D2 - T6 - Instrumentos financieros con caracteristicas de patrimonio - Stephen Cooper

International Financial Reporting Standards

Financial Instruments with Characteristics of Equity Joint IFRS Foundation and INCP IFRS Conference, Cartagena November 2015

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

Š IFRS Foundation. 30 Cannon Street | London EC4M

Agenda • • • • •

Background and current requirements Case studies What are the challenges?

How are we approaching these challenges?

Next steps

3 International Financial Reporting Standards

Background and current requirements

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Š IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

About this project • The issue of debt vs equity has a long history in standard setting – on and off the agenda of the FASB and IASB since 1986 – the MoU project with the FASB (suspended in 2010)

• Responses to the Agenda Consultation 2011 noted continuing challenges with IAS 32 Financial Instruments: Presentation – however IAS 32 proved robust during financial crisis

• The IASB considered some of the issues in the Conceptual Framework project • The Research Project continues that work with a focus on IAS 32

How will the project interact with the Conceptual Framework project?

• The recent Conceptual Framework Exposure Draft will include proposed changes to the definition of a liability: – Those changes are directed at addressing problems to do with the application of the definition to uncertain or conditional liabilities.

• However, those changes do not address problems to do with the application of the definition to distinguishing liabilities from equity claims: – the IASB will consider these problems in this research project, and the research project will not be constrained by the proposed definitions in the Conceptual Framework ED – one possible outcome of the research is a recommendation to consider adding a project to amend the Conceptual Framework in relation to distinguishing between liabilities and equity – nevertheless, the IASB does not expect that any potential changes will reverse the clarifications to be suggested in the Conceptual Framework ED

What is the scope of the project?

• This project is investigating potential improvements: – to the classification of liabilities and equity in IAS 32, including investigating potential amendments to the definitions of liabilities and equity in the Conceptual Framework; and – to the presentation and disclosure requirements, irrespective of whether they are classified as liabilities or equity.

• By exploring ways to provide information through classification, presentation and disclosure, it is hoped that the project will be more successful • We are not starting with a blank sheet of paper, we are starting with the current requirements of IAS 32

Current requirements • IAS 32 has two main requirements for financial liabilities: – Obligation to transfer cash or another financial asset – Obligation to transfer variable number of shares (or, for derivatives, not ‘fixed-for-fixed’) • Some basic examples: – Case 1: Ordinary shares: No obligation to transfer anything, does not meet the definition of liability, therefore equity.

– Case 2: Fixed debt: Obligation to transfer a specified amount of cash at a specified time meets the definition of a liability.

Current requirements • However IAS 32 has seen various exceptions through piecemeal amendments over the years: – Some puttable shares classified as equity – even though there is an obligation to transfer cash

– Foreign currency rights issues classified as equity – even though there is an obligation to transfer shares that is not ‘fixed-for-fixed’ in the functional currency

What information is currently provided through classification as liabilities or equity?

• Classification provides the following information: – Financial position: – Aggregation of total liabilities and total equity

– Measurement: – Direct measurement if liability (eg amortised cost, fair value etc); or – Indirect measurement if equity (eg through allocation of the accounting residual)

– Financial performance: – Changes in liabilities are income or expense – Changes in equity are not income or expense

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Case studies

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Š IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Case 1: Ordinary shares (no liabilities) • Ordinary share: An obligation to deliver any remaining assets at liquidation and to participate in any dividends paid, however the timing, amount or type (eg cash) of payment is not specified. • Depiction through indirect measurement (ie depending on the recognition and measurement of the assets) is sufficient because the claim depends only on the assets.

Financial Position

Assets

Ordinary shares

Financial Performance

Total net income generated on assets (return on assets)

Total profit or loss and other comprehensive income

Changes in equity

Return on ordinary shares

Case 2: Cash-settled debt • Cash-settled debt: An obligation to deliver a specified amount of cash at a specified time prior to liquidation.

• Depiction of cash-settled debt through direct measurement (eg amortised cost or fair value) and presentation separately from ordinary shares provides a user with information about: – the cash payment requirement; and – returns to the debt holder as determined by the specified amount (eg interest) Financial Position

Financial Performance

Changes in equity

Interest on cashsettled debt Cash-settled debt Total net income generated on assets (return on assets)

Assets Ordinary shares

Total profit or loss and other comprehensive income

Return on ordinary shares

Case 3: Puttable shares • Puttable shares: An obligation to deliver, at the option of the holder, an amount of cash equal to the value of a fixed number of ordinary shares: – Cash payment requirement is similar to cash settled debt – However value changes (hence returns) are similar to ordinary shares

• Currently meet the definitions of a liability under both IAS 32 and CF (although IAS 32 has an exception if they are the most residual claim) Financial Position

Financial Performance Interest on cashsettled debt

Cash-settled debt

Assets

Puttable shares

Ordinary shares

Changes in equity

Total net income generated on assets (return on assets)

Gain/loss on puttable shares Total profit or loss and other comprehensive income

Return on ordinary shares

Case 3: Puttable shares (as liability) • Depiction of puttable shares through direct measurement and presentation separately from ordinary shares provides a user with information about the similarity with cash settled debt (the cash payment requirement) • But how can we depict the similarity with ordinary shares?

Financial Position

Financial Performance Interest on cashsettled debt

Cash-settled debt

Assets

Puttable shares

Ordinary shares

Changes in equity

Total net income generated on assets (return on assets)

Gain/loss on puttable shares Total profit or loss and other comprehensive income

Return on ordinary shares

Case 3: Puttable shares (as equity) • Depiction of puttable shares through indirect measurement and presentation separately from cash-settled debt provides a user with information about the similarity of returns with ordinary shares • But how can we depict the similarity with cash-settled debt?

Financial Position

Financial Performance Interest on cashsettled debt

Cash-settled debt

Assets

Puttable shares

Ordinary shares

Changes in equity

Total net income generated on assets (return on assets)

Total profit or loss and other comprehensive income

Gain/loss on puttable shares

Return on ordinary shares

Case 4: Share-settled debt • Share-settled debt: Obligations to deliver a variable number of common shares equal to the value of a fixed monetary amount (eg CU 100).

– Value changes (hence returns) are similar to cash-settled debt – However, lack of any requirement to pay cash (or transfer any economic resources) is similar to ordinary shares

• Currently meet the definition of a liability under IAS 32 but not under the CF Financial Position

Financial Performance Interest on cashsettled debt

Cash-settled debt

Assets

Share-settled debt

Ordinary shares

Changes in equity

Total net income generated on assets (return on assets)

Gain/loss on share-settled debt Total profit or loss and other comprehensive income

Return on ordinary shares

Case 4: Share-settled debt (as liability) • Depiction of share-settled debt through direct measurement and presentation separately from ordinary shares provides a user with information about its similarity with cash-settled debt (ie returns based on a specified amount) • But how can we depict the similarities with ordinary shares?

Financial Position

Financial Performance Interest on cashsettled debt

Cash-settled debt

Assets

Share-settled debt

Common shares

Changes in equity

Total net income generated on assets (return on assets)

Gain/loss on sharesettled debt Total profit or loss and other comprehensive income

Return on common shares

Case 4: Share-settled debt (as equity) • Depiction of share-settled debt through indirect measurement and presentation separately from cash-settled debt provides a user with information about the similarity with ordinary shares (ie the lack of cash requirement) • But how can we depict the similarities with cash-settled debt?

Financial Position

Financial Performance Interest on cashsettled debt

Cash-settled debt

Assets

Share-settled debt

Ordinary shares

Changes in equity

Total net income generated on assets (return on assets)

Gain/loss on sharesettled debt Total profit or loss and other comprehensive income

Return on ordinary shares

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What are the challenges?

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Š IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Challenges • Conceptual challenges – Fundamental challenge of depicting similarities and differences between a wide range of claims with a single distinction – Difficulty identifying the underlying rationale of the distinction between liabilities and equity in IAS 32

• Application challenges – Difficulty applying requirements of IAS 32 to some types of instruments – Some requirements of IAS 32 are inconsistent, incomplete or unclear

What is the fundamental challenge?

• Economic factors – – – –

Wide range of different types of claims Claims can also be complex and opaque Financial instruments can be structured in different ways Instruments with a mix of debt and equity features are becoming more prevalent.

• Accounting factors – We want to distinguish between claims to show similarities and differences – Distinction between liabilities and equity has polarised reporting outcomes with consequences for balance sheet and performance ratios and analysis – We are constrained by partial recognition and mixed measurement

What is the underlying rationale of IAS 32?

• Inconsistent use of liability definition in IFRS – ‘variable share settlement’ requirement not in Conceptual Framework (or IFRS 2)

• Exception to IAS 32 for puttable shares – otherwise some entities would have no equity (ie all claims meet definition of a liability)

• Put options on own equity instruments – PV of redemption amount as liability – If fixed redemption amount, then accounting arguably consistent with convertible bonds – If fair value redemption amount, then should changes in value of shares be recognised in P&L?

Complex instruments • Contingently convertible bonds – Many banks have been issuing these lately for regulatory capital purposes – Have various outcomes depending on different types of contingent events

• Put options written on non-controlling interest shares – Common example is when NCI is closely held – Issuer has the obligation to repurchase shares at the option of the holder(s)

• Foreign currency convertible bonds – Many entities raise capital in foreign markets

Unclear requirements • When does a contractual obligation exist?

• What does the ‘fixed’ in the ‘fixed-for-fixed’ really mean?

• When is a contingent settlement option within control of holder?

• How should the present value of redemption amount be measured?

• How should items be accounted for within equity?

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How are we approaching these challenges?

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Š IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Approaches other than binary distinction • Some suggest a no-split or claims approach – However recognised elements are not complete, therefore there needs to be one element that is a residual measurement

• Some suggest third category – Would changes be income/expense?

– We can have sub-classes within liabilities or equity

• IASB tentatively decided to continue to make a binary distinction between liabilities and equity, and to use additional sub-classes within liabilities or within equity for additional info

Overall approach • Conceptual – Need to identify, confirm (or change) and reinforce underlying rationale for the distinction between liabilities and equity – Need to develop other distinctions within liabilities or within equity that will provide other information through better presentation and disclosure

• Application – Need to improve consistency, completeness and clarity of requirements

Approach to conceptual challenges • Information about all relevant characteristics will need to be provided in the financial statements in some way.

• Our challenge is to identify: – what information is best provided using the debt/equity distinction; and – what information is best provided through disclosure, presentation of subclasses and other means (such as EPS).

• To do the above, we need to better understand: – What distinctions between claims might be useful and why.

– How different approaches to the classification might enhance (or diminish) the usefulness of the distinction.

Should all information rely on the same distinction?

• Features of claims have different consequences for the financial position and financial performance of the entity • Using the same distinction for all information provided results in ‘trading-off’ the usefulness of depicting one feature for another • Instead we might provide more useful information by depicting different features in different ways

Recent discussions • In June and July the IASB discussed: – what features of claims might be relevant to users of financial statements, including: – the timing of the transfer of economic resources (eg specified payment dates) – the amount of economic resources required to be transferred if the claim is settled (eg currency units, commodity units etc) – the type of economic resource to required to be transferred (eg cash) – the priority of the claim on liquidation (eg senior, junior etc)

– the relevance of those features to assessments of financial position and financial performance

• In September the IASB discussed: – an analysis of the existing requirements in IAS 32 using the features identified; and – three possible approaches for improvements to those requirements based on the features identified

Recent discussions • In October the IASB discussed: – the challenges with the accounting for derivatives on ‘own equity’ and – how IAS 32 deals with those challenges.

• The IASB has not yet formed preliminary views.

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Next steps?

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

Š IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Next steps • IASB has acknowledged that a single distinction cannot convey all relevant characteristics of claims against an entity • The IASB will still need to decide on classification, however, in addition, the IASB will consider presentation and disclosure requirements in parallel • The IASB is currently considering the various features of claims, their implications for the entity, and how information about those features can be best provided to users of financial statements

Thank you Expressions of individual views by members of the IASB and its staff are encouraged.

The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.