I would appreciate your including our comments in your summary of analysis.

Transcription

1 28 March 2013 International Accounting Standards Board 30 Cannon Street, London EC4M 6XH United Kingdom Dear Sir or Madam: The Korea Accounting Standards Board (KASB) has finalized its comments on Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9. I would appreciate your including our comments in your summary of analysis. The enclosed comments represent official positions of the KASB. They have been determined after extensive due process and deliberation. Please do not hesitate to contact us if you have any inquiries regarding our comments. You may direct your inquiries either to me (suklim@kasb.or.kr) or to Mr. Il-Hong Park (ihpark@kasb.or.kr), Senior Technical Manager of the KASB. Yours faithfully, Suk-Sig (Steve) Lim Chair, Korea Accounting Standards Board Cc: Sungsoo Kwon, Research Fellow of Research Department Se-Whan Park, Director of KASB

2 We are pleased to comment on the Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9. Our comments include views from a public hearing and responses collected from the various associations. We finalized the comment letter through the due process established in the KASB. Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9 GENERAL COMMENTS We agree with the following proposals of the ED: - Clarification of contractual cash flow characteristics assessment and distinguishing business model in the light of operationality - Prohibiting early application of previous version of IFRS 9 once the completed version of IFRS 9 is issued in the light of improving comparability - Allowing early application of the own credit requirements in IFRS 9 once the completed version of IFRS 9 is issued in the light of prompt application of improved accounting treatment - Providing entities that have already applied IFRS 9 or have undertaken significant preparations to apply IFRS 9 with six months lead time after the completed version of IFRS 9 is issued However, operationality of distinguishing various business models and effective reduction of accounting mismatch between insurance liabilities and financial assets should be considered carefully in creating FVOCI-debt category. The ED proposes reflecting various business models, eliminating accounting mismatch and reduction of key differences between the IASB s requirements for classification and measurement of financial instruments and the tentative classification and measurement model considered by the FASB. However, creating the third measurement category increases complexity of accounting for financial instrument and is inconsistent with the objective of financial instrument project to simplify accounting treatment and increase understandability. Creating FVOCI-debt category without a clear basis is inappropriate when there is no principle of accounting treatment for items that are recognized in other comprehensive income and recycling. In addition, distinguishing a business model in which assets are managed both in order to collect contractual cash flows and for sale is difficult and arbitrary. Insurance - 1 -

3 contract project 1 and the FASB s classification and measurement model 2 are tentative and might be changed in the future. As all financial assets that back insurance liabilities are not necessarily classified into FVOCI category, accounting mismatch between insurance liabilities and financial assets might not be eliminated completely. A high degree of management judgement is necessary on the contractual cash flow characteristics assessment and distinguishing business models. Therefore, additional specific application guidance is required in order to prevent arbitrary accounting treatment. While current IFRS 9 provides the accounting treatment for the modification of financial liabilities, such as alleviation of interest rate, extension of maturity and conversion of investment, it does not provide the accounting treatment for the modification of financial assets. It might cause diversity in accounting treatment, and provision of the accounting treatment for the modification of financial assets should be considered. When publishing the completed version of IFRS 9, comprehensive review is necessary in order to secure concise expression and consistency between previous versions of IFRS 9. We believe that at least two years lead time is necessary in order to secure enough time to prepare for the application of IFRS 9 once the completed version of IFRS 9 is issued. Therefore, if the completed version of IFRS 9 is published at the end of 2013, the current effective date should be reconsidered. Additionally, if the effective dates of IFRS 4 and IFRS 9 3 are different, confusion is expected because of the temporary measurement mismatch between insurance liabilities and financial assets. Therefore reconciliation of the two effective dates might be necessary. SPECIFIC COMMENTS 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 1 The IASB tentatively decided that changes in insurance contracts liabilities attributable to changes in the discount rate will be presented in other comprehensive income because of concerning the volatility arising from changes in interest rates and reflecting inappropriately business performance. 2 Fair value changes of financial instruments within FVOCI category are recognized in other comprehensive income and the gains or losses previously accumulated in other comprehensive income are recycled to profit or loss when financial instruments are derecognized. 3 Expected effective date is from annual periods beginning on or after 1 January 2018 and 2015 respectively

4 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 ED s proposed amendments. 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? We do not agree with the ED s proposed amendments. The ED proposes that when assessing a modified economic relationship, an entity shall consider cash flows on a comparable financial asset that does not contain the modification (benchmark cash flows). An entity may consider either an actual or a hypothetical financial asset as the basis for the assessment. However the ED does not provide specific guidance for hypothetical financial asset and raises a significant cost for preparers to implement the assessing. Additional guidance is required regarding how to implement a hypothetical financial asset such as whether contractual cash flows of financial instrument are more than insignificantly different from the cash flows of a benchmark instrument. The term modification may cause confusion as the term modification is used not only in economic relationships in the ED and but also with regard to derecognition of financial liabilities in the existing IFRS 9. Therefore, it is needed to clarify the meaning of modification or change it into other word. 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 partially agree with the ED s proposed amendments

5 B4.1.9C of the ED proposes that the conclusion of assessing a modified economic relationship would be unchanged whether the rate is required to be set in this way to provide consumer protection or is included in a bespoke structured product to achieve a particular economic outcome. However, we believe that additional outreach is required to find out whether the regulated pricing is prevalent in the world or limited in a few jurisdictions. The IASB should consider providing additional guidance or exception for the contractual cash flow characteristics assessment as a result of the outreach. In some jurisdictions, pricing of financial assets in market may be regulated by regulatory authorities in order to provide consumer protection or achieve a particular economic outcome. The pricing might become the accepted structure for the time value of money for all or part of financial assets; therefore, a benchmark instrument might not exist. If a similar term structure was applied to financial liabilities which are held not for sale but lending, these financial liabilities would most likely be measured at amortised cost. Therefore, if financial assets were measured at FV-PL, a significant accounting mismatch would arise. Bond markets in emerging countries are not as developed as those in developed countries and interest rates are also not as various as those in developed countries. Thus, identifying benchmark cash flows for assessing a modified economic relationship might be difficult in emerging countries. 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? Operationality of distinguishing various business models and effective reduction of accounting mismatch between insurance liabilities and financial assets should be considered carefully in creating FVOCI-debt category. The ED proposes reflecting various business models, eliminating accounting mismatch and reduction of key differences between the IASB s requirements for classification and measurement of financial instruments and the tentative classification and measurement model considered by the FASB. However, creating the third measurement category increases complexity of accounting for financial instrument and is inconsistent with the objective of financial instrument project to simplify accounting - 4 -

6 treatment and increase understandability. Creating FVOCI-debt category causes IFRS 9 to have the same degree of complexity as IAS 39 in such areas as recycling the gains or losses previously accumulated in other comprehensive income to profit or loss, impairment and reclassification. Creating FVOCI-debt category without a clear basis is inappropriate when there is no principle of accounting treatment for items that are recognized in other comprehensive income and recycling. In IFRS 9, the gains or losses previously accumulated in other comprehensive income of FVOCI-equity are not recycled to profit or loss when financial instruments are derecognized. The ED proposes that the gains or losses previously accumulated in other comprehensive income of FVOCI-debt are recycled to profit or loss when financial instruments are derecognized. Therefore, accounting treatment of recycling between debt instrument and equity instrument are inconsistent. In addition, distinguishing a business model in which assets are managed both in order to collect contractual cash flows and for sale is difficult and arbitrary. Insurance contract project 4 and the FASB s classification and measurement model 5 are tentative and might be changed in the future. As all financial assets that back insurance liabilities are not necessarily classified into FVOCI category, accounting mismatch between insurance liabilities and financial assets might not be eliminated completely. One of the primary objectives of creating FVOCI-debt category is interaction with accounting for insurance contracts, and whether presenting changes in insurance contracts liabilities attributable to changes in the discount rate in other comprehensive income is appropriate should be considered preferentially or simultaneously. Distinction or interaction between specificity of insurance contracts accounting and general purpose of financial statement preparation should be considered in relation to creating FVOCI-debt category. Other ways to resolve accounting mismatch between insurance liabilities and financial assets within insurance contracts project might be considered, for example, FVOCI-debt category may be only allowed for the entities within the scope of insurance contracts (IFRS 4) rather than creating FVOCI-debt category in IFRS 9 to eliminate accounting mismatch. Meanwhile, insurance companies in our jurisdiction commented that recycling should be required for FVOCI-equity instruments category in the light of consistency of accounting treatment between financial instruments and specificity of asset management by insurance companies in emerging countries. Because long-term bonds matched with long-term insurance liabilities are not frequently traded in emerging countries, insurance companies generally make up an investment portfolio with equity instruments and debt instruments in the light of return on asset and matching of duration. Therefore, recycling should be required for FVOCI-equity as well as FVOCI-debt considering consistency with accounting treatment. 4 The IASB tentatively decided that changes in insurance contracts liabilities attributable to changes in the discount rate will be presented in other comprehensive income because of concerning the volatility arising from changes in interest rates and reflecting inappropriately business performance. 5 Fair value changes of financial instruments within FVOCI category are recognized in other comprehensive income and the gains or losses previously accumulated in other comprehensive income are recycled to profit or loss when financial instruments are derecognized

7 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 do not agree with the ED s proposed amendments. The ED proposes application guidance on how to distinguish between business models which collect contractual cash flows and sell. However, it is very difficult and arbitrary to distinguish objectively the three business models. Therefore, additional specific application guidance is required. 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 conditionally agree with the ED s proposed amendments. If the IASB proceeds with creating FVOCI-debt category, extending the existing fair value option to FVOCI-debt would be appropriate because it allows elimination or significant reduction of accounting mismatch in the same manner as financial instruments measured at amortised cost. 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? - 6 -

8 We agree with the ED s proposed amendments. However, we would like to express concern for the mandatory effective date of the completed version of IFRS 9. Korea has not adopted IFRS 9 yet. Entities in Korea need a sufficient amount of time to change their accounting systems to accommodate to the completed version of IFRS 9. In addition, it takes a considerable period of time to complete the due process of adopting IFRS 9, the process including translation, effect analysis and deliberation of the standard. We believe that at least two years lead time is necessary in order to secure enough time to prepare for the application of the completed version of IFRS 9. Therefore, if the completed version of IFRS 9 is published at the end of 2013, the current effective date should be reconsidered. The completed version of IFRS 9 includes classification and measurement, impairment and general hedge accounting. However, the IASB and the FASB have significantly different views on the impairment model. Therefore, we are concerned about whether the completed version of IFRS 9 would be published as scheduled. 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 with the ED s proposed amendments. Entities are able to apply the own credit provisions after the completed version of IFRS 9 is published. Some argue for amendment of IAS 39 to include the own credit provisions so that entities may apply the provisions as early as possible, citing that the own credit provision is improvement of accounting for financial liabilities; the effective date was already deferred once from 2013 to 2015; markets continue to be volatile; and own credit gains or losses remain significant. However, IAS 39 is to be replaced with IFRS 9 soon and including the own credit provisions in IAS 39 might cause complexity and unintended consequences. Unless the application of own credit gains and losses are urgent and significant to the relevant entities, waiting until the completed version of IFRS 9 is published seems appropriate. However, if the final version of IFRS 9 is not completed as scheduled and the effective date is deferred again, IAS 39 should be amended to include the own credit provisions in order to apply the standard as early as possible. Question 9-7 -

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 specific comments