Subject: IBFed response to the IASB Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9

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1 Pinners Hall Old Broad Street London EC2N 1EX tel: + 44 (0) fax: + 44 (2) web: Mr Hans HOOGERVORST Chairman International Accounting Standards Board 30 Cannon Street London, EC4M 6XH United Kingdom 27 th March hhoogervorst@ifrs.org Dear Mr Hoogervorst, Subject: IBFed response to the IASB Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9 Dear Mr Hoogervorst, The International Banking Federation ( IBFed ) 1 appreciates the opportunity to comment on the Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9 and would also like to express gratitude to the IASB staff for the extensive outreach undertaken during the consultation period. Our comments as well as answers to the questions raised in the Exposure Draft are set below. We hope you find our comments useful and stay to your disposal should you have any further questions or would like to discuss our views in more details. Yours sincerely, Sally Scutt Managing Director, IBFed 1 IBFed is the representative body for national and international banking federations from leading financial nations around the world. Its membership includes the American Bankers Association, the Australian Bankers Association, the Canadian Bankers Association, the European Banking Federation, the Japanese Bankers Association, the China Banking Association, the Indian Banks Association, the Korean Federation of Banks, the Association of Russian Banks and the Banking Association South Africa. This worldwide reach enables the Federation to function as the key international forum for considering legislative, regulatory and other issues of interest to the banking industry and to its customers.

2 IBFed response to the IASB Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9 General comments The IBFed understands that the scope of the revision is to be limited to address certain issues. However, given that further analyses were performed since the original ED, the IBFed would suggest taking the opportunity to review the appropriateness and relevance of the definition of the amortised cost category in general. The IBFed would support IFRS 9 where properly articulated business models were the key drivers for the classification and measurement of financial instruments. As the business model sets the manner in which the value is created and distributed, for financial services entities the interaction between assets and liabilities is important to the business model rather than just considering individual financial instruments or portfolios of assets in isolation. Financial statements should portray the business and economic substance of financial transactions. However, we believe that the SPPI criteria have the potential to expand the Fair Value through Profit and Loss (FVPL) classification, which would not reflect the economic substance of the instruments. As a result, as issuers of debt instruments, banks are concerned that certain debt instruments would become unattractive as an investment. Requirements for such instruments to be classified FVPL would lead to either significant accounting mismatches, in particular for the insurance industry, or fair value accounting that is not in alignment with the business purpose of holding the investment for other industries. This is contrary to one of the main objectives of this limited scope revision of IFRS 9. Such instruments include the contingent convertible bonds (with equity conversion features) that are expected to be increasingly used for capital under Basel III and certain types of banks capital instruments with deferred interest payments. While one of the objectives of the revised exposure draft was to converge with FASB, the text of the FASB exposure draft is different when it comes to business model. The IBFed suggests that any differences should be clearly articulated to provide clarity for the user community. The IBFed fully appreciates that the objectives of financial statements and regulatory objectives are not the same. Financial statements should portray the economic substance of transactions and should not necessarily aim at addressing the prudential objectives of regulators. However, in some cases the regulatory and accounting objectives are similar and given the wider economic impact of the accounting rules, the IBFed would call for greater dialogue among standard setters, regulators and other policy makers. The IBFed is particularly concerned about the relationship between the classification and measurement of financial instruments and the Basel III capital requirements, especially when differences in the accounting classifications will result in differences in required regulatory capital. Business model The IBFed understands that the objective of the revision was not to change the articulation of the amortised cost business model in IFRS 9 (2010), and strongly supports this approach. 2

3 However the IBFed believes that the definition of the business model should reflect how the business is managed, and that this requires judgement and broader considerations of the relationship between assets and liabilities. Reducing the business model classification to a matter of fact, based on defined criteria, creates a risk of rules-based accounting where the accounting is at odds to the business model as understood by management. This could lead to a disconnection between the actual business model and the accounting, which could undermine the quality of financial statements and the ability of financial reporting to explain the results. In the application guidance, the IBFed suggests further guidance around the concepts of frequent and significant to avoid diversity in practice. A certain level of sales is consistent with the amortised cost category, and the rules around these should not be so strict so as to preclude all financial assets except IAS 39 loans and receivables qualifying for amortised cost measurement. One of the industry s main concerns is the classification and measurement of liquidity and interest rate management portfolios. The IBFed believes that the definition of the business model applicable to the liquidity/balance sheet and interest rate management portfolios that hold commonly issued instruments includes the regulatory requirements for sales as well as appropriate reasons for rebalancing of such portfolios, so that the traditional banking business, such as prime lending and deposit taking, falls within the scope of the amortised cost category. This would appropriately reflect, in both profit and loss and in the balance sheet, amortised cost for balances that result from and support banking business that is also at amortised cost, provided that the initial investment strategy and its operation is consistent with this function. Modified economic relationship The IBFed welcomes the intent of the IASB to propose clarification in the Exposure Draft in respect of instruments with modified economic relationships between principal and interest, which allows instruments with immaterial modifications to pass the SPPI test. However, the IBFed remains concerned over the instruments that will not pass the SPPI test, but where amortised cost would provide the most useful information, The IBFed believes that amortised cost would provide users with more useful information in circumstances when financial instrument features do not include significant leverage, do not have an impact on whether there is a gain or non-credit related loss upon the maturity of the instruments, and when the change in fair value caused by the special feature in question is not significant. This is especially important as a result of the elimination of the ability to bifurcate embedded derivatives. The IBFed also believes that features that are not in the control of market participants should not result in otherwise-compliant financial assets failing to qualify for amortised cost measurement. These include products where interest rates are being set by the governments or regulations requiring a particular method of averaging or determining interest reset periods, or where governments require certain features to be included in determining the interest rate. Concerns have also been expressed over the operational difficulties of the SPPI test, in particular when it is not clear how to identify the benchmark or hypothetical instrument and possible diverging interpretations of more than insignificantly different from the 3

4 benchmark cash flows. As a result, the IBFed is concerned that the SPPI test could be interpreted to cause some instruments to be classified as FVPL that should not be. Additionally, the SPPI test needs to be further clarified to be operational. Several options were brought forward by different members of the IBFed for consideration, to allow assets that are currently being measured at amortised cost and are held with the objective to collect cash flows, to remain in that category: Amendments/clarifications to the SPPI test Clarifying and simplifying the SPPI test by revising the definition of interest to reflect its basis components of the time value of money and credit risk to include liquidity risk, spread adjustments to facilitate business strategies to expand in particular markets, funding costs, administrative costs and profit margin. Consider similar language to that in IAS 39 which assesses embedded foreign currency derivatives in the context of what is routinely denominated in commercial transactions or commonly used in the economic environment in which the transaction takes place to try and differentiate features that are required by law or regulators in a particular country, from features that should be assessed for SPPI because they are unusual and inserted for a particular economic effect such as embedded derivative. Scope out of the SPPI test modifications which arise from the operation of law or regulatory requirements in a market or provide clear examples demonstrating that the application of the SPPI test to these instruments would allow them to be classified at amortised cost in alignment with the economics. Clearly explain the difference between embedded derivatives and modified economic relationships, clarifying why certain features would cause an instrument to fail the SPPI test, but would not be considered embedded derivatives under IAS 39, specifically interest rate mismatch features. The IBFed would also like to understand why it is appropriate for such instruments to be measured at fair value through profit or loss. As a result of removing the bifurcation requirements for financial assets in the aim of simplifying financial reporting, many members believe that the SPPI test should be designed to cause a narrower scope of instruments to be classified as FVPL relative to instruments that were bifurcated under IAS 39. The absence of such a clarification of in IFRS 9 could cause instruments that had relatively insignificant embedded derivatives to be fully fair valued under IFRS 9 which in many cases is not in alignment with the economics of holding such instruments. Replace more than insignificantly with significantly, to avoid possible narrow interpretation and increase comparability and simplify the reading of the standard. This is believed to be consistent with the understanding that the SPPI test should cause a narrower scope of instruments to be classified as FVPL relative to instruments that were bifurcated under IAS 39. Expand the explicit notion of significance to all contractual features and terms and not just to the relationship between principal and interest to prevent financial instruments with less than significant special features leading to fair value of the whole instrument as a result of elimination of bifurcation of financial assets. 4

5 Replacement of the SPPI test Replace the SPPI concept with either (i) the closely related test from IAS 39, without bifurcation or (ii) with the closely related test from IAS 39, with bifurcation, especially if the intent of the Board is not consistent with the concern raised in the preceding points. In such case, however, the IBFed questions whether the results of the IFRS 9 revision would represent sufficient improvements over IAS 39 and whether the implementation efforts and the additional complexity would justify the change to IFRS 9. Others The IBFed agrees that only a completed version of IFRS 9 (including impairment and general hedge accounting) should be allowed for implementation, however also believes that it is no longer realistic to set 2015 as the mandatory application date of IFRS 9. Taking into account the complexity and substantial changes expected to banks internal systems and processes when implementing the new provisioning model, at least 3 years should be envisaged as the implementation period once the standard is finalised. Formalising the delay to the mandatory effective date as soon as possible would be helpful for entities in planning their conversions, particularly those that are foreign private issuers in the US. While the possibility of early adoption of the finalized IFRS 9 should be evaluated against the resulting lack of comparability and the consequences, the modification concerning the own credit requirements should be allowed for early application as soon as possible. This is because own credit is an existing provision that needs repair, and waiting for completion of IFRS 9 would mislead users during the interim. The IBFed is of the view that it would be preferable to introduce the changes to the own credit via amendments to IAS 39 than wait for IFRS 9 to be completed. 5

6 Response to the selected questions raised in the Exposure Draft Question 1 Do you agree that a financial asset with a modified economic relationship between principal and consideration for the time value of money and the credit risk could be considered, for the purposes of IFRS 9, to contain cash flows that are solely payments of principal and interest? Do you agree that this should be the case if, and only if, the contractual cash flows could not be more than insignificantly different from the benchmark cash flows? If not, why and what would you propose instead? The IBFed welcomes the intended clarification, in that it aims to address some concerns that were raised by constituents about the requirement to fair value certain instruments that are part of normal banking business or in certain cases even required by law, consumer protection regulations or resulting from other regulatory requirements. The IBFed acknowledges that this would solve the problem for certain loans with interest rate mismatches between the rate term and fixation period, or loans with administrative rates, particularly those where interest rate reset features have an element of averaging over short time (i.e. a smoothing element). However, there remain concerns over the instruments that would be interpreted to not pass the SPPI test, despite clear consistency with the held to collect business model. The IBFed believes that further amendments to the standard are necessary to ensure that instruments where amortised cost will provide users with better information will continue to qualify for this category. Question 2 Do you believe that this Exposure Draft proposes sufficient, operational application guidance on assessing a modified economic relationship? If not, why? What additional guidance would you propose and why? The IBFed welcomes the principles-based approach of the Exposure Draft; nevertheless it is believed the principles would benefit from further clarification and illustration by providing a few additional examples. The industry would also welcome the clarification as to whether the SPPI test for modified economic relationships is always mandatory to carry out under the conditions mentioned in the exposure draft, or given the complexity of the test, whether the entity would be allowed to opt out and measure the financial instrument at fair value through profit or loss. It is believed that replacing shall with may in paragraph B4.1.9B would decrease the operational complexity of the proposal. Please see further the response to question 3. Question 3 Do you believe that this proposed amendment to IFRS 9 will achieve the IASB s objective of clarifying the application of the contractual cash flow characteristics assessment to financial 6

7 assets that contain interest rate mismatch features? Will it result in more appropriate identification of financial assets with contractual cash flows that should be considered solely payments of principal and interest? If not, why and what would you propose instead? The IBFed is concerned with the complexity of the proposal and believes simplification, in addition to further clarification, needs to be provided. Some members suggested that the degree of complexity in operating this test would be similar to that of the embedded derivative test. Given the lack of clarity, there are differences in views as to when comparison between benchmark and instrument is required and whether it would or would not fail the test. The differences between an embedded derivative and the modified economic relationship are unclear, nor is it clear why instruments should be fair valued when they do not contain embedded derivatives (or closely related embedded derivatives) or features that contain leverage or impact fair value. There seems to be an overemphasis on mismatch features that does not seem warranted by their potential impact on fair value. As a result of the removal of the bifurcation requirements for financial assets in the aim of simplifying financial reporting, many members believe that the SPPI test should be designed to cause a narrower scope of instruments to be classified as FVPL relative to instruments that were bifurcated under IAS 39. The absence of such a clarification of in IFRS 9 could cause instruments that had relatively insignificant embedded derivatives to be fully fair valued under IFRS 9 which in many cases is not in alignment with the economics of holding such instruments. The IBFed is concerned that it will be operationally difficult to perform the test for certain instruments, in particular where it is not clear how to identify the benchmark or hypothetical instrument. It remains unclear how to determine hypothetical financial assets in particular for regulated interest rates that are the only available interest rates (and the IBFed would question the usefulness of a comparison to a hypothetical financial asset that may not even be legally possible in the jurisdiction). These include, for example, products where interest rates are being set by the governments or regulations requiring a particular method of averaging or determining interest reset periods, or where governments require certain features to be included in determining the interest rate such as the Chinese constant maturity loans, or the receivables with government institution, backed by French Livret A where interest rates are effectively set by authorities. There are concerns that the proposed clarification does not adequately capture traditional retail or corporate lending with a pricing mechanism based on some kind of reference rate. The standard should allow for specific exemption for government set rates and features for specific regulated products in market economy and regulated jurisdictions or provide examples demonstrating that the application of the SPPI test to these instruments would allow the amortised cost classification in line with their economic substance. The IBFed would welcome clarification of the term significant, particularly with reference to materiality. Given the possible narrow interpretation, the IBFed believes replacing more than insignificantly with significantly would simplify the reading of the standard. Also, given that the concept of insignificance is similar to the closely-related for bifurcation of liabilities, the IBFed would suggest that the quantitative threshold that of insignificant is consistent with the doubledouble' test interpretation that is broadly understood. Such clarification would narrow the scope of instruments that would fail the amortised cost category due to the elimination of the bifurcation. There is also uncertainty regarding the unit of account for performing the SPPI test. One of the reasons for this uncertainty is that some indicators regarding when to measure at amortised cost 7

8 seem to be at some kind of portfolio level while others seem to be focused on a single instrument. The IBFed believes the unit of account may be a very important factor when performing the SPPI test for some financial assets. The reason for our comment is that the interest rate may be set based on the expected duration of the portfolio rather the contractual maturity for a single financial asset. This could be the case solely based on internal risk management or based on local regulations requiring a pricing based on the expected duration of the portfolio rather than a shorter contractual maturity. Clarification is also requested as to whether the appropriate comparable financial asset could adjust the tenor to the reset period (when the term of the loan is changed to be the same as the reset feature) rather the reset period to the tenor. The IBFed believes that IFRS 9 should be further amended to ensure that the classification of financial instruments will be more aligned with the business model. Otherwise, financial assets with contractual cash flows that, based on their economic substance, should be valued at amortised cost would be interpreted to fail the SPPI test. Such examples include but are not limited to: Assets where the actual pricing is based on the total expected relationship with the customer. When pricing retail loans and corporate loans that are not listed, the price may include factors related to the actual other services provided to the customer and the expected future relationship with the customer and also the expected behavior of the customer (i.e. the actual interest rate may include factors than just time value of money and credit risk on an explicit or implicit basis). While the pricing methodology as such is not prescribed in the standard, there are concerns that some parts of the standard (such as B4.1.9C, which states that the reason for the rate being set in a particular way is not relevant to the analysis) may have an impact on the interpretation of the requirements and result in such pricing failing SPPI test. Certain types of banks capital instruments with features that stop coupon payments if prevented by the regulator (perpetual debt instruments). This is illustrated by instrument G in B Such instruments in which the issuer may be required to defer interest payments in the contingent event that predefined solvency ratios are breached and additional interest does not accrue on those deferred interest amounts, would not pass the SPPI test. It is not clear why the ability to defer coupon should result in fair value measurement for the instrument, while the feature does not add any leverage and the probability of deferral may be remote. The pricing of this feature is a pricing of credit risk and the instruments are traded in the fixed income market. The credit risk feature is not different than the default risk in other instruments without this feature. Not measuring these instruments at amortised cost would not reflect the business model of an entity that acquires these instruments, which is from the perspective of a holder of a long-term investment designed to provide a steady yield in all but the most adverse scenarios. According to IFRS 9 such instruments cannot qualify for amortised cost, as an issuer may be required to defer interest payments and without interest accrual, there is not consideration for the time value of money. An entity would purchase these instruments as long term investments, yet because interest could be suspended, fair value measurement would be required, even though this would not reflect its actual business model. 8

9 Contingent convertible instruments (with an equity conversion features) that are expected to be increasingly issued by banks for capital under Basel III. The fact that the conversion feature is remote at inception should not cause the entire instrument to be fair valued over its life. In addition, requirements to fair value such instruments through profit or loss would lead to either significant accounting mismatch, in particular for the insurance industry as potential holder of those instruments, contrary to one of the main objectives of this limited scope revision of IFRS 9 or fair value accounting that is not in alignment with the business purpose of holding the investment for other industries. Mortgage loans with a floating rate in reference to short-term prime rate that is set by individual banks, considering not only time value of money and credit spread, but also other factors (margin, funding cost, administrative cost). Retail loans based on an average Euribor 3 month rate for a period of interests of 1 year without refixing in the course of the year. 15-year floating-rate government bonds with the coupon which is paid every 6 month and whose rate is determined each time by the recent auction for 10-year fixed rate governmental bonds, minus the fixed adjusting factor determined when issued. The fixed adjusting factor is basically to match expected value of 15-year floating-rate government bonds with that of benchmark interest of 6 month. The IBFed understands that the scope of the revision is to be limited to address certain issues. However, given that further analyses were performed since the original ED, the IBFed would suggest taking the opportunity to review the appropriateness and relevance of the definition of amortised cost category in general. Several options could be considered, in addition to the clarification provided by the IASB, to allow assets that are currently being measured at amortised cost and are held with the objective to collect cash flows to remain in that category: Revise the definition of interest to reflect components, other than time value of money and credit risk, that may be of commercial nature (e.g. liquidity risk, business strategy to expand on particular market, funding costs, administrative cost, profit margin). Clarify that liquidity considerations are also part of the time value of money by including the reference in BC4.22 in the standard. Also, consider whether the current definition is in line with other IASB projects (see the insurance project definition of interest). It is not suggested that this should imply assessment of each component of interest as part of the detailed SPPI test. Clearly explain the difference between embedded derivatives and modified economic relationships, clarifying why certain features would cause an instrument to fail the SPPI test, but would not be considered an embedded derivative under IAS 39, specifically interest rate mismatches. Further, the IBFed would like to understand why it is appropriate for such instruments to be measured at fair value through profit or loss. This will help with the understanding of the differences which will remain for financial liabilities and may help preparers make judgements about the significance of features that fail SPPI test. Consider similar language to that in IAS 39 which assesses embedded foreign currency derivatives in the context of what is routinely denominated in commercial transactions or commonly used in the economic environment in which the transaction takes place to try to differentiate features that are required by regulation in a particular country from features that are inserted for a particular economic effect. This would also involve deleting the last 9

10 sentence in B4.1.9C that the conclusion is unchanged regardless of the reason for the feature. Scope out modifications that arise from the operation of law or regulatory requirements in a market it is noted that this was the approach in the staff paper for the October 2012 IASB meeting which was not discussed. Replace more than insignificantly with significantly, to avoid possible narrow interpretation and increase comparability and simplify the reading of the standard. This is believed to be consistent with the understanding that the SPPI test should cause a narrower scope of instruments to be classified as FVPL relative to instruments that were bifurcated under IAS 39. Expand the explicit notion of significance to all contractual features and terms and not just to the relationship between principal and interest to prevent financial instruments with less than significant leverage leading to fair value of the whole instrument as a result of elimination of bifurcation of financial assets. Replace the SPPI concept with the closely related test from IAS 39. Question 4 and question 5 Question 4 Do you agree that financial assets that are held within a business model in which assets are managed both in order to collect contractual cash flows and for sale should be required to be measured at fair value through OCI (subject to the contractual cash flow characteristics assessment) such that: (a) interest revenue, credit impairment and any gain or loss on derecognition are recognised in profit or loss in the same manner as for financial assets measured at amortised cost; and (b) all other gains and losses are recognised in OCI? Question 5 Do you believe that the Exposure Draft proposes sufficient, operational application guidance on how to distinguish between the three business models, including determining whether the business model is to manage assets both to collect contractual cash flows and to sell? Do you agree with the guidance provided to describe those business models? If not, why? What additional guidance would you propose and why? The IBFed understands that the objective of the revision was not intended to change the articulation of the business model in IFRS 9 (2010) and strongly supports this approach. However the IBFed believes that the definition of the business model should reflect how the business is managed, and that this requires judgement and broader considerations of the relationship between assets and liabilities. Reducing the business model classification to a matter of fact, based on defined criteria, creates a risk of rules-based accounting where the accounting is at odds with the business model as utilised by management. This could lead to a disconnection between the actual business model and the accounting, which could undermine the quality of financial statements and the ability of financial reporting to explain the results. From the perspective of the financial industry, it is 10

11 imperative that the traditional banking business, including lending and deposit taking, fall within the scope of the amortised cost category. While the IBFed recognises that the frequency of sales and significance would imply a certain degree of judgment, it is believed further clarification may be necessary to ensure that appropriate business models fall into the amortised cost category. One of the main concerns of the industry is the measurement for the liquidity and interest rate management portfolios. The purpose of the regulatory requirement for an entity to hold these portfolios is to provide liquidity for any stress case scenarios, and to maintain a sufficient regulatory buffer in times when there is a need for increased liquidity. Many jurisdictions have regulatory requirements that instruments in these portfolios must be sold occasionally, to demonstrate liquidity to the local regulators (although the nature and amount of sales required by regulators may vary by jurisdiction or portfolio). There is also sometimes a need to re-balance these portfolios, due to changes in interest rates or changes in the credit quality of issuers. There is no intention on behalf of the entity to manage these portfolios in terms of producing short term profit-taking, but adjustments are required to match the business which they are supporting. There is concern that these assets may fail the amortised cost classification as a result of the strict rules around permitted sales. Should these portfolios fail the amortised cost classification, an accounting mismatch would be created given that the underlying liabilities are accounted for at amortised cost. Portfolios are used to manage the interest rate risk of amortised cost liabilities, and requiring the related assets to be measured at fair value would generate accounting results at odds with the economics. The IBFed therefore believes that the amortised cost business model is appropriate for liquidity/balance sheet management portfolios which hold commonly issued instruments, and the proposals should permit sales as a result of regulatory requirements, given that these are required by an external party, and not representative of management intention for the portfolio as a whole. The reason for rebalancing of portfolios must also be considered. For example, the transition to IFRS 9 is most likely to happen in the environment of low interest rates; however, it is expected that the interest rate will increase in the future. The IASB should clarify how such rebalancing would be assessed, and whether such rebalancing should require the whole portfolio to be measured at fair value. The IBFed believes that the entity s specific requirements to manage changes in interest rates or credit concentration risk as defined and documented in entities risk management practices and investment strategies and supported by objective evidence that could be corroborated by independent third party (or market) should be built into the definition of the business model. As the proposal requires that the business model assessment is not done at the level of individual instruments, it is consistent that reasons for sales should not be done at this level. Therefore, sales due to the management of credit concentration should also be permitted within an amortised cost model. The ED states that sales that are the result of the credit deterioration in the asset s credit quality are not inconsistent with the objective of hold to collect. The IBFed believes that the wording should clarify that sales for the purpose of preventing losses from arising due to credit deterioration, in advance of actual credit downgrades, are also permitted, provided there is sufficient objective evidence and the sales are consistent with entity s documented risk management policy and internal gradings. 11

12 The IBFed understands that it is the IASB s intent, and as a result it is believed it should be clarified, that the degree of credit deterioration that would warrant a sale from the amortised cost category is not meant to be as high as the degree that would cause a financial asset to shift buckets under the proposed IFRS 9 impairment standard. Also, the following would require clarification in regards to assessment of the held to collect business model: o Whether or not a level of securitisations will impact the business model assessment, even if derecognition is not achieved We understand that if derecognition is not achieved, securitisation is not considered a sale. However, clarification in this area would be appreciated. When a loan is syndicated, it is not clear whether the portion to sell and the retained portion should both be classified within the FVOCI category. Under IAS 39, the portion to sell would be held at fair value through profit or loss, and the retained portion would be held at amortised cost, which is a sensible representation of management intention for each portion. The IBFed recommends that it be made clear that the business model can be applied to portions of instruments, so as to maintain the IAS 39 treatment. Similarly, if there were significant loan restructurings which resulted in derecognition of the original loans, it is not clear if this would affect the business model classification as amortised cost. o How the business model assessment interacts with the held for sale assessments under IFRS 5 If the business model changes and a reclassification is required, IFRS 9 would require that this be made prospectively at the start of the first reporting period following the change in business model. The remainder of the disposal group would be reclassified when the IFRS 5 criteria are met. This could result in different dates of reclassification for the financial assets and the other items in the disposal group. IFRS 9 would require measurement of the assets at fair value, but IFRS 5 requires re-measurement at the lower of its carrying amount and fair value less costs to sell and carrying amount. o It remains unclear whether the assessment of sales and significance should be evaluated in the context of individual portfolios or the business as a whole. Finally, although the IBFed supports convergence with the FASB model, and the proposals are a step in that direction, it is important to evaluate how successfully the two models are converged. The FASB model is more explicit than the IASB proposals, and would appear to have stricter rules around what can be classified as amortised cost. It would be useful to have a clearer understanding from the IASB as to how the models are expected to differ. For example, it is not clear whether or not sales due to risk concentrations are permitted within an amortised cost model under the IASB proposals, whereas this is expressly prohibited under the FASB model. Although the models look similar, on more detailed inspection there are subtle and complex differences that need to be addressed. Without further guidance, it is possible that the interpretation of the IASB proposals will further broaden the gap between the measurement and the economic substance of transactions. Question 7 and question 8 Question 7 Do you agree that an entity that chooses to early apply IFRS 9 after the completed version of IFRS 9 is issued should be required to apply the completed version of IFRS 9 (ie including all 12

13 chapters)? If not, why? Do you believe that the proposed six-month period between the issuance of the completed version of IFRS 9 and when the prohibition on newly applying previous versions of IFRS 9 becomes effective is sufficient? If not, what would be an appropriate period and why? Question 8 Do you agree that entities should be permitted to choose to early apply only the own credit provisions in IFRS 9 once the completed version of IFRS 9 is issued? If not, why and what do you propose instead? The IBFed believes it is no longer realistic to envisage 2015 as a mandatory application date given the complex and substantial changes which will be required, in particular when implementing the proposed credit impairment model. The IBFed believes that a sensible approach would be to implement the final standards for credit impairment and classification and measurement at the same time. We anticipate that this application date would be at least three years following the finalisation of both standards. The interdependencies between IFRS 4 and IFRS 9 should also be taken into account when considering the IFRS 9 mandatory implementation date. The possibility of early adoption of the finalised IFRS 9 should be evaluated against the resulting lack of comparability and the consequences it may have for the users. However, the IBFed believes the own credit requirements should be allowed for early application as soon as possible. To do so, the IBFed is of the view that it would be preferable to introduce the changes to the own credit via amendments to IAS 39. Given the recent decision of the IASB to open IAS 39 for a narrow scope amendment in terms of novations of derivatives and continuation of hedge accounting, the IBFed encourages the Board to take similar action and adjust IAS 39 to allow an early application of the own credit requirements. * * * 13