CESR comment letter to EFRAG on IASB - Financial Instruments with the characteristics of Equity
11 September 2008
CESR is among others concerned that possible 3-category approach as proposed by EFRAG could reduce both the understandability of information on capital and the reliability of some key financial ratios used by investors.
CESR is in general supportive of the comment letter prepared by EFRAG but also has a number of concerns. CESR disagrees, for example, that the reassessed expected outcome (REO approach) provides a practical solution to the distinction between liability and equity. CESR thinks that both the basic ownership approach and the ownership settlement approach could serve as a basis for a solution to this issue.
CESR is also concerned that possible 3-category approach – as proposed by EFRAG - could reduce both the understandability of information on capital and the reliability of some key financial ratios used by investors.
Further issues of concern include:
- Basic Ownership Instruments - it is not clear whether most of the instruments that would qualify for equity treatment under IFRIC No. 2, “Members’ Shares in Co-Operative Entities And Similar Instruments” (IFRIC 2) or the amendments to IAS 32 and IAS 1, “Puttable Financial Instruments And Obligations Arising On Liquidation”, would qualify for equity treatment under the Basic Ownership approach. CESR finds it surprising that the IASB, which recently adopted amendments to IAS 32 and IAS 1 to remedy what the Board characterized as the “lack of relevance and understandability of the current accounting treatment” of the equity interests of many entities would consider an alternative approach that may negate such changes. Perhaps the Basic Ownership approach does not in fact disqualify as many co-operative entity instruments from equity treatment as one might think.
- At a minimum any exposure draft should provide an in-depth discussion of the reconciliation of the Boards’ current views with respect to redeemable ownership instruments with IFRIC 2 and the recent amendments to IAS 32 for puttable shares.
- Scope of the project - CESR is concerned that while the Basic Ownership model would result in most share-based payment awards being treated as liabilities, the FASB indicates that it would have to consider at a future date whether the Basic Ownership model would apply to such awards.
- CESR suggests that EFRAG establishes a combined list of examples collected throughout Europe by National Standard Setters of instruments involving equity and/or liability,
Full letter
© CESR - Committee of European Securities Regulators
