The IASB issued the Exposure Draft Financial Instruments with Characteristics of Equity—Proposed amendments to IAS 32, IFRS 7 and IAS 1, with a comment deadline of March 29, 2024.

In common with pretty much everything the IASB ever issues, the exposure draft included a proposed increase in disclosure requirements, some of which don’t seem to have gone down particularly well with respondents. Prime among these is to provide, for financial instruments with both financial liability and equity characteristics, “information that enables users of financial statements to understand the priority on liquidation of each class of financial instruments,” including among other things disclosing the terms and conditions of financial instruments that indicate their priority on liquidation, including those that could lead to a change in priority on liquidation (for example conversion or contingent features); and information about any significant uncertainty about how laws or regulations applicable to financial instruments could affect their priority on liquidation, including  a description of any intra-group arrangements, such as guarantees, that might affect this.

PricewaterhouseCoopers said it’s unclear how this “would be applied by an entity that operates in multiple jurisdictions, each with different liquidation rules. Such a group cannot itself be liquidated, and the priority on liquidation at a subsidiary level or standalone parent entity level could, to a significant extent, be dependent on the order of liquidation under the respective liquidation framework. Further complexities could arise from intra-group financing arrangements that will not be visible in consolidated financial statements, but could affect the priorities of the external creditors. In light of these complexities, we challenge whether the objective of this proposed disclosure requirement could be met in a manner that results in useful information for a variety of practical use cases.”

Many industry respondents took a similar view. The German Insurance Association said such disclosures would “be specifically burdensome to comply with. At the same time we question how the investors or users of the financial statements are going to absorb all these mostly narrative information of different levels of granularity between entities. Moreover, as long the entities are preparing their financial statements under the going concern assumption, the intensified focus on the case of liquidation (as worst case not underlying the regular process when preparing the financial statements) does not seem to be reasonable.” It wouldn’t be a surprise if the IASB dropped or at least scaled back this aspect of the proposals.

Another somewhat unpopular disclosure idea was to “provide information that enables users of financial statements to understand the potential dilution to the entity’s ownership structure resulting from financial instruments issued at the reporting date.” Of course, this is already somewhat covered by earnings per share disclosures under IAS 33, but EPS is intended as a weighted performance measure, not a measure of maximum possible dilution of ordinary shares. A comment letter received from French industry respondents expressed “strong reservations about the proposed disclosure on potential dilution since we struggle to understand the link between this, and the information already provided according to IAS 33. If the Board believes that diluted earnings per share disclosure should be improved, then this should be done by amending IAS 33 not by including similar but different disclosures in IFRS 7 as this will add a lot of confusion and may also be misinterpreted.” Credit Agricole said these proposed disclosures “seem to us very difficult to provide. Moreover, the description of the terms and conditions of contracts that are relevant in understanding the likelihood of the maximum dilution of ordinary shares…supposes an extreme effort to justify this likelihood, whereas it appears to us to be based on subjective bases. Those additional disclosures go beyond the scope of IAS 33 and we do not see a clear benefit to them.”

On the other hand, it seems possible that some readers would get as much or even more out of the proposed disclosures as they do from what IAS 33 provides. This is from the Johannesburg Stock Exchange:

• The proposed disclosures will provide information of the extent to which control or voting rights may be diluted in future periods as a result of contracts that were entered into in the current and prior periods which we believe is useful to users.
• We have found investors in our market to be cautious about events or transactions that may cause their shareholding (or voting rights) to be diluted. As a listing’s authority, we require issuers to identify and quantify potential future dilution events in prelisting statements and when certain transactions are placed before that are placed before shareholders…(therefore) codifying the requirements into IFRS for disclosing additional ordinary shares that may be issued will make the information easily accessible to current and future shareholders.

Place your bets now on which side of that argument wins the day…

The opinions expressed are solely those of the author.