International Accounting Standards Board
30 Cannon Street
London
EC4M 6XH
Commentletter@iasb.org
5 September 2008
Dear Sirs,
Financial Instruments with Characteristics of Equity
This is the British Bankers’ Association’s response to the above discussion paper. The BBA is the
leading association for the UK banking and financial services sector, speaking for 223 banking
members from 60 countries on the full range of UK or international banking issues and engaging with
37 associated professional firms. Collectively providing the full range of services, our member banks
make up the world's largest international banking centre, operating some 150 million accounts and
contributing £50 billion annually to the UK economy. We welcome the opportunity to comment.
General Comments
We recognise the shortcomings of IAS 32 outlined in paragraph 15 of the discussion paper and the
Board’s desire to resolve them. However we believe that IAS 32 works well for the majority of
companies in the majority of circumstances. There are other more pressing issues for the IASB to
address before redeliberation of IAS 32. The rationale for the project appears to be the real
uncertainty about how to differentiate between debt and equity within the context of the US GAAP.
We would suggest that this is in no small part due to the lack of an overarching principle and the
consequential layers of application guidance. This is at the heart of the difference between IFRS and
US GAAP and is why we consider principles-based IFRS to be superior.
Given this, we cannot agree that a ‘modified joint project’ is the best way for either Board to proceed
on this topic. The FASB Preliminary Views paper has been prepared to address the weaknesses in
the US GAAP framework and not the application of IAS 32. As a result the Preliminary Views
document fails to put forward suggestions which would substantially improve or simplify IFRS. In our
view, reconsideration of IAS 32 should start from a different place and be relevant to the issues
faced by those who apply IFRS.
We believe that a review of IAS 32 and thus a fundamental debate as to which financial instruments
are to be classified as equity and which as liabilities must start at the conceptual level. We note that
none of the approaches suggested in the discussion paper are consistent with the current
conceptual framework nor does the paper contain a rationale for distinguishing between equity and
liability. As the Boards are currently in the process of renewing the conceptual framework, we cannot
support the project to review IAS 32 forerunning the framework debate. By way of illustration of the
importance of this point, we highlight the fact that the proposals in the discussion paper are at odds
with the tentative definition of a liability that has been reached in the project on elements of financial
statements. As there does not appear to be an immediate desire to replace IAS 32 we would
suggest that it would be wise to develop definitions first within the context of the conceptual
framework and then proceed with a review of IAS 32. If done successfully, the revised standard
would in practice be application guidance for the classification of financial instruments as financial
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assets and financial liabilities. If the FASB’s constituents’ believe an immediate amendment to US
GAAP is necessary, we believe the FASB should proceed with this separately.
As a final point before turning to the specific questions, we would highlight the importance of the
agreed solution working for both separate financial statements and consolidated financial statements
without recourse to additional, arbitrary rules. We believe that both the basic ownership and
ownership-settlement approaches fail this test.
Below we comment on the questions posed in Appendix B of the discussion paper.
Specific Comments
B1 Are the three approaches expressed in the FASB Preliminary Views document a suitable
starting point for a project to improve and simplify IAS 32? If not, why?
We do not believe that the FASB Preliminary Views paper is a suitable place for the IASB to begin a
review to improve IAS 32. The paper fails to consider the conceptual reasons for the difference
between items considered to be equity and items considered to be debt in the context of financial
instrument measurement and the presentation of performance. A review should start by first
considering the purpose of the distinction between equity and liability before then developing a
principle capable of broad application. Also, as stated above, we believe it would be a mistake to
address the issue in isolation from the conceptual framework debate.
a) Do you believe that the three approaches would be feasible to implement? If not, what
aspects do you believe could be difficult to apply, and why?
It is difficult to make an assessment of the three approaches in the absence of a conceptual analysis
of how each approach meets the qualitative characteristics of relevance, reliability and decision
usefulness. We therefore suggest that the Boards should consider how each of the alternative
approaches balances the competing objectives of decision usefulness and the need for a principlesbased approach and reliance on economic substance of an instrument rather than its form.
At first review, we note that the basic-ownership approach looks at equity in isolation whereas IAS
32 considers financial instruments more generally. There could therefore be issues of scope to
overcome. We also stress that we would want to see a more thorough assessment of how the basicownership approach meets the objectives of financial reporting before reaching any determinative
conclusions its merits.
There are a number of shortcomings in the ownership-settlement approach. Intuitively it seems to be
‘outcomes-based’ rather than principles-based, as others have noted, this may be due to attempting
to accommodate the view that derivatives on own equity are nascent equity and that perpetual
instruments should be treated as equity. It is overly rules-based and therefore at odds with body of
IFRS and we do not believe it would address the application weaknesses profiled in the discussion
paper.
We find the reassessed expected outcome approach to be very complex and difficult to understand.
Consequently we expect it would be difficult to apply.
As noted above, we have concerns about how both the basic-ownership and ownership-settlement
approaches would be applied to consolidated financial statements.
b) Are there alternative approaches to improve and simplify IAS 32 that you would
recommend? What are those approaches and what would be the benefit of those
alternatives to uses of financial statements?
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Although we do not have any specific alternative approaches to recommend, we believe that the
EFRAG discussion paper on distinguishing between equity and liabilities contains a good analysis of
the issues and suggest that there are approaches and suggestions in the paper worthy of further
consideration. As noted above, we also believe that it is important for the answer reached in this
debate to be coherent with the new conceptual framework. We believe work should progress on the
elements of financial statements project and the definition of liabilities before this issue is reopened.
B2 Is the scope of the project as set out in paragraph 15 of the FASB Preliminary Views
document appropriate? If not, why? What other scope would you recommend and why?
No. We believe the scope of the Preliminary Views paper is too narrow to allow for the development
of a suitably broad principle. Any principle which is developed should be capable of application to all
types of balance sheet item, no matter whether they are financial instruments with characteristics of
equity or not.
B3 Are the principles behind the basic ownership instrument inappropriate to any types of
entities or in any jurisdictions? If so, to which types of entities are they inappropriate, and
why?
As stated in our response to question B1 (a) we are not convinced that the basic-ownership
approach is the correct solution to the issue of distinguishing equity and liabilities. Ideally, any
principle for distinguishing between debt and equity should be capable of application across all
entities and all jurisdictions. We would suggest that any classification system be extensively field
tested to establish whether there are certain types of entities or jurisdictions with legal traditions that
make application difficult. The not for profit sector may be one area where the principles are not
readily applicable.
B4 Are the other principles set out in the FASB Preliminary Views document inappropriate to
any types of entities or in any jurisdictions? (those principles include separation, linkage and
substance.) If so, to which types of entities or in which jurisdictions are they inappropriate
and why?
Please see our answer to question B3.
B5 Please provide comments on any other matters raised by the discussion paper.
We again reiterate our belief that the Board’s time would be better directed at more pressing topics.
If, however, after consideration of other constituents’ views a review of IAS 32 is deemed necessary
we would not support the FASB preliminary views document being used as the starting point for the
IASB’s to begin its considerations. Rather, we suggest, a review of IAS 32 should start at the
conceptual level and consider the reasons why financial instruments should be classified as equity
and which as liabilities and involve a review of the rationale of the classification of financial
instruments as equity or liabilities based specifically on IFRS.
Yours sincerely,
Paul Chisnall
Executive Director
Direct Line: 020 7216 8865
E-mail: paul.chisnall@bba.org.uk
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