Following the publication of IASB’s Exposure Draft IASB/ED/2023/5 Financial Instruments with Characteristics of Equity Proposed amendments to IAS 32, IFRS 7 and IAS 1, issued by the IASB in November 2023, Insurance Europe and the CFO Forum prepared two letters to be sent respectively to IASB and EFRAG. The letters will be sent today.
The letter has been drafted to IASB following the publication of their Exposure Draft. The letter expresses Europe’s insurers disagreement with the approach suggested by the IASB on their initial accounting as well as their subsequent measurement in profit or loss of financial liabilities related to written put-options on non-controlling interest.
The letter prepared for EFRAG points out the same issues as the ones discussed in the letter to IASB. We also attached as an appendix the letter we will be sending to IASB.
Please note that the following edits were included from the CFOF fatal flaw process:
On question 4:
“We would recommend amending the wording for contingent settlement provisions to clarify that only compound instruments are in scope of the new guidance.
Furthermore, there might be financial instruments in practice containing a contractual obligation to be settled upon a contingent event. At inception, the settlement amount includes several possible future cash flows with assigned probabilities which might differ from the consideration received. It is not explicitly clear from the definition of contingent settlement provisions (IAS 32.25) that contractual obligations for which various cash flow settlement scenarios are conceivable at inception (i.e. various probability-weighted individual cases) are excluded. However, even if the scenario with the maximum obligation possible is considered unlikely under economic considerations (but not as ‘non genuine’), the maximum obligation possible would be relevant for the initial measurement of the financial instrument according to the ED. We have strong concerns relating to the economic substance which we think is not reflected appropriately under the approach proposed by the ED. Further, disregarding probabilities when determining the fair value does not seem to be consistent with the measurement requirements of IFRS 9 and IFRS 13. In general, IFRS 9.5.1.1 requires the initial measurement of financial instruments at fair value (not nominal or highest possible amount).”
On question 1, the following paragraph was removed:
“Therefore, the practical effect of the amendment raises issues. Notably, if cancellation rights are only based on the law some instruments like German commercial partnerships or limited partnerships currently classified as equity by exception in accordance with paragraphs 16A and 16B of IAS 32 might be considered as equity but under IAS 32’s general provisions. This could lead to the application of the FVOCI option under IFRS 9 5.7.5 for holders of such instruments.”
Insurance Europe