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EBA Comment Letter on IASB Discussion Paper DP/2018/1: Financial Instruments with Characteristics of Equity

Core Content

The European Banking Authority (EBA) has provided comments on the International Accounting Standards Board (IASB)'s Discussion Paper DP/2018/1, which aims to clarify the classification of financial instruments with characteristics of equity. The EBA emphasizes the importance of clear and consistent accounting standards for the banking and financial industry, as they directly impact the quality of financial statements and market discipline.

The EBA supports the IASB's efforts to redefine the distinction between equity and liability, particularly in the context of the Capital Requirements Regulation (CRR). The classification of financial instruments as equity or liability is crucial for regulatory capital frameworks, such as Common Equity Tier 1 (CET1) and State Aid. Therefore, it is essential that regulators fully understand the underlying accounting principles.

Main Views and Key Information

General Comments

• The EBA believes that the IASB's preferred approach in the discussion paper better clarifies the rationale for classifying financial instruments.
• It agrees with paragraph IN21 that the proposed approach is unlikely to change the classification outcomes for most instruments.
• The EBA recommends that the IASB perform a cost-benefit analysis to avoid unintended consequences or operational costs.
• It suggests that a standard-level solution should be considered instead of non-mandatory guidance, to ensure consistency and transparency.

Putable Exception and Members' Shares in Cooperative Entities

• The EBA supports retaining the current putable exception under IAS 32, as it is crucial for the classification of cooperative shares as equity.
• It also supports the current accounting treatment of cooperative shares under IFRIC 2.
• The EBA encourages the IASB to consider integrating the principles from IFRIC 2 into the conceptual framework of the revised IAS 32 to reduce the need for exemptions.

Application of the "Timing" and "Amount" Features

• The EBA highlights the need for additional clarification on the application of the "timing" and "amount" features.
• It calls for a clear definition of "independence of the entity's available economic resources," especially in the context of variables like the CET1 ratio, which can be influenced by both internal and external factors.
• The EBA suggests that the IASB should clarify how the obligation for an independent amount is assessed in liquidation, as there appears to be a contradiction in the discussion paper regarding the role of claim ranking.

Compound Instruments and Contingent Convertibles

• The EBA recommends that the IASB provide more examples on the classification of compound instruments, particularly contingent convertible bonds.
• It suggests that the IASB should clarify how the equity component of these instruments is measured, especially in relation to the January 2014 Staff Paper, which proposed measuring the equity component at zero.
• Additional examples on embedded caps and floors in convertible instruments would be beneficial for clarity and application.

Presentation and Disclosure

• The EBA considers the attribution of total comprehensive income to equity instruments other than ordinary shares to be complex and burdensome.
• It questions the real benefits of this approach and suggests that the IASB should review the rationale behind it.
• The EBA recommends that the IASB assess whether requiring additional disclosures on economic incentives is a reasonable burden compared to the benefits for stakeholders.
• If the cost-benefit assessment is favorable, the IASB could explore expanding disclosure requirements as part of a final standard-level solution.

Conclusion

The EBA's comments focus on ensuring that the IASB's proposals are consistent, transparent, and operationally feasible. It underscores the importance of aligning accounting standards with prudential regulatory requirements and encourages further clarification and integration of relevant concepts into a final standard.