COMMENTS ON IASB DISCUSSION PAPER ON “FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF EQUITY”
I do not agree with the FASB’s Preliminary Views that the Basic Ownership Approach is the
most appropriate approach for distinguishing equity instruments from non-equity instruments
for the following reasons:
1.
The Basic Ownership Approach lacks conceptual justifications
The Basic Ownership Approach calls for a fundamental change in the principles and
concepts of the basic building blocks of financial statements. The topic could easily
become a conceptual framework project instead of an amendment to IAS32.
Having said that, I have not seen any convincing arguments for classifying only the
most subordinate interests as equity as advocated by the Basic Ownership Approach.
2.
The Basic Ownership Approach conflicts with the going concern principle
Paragraph 18a of the FASB Preliminary Views on “Financial Instruments with
Characteristics of Equity” states that one of the two characteristics of a basic
ownership instrument is that the holder has a claim to a share of the assets of the
entity that would have no priority over any other claims if the issuer were to liquidate
on the date the classification decision is being made.
Having liquidation as a basis for defining equity is not consistent with the going
concern principle, which is fundamental to financial reporting.
3.
The Basic Ownership Approach will complicate, instead of simplifying,
accounting for equity instruments
One of the claimed advantages of the Basic Ownership Approach is the reduction of
the complexity of financial reporting. However, the Approach will introduce an
added level of complexity in its application. In practice, it may be difficult to
determine which financial instruments are the most subordinate given the complex
terms of many hybrid instruments, such as convertible debts.
4.
Under the Basic Ownership Approach similar financial instruments will not be
accounted for similarly
Two same financial instruments issued by two entities may be accounted for
differently under the Basic Ownership Approach, depending on whether there is a
more subordinate instrument already issued. Users of financial statements will find it
difficult to compare financial instruments of different entities.
5.
Basic ownership instruments may be redeemable under the Basic Ownership
Approach
The Basic Ownership Approach will classify some redeemable instruments as equity
provided certain criteria are met.
The idea of a basic ownership instrument being redeemable is simply flawed.
MY RECOMMENDATIONS
A.
We need a simple and concise definition of equity
The fundamental characteristic of equity is that equity instrument holders will
participate directly in the risks and rewards of ownership. Any ownership interest
amounting to a direct participation in the profits, losses and residual value of an entity
is equity in nature. Such ownership interest includes any financial instrument that
will be converted into equity interests with value fluctuating in the same direction as
those ownership interests.
The demarcation between liabilities and equity should be based on the terms, i.e. the
nature, of an instrument itself rather than depending on the status of other instruments
issued by the entity.
B.
An application guideline of how to classify equity is needed
In order to avoid any attempts to circumvent accounting standards by means of
aggressive, and even abusive, structuring of financial instruments, a guideline is
needed in applying the definition of equity instruments. Without such application
guideline, inconsistent classification across entities may result.
The application guideline will probably make reference to the principle of “substance
over form” and will address issues like treatment of multiple component instruments
and EPS calculation.
Prepared by :
Date :
Note :
Paul Mok
18 July 2008
The above views represent those of Paul Mok only, not of any
organisations to which he is related.
莫恩禮簡歷
姓名：
莫恩禮博士
現職：
集團財務總監，東方海外（國際）有限公司
資歷：
中國北京大學經濟學博士
中國北京大學經濟學碩士
香港中文大學工商管理碩士
香港理工大學資訊系統碩士
英國倫敦大學榮譽法律學士
中國註冊會計師協會非執業會員
美國註冊會計師
英國特許公認會計師公會資深會員
英國特許管理會計師公會資深會員
英國特許秘書及行政人員公會資深會員
英國特許銀行學會會士
香港資深會計師
香港稅務學會資深會員
香港公司秘書公會資深會員
香港銀行學會會士
公職：


香港特別行政區政府行政長官委任稅務上訴委員會會員(自 2000 年起)
香港會計師公會
Member of Practice Review Committee (Statutory)
Member of Professional Standards Monitoring Committee
Member of Professional Accountants in Business Committee
聯絡：
地址： 香港港灣道 25 號海港中心 33 樓
電話： 2833 3522
電郵： paul.mok@oocl.com
Profile of Paul Mok
Name :
Dr Mok Yun Lee, Paul
(A qualified accountant in the US, the UK, China and HK; a
Chartered Secretary, a Chartered Management Accountant, a
Chartered Banker; holder of a PhD, three masters’ degrees and an
LLB)
Occupation :
Group Financial Controller, Orient Overseas (International) Ltd
Academic &
Professional
Qualifications :
Doctorate in Economics , Peking University
Master of Economics , Peking University
Master of Business Administration , The Chinese University of
Hong Kong
Master of Science in Information Systems, Hong Kong Polytechnic
University
Bachelor of Laws , University of London
CPA (PRC), The Chinese Institute of Certified Public Accountants
CPA (USA), The American Institute of Certified Public Accountants
Fellow of The Chartered Association of Certified Accountants (UK)
Fellow of The Chartered Institute of Management Accountants (UK)
Fellow of The Institute of Chartered Secretaries and Administrators (UK)
Associate of The Chartered Institute of Bankers (UK)
Fellow of The Hong Kong Institute of Certified Public Accountants
Fellow of The Taxation Institute of Hong Kong
Fellow of The Hong Kong Institute of Company Secretaries
Associate of The Hong Kong Institute of Bankers
Public Service :
Member of the Panel of the Board of Review (Inland Revenue
Ordinance)
Appointed by the Chief Executive of the HK SAR Government
since 2000
Hong Kong Institute of Certified Public Accountants
Member of Practice Review Committee (Statutory)
Member of Professional Standards Monitoring Committee
Member of Professional Accountants in Business Committee
Contact :
Address : 33/F Harbour Centre, 25 Harbour Road, Wanchai, Hong
Kong
Tel. No. : 2833 3522
E-mail : paul.mok@oocl.com
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