ED IAS 39 Financial Instruments: Classification and Measurement published by IASB on 14 th July 2009

Transcription

1 ED IAS 39 Financial Instruments: Classification and Measurement published by IASB on 14 th July 2009 Comment letter August 2009 DRAFT PAPER DOCUMENTS 08/2009

2 ED IAS 39 Financial Instruments: Classification and Measurement published by IASB on 14 th July Introductory remarks ***** Comment letter Generally speaking ABI agrees upon the requirement of applying a rapid and meaningful amendment to IAS 39. In particular, the areas of intervention that have been identified (classification and measurement, impairment, hedge accounting), included in the document where procedures for the fair value assessment of a financial instrument are thoroughly defined, prove to be indeed the issues whereto amendments are to be applied. The need to operate consecutively in order to shorten the time requirement for the adoption of the new regulations is also understood. On the other hand, it is advisable to point out that the different areas of intervention concerning IAS 39 as proposed by the Board prove to have intrinsic relations (for instance, some measurement themes, such as the adoption of the fair value option, may be associated with hedge accounting management) and therefore, given that there is going to be a general revision of this standard, they cannot be managed separately. Therefore, despite gathering the impossibility of dealing with different areas of intervention at once, it would be advisable to put as forward as possible the release of exposure drafts on different themes and, simultaneously, reach a definitive approval of the modifications, at least with respect to the Recognition and measurement and Hedge accounting issues. As regards the compulsory implementation of the new provisions, it is deemed advisable to highlight how an extended timeframe of voluntary application (possibly until 1 st January 2012) would potentially reduce the financial statements comparability. Hence, it is deemed suitable to provide a definition of the new set of rules at short notice, also in order to curtail the option of applying different regulations. With specific reference to the document Classification and Measurement, we agree upon the need to reduce financial instruments number of categories, due to both the restrictions on the use of certain prior classifications (the non-listing of financial instruments for the Loans and Receivables category or the strict penalties for the Held-to-Maturity category) thereby the use of such classifications was greatly limited, and to certain rigidities that characterised the Available for Sale category. Specifically, we shall hereinafter point out some complexities that have been acknowledged in our national framework regarding financial instruments classification and measurement: - financial instruments HTM: the forecast of the tainting rule (stating that in case of more than an insignificant sale or reclassification of securities included in the HTM category, an enterprise should not classify or hold ED IAS 39 Financial Instruments: Classification and Measurement published by Page 2 of 19

3 any financial assets as held-to-maturity during the current financial year or during the two following years); as well as the inclusion of only listed instruments make this category extremely rigid and, therefore, rarely used; thus also restricting the chances of reclassifications allowed by the amendment to IAS 39 of October 2008; - Loans & Receivables: under certain circumstances, the exclusive possibility of including not-listed instruments restricts the scope of such category; - measurement and impairment of AFS capital securities: the measurement of listed capital securities is strongly influenced by highly volatile factors and elements, characterising current markets and that might not be directly linked to the issuer s solvency and therefore potentially contrasting with the purpose of the impairment test used to measure impairment of assets that are not deemed recoverable within a reasonable space of time; moreover, the existing impairment method presents some problems regarding its application as well as contradictions/asymmetries related to accounting activity. In particular: the reference value for impairment is nonetheless represented by fair value, either in irrational and extremely volatile market situations or when stock prices do not represent the fundamental real value of the related undertaking; positive variations in fair value following the assessment of the impairment shall not become ascribable to the fair value through profit or loss; negative variations in fair value following the assessment of the impairment shall be ascribed to the P&L Account. - Statement of Other Comprehensive Income (OCI): with respect to AFS securities, the double level of results may generate some difficulties in terms of comprehension by financial statements readers; - Strategic minorities: existing accounting standards do not enable classification as shares, and consequently to recognise at cost, specific and strategic minority interests for which a long-term outlook for investment is envisaged; such rigid classification, according to the current version of IAS 39, represents one of the AFS instruments, thus resulting in the volatility of the stockholder s OCI as well as in the necessity to take into account, for the purposes of the impairment test of the listed instruments, the stock prices and not the issuing enterprise s real value (aspects that are inconsistent with the underlying investment purpose); - Fair Value Option: the lack of flexibility that characterises the irrevocability of the initial designation limits its relative application, notwithstanding the reclassifications allowed by the amendment to IAS 39 of October Moreover, since a generalised application of fair value is not deemed feasible, the choice of maintaining the so-called mixed measurement model for financial instruments measurement is also viewed positively. Indeed, the objective of simplification into two classifications and models of Page 3 of 19

4 measurement, as reported in the exposure draft, is partly unexpected as a hybrid category has been identified (Other Comprehensive Income) and we also shall address this issue hereinafter, as well as for the upholding of the so-called fair value option. However, the procedures and the solutions referred to in the exposure draft to reach such rationalisation and simplification are characterised by certain features that we do not view positively. These shall be thoroughly addressed and explained hereinafter. In short, we do not agree upon: - the choice to link a financial instrument s classification to its technical characteristics rather than to a business model; - the choice to require the application of fair value to all equity instruments; - the prohibition to reclassify financial instruments; - the cancellation of the requirement regarding the separation of the embedded derivatives. With respect to such aspects, ABI believes it would be more appropriate to correlate the classification and measurement of a financial instrument to a business model, and therefore to the model selected by the business in order to generate the profits and losses deriving from the purchased/sold financial instruments (associated to strong restrictions for a prospective subsequent reclassification) and, under the assumption that the requirement of a fair value measurement of all derivatives cannot be annulled, to maintain the requirement concerning the separation of the embedded derivatives. 2 ABI s position In view of the complex and partially diverse attitudes of the Italian banking industry towards this issue, specifically concerning financial instruments classification and measurement regarding solutions set forth in the exposure draft, it is deemed advisable to develop such position before providing an analytical answer to the number of questions submitted by the IASB (in case, where it is considered possible, referring back to the answers contained in such exposure). Classification of financial instruments The ED sets forth the transition from the existing four categories of financial instruments to two categories: instruments evaluated at fair value ascribable in the profit and loss account and amortised cost instruments. The discriminating element for classification is represented by the instrument s technical characteristics: instruments that have contractual financial flows or determinable ones and do not present any leverage are assessable at amortised cost; all the other instruments shall be assessed at fair value given that alternatively any assessment of such instruments Page 4 of 19

5 would not allow the financial statement users to estimate future financial flows, therefore depriving them of the proper information to make their own investment decisions. The technical characteristics of the financial instrument, for the purpose of its classification, can be by-passed only in the event an instrument, despite having characteristics that would allow its assessment at amortised cost, is assessed at fair value with respect to the fact that it is managed on a fair value basis. Therefore, for the purpose of classification, the business model becomes a secondary discriminatory factor with regard to the instrument s characteristics. The number of categories reduction is certainly a move towards rationalisation and simplification of accounting rules. However, restrictions resulting from the instrument s characteristics, relevant to its classification, may lead to a lessening of the simplification (or possibly, in some circumstances, exacerbating existing accounting rules). The crucial element to analyse is to identify situations where a fair value measurement provides financial statement readers with better information compared to any measurement made on amortised cost. Based on the above, we generally hold that it is not possible to separate a financial instrument s representation in a balance sheet from its incorporated risk management by management itself. A financial instrument s measurement based on market variables that aren t monitored or managed by management would lead to an unlinked representation of objectives and corporate management choices to which the management is measured. As it was correctly pointed out in the Exposure Draft, we sustain that the most appropriate measurement criterion is the one that provides the best information on future financial flows generated by financial instruments. These flows obviously depend not only on market variables but also (especially) on the management s intentions and choices. This unlinked approach can lead the financial statement s reader to expect financial flows that are never (or seldom) realised and can therefore lead to potentially incorrect investment choices. Specifically, we hold that for instruments where management strategies are to realise short-terms profits deriving from price variations, or alternatively, whose management involves continuous opening and closing risk standings, the fair value measurement is the most appropriate one. Indeed, in those circumstances corporate results are strongly affected by market conditions and fair value measurement is better suited to measure these dynamics giving the best representation of future financial flows. Moreover this criterion permits one to measure management performance in exploiting opportunities or managing in troubled times. Alternatively, instruments that are managed for the purpose of generating long-term financial flows (and the same management is measured on the basis of these financial flows) present a movement of financial flows represented by their own returns and not by the fair value variations, Page 5 of 19

6 which, however - if present at the moment of the transfer of the instrument will appear with a time deferment that might be significant with respect to the financial statement s date. The fair value variation that would be revealed in the financial statement through assessment at fair value (either in the profit and loss account or in the net equity) on those instruments is potentially bound to change significantly in the following periods or even to alter its allocation. Therefore, in such circumstances the financial statement would result contaminated by values that in all probability will never have a financial index correlated with the variation of the instrument s value (or they will have an index of a different amount). However, fair value variations would not represent the forecasts of future financial flows realised by the company because it had no intention at all to sell the instrument and when it would eventually divest it, the market variables could be extremely different. An unjustified volatility of the financial statement s results would derive from this, which would contribute to nourish such factors of cyclicity for which the greater the expansion of the economic cycle, the more the company results grow, the more the market values raise, and likewise in the opposite situation. In contrast, following an examination of connections between accounting principles and financial market courses (a widespread opinion states that accounting rules were not the cause of the crisis but rather a contributory factor in its fuelling), the general expectations are for reducing the volatility of results, at least when such volatility does not derive from management methods of financial instruments Therefore, for all financial instruments that are not managed on a fair value basis, the most appropriate criterion of accounting measurement should be the amortised cost coupled with strict procedures of impairment test execution. Therefore, it is our opinion that the business model is the real driver for a financial instrument s classification and measurement. Only through uniformity between a financial instrument s management methods and its measurement criteria, can the financial statement provide an adequate representation of the results and the means used to reach those financial flows. This principle should be valid for any kind of financial instrument, excluding derivative contracts (stand alone or incorporated into complex instruments); theoretically speaking, the abovementioned principles could be valid for such instruments as well, but in their case it is preferable to take into account the instrument s financial characteristics: it is a case of instruments that, if not assessed at fair value, would not have be traceable in the financial statement due to the fact that most of them do not entail Page 6 of 19

7 acquisition costs. On the contrary, as regards equity instruments, there is no reason why the abovementioned methods should not be applied. Where instruments are not assessed at fair value, the informative requirements for investors can be met through compulsory disclosures of the financial statement. An appropriate disclosure of fair value (and, for some instruments, of the relative dynamics as well) for the instruments evaluated at amortised cost, would allow investors to have the same informative elements necessary to make their own investment choices. Indeed, it is believed that the financial statement should firstly report and correctly disclose the decisions taken by the businesses management. Hence, the results disclosed in the financial statements shall be consistent with the same decisions. In contrast, supplementary disclosures may provide stakeholders with some decision-useful information so as to come forward with remarks and opinions diverging from the ones set forth by management. As a result thereof, certain information that could not be reported in the financial statements can be properly represented. A compulsory fair value measurement of an instrument that is not assessed on fair value basis might force businesses to anticipate the trading transactions (compared to the provisions envisaged in their own business model) of certain financial instruments so as to avoid an unjustified volatility of the financial results. Lastly, it is important to underline how the choice to use the instrument s characteristics for its classification implies the drafting of a comprehensive application guide to specify when we are in presence of instruments with a basic loan feature. In particular, a strict application of the concise standards reported in the exposure draft would lead to assess at fair value instruments that are currently evaluated at amortised cost in congruity with the business model. In particular, we refer to the measurement of securitisation tranches, instruments acquired at a discount, and certain financial liabilities. As it has already been acknowledged, such accounting resolution would bring about an increase in financial statements volatility inconsistent with the actual procedures for business management. This is the exact opposite of the objective pursued. It has been acknowledged that a classification of instruments based exclusively on the business model might have discretionary elements for companies that are difficultly ascribable within the ambit of the accounting principles. With respect to the foregoing, it is possible to subscribe to the IASB argument regarding the difference between business model and management intent, and it is agreed that the former represents greater elements of impartiality, and hence must be preferred to the latter. Thus, we agree upon the requirement that the choice of classification and measurement criterion shall be taken through segments of businesses Page 7 of 19

8 either identified or reported in the exposure draft of accounting standards, and not through the individual financial instruments within a business line. In any case, it is possible to set a limit to any arbitrage through rules of reclassification. The convergence to a few exceptions of possibilities for a financial instrument s reclassification (the rare circumstances provided for by last October s amendment or a radical change of the business model) would provide the company with choices during the initial entry whose consequences, if not made in congruity with the business model, would soon become apparent in the financial statement in terms of unjustified volatility (in case the instrument is wrongly assessed at fair value, with respect to the business model) or of absence of effects on the profit and loss account (in case the instrument is wrongly assessed at amortised cost). The possibilities of the abovementioned reclassifications (exceptional financial market circumstances or change of business model) would have different effects: a change in the market conditions might even affect a single financial instrument held by the company and might require a shift from the fair value assessment criterion to the amortised cost criterion (and not vice versa); a change in the business model would affect the whole set of financial instruments held by a business unit and might bring about a shift from the measurement at fair value to the measurement at amortised cost or even vice versa. Many of the aforesaid issues are also the basis for the disagreeable perspective of creating a hybrid category for sole equity instruments represented by the OCI method. Such category of instruments represents a unique example in the financial statement: they would be the only activities for which profit and loss flows are not forecast, for which impairment tests would not be provided for. Regarding this matter, we believe that any loss in value due to impairment, any following recoveries, the gains from the sale of these assets, as well as the profits, in terms of dividends, resulting from these assets should be recognised in the profit and loss account. The fact that the OCI capital investment is held with a long-term view certainly confirms that the participating firm does not intend to benefit from the periodic fluctuations in FV; nonetheless, this does not imply that the participating firm does not intend to benefit from this investment s periodic flows, which compensate the firm for the risk associated with the investment, as well as partially recover the cost of the investment (that, on the contrary, would be recognised through PL). Notwithstanding that it had been acknowledged in the exposure draft the definition of such category, provided in the Staff papers released in June, this definition ( an equity instrument that is held in a broader business context and not primarily for realizing the financial benefits inherent in it ) has not been reported, with a merely formal omission. Indeed, the removal of any acknowledgment in the P&L account would cause the use of such Page 8 of 19

9 category in a very particular and restricted number of circumstances. Indeed, as already noted in a large number of cases, when an investment is performed fulfilling the management s expectations, this should have prospects of profitability regardless of the synergies with the businesses managed by the group. Hence, it is believed that in the event that flows deriving from such investments are not recognised in the P&L Account, only a marginal part of financial instruments would be classified into such category, consequently increasing the number of financial instruments to be measured at fair value through profit or loss and an unjustified volatility of results would follow thereof. Lastly, the OCI appears as an accounting component that includes earned profits, such as dividends, and unrealised values such as fair value variations, and the absence of such distinction creates uncertainties in the reading of financial statements. Moreover, the same distinction between components ascribed to the P&L Account and components ascribed to net equity, with the arrangement of the statement of comprehensive income, would be marginal since it would indeed merely result in a classification of the effects on different lines of the abovementioned statement. Moreover, we herein seize the opportunity to underline how the double level of results may generate some difficulties in terms of comprehension by readers of financial statements regarding identification of the correct result of business management. Hence, the solutions to reduce the allocations to net equity rather than to the P&L Account also meet the objective of reducing the gap between these two results. In Italy, the coherence between business model and measurement criterion is particularly relevant because, as it is generally understood, the option to adopt the IFRS principles has been exercised also for separate financial statements. Such financial statements fulfil a function that is not merely informative, and their recipients are not only the investors. They have legal value (consider, for example, the distribution of dividends, the creditors protection is represented by the equity) and represent the basis for the fiscal income determination. Separation of embedded derivatives As previously pointed out, we recognise and agree upon the need to assess at fair value any derivative contracts. The requirement of separating embedded derivatives in complex contracts is also aimed at meeting such goal. The cancellation of such requirement, is not only inconsistent with the aforementioned objective, but if read along with the definition and features of financial instruments assessable at amortised cost, it would essentially determine the classification of hybrid instruments into the category of financial instruments assessed at Fair Value with recording of effects in the profit and loss account, thus resulting in an unjustified increase in results volatility. Page 9 of 19

10 Indeed, in several circumstances, the derivative component turns a contract that has a basic loan feature into a contract with indeterminable flows or subject to effects of financial leverage. The need to consider such features with reference to the contract as a whole would inhibit, in numerous circumstances, its measurement at amortised cost. Such position represents a substantial change of the existing accounting rules determining the classification at fair value of hybrid instruments that today are subject to separation since they are not categorised as either HFT nor FVO. With respect to the foregoing, we do not agree with this approach for the following reasons: 1) classification at FV of the entire hybrid instrument does not allow its correct representation in the financial statement concerning the company s business model. In this regard, it is acknowledged that hybrid instruments might represent a medium and long-term method of usage/collection not managed on a fair value basis. The FV assessment of the entire instrument would therefore determine the necessity to reveal through profit and loss any value variations due to variations in the rate of interest and credit risk of the issuer, which are difficult to realise in case the company intends to maintain the instrument in its portfolio for an indefinite period of time; 2) application of the proposed approach would determine an increase in the number of financial instruments of assessment at fair value, consequently with an unjustified increase of the profit and loss account s volatility by the adopted business model. In case of hybrid liabilities this increase of volatility would be determined also by the necessity of recording variations in one s creditworthiness; 3) the proposed approach may determine different descriptions due to the fact that implied economical effects in a structured bond can be formalised into one or more contracts. Indeed, a company could obtain the same economical results derived from the subscription to a structured bond through the simultaneous stipulation with the same counterparty of a plain-vanilla bond and a derivative contract. The model proposed by the Board would determine, in the first case, the necessity to register the entire contract at Fair Value, and in the second case, the assessment at FV of the single derivative (and therefore, its separation). On the contrary, the application of the existing separation regulations would determine in both cases the homogenous registration of the derivative and a plain-vanilla bond. For such reasons, it is preferable to maintain existing regulations regarding the separation of implicit derivatives. Indeed if necessary, this would enable the treatment of the bond component at amortised cost with the registration of any impairment due to the counterpart s risk, in line with the management s purpose (business model) for the investment. Page 10 of 19

11 3 Answers to the questions submitted by IASB Question 1 Does amortised cost provide decision-useful information for a financial asset or financial liability that has basic loan features and is managed on a contractual yield basis? If not, why? We agree only in part upon such statement. In particular, amortised cost certainly provides the best representation in a financial statement of an asset if the same is managed on a contractual yield basis. In contrast, the features of a financial instrument shall not necessarily be considered significant for the purposes of the measurement. A financial instrument that is not managed on a fair value basis if evaluated on the grounds of its fair value would lead to reporting certain values that the management has no intention of realising in the financial statement and that, in the future, are also unlikely to be realised. It is the case of merely hypothetical values, which would definitely and significantly alter over time. Question 2 Do you believe that the exposure draft proposes sufficient, operational guidance on the application of whether an instrument has basic loan features and is managed on a contractual yield basis? If not, why? What additional guidance would you propose and why? In our opinion, the concept of management on a contractual yield basis is sufficiently clear, even if with some limitations that the businesses can easily understand and manage where it is specified that the verification of such requirement shall be performed with reference to the business model of a business line and not with reference to single financial instruments. In contrast, the concept of basic loan feature presents a general definition that is fairly wide-ranging, but that also includes application examples in sections from B3-B8, which seem to narrow the field of those instruments characterised by such feature. Only by way of example, we shall mention certain cases that, as referred to in the aforementioned sections, would not appear to have a basic loan feature and that, therefore, should be measured, improperly according to our viewpoint, at fair value: - we suppose that the sole instruments that may be classified at amortised cost shall be those that envisage cash flows ascribable to capital payments and interest rates. By interest we mean a financial flow that refunds investors for the time value as well as for the credit risk. Cash flows that compensate investors for other factors should not be included in the definition of interest. The rates of return that cover the remuneration for the time value or of the credit risk in a larger manner if compared to the type of instrument (so called leverage effects) do not have the appropriate characteristics to be recognised at amortised cost. Such is the case of junior tranche arising from securitisation Page 11 of 19

12 transactions, which usually show considerable variability in flows if compared to the one of underlying credits; in contrast, the senior tranche, by reducing the variability in flows of the underlying instruments, have the proper characteristics to be recognised in the category of instruments at amortised cost. To date, when the market is not particularly active and financial instruments are held with a longterm strategy, the same are measured at amortised cost. According to the proposal set forth by IASB, these instruments shall be compulsorily assessed at fair value. In our opinion, on the other hand, these are instruments that may measured at amortised cost, also according to the procedures currently in force; - with reference to the financial assets that are acquired at a discount, IASB envisages that they shall be measured at fair value since their price discounts a level of expected credit losses usually higher than the incurred ones, thereby increasing the variability in expected future cash. We does not deem that the expectations of the purchaser on the expected losses on the instruments is a factor that might establish the characteristics thereof, and it cannot even be assumed that the purchaser acquires the instrument with the aim of reselling it. Moreover, in the Countries as Italy, where banks are oblie to applying IAS/IFRS to the separate financial statements, in the case quite frequent of captive entities that are engaged to manage non performing credits for the group, purchased credits would be measured at fair value in the separate financial statement of these entities and at the amortized cost in the consolidated financial statement; - the compelling examples, correlated to the elimination of the requirement for separating embedded derivatives, lead us to believe that issued financial liabilities that include embedded derivatives or other non basic features should be evaluated at fair value. This gives lead to some concerns also with reference to the well-known doubts about the inclusion of the variation of one s creditworthiness for the fair value assessment. Question 3 Do you believe that other conditions would be more appropriate to identify which financial asset or financial liabilities should be measured at amortised cost? If so, (a) What alternative conditions would you propose? Why are those conditions more appropriate? (b) If additional financial assets or financial liabilities would be measured at amortised cost using those conditions, what are those additional financial assets or financial liabilities? Why does measurement at amortised cost result in information that is more decision-useful than measurement at fair value? Page 12 of 19

13 (c) If financial assets or financial liabilities that the exposure draft would measure at amortised cost do not meet your proposed conditions, do you think that those financial assets or financial liabilities should be measured at fair value? If not, what measurement attribute is appropriate and why? The foregoing chapter, where ABI s position on classification and measurement of financial instruments was defined, also provides the answer to these questions, as well as the consequences in terms of a meaningful increase in the number of instruments assessed at fair value that would arise from the application of the proposed regulations. Alternatively, elimination of certain existing restrictions provided for in the classification between Held to Maturity and Loans and Receivables (tainting rules, listing) entails the possibility to classify some debt instruments in the category of instruments measured at amortised cost. The cancellation of existing penalties envisaged for HTM securities allows the classification as an instrument to be measured at amortised cost also those securities that not necessarily must be held until their date of maturity; with the removal of the requirement, these instruments cannot be listed in an active market, currently provided for the L&R category, and enables the classification at amortised cost also debt instruments that are listed with a basic loan feature if held on a contractual yield basis. Question 4(a) Do you agree that the embedded derivative requirements for a hybrid contract with a financial host should be eliminated? If not, please describe any alternative proposal, explain how it simplifies the accounting requirements and how it would improve the decision-usefulness of information about hybrid contracts. The existing requirement of separating embedded derivatives undoubtedly represents an operational and administrative complication. We therefore welcome the objective to put forward some simplifications on such issue. However, the proposed approach, in many circumstances, may lead to the classification of an entire contract (host contract + embedded derivative) managed on a contractual yield basis in the category of the instruments measured at fair value, moreover reaching different representations, according to whether a certain contractual relation is formalised with a single contract (structured financial instrument) or with two separate contracts (financial instrument with a basic loan feature and derivative contract). While we invite you to refer to the foregoing chapter concerning ABI s position in order to have more information, we also deem more suitable to maintain the current provisions of separation or at least to provide for a chance of separation for complex contracts that do not present the basic loan feature. Page 13 of 19

14 Question 4(b) Do you agree with the proposed approach regarding the application of the proposed classification approach to contractually subordinated interests (e.g. tranches)? If not, what approach would you propose for such contractually subordinated interests. How is that approach consistent with the proposed classification approach? How would that approach simplify the accounting requirements and improve the decision-usefulness of information about contractually subordinated interests? Please refer to the answer provided to Question #2. As regards the valorisation of different tranches of securitisation transactions, it is deemed necessary to perform a detailed study of the business model for the instrument s management in order to understand whether an measurement at amortised cost or an measurement at fair value is more suitable. Question 5 Do you agree that entities should be permitted to designate any financial asset or financial liability at fair value through profit or loss if such designation eliminates or significantly reduces an accounting mismatch? If not, why? In the classification and measurement model proposed by ABI, the question concerning the fair value option would automatically be solved, at least with reference to issues of accounting mismatches. In the current formulations of the exposure draft, which envisage a tight correlation between the technical characteristics of the financial instrument and its measurement criterion, it is deemed necessary to maintain the fair value option for the management of accounting mismatches. Moreover, after having thoroughly analysed the themes of changes to hedge accounting, we deem it necessary to newly address the issue regarding the fair value option. Question 6 Should the fair value option be allowed under any other conditions? If so, under what other conditions should it be allowed and why? With reference to the current possibility to apply the fair value option as an alternative to separating embedded derivatives, should the final solution correspond to the one currently put forward by IASB, the problem would already be clearly overcome; however, since in the previous answers it has been stated that we do not agree upon the proposal to eliminate the requirement of separating embedded derivatives, in the event that IASB shall welcome such request, it would be advisable to also re-establish the possibility to apply the fair value option as an alternative to separating embedded derivatives. Page 14 of 19

15 Question 7 Do you agree that reclassification should be prohibited? If not, in what circumstances do you believe reclassification is appropriate and why do such reclassifications provide understandable and useful information to users of financial statements? How would you account for such reclassifications? Generally speaking we believe, as previously illustrated, that the representations in the financial statements of instruments should be closely related to the business model selected by management. Therefore, should such the business model be modified during the company s activities, it would be legitimate to expect that such change would also affect financial statements. Since we agree upon the fact that an excessive level of freedom in the reclassifications would harm the financial statements comparability, in the proposals set forth by ABI in Chapter 2, the possibility to reclassify the financial instruments only in particular market conditions (if, owing to verified market conditions, the instrument cannot be managed according to the procedures established on the initial acquisition) is envisaged; or owing to a change to the business management models (in this case, the reclassification presumably involves a group of financial instruments rather than an individual single asset). As already underlined in Chapter 2, the aforementioned circumstances would have different impacts: a change in market conditions might even affect a single financial instrument held by the company and might require a shift from fair value assessment criterion to amortised cost criterion (and not vice versa); a change in the business model would affect the whole set of financial instruments held by a business unit and might bring about a shift from the measurement at fair value to the measurement at amortised cost or even vice versa. Contrarily, the exposure draft eliminates any possibilities of reclassification, effectively taking a step backwards concerning the meaningful amendments applied to IAS 39 in October Clearly, by supporting a policy of valorisation of financial instruments closely related to the technical characteristics of the same ( basic loan feature ), since such characteristics do not modify over time, the issue of reclassification is apparently less significant. However, at least with reference to the assets without a basic loan feature for which the management model changes over time, we deem it necessary to maintain the possibility of a reclassification. Question 8 Do you believe that more decision-useful information about investments in equity instruments (and derivatives on those equity instruments) results if all such investments are measured at fair value? Also with reference to the issue concerning the equity instruments measurement, please refer to Chapter 2. Page 15 of 19

16 We not only deem unsuitable the requirement of a compulsory measurement at fair value for all stocks, but we also believe that, upon the selection of the measurement criterion, the business model should prevail for them as well; therefore, the cost measurement should not be limited, as upheld in the current version of IAS 39, to those instruments for which fair value is not reasonably determinable. In addition to what was stated in Chapter 2, we shall underline how the accounting management of an equity instrument classified into the OCI category with an embedded derivative is unclear: would the fair value of the embedded derivative be ascribed directly in the net equity? Question 9 Are there circumstances in which the benefits of improved decision-usefulness do not outweigh the costs of providing this information? In such circumstances, what impairment test would you require and why? The problems concerning the measurement of stocks (and the ensuing request of cost measurement) are related to the consistency of the accounting representations with the business model and not to operational complexities; indeed, in the solution put forward in Chapter 2, it has been envisaged to provide the disclosure of fair value for all instruments measured at amortised cost. Question 10 Do you believe that improved financial reporting results when fair value changes for particular investments in equity instruments are presented in other comprehensive income? If not, why? Also with regard to the recording in the net equity of the economic effects related to equity instruments, please refer to Chapter 2. However, should the hypotheses envisaged by ABI not be positively welcomed, with respect to such instruments it is deemed necessary to maintain the accounting principles currently in force for the Available for Sale instruments (variations in fair value at net equity, impairment, dividends, profits/losses), applying some amendments to the standards for the determination of the impairment of listed securities. In particular, the situation of a long or extended listing below the original purchase price must represent a limit beyond which it is necessary the estimation of the economic value of stocks in order to determine whether or not they have been affected by a loss in value. Further, it is required to remove the existing provision that prohibits the recording in the P&L Account of any potential increases in value. Page 16 of 19

17 The solution to ascribe economic effects related to such assets in the P&L Account only upon the sale of the same does not provide a proper representation of the business performance by postponing their ascription in the P&L account. Moreover this leads to the reclassification of already realised components (such as the dividends) from one line to another in the statement of the comprehensive income, and to the lack of special emphasis on situations of self-evident losses in value until loss realisation. Moreover, the item of the OCI would include both measurement and realised components, for whose traceability in accounting terms, one should necessary resort to the notes to the financial statement. Question 11 Do you agree that an entity should be permitted to present in other comprehensive income changes in the fair value of any investment in equity instruments (other than those that are held for trading), if it elects to do so only at initial recognition? If not: (a) What principle do you propose to identify those for which presentation in other comprehensive income is appropriate? (b) Should entities present changes in fair value in other comprehensive income only in the periods in which the investments in equity instruments meet that principle? We have already expressed our opinion on the need to relate the accounting standards to the methods whereby financial instruments are managed. This is also clearly valid for stocks. Hence, theoretically, it would be necessary to envisage such faculty also for the OCI category. However, the accounting principles underlying such category (the economic effects always ascribed to the net equity, whether realised or only for the purposes of the measurement) do not simplify the accounting management of a potential reclassification of an asset from the OCI category to the fair value category through profit or loss. Question 12 Do you agree with the additional disclosure requirements proposed for entities that adopt the proposed IFRS early? If not, what would you propose instead and why? In view of the prospective and meaningful impacts that the new regulations might have on the businesses financial statements, we agree upon the retrospective implementation of new rules as well as upon the need of a significant disclosure of the effects. Moreover, such disclosure should be provided both by those entities that have adopted the new regulations on the period of transition, both by those entities that will apply them from the date on which the provisions shall become effective. Page 17 of 19

18 Question 13 Do you agree with the proposed transition guidance? If not, why? What transition guidance would you propose instead and why? We agree upon the need to carry out reclassifications of financial instruments from the previous IAS 39 to the new set of rules with reference to situations existing on the first implementation of the new rules. However, given the importance of the changes and of the information necessary for a retrospective application of those rules, we deem it advisable to envisage that in the event of objective hindrances to the retrieval of required information, the possibility of a prospective application should be allowed by reporting it in the notes to the financial statement and explaining the reasons that thwarted the retrieval of information. In particular, as regards the assets for which a shift is envisaged from the fair value measurement to an amortised cost mesurement, the perspective application should be allowed even in circumstances where the economic burden of the information recovery exceeds the benefits arising from the retrospective implementation of the new standards. Moreover, we shall underline an important issue concerning equity instruments that are currently classified in the AFS category, for which, under the current accounting standards, impairment tests have been performed and that, according to the rules, will be reclassified into the OCI. In such circumstances, in view of the future prohibition to allocate any effects in the P&L Account, it is deemed necessary to provide for the possibility to ascribe in the P&L Account potential increases in value or in result achieved with respect to the original purchase price. It is deemed necessary to carry out in-depth analyses on the exhaustiveness of the guide, which to date has still not been performed. Question 14 Do you believe that this alternative approach provides more-decision useful information than measuring those financial assets at amortised cost, specifically: (a) In the statement of financial position? (b) In the statement of comprehensive income? If so, why? The alternative approach further reduces the number of components that can be measured at amortised cost and determines a different accounting management among the assets that fall within the current definition of L&R and the assets that do not come into such definition, but which are managed in the same manner. Indeed, different accounting treatment of economic components (some at P&L Account and some in the net equity without any allocation to the P&L Account), lacks apparent expository clarity. Question 15 Do you believe that either of the possible variants of the alternative approach provides more decision-useful information Page 18 of 19

19 than the alternative approach and the approach proposed in the exposure draft? If so, which variant and why? The variants to the proposed alternative approach are not viewed positively. Moreover, the second variant leads to the application of the full fair value; whereas, as heretofore stated, we believe that the mixed model for the representation of the financial instruments proves to be the most feasible one. Page 19 of 19