ISRAEL SECURITIES AUTHORITY Corporate Finance Department 22 Kanfei Nesharim Street, Jerusalem Tel: Fax:

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1 ISRAEL SECURITIES AUTHORITY Corporate Finance Department 22 Kanfei Nesharim Street, Jerusalem Tel: Fax: International Accounting Standards Board 30 Cannon street London EC4M 6XH United Kingdom June 9 th, 2015 Dear IASB members, We are happy to respond to the IFRS Foundation's Exposure Draft of proposed amendments to IAS 1, Classification of Liabilities, published in February 2015 (ED 2015/1). 1. We acknowledge the need to clarify IAS 1's provisions regarding classification of liabilities, and strongly support the Foundation's proposal to clarify that the classification of liabilities is based on the rights that are in existence at the end of the reporting period. 1

2 2. We are of the opinion that the provisions of current paragraphs to IAS 1 may be inconsistent with those of paragraph 69(d). However, the proposed amendments do not fully resolve this supposed inconsistency. For example, assume Entity A and Entity B have received a long term loan on January 1 st, The terms of the loan include covenants that are examined twice a year: on March 31 st and on September 30 th. As Entity A did not breach the covenants on September 30 th, 2014, the loan was classified as non-current in its 2014 annual financial statements. That is in accordance with IAS 1 current provisions, and despite the fact that the next measuring date is only 3 months after the reporting period. On the contrary, since Entity B did not fulfil the covenants on September 30 th, 2014, and was given a waiver according to which the covenants will not be examined on that measurement date, but rather only on the next measurement date (March 31 st, 2015) the loan is to be classified as current in its 2014 annual financial statements. That is, according to IAS 1.74, and despite the fact that during the period between September 30 th 2014 and March 31 st, 2015, the lender cannot demand immediate repayment, and on March 31 st payment cannot be required should the covenants be fulfilled. In these two cases it seems that the circumstances lead to similar situations (from both legal and economic aspects); Compliance with the covenants will be examined on the same date (March 31 st, 2015) and lender does not have a right to demand immediate repayment until the next measuring date. In accordance with IAS 1's requirements, it seems that these entities shall classify their respective liabilities differently. In that matter, in light of the comprehensive discussions held by the board, we wish to understand whether the board is still of the opinion that there are reasons to distinguish between these cases, and if there is a difference, what are the reasons. 3. Regarding the proposal to delete the word 'unconditional' from paragraph 69(d), we are of the opinion that such amendment might give the impression that any right to defer a settlement for 12 months after the reporting period is sufficient for classification as non-current, regardless of economic compulsion. Thus, it would seem that even if it is uneconomical for the entity to defer settlement of the liability for at least 12 month after the reporting period (e.g. an extremely high refinancing fee) or the probability to do so is remote, the liability would be classified as non- 2

3 current. Hence, we suggest clarifying the paragraph, as for our understanding this does not appear to be the initial intention of the amendment. We also suggest clarifying whether a conditional right can be considered a "right to defer settlement of the liability", as noted in paragraph 69(d), and if so, under what circumstances. 4. Regarding paragraph 72R proposal to delete the word 'expects' - to our understanding, the requirements of paragraph 72R are subject to all of paragraph 69's provisions, and specifically paragraph 69(a). Thus, in our view, if an entity breaches a provision of a long term loan arrangement before the end of the reporting period, even if the lender agreed by the end of the reporting period to provide a period of grace ending at least 12 months after the reporting period, the entity shall classify the liability as current if it expects to settle the liability in its normal operating cycle. This is in accordance with paragraph 69(a). Therefore, we recommend retaining reference to the entity's expectation in paragraph 72R, or rather clarifying the relation between paragraph 69(a) and paragraph In 2010, paragraph 69 of IAS 1 was amended to clarify that "terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification". We are of the opinion that it is important that the board clarifies how the currently proposed amendment relates to the 2010 amendment mentioned above. Particularly, we recommend clarifying in both amendments whether the mentioned "equity instruments" are counterparties' equity instruments held by the entity as an investment or the entity's own equity instruments. 6. Under the assumption that the intention is to relate to the entity's equity instruments, in our view, there is still need for further clarification whether this applies also to equity instruments which do not meet the requirements of IAS or only equity 3

4 instruments which meet those requirements. Hereinafter, two examples which demonstrate the potential issues arising from the current wording of the standard: 6.1 The first example is of a convertible debt due to be settled more than 12 months after the reporting period, but convertible upon demand by the holder in exchange for a variable amount of shares (therefore, the conversion component is classified by the issuing entity as a liability). In this example, if the instrument was separated into two components (a debt component and a conversion component), View A would claim that according to the current wording of the standard and of BC38I, it seems that both components should be classified as non-current, as issuance of equity instrument does not affect its classification. On the other hand, View B would be that the debt component should be classified as non-current while the conversion component (which is classified as a liability) should be classified as current, since transfer of equity instrument is a way of settlement of liability and therefore should be considered when classifying the liability. If the instrument is not separated into components but is rather classified in its entirety as measured at fair value through profit or loss in accordance with IAS 39.9, two views could be claimed. View A would claim that the liability should be classified as current as the entity might be required to settle the liability by issuing equity instruments within 12 months after the reporting period. View B would claim that the liability should be classified as non-current as payment cannot be required within the 12 months following the reporting period (and the possibility of issuing equity instruments within 12 months does not affect the classification). Hence, we recommend clarifying the intention in this amendment. 6.2 The second example is of an option issued by the entity, classified as a liability, exercisable within 12 months after the reporting period. As the entity will be forced to settle the liability within 12 months after the reporting period, it would seem that the liability shall be classified as a current liability, and this seems to be the intention of the proposed amendment to paragraph 69. However, in accordance with the current wording of paragraph 69(d) [as was amended in 4

5 2010 (and not affected by the current proposed amendment)] and BC38I, settling a liability by the issuance of equity instruments does not affect its classification. Therefore, it seems that as this liability should not be classified as current just because the entity will be required to issue equity instruments within 12 months after the reporting period. Therefore, we recommend clarifying how this option should be classified in accordance with the proposed amendment. 7. We agree with the proposed transition provisions. We will be happy to elaborate or answer any questions regarding our comments above by mail or (Yehudaa@isa.gov.il). Kind Regards, Yehuda Algarisi Chief Accountant 5