Comment Letter on Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9 (proposed amendments to IFRS 9 (2010))

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1 Verband der Industrie- und Dienstleistungskonzerne in der Schweiz Fédération des groupes industriels et de services en Suisse Federation of Industrial and Service Groups in Switzerland 26 March 2013 International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Comment Letter on Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9 (proposed amendments to IFRS 9 (2010)) Dear Sir/Madam, SwissHoldings, the Swiss Federation of Industrial and Service Groups in Switzerland, represents 57 Swiss groups, including most of the country s major industrial and commercial enterprises. We very much welcome the opportunity to comment on the above-mentioned Exposure Draft, and our response (in the appendix) has been prepared in conjunction with our member companies. We appreciate the Boards efforts to clarify further application issues on the classification and the measurement for certain financial instruments and business model approaches by amending IFRS 9. We believe that the proposals respond to requirements of certain business or investment activities to properly reflect these activities in their financial statements and to avoid further accounting and/or presentation mismatches. We thank you for the opportunity to submit our comments on your proposal. Yours sincerely SwissHoldings Federation of Industrial and Service Groups in Switzerland David Frick Chair, Nestlé SA Christian Stiefel Chair Executive Committee cc SH Board Postfach 402, 3000 Bern 7 Nägeligasse 13, 3011 Bern Tel. +41 (0) Fax +41 (0) sh@swissholdings.ch

2 SwissHoldings 2 APPENDIX ANSWERS TO SPECIFIC QUESTIONS IN INVITATION TO COMMENT Contractual cash flow characteristics assessment: a modified economic relationship between principal and consideration for the time value of money and the credit risk 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? We agree with the Board s proposals made through the amendment of paragraphs B B4.1.9E and its view expressed in paragraphs BC41-BC43 that a financial asset with features to allow a modified economic relationship between principal and consideration for the time value of money and credit risk still could be assessed in IFRS 9 to be a financial asset which contains solely payments of principal and interest and thus could be measured at amortised cost. 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 proposed guidance provides useful examples for operational application. However we could well imagine that some financial instruments might fail the contractual cash flow characteristics assessment although the financial instrument measured at amortised cost would provide more decision useful information and such a measurement would be more appropriate than its measurement through profit or loss. We consider, for example, instruments with early redemption features before the contractual maturity still as financial instrument with cash flows originating from principal and interest. We believe that additional guidance should be given for cases where the financial instrument has redemption features linked to the issuer s instances as such instruments should be eligible for measurement at amortised cost. 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 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? We believe that IASB has achieved its objective of clarifying the application of the contractual cash flow characteristics assessment to financial assets that contain interest rate mismatch

3 SwissHoldings 3 features. The proposed amendment will be useful for a more appropriate identification of financial instruments being compliant with the contractual cash flow characteristics and as such applicable for the measurement at amortised cost. Business model assessment: the fair value through other comprehensive income measurement category for financial assets that contain contractual cash flows that are solely payments of principal and interest 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? If not, why? What do you propose instead and why? We agree that the proposed measurement category would be concordant with the comprehensive approach of IFRS 9 that the classification and measurement of financial instruments should be determined based on the business model under which they are held or deployed. In this respect, we welcome the introduction of such a measurement category as it allows better representing the investment strategy of the various industrial preparers and is providing decision useful information to the user of the financial statements. In contrast, we believe that the measurement category at fair value through profit or loss would not appropriately reflect such a business model under which an entity holds financial assets for longer periods but, if applicable, would sell them in order to benefit from favourable market conditions. 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? We understand that the qualification for the fair value measurement through OCI would be achieved when the entity s key management has made a decision that it will hold to collect contractual cash flows, but also to sell financial assets within a portfolio in order to achieve the objective of a business model, for example, in order to increase yields by realizing favourable market price movements. We believe that the ED provides sufficient operational application guidance on how to distinguish between the three business models. However, we believe that additional guidance should be given, perhaps through an Illustrative Example, for cases where in particular industrial preparers are entering into non-recourse factoring agreements under which an entity is selling selected accounts receivables to a third party, while retaining full control of all other accounts receivables. Would the management of

4 SwissHoldings 4 financial assets via factoring fall under a business model which is aiming to both follow the collect contractual cash flows and hold for sale approach or would the financial assets which are remaining on the balance sheet fullfil the criteria hold to collect and still be valued at amortized cost instead of at fair value through OCI? Our view is that, as the primary purpose of non-recourse factoring is to mitigate non-collection risk (just as the primary purpose of factoring with recourse is to secure the cash flow benefit of additional financing), non-recourse factoring is consistent with a hold to collect model. If nonrecourse factoring of selected receivables were to be considered as evidence of a hold to collect and sell model for the accounts receivable ledger as a whole, the reporting entity might have to anticipate a factoring discount in its accounting for receivables which it has no intention of factoring and for which it expects to collect contractual cash flows in full. If the agreed credit period for those receivables spans a reporting period end, that accounting treatment would effectively shift an amount of profit from the first period into the second period, when the discount would be written back on collection of the receivables. In our opinion, that would not result in relevant information for financial statement users. Question 6 Do you agree that the existing fair value option in IFRS 9 should be extended to financial assets that would otherwise be mandatorily measured at fair value through OCI? If not, why and what would you propose instead? We believe it would be consistent to extend the existing fair value option in IFRS 9 also to financial assets that would be measured at fair value through OCI. Similar to other mismatches, this extension would also mitigate or eliminate accounting mismatches. E.g. an entity would be mandatorily required to measure financial assets at fair value through OCI but these financial assets are funded or partly funded by financial liabilities which are required to be measured at amortised cost. In such cases, it could be appropriate to have the option to identically measure the financial assets and related liabilities in order to avoid resulting accounting mismatches. Early application 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 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? The current approach of a phased revision and introduction of IFRS 9 is increasing significantly complexity. We, therefore, believe that the IFRS 9 revision should not be further delayed by including also the macro hedge accounting section in order to present the completed version and applicants should be allowed to apply the already introduced chapters without the macro-hedging section as it will be likely that the macro hedge accounting part will add additional complex discussions to the completion of IFRS 9 and thus further delay the revision process and introduction of the complete version. We agree that an entity early applying IFRS 9 should be required to apply IFRS 9 in its entirety. In this respect we understand that the IASB will finalise IFRS 9 once the proposals of this ED, impairment and general hedge accounting will be issued. Consequently, we understand that the

5 SwissHoldings 5 completed version of IFRS 9 will not include the standards on macro hedge accounting which is being deliberated separately from this project. On the other hand, we do not fully understand the application of the 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. In particular, we are uncertain whether an entity would need to publish interim financial statements during the six-month period in order to qualify for the relief of the amendment as proposed in paragraph 7.1.1A. We believe that the IASB should state clearly whether entities would need to publish interim financial statements or whether the relief would be applicable for annual periods beginning six months after the completed version of IFRS 9 will be published. In addition, we believe that for preparers who intend to early apply the previous versions of IFRS 9 an extension of the proposed six-month period to a twelve-month period would clearly facilitate the implementation process. We, therefore, would like to ask the IASB to reconsider an extension to a twelve-month period. Presentation of own credit gains or losses on financial liabilities 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? We agree that entities should be permitted to early apply the own credit provisions of IFRS 9. We would also like to suggest that the IASB should revisit its decision to amend IAS 39 in this respect as we believe that the presentation of fair value changes in a liability s credit risk attributable to changes in the issuer s own credit should be presented in OCI as required by IFRS 9 rather than in profit or loss. By amending IAS 39 the introduction of the own credit effect presentation would not depend on the finalisation of IFRS 9 and thus not be further delayed depending on the effective date of IFRS 9. First-time adoption Question 9 Do you believe there are considerations unique to first-time adopters that the IASB should consider for the transition to IFRS 9? If so, what are those considerations? We do not have any considerations unique to first-time adopters apart from our caveat commented in the answer to question 7 in respect of the complete issuance of IFRS 9 that the macro-hedging part should be decoupled from the already published or most recently exposed sections and to extend the proposed six-month period to a twelve-month period for preparers who intend to early apply the previous versions of IFRS 9. Question 10 Other comments Do you have any other comments on the proposals? We would also like to mention that the ED does not propose amendments to the Review Draft General Hedge Accounting. In particular, we would expect that the gain or loss on the hedging instrument if the hedged item is an eligible debt instrument, which is measured at fair value through OCI, should be consequently recognised also in OCI. At present, the Review Draft

6 SwissHoldings 6 addresses the case of fair value hedges of equity instruments for which an entity has elected at inception to measure them at fair value through OCI, i.e. that the gain or loss on the hedging instruments in this situation should be recognised in OCI, too. We believe that an amendment in this respect to the Review Draft General Hedge Accounting should be considered.