29 March 2024

Dr. Andreas Barckow
Chair
International Accounting Standards Board
Columbus Building, 7 Westferry Circus
Canary Wharf, London, E14 4HD
United Kingdom

Comments on the Exposure Draft (IASB/ED/2023/5) Financial Instruments with
Characteristics of Equity (Proposed amendments to IAS 32, IFRS 7 and IAS 1)
1.

The Accounting Standards Board of Japan (“we”) welcome the opportunity toprovide our comments on the International Accounting Standards Board (“theIASB”)’s Exposure Draft (IASB/ED/2023/5) Financial Instruments with
Characteristics of Equity (Proposed amendments to IAS 32, IFRS 7 and IAS 1) (“theED”), issued in November 2023.

2.

We previously commented that a more fundamental review of the classification offinancial liabilities and equity instruments would assist consistency andunderstandability of the classification. However, if the rationale behind the existing
requirements in IAS 32 Financial Instruments: Presentation were to remain in place
for the foreseeable future, we think that the focused efforts of this project to address
practical questions that have accumulated over the years would be beneficial.

3.

With respect to the effects of relevant laws or regulations discussed in Question 1,
we believe that classification should, in principle, be based on all facts andcircumstances, and that the IASB should take steps to reconsider the requirements of
IAS 32 to consider only contractual rights and obligations in classification in the long
term.

4.

Regarding the proposed disclosures discussed in Question 7, we believe that further
consideration should be given to measures to reduce the cost of preparing the1 / 15

disclosures, as such costs may not be proportional to the benefits for some entities,
depending on how those entities raise capital.
5.

Our responses to each of the questions are set out in the Appendix.

We hope that our comments will contribute to future deliberations at the IASB.
feel free to contact us if you have any questions.

Yours sincerely,

Yasunobu Kawanishi
Chair
Accounting Standards Board of Japan2 / 15

PleaseAppendix
Question 1—The effects of relevant laws or regulations (paragraphs 15A and
AG24A–AG24B of IAS 32)
The IASB proposes to clarify that:(a)only contractual rights and obligations that are enforceable by laws or
regulations and are in addition to those created by relevant laws or regulations
are considered in classifying a financial instrument or its component parts(paragraph 15A); and(b)a contractual right or obligation that is not solely created by laws or regulations,but is in addition to a right or obligation created by relevant laws or regulations
shall be considered in its entirety in classifying the financial instrument or its
component parts (paragraph AG24B).

Paragraphs BC12–BC30 of the Basis for Conclusions explain the IASB’s rationale forthese proposals.
Do you agree with these proposals? Why or why not? If you disagree with any of the
proposals, please explain what you suggest instead and why.
(Comments)
1.

We do not agree with the proposals.

2.

We understand that the proposals are based on the rationale behind the existing
requirements in IAS 32, which requires an entity to consider only contractual rights
and obligations in classifying financial instruments. The definitions of a financial
instrument, a financial asset, a financial liability and an equity instrument in IAS 32
refer to contracts and contractual rights and obligations and we acknowledge that
there is an established practice based on those definitions. However, we areconcerned that the proposals could result in different classifications of instrumentsthat have no substantive difference in the obligations when laws and regulations aretaken into account. In this regard, the proposals differ from the requirements ofother IFRS Accounting Standards, including IFRS 15 Revenue from Contracts with
Customers, which require an entity to consider contractual terms as well as any
legislation or legal precedent that could supplement those contractual terms.
3 / 15

3.

As a result of the proposals to focus on contractual terms, additional issues arise suchas whether the minimum dividend rate established by law should be treatedseparately or together with the dividend rate established by the contract. Anotherissue may arise in relation to the so-called bail-in instruments issued by regulatedbanks. Each jurisdiction has discretion as to whether the conditions to determine
whether certain bail-in instruments qualify for Tier 2 status should be prescribed inlaws or regulations, or in a contract. As a result, there may be differences inclassification depending on the decisions each jurisdiction makes.

4.

We believe that classification should essentially reflect all facts and circumstances.
We acknowledge that it is difficult to achieve this objective in the short term, but webelieve that the IASB should work toward this objective and consider revising therequirements of IAS 32 in the longer term.

5.

We would also add that, if the IASB were to proceed with the proposals in the ED,
clarification related to the following proposals are warranted:(a) In relation to paragraph 15A of IAS 32 and paragraph AG24B of IAS 32,
although we acknowledge that an example is provided of a minimum dividend
payment under relevant laws and an additional minimum dividend payment
under contractual terms, the ED does not necessarily describe the conditions
under which an entity should apply the latter, and there is a concern that thismay be read as the former and latter being used interchangeably.
(b) Some of our stakeholders note that the wording of the former and latter in (a) issimilar, and that it is difficult to distinguish between the two, and that there is aconcern that this may lead to misunderstandings in their application.

Question 2—Settlement in an entity’s own equity instruments (paragraphs 16, 22,
22B–22D, AG27A and AG29B of IAS 32)
The IASB proposes to clarify when the fixed-for-fixed condition in paragraph 16(b)(ii)
of IAS 32 is met by specifying that the amount of consideration to be exchanged foreach of an entity’s own equity instruments is required to be denominated in the entity’sfunctional currency, and either:4 / 15(a)fixed (will not vary under any circumstances); or(b)variable solely because of:(i)preservation adjustments that require the entity to preserve the relative
economic interests of future shareholders to an equal or lesser extent thanthose of current shareholders; and/or(ii)

passage-of-time adjustments that are predetermined, vary with thepassage of time only, and have the effect of fixing on initial recognition
the present value of the amount of consideration exchanged for each of
the entity’s own equity instruments (paragraphs 22B–22C).

The IASB also proposes to clarify that if a derivative gives one party a choice ofsettlement between two or more classes of an entity’s own equity instruments, the entity
considers whether the fixed-for-fixed condition is met for each class of its own equity
instruments that may be delivered on settlement. Such a derivative is an equity
instrument only if all the settlement alternatives meet the fixed-for-fixed condition(paragraph AG27A(b)).
The IASB further proposes to clarify that a contract that will or may be settled by theexchange of a fixed number of one class of an entity’s own non-derivative equity
instruments for a fixed number of another class of its own non-derivative equity
instruments is an equity instrument (paragraph 22D).
Paragraphs BC31–BC61 of the Basis for Conclusions explain the IASB’s rationale forthese proposals.
Do you agree with these proposals? Why or why not? If you disagree with any of the
proposals, please explain what you suggest instead and why.
(Comments)
6.

We basically do not object to the proposals, but comment on the following:(a) Paragraph BC47 of the ED describes the arguments for the preservation
adjustments as being to ensure that current and future equity instrument holders
have the same relative residual interest in the net assets of the entity. In thisregard, paragraph BC48 of the ED provides an example of an adjustment thatmight favour a future equity instrument holder at the expense of current equity

5 / 15

instrument holder, and paragraph BC49 of the ED provides an example of the
opposite situation. The ED proposes that only the latter situation be consistent
with the fixed-for-fixed condition, presumably because, in some cases, it isconsistent with the pure fixed-for-fixed condition even if it would favour current
equity instrument holders. We suspect, however, this may not always apply.
We think that there is a need for further clarification of the rationale behind the
proposal and whether there should be any limitations to which such a situation
should apply.

Question 3—Obligations to purchase an entity’s own equity instruments(paragraphs 23 and AG27B–AG27D of IAS 32)
The IASB proposes to clarify that:(a)the requirements in IAS 32 for contracts containing an obligation for an entity
to purchase its own equity instruments also apply to contracts that will besettled by delivering a variable number of another class of the entity’s own
equity instruments (paragraph 23).

(b)on initial recognition of the obligation to redeem an entity’s own equity
instruments, if the entity does not yet have access to the rights and returns
associated with ownership of the equity instruments to which the obligation
relates, those equity instruments would continue to be recognised. The initialamount of the financial liability would, therefore, be removed from acomponent of equity other than non-controlling interests or issued share capital(paragraph AG27B).

(c)an entity is required to use the same approach for initial and subsequent
measurement of the financial liability—measure the liability at the present
value of the redemption amount and ignore the probability and estimated timingof the counterparty exercising that redemption right (paragraph 23).

(d)

any gains or losses on remeasurement of the financial liability are recognised
in profit or loss (paragraph 23).

(e)

if a contract containing an obligation for an entity to purchase its own equity

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instruments expires without delivery:

(f)

(i)

the carrying amount of the financial liability would be removed fromfinancial liabilities and included in the same component of equity as thatfrom which it was removed on initial recognition of the financial liability.

(ii)

any gains or losses previously recognised from remeasuring the financial
liability would not be reversed in profit or loss. However, the entity may
transfer the cumulative amount of those gains or losses from retained
earnings to another component of equity (paragraph AG27C).

written put options and forward purchase contracts on an entity’s own equity
instruments that are gross physically settled—consideration is exchanged forown equity instruments—are required to be presented on a gross basis(paragraph AG27D).

Paragraphs BC62–BC93 of the Basis for Conclusions explain the IASB’s rationale forthese proposals.
Do you agree with these proposals? Why or why not? If you disagree with any of the
proposals, please explain what you suggest instead and why.
(Comments)
7.

We have the following comments:(a) Regarding the proposal in paragraph 23 of IAS 32 (measuring the liability at thepresent value of the redemption amount and ignoring the probability andestimated timing of the counterparty exercising that redemption right), we do not
disagree with the proposal in light of the overall intention of the project, whichis to address practice issues without fundamentally changing IAS 32. However,an entity may have other obligations with contingencies beyond its control thatshould be measured in accordance with other standards. Compared with thissituation, the approach in paragraph 23 of IAS 32 may be perceived as being
inconsistent with the requirements in other IFRS Accounting Standards.
Accordingly, we think that analysis should be conducted to identify any
differences between the approach in paragraph 23 of IAS 32 and themeasurement concepts of liabilities in other IFRS Accounting Standards (forexample, measuring financial instruments in accordance with IFRS 9 Financial

7 / 15

Instruments at fair value under IFRS 13 Fair Value Measurement and measuring
non-financial liabilities in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets).
(b) The ED proposes to remove “in accordance with IFRS 9” from paragraph 23 of
IAS 32 and makes it less clear whether a liability for an entity's obligation topurchase its own equity instruments should remain as a financial liability within
the scope of IFRS 9. In addition, though the proposed disclosures in paragraph
30J of IFRS 7 Financial Instruments: Disclosures corresponds to therequirements in paragraph 23 of IAS 32, it is unclear whether other disclosuresin IFRS 7 required for financial liabilities under IFRS 9 should apply to thisobligation. We think that these points should be clarified.
(c) While many stakeholders agree with the proposal in paragraph 23 of IAS 32 thatremeasurement gains or losses be recognised in profit or loss, some stakeholders
have a reservation about this proposal, stating that counterintuitive results may
arise for instruments that can be exercised at fair value and that some entities
currently recognise the changes in equity. We expect that the IASB willconduct more in-depth and balanced analysis of both arguments to make its
conclusion more persuasive.

Question 4—Contingent settlement provisions (paragraphs 11, 25, 25A, 31, 32A,
AG28 and AG37 of IAS 32)
The IASB proposes to clarify that:(a)some financial instruments with contingent settlement provisions arecompound financial instruments with liability and equity components(paragraphs 25 and 32A);(b)

the initial and subsequent measurement of the financial liability (or liability
component of a compound financial instrument) arising from a contingent
settlement provision would not take into account the probability and estimatedtiming of occurrence or non-occurrence of the contingent event (paragraph
25A);

(c)

payments at the issuer’s discretion are recognised in equity even if the equity
8 / 15

component of a compound financial instrument has an initial carrying amountof zero (paragraphs 32A and AG37);(d)the term ‘liquidation’ refers to the process that begins after an entity has
permanently ceased its operations (paragraph 11); and(e)the assessment of whether a contractual term is ‘not genuine’ in accordancewith paragraph 25(a) of IAS 32 requires judgement based on the specific facts
and circumstances and is not based solely on the probability or likelihood of
the contingent event occurring (paragraph AG28).

Paragraphs BC94–BC115 of the Basis for Conclusions explain the IASB’s rationale
for these proposals.
Do you agree with these proposals? Why or why not? If you disagree with any of the
proposals, please explain what you suggest instead and why.
(Comments)
8.

Similar to our comments in response to Question 3, we think that additional analysis
should be performed to determine the appropriateness or rationale for ignoring theprobability of occurrence or non-occurrence of the event and the estimated timing of
the event in the measurement.

9.

Some stakeholders in our jurisdiction note that paragraph AG28 of IAS 32 in the ED
does not add factors to consider when assessing whether the contingent settlement
provision is genuine or not. These stakeholders are concerned that, without suchassessment factors, regulatory change in capital requirements could always be
considered genuine or not genuine.

Question 6—Reclassification of financial liabilities and equity instruments(paragraphs 32B–32D and AG35A of IAS 32)
The IASB proposes:(a)to add a general requirement that prohibits the reclassification of a financial
instrument after initial recognition, unless paragraph 16E of IAS 32 applies or

9 / 15the substance of the contractual arrangement changes because of a change incircumstances external to the contractual arrangement (paragraphs 32B–32C).
(b)

to specify that if the substance of the contractual arrangement changes becauseof a change in circumstances external to the contractual arrangement, an entity
would:(i)reclassify the instrument prospectively from the date when that change incircumstances occurred.

(ii)

measure a financial liability reclassified from equity at the fair value ofthat financial liability at the date of reclassification. Any difference
between the carrying amount of the equity instrument and the fair valueof the financial liability at the date of reclassification would be recognisedin equity.

(iii) measure an equity instrument reclassified from a financial liability at thecarrying amount of the financial liability at the date of reclassification.
No gain or loss would be recognised on reclassification (paragraph 32D).
(c)provide examples of changes in circumstances external to the contractual
arrangement requiring reclassification (paragraph AG35A).

Paragraphs BC126–BC164 of the Basis for Conclusions explain the IASB’s rationale
for these proposals.
Do you agree with these proposals? Why or why not? If you disagree with any of the
proposals, please explain what you suggest instead and why.
Would the proposal to reclassify the instrument prospectively from the date when achange in circumstances occurred give rise to any practical difficulties? If so, please
describe those practical difficulties and the circumstances in which they would arise.
(Comment)
10. We basically have no objection to the proposal. However, we note that it should be
noted in the main text of IAS 32 that this proposal is not a treatment for cases where
the contractual terms are modified, as described in paragraph BC127 of the ED.

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Question 7—Disclosure (paragraphs 1, 3, 12E, 17A, 20, 30A–30J and B5A–B5L of
IFRS 7)The IASB proposes:(a)to expand the objective of IFRS 7 to enable users of financial statements tounderstand how an entity is financed and what its ownership structure is,including potential dilution to the ownership structure from financial
instruments issued at the reporting date (paragraph 1).

(b)

to delete the reference to derivatives that meet the definition of an equity
instrument in IAS 32 from paragraph 3(a) of IFRS 7.

(c)to move paragraphs 80A and 136A from IAS 1 to IFRS 7. These paragraphs set
out requirements for disclosures relating to financial instruments classified as
equity in accordance with paragraphs 16A–16B and/or paragraphs 16C–16D of
IAS 32 (paragraphs 12E and 30I). The IASB also proposes to expand paragraph
80A to cover reclassifications if there are changes in the substance of thecontractual arrangement from a change in circumstances external to thecontractual arrangement.

(d)to amend paragraph 20(a)(i) of IFRS 7 to require an entity to disclose gains orlosses on financial liabilities containing contractual obligations to pay amounts
based on the entity’s performance or changes in its net assets, separately fromgains or losses on other financial liabilities in each reporting period.

(e)to include disclosure requirements for compound financial instruments in IFRS
7 (paragraph 17A).

The IASB proposes to require an entity to disclose information about:(a)the nature and priority of claims against the entity on liquidation arising fromfinancial liabilities and equity instruments (paragraphs 30A–30B);(b)

the terms and conditions of financial instruments with both financial liability
and equity characteristics (paragraphs 30C–30E and B5B–B5H);(c)terms and conditions that become, or stop being, effective with the passage oftime (paragraph 30F);

11 / 15(d)the potential dilution of ordinary shares (paragraphs 30G–30H and B5I–B5L);
and

(e)

instruments that include obligations to purchase the entity’s own equity
instruments (paragraph 30J).

Paragraphs BC170–BC245 of the Basis for Conclusions explain the IASB’s rationale
for these proposals.
Do you agree with the proposals? Why or why not? If you disagree with any of the
proposals, please explain what you suggest instead and why.
(Comments)
11. The proposed disclosures about “(a) the nature and priority of claims against theentity on liquidation arising from financial liabilities and equity instruments,” “(b)the terms and conditions of financial instruments with both financial liability andequity characteristics,” and “(c) terms and conditions that become, or stop being,
effective with the passage of time” could be a significant burden for entities that issue
a large number of and a variety of financial instruments. In addition, there is also
the risk of more information provided in the notes, which could undermine theusefulness of the information by failing to provide targeted information aboutsignificant instruments and their contractual terms. For these reasons, we think thatthe following measures should be considered:(a) disclosures should be limited to those that are significant.
(b) cross-referencing to information in documents other than financial statements
should be permitted as permitted for the disclosures of “Nature and extent ofrisks arising from financial instruments” in paragraph B6 of IFRS 7.
12. Some stakeholders in our jurisdiction are concerned about the proposal to separate
the carrying amounts of claims issued by the parent from those issued by subsidiaries
in the proposed disclosure of “Nature and priority of claims on liquidation, arisingfrom financial instruments.” Because the parent may undertake financing of thewhole group and distributes the funds to its subsidiaries, these stakeholders areconcerned that the disclosure may not be a faithful representation as the informationof the parent would reflect the financing of its subsidiaries within the consolidated
group and not necessarily the parent itself. We think that many consolidated groups

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use similar financing schemes to raise capital efficiently, and that guidance thatwould encourage entities to include additional explanations would facilitate theunderstanding of users.

Question 8—Presentation of amounts attributable to ordinary shareholders(paragraphs 54, 81B and 107–108 of IAS 1)
The IASB proposes to amend IAS 1 to require an entity to provide additional
information about amounts attributable to ordinary shareholders. The proposed
amendments are that:(a)the statement of financial position shows issued share capital and reserves
attributable to ordinary shareholders of the parent separately from issued sharecapital and reserves attributable to other owners of the parent (paragraph 54);(b)

the statement of comprehensive income shows an allocation of profit or loss
and other comprehensive income attributable to owners of the parent between
ordinary shareholders and other owners of the parent (paragraph 81B);(c)

the components of equity reconciled in the statement of changes in equity
include each class of ordinary share capital and each class of other contributed
equity (paragraph 108); and(d)dividend amounts relating to ordinary shareholders are presented separatelyfrom amounts relating to other owners of the entity (paragraph 107).

Paragraphs BC246–BC256 of the Basis for Conclusions explain the IASB’s rationale
for these proposals.
Do you agree with these proposals? Why or why not? If you disagree with any of the
proposals, please explain what you suggest instead and why.
Would the proposed requirement to allocate issued share capital and reserves between
ordinary shareholders and other owners of the parent give rise to any practicaldifficulties in determining the required amounts? If so, please describe the possible
difficulties and specify areas in which further guidance would be helpful.
(Comment)
13 / 15

13. The ED does not provide guidance on calculating the amount to be allocated between
ordinary shareholders and other owners of the parent, and we think that practicaldifficulties may arise. For example, we believe that practical difficulties may arisein allocating the amount to instruments where the entity has discretion in the timing
and amount of coupon payments, and allocating the amount to warrants where no
coupon payment occurs. We think that additional guidance is needed.

Question 9—Transition (paragraphs 97U–97Z of IAS 32)
The IASB proposes to require an entity to apply the proposed amendments
retrospectively with the restatement of comparative information (a fully retrospective
approach). However, to minimise costs, the IASB proposes not to require therestatement of information for more than one comparative period, even if the entity
chooses or is required to present more than one comparative period in its financial
statements.
For an entity already applying IFRS Accounting Standards, the IASB proposes:(a)to require the entity to treat the fair value at the transition date as the amortised
cost of the financial liability at that date if it is impracticable (as defined in IAS
8 Accounting Policies, Changes in Accounting Estimates and Errors) for theentity to apply the effective interest method in IFRS 9 Financial Instruments
retrospectively (paragraph 97X);(b)

not to require the entity to separate the liability and equity components if theliability component of a compound financial instrument with a contingent
settlement provision was no longer outstanding at the date of initial application(paragraph 97W);(c)to require the entity to disclose, in the reporting period that includes the date ofinitial application of the amendments, the nature and amount of any changes inclassification resulting from initial application of the amendments (paragraph
97Z);

(d)

to provide transition relief from the quantitative disclosures in paragraph 28(f)of IAS 8 (paragraph 97Y); and14 / 15(e)no specific transition requirements in relation to IAS 34 Interim Financial
Reporting for interim financial statements issued within the annual period inwhich the entity first applies the amendments.

For first-time adopters, the IASB proposes to provide no additional transition
requirements.
Paragraphs BC262–BC270 of the Basis for Conclusions explain the IASB’s rationale
for these proposals.
Do you agree with these proposals? Why or why not? If you disagree with any of the
proposals, please explain what you suggest instead and why.
Would the proposal to apply the proposed amendments retrospectively give rise to any
other cases in which hindsight would be necessary? If so, please describe those cases
and the circumstances in which the need for hindsight would arise.
(Comments)
14. For entities that already applied IFRS Accounting Standards, we agree with theproposal of retrospective application of the proposed requirements and with theproposed transitional provisions. However, some of the proposals for classificationin the ED may add complexity to classifying the instruments or may require a certain
degree of judgment at initial recognition, and we think that the IASB should
additionally consider whether the cost of applying such proposals to financial
instruments that do not exist at the date of initial application of the amendments islikely to be commensurate with the benefits.
15. For first-time adopters, we think that the IASB should consider whether thetransitional provisions should be aligned with any transitional provisions for entities
that have already applied IFRS Accounting Standards, added as a result of further
consideration in response to the comments received, such as the consideration notedin the previous paragraph.

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