This Exposure Draft (IASB/ED2023/5) follows on from the IASB’s Discussion Paper (DP) Financial Instruments with Characteristics of Equity in June 2018. After considering stakeholder feedback on the DP, the IASB decided not to proceed with introducing a new conceptual basis for classifying financial instruments as debt or equity. Instead, the IASB decided to clarify the IAS 32 Financial Instruments: Presentation’s existing classification requirements.

In principle, our joint CA ANZ / CPA Australia submission supports clarifying the requirements in IAS 32 and related standards. However, the feedback we received indicates that some of the proposed amendments could be subject to varying interpretations. Consequently, some proposed amendments may not achieve the IASB's objective of reducing diversity in practice. Furthermore, the increased uncertainty is likely to require more attention from senior staff, management and boards/audit and risk committees. Hence, there is a risk the proposals have not struck the right balance between principles and prescription to meet the objective of the project in the most cost-effective way.

There appears to be an increasing need to refer to the Basis for Conclusions to interpret the Application Guidance which, we heard, preparers of financial statements seldom do. We therefore recommend that the clarifications from the Basis for Conclusions be incorporated in the standard.

We have heard mixed views on the expected impact of the proposals. A cohort generally did not expect classification outcomes to change, while others believed that more classification changes would be required than originally envisaged. On this basis we recommend the IASB conducts field testing of the proposals which in our view is critical to assess any operational challenges – not only for preparers but also for auditors and regulators – and whether it leads to more useful financial information for users.