MADISON, Wis.–The World Council of Credit Unions has filed a comment letter with the International Accounting Standards Board that calls for clarification on how regulatory requirements should be accounted for on convertible bonds and similar instruments.
World Council said it strongly supports carrying forward the existing rules for accounting for co-operative shares as equity under IFRIC Interpretation Number 2, as the IASB proposes, and it further called on the board to finalize these aspects of the discussion paper as proposed.
Similarly, WOCCU noted it also agrees with a number of other proposals and urged finalization of those, as well.
In terms of the board view that an entity shall apply the board’s preferred approach to the contractual terms of a financial instrument consistently with the existing scope of IAS 32, the World Council wrote it does not agree there is a practical difference between whether “rights and obligations arise from a contract or from the law” in terms of distinguishing equity from liabilities as the board argues.
‘Concern’ Over Statements
“Contractual rights and obligations are legal rights and obligations that arise from ‘the law’ like other enforceable rights and obligations do,” the letter states. “We believe that both contractual and non-contractual sources of rights and obligations should be considered in distinguishing equity from liabilities because both are enforceable rights and obligations that can result in the same or similar economic consequences.
“We are concerned that statements implying that contractual rights and obligations operate independently of the law, if finalized, would be confusing to users of this standard because it would create an arbitrary distinction between one set of enforceable rules and a different set of equally enforceable rules, both of which are rooted in law and can affect the economic substance of the equity-liability distinction,” the letter continues. “While we support looking to co-operative laws as a source of the rights and obligations of co-operative societies and their member-shareholders, we believe that IFRIC Interpretation No. 2’s references to co-operative laws…should not be viewed as an exception to a general rule. The economic consequences of exercising a right or obligation should be essentially the same on an accounting basis whether or not the right or obligation is based in contract or on non-contract legal provisions, even in the case of a retroactive law.”
To view the full letter, go here: http://www.woccu.org/documents/WOCCU_-_IASB_Financial_Instruments_as_Equity