Accounting problems on the classification of liability and equity from the perspective of cooperatives

June 1st, 2019
Norinchukin Research Institute Co., Ltd.
AKEDA Tsukuru, Visiting Researcher


In June 2018, with regard to the classification of financial instruments under IAS 32, IASB has made a new proposal and invited the public to give comments on the classification of liability and equity based on the two new criteria, “timing feature” and “amount feature” of the delivery of the entity’s economic resources.

This newly proposed criteria offer nothing but a working explanation on the controversial fixed-for-fixed condition for derivative financial instruments that are to be settled with their own shares, and on an equity instrument that is not classified as equity.

Cooperatives and other similar entities have expresses their concern that the implementation of the new ‘amount feature’ criterium could affect the handling of IFRIC 2, while it remains an unsolved problem that the members’ shares in cooperatives in many countries are still treated as financial liabilities.

The reason the discussion has failed to achieve convergence is that an element contradicting the liability-based approach in the Conceptual Framework of IASB, has to be introduced in order to sort out the classification issue of liability and equity under IAS 32.

The classification of liability and equity is inherently and mainly based on the legal nature of the financial instruments. For the convergence of the discussion and the establishment of the standards applicable to any kind of entity, there would be no other option than to use the classification based on their legal nature.

In Japan, domestic accounting standards equivalent to IAS 32 are not yet discussed. If this will ever happen, the discussion must not take the existing standards as the precondition to focus on possible problems in their implementation. What is required here is to revert to the basic principles of accounting.…Link reading

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