Project Director Peter Godsall explains the proposals in the latest exposure draft to be issued by the ASB.

This month, the ASB has issued an exposure draft of an amendment to Financial Reporting Standard (FRS) 25 (IAS 32) Financial Instruments: Presentation. The amendment would change the classification from liabilities to equity of certain financial instruments. The amendment follow similar proposals to amend International Accounting Standard (IAS) 32 Financial Instruments: Presentation issued in June 2006 by the IASB.

The IASB noted that certain financial instruments with characteristics similar to ordinary shares were classified as liabilities under IAS 32. The objective of the exposure draft is to develop a limited scope, short term solution to improve the financial reporting of these instruments, pending the outcome of the IASB's longer-term project on equities and liabilities. The new proposals would require classification as equity of financial instruments puttable at the fair value of a pro rata share of the net assets of the entity and instruments with obligations for a pro rata a share of the entity on liquidation, provided certain criteria were met. The amendments would be applied retrospectively, with one exception relating to compound instruments, from a date to be decided after exposure.

Following the issue of the IASB exposure draft, the ASB is proposing to make corresponding changes to FRS 25 to keep it in line with the international standard.

The ASB has noted the concerns raised by two IASB Board Members set out in the alternative views in the exposure draft. However, the ASB does not believe that these concerns are sufficient to justify a divergence between the UK and international standards.

The Exposure Draft can be accessed from the website at: http://www.frc.org.uk/asb/press/pub1139.html. Comments are requested by 23 October 2006.