FICE project: ongoing discussions of proposed amendments to IAS 32 and IFRS 7

Keywords: Mazars, Thailand, IFRS 7, IAS 32, FICE project, IASB 

14 July 2023 

Readers will recall that the purpose of this project is to clarify the principles of IAS 32, to address the issues of its practical application and to improve the disclosures. 

The tentative decisions taken by the IASB during these meetings essentially relate to the inclusion of new disclosures and to the transitional arrangements for the proposed amendments to IAS 32, IFRS 7 and IAS 1.  

Proposed amendments to IFRS 7 – Financial instruments: Disclosures 

During its April 2023 discussions, the IASB proposed to amend IFRS 7 by: 

• adding an overall objective to IFRS 7 to enable users of financial statements to understand how an entity is financed and what its current and potential ownership structures are. This can be broken down into more specific objectives, such as providing information that enables users of the financial statements to understand: 
  • the nature, amount, timing and uncertainty of cash flows arising from issued financial instruments; 
  • dilution that could arise from any potential increase in the number of issued ordinary shares; and 
  • the nature and priority of claims, and the risks and returns on financial instruments in the event of liquidation of the entity;  

• including in the scope of the standard derivatives that meet the definition of equity instruments under IAS 32, which are currently excluded (IFRS 7.3(a)). 

The IASB also returned to its tentative decisions of April 2021 concerning disclosure requirements on the terms and conditions of equity and debt instruments, and tentatively decided to refine and expand these disclosures by: 

• including explanations and examples of ‘debt-like’ and ‘equity-like’ features in the forthcoming exposure draft; 
• clarifying that the disclosures of ‘debt-like’ and ‘equity-like’ features would include both quantitative and qualitative information, including disclosures on clauses representing economic compulsion for the issuer; 
• requiring an entity to disclose the amounts allocated initially to the financial liability and equity components of compound financial instruments; 
• requiring an entity to disclose the significant judgements it made in classifying the financial instrument, or its component parts, as a financial liability or as equity, for example judgements relating to the assessment of the discretionary nature of decisions taken by the entity's shareholders, or the “fixed-for-fixed" condition; 
• requiring an entity to disclose, if applicable, information about terms and conditions that become, or stop being, effective with the passage of time before the end of the contractual term of the instrument, in order to capture changes in the contractual substance of the instrument that do not result in a reclassification (e.g. a convertible instrument initially classified as a debt whose conversion ratio becomes fixed as a result of the passage of time). 

Finally, the IASB has tentatively decided to require new disclosures on the following topics: 

• reclassification of instruments: relocation of the disclosure requirement in paragraph 80A of IAS 1 Presentation of Financial Statements to IFRS 7, expanding it to cover reclassifications when changes in the substance of the contractual terms arise from changes in circumstances outside the contract. An entity would be required to disclose the amounts reclassified into and out of financial liabilities or equity, and the timing and reason for that reclassification. 
• for instruments containing obligations to redeem equity instruments: 
  • the amount of the financial liability representing the obligation and the equity component against which the debt has been charged; 
  • the amount of remeasurement gain or loss recognised in profit or loss during the reporting period; 
  • the amount of gain or loss, if any, that was recognised on settlement if the obligation is settled during the reporting period; 
  • the amount reclassified in equity if a written put option has expired unexercised;  
  • if applicable, the cumulative amount in retained earnings corresponding to the remeasurement of the debt which has been reclassified in another component of equity and the designation of this component; 

• financial liabilities containing contractual obligations to pay amounts based on an entity’s performance or changes in the entity’s net assets: amendment to paragraph 20(a)(i) of IFRS 7 to require the separate disclosure of the total gains or losses in each reporting period that arise from remeasuring this category of financial liabilities, following on from the tentative decisions taken in December 2022.

Transition requirements for amendments to IAS 32, IFRS 7 and IAS 1 

The IASB tentatively decided: 

• to require an entity to apply the amendments proposed as part of the FICE project retrospectively, with the restatement of comparative information; 
• to propose the following transitional arrangements for entities already applying IFRS: 
  • where a liability component is remeasured as a result of the application of the amendments, to treat the fair value at the beginning of the earliest comparative period presented as the amortised cost of the financial liability at that date if it is impracticable for the entity to apply the effective interest method retrospectively; 
  • not to require the entity to separate the debt and equity components if the liability component of a compound financial instrument with a contingent settlement provision was no longer outstanding at the date of initial application; 
  • to require the entity to disclose the nature and amount of any changes in the classification of financial instruments resulting from initial application of the amendments; 
  • to provide transition relief from the quantitative disclosures in paragraph 28(f) of IAS 8 (i.e. amounts of adjustments arising from the application of the amendments to each line item in the financial statements affected and to basic and diluted earnings per share for entities applying IAS 33); 
  • not to provide any transition relief from the requirements in IAS 34 for interim financial statements issued within the annual period in which the entity first applies the amendments; 

• for first-time IFRS adopters, not to propose any additional transition relief. 

Following its re-deliberations in May 2023, the IASB decided to set a 120-day comment period for the forthcoming Exposure Draft on the FICE project, which is expected to be published in the second half of 2023.