting date. It also differentiates ‘reclassification’ from modification to the contract that may result in the recognition of a new financial instrument following the derecognition of a financial liability.

However, we suggest the IASB consider permitting a relief for situations when the ‘date of change in circumstances’ is not determinable. See the details in our comments to question 6.


We received mixed views from stakeholders when discussing the proposed disclosure of terms and conditions of financial instruments. On one hand, the disclosure may help users understand the instrument’s (or its component’s) nature and its classification as either financial liability or equity. However, the usefulness of such granular information may diminish when an entity has many contracts with both financial liability and equity
characteristics during a reporting period.

Meanwhile, we believe the proposed disclosure requirements to help users comprehend the potential change in an entity’s debt-to-equity ratio, and the maximum potential dilution of ordinary shares are important. See the details in our comments to question 7.

Presentation of amounts attributable to ordinary shareholders

We generally do not agree with the proposed presentation of amounts attributable to ‘ordinary shareholders of the parent’ and ‘other owners of the parent’. See the details in our comments to question 8.


The proposed transition approach and the proposed transition reliefs are pragmatic. However, this ED introduces a high volume of new information to be disclosed when the proposed amendments to IAS 32, IAS 1 and IFRS 7 become effective at the same time. The required information may not be readily available for disclosure. We suggest the IASB consider the time that entities would reasonably need to get ready when deciding the effective date and consider providing specific reliefs when applying the full retrospective approach may involve undue cost or effort. See the details in our comments to questions 7 and 9.

Disclosure requirements for eligible subsidiaries

We have concerns about the volume of information to be disclosed and the usefulness of the information that needs to be disclosed by subsidiaries without public accountability. Given these entities do not have public accountability, the benefits of providing the proposed disclosures may not outweigh the costs. See the details in our comments to question 10.

To read the detailed response, please download the consultation response document on this page.