Ref.: IASB Discussion Paper A Review of the Conceptual Framework for Financial Reporting DP/2013/1

Transcription

1 Tel.: São Paulo, January 10, International Accounting Standard Board 30 Cannon Street London, EC4M 6XH United Kingdom Ref.: IASB Discussion Paper A Review of the Conceptual Framework for Financial Reporting DP/2013/1 Dear Sir/Madam, The Federação Brasileira de Bancos (FEBRABAN) appreciates the opportunity to comment on the International Accounting Standards Board s (IASB) Discussion Paper DP/2013/1 A Review of the Conceptual Framework for Financial Reporting. FEBRABAN is the leading body representing the Brazilian banking sector. It was founded in 1967 and our mission is to contribute to the economic, social and sustainable development of the country, seeking a continuous improvement of the financial system and its relations with society. We believe that a healthful, ethical and efficient financial system is essential condition for this development. In Brazil, discussions on accounting convergence have been increasing over the last years. The Central Bank of Brazil, federations as FEBRABAN, market representatives and accountant associations have actively taken part in the dialogues and analysis. Regarding to the DP/2013/1, we would like to comment that this letter was prepared by FEBRABAN s IFRS Workgroup (GT IFRS), which is composed by accountant specialists indicated by our members and that they are responsible in their financial institution to prepare IFRS financial statements. It is important to emphasize that although the document summarizes the views of this Federation, we have also made recommendations to our members to send comments directly to IASB, if they deem necessary. Furthermore, although the Discussion Paper is composed by 9 sections, FEBRABAN s Workgroup has decided to comment the most relevance questions in terms of accounting effects to Brazilian bank institutions. This questions in reference are those described in sections 5 (that discusses the definition of equity, measurement and presentation of different classes of equity and how to distinguish liabilities from equity instruments), 6 (measurement) and 8 (related to presentation in the statement of comprehensive income). It is important to mention that the topics covered by FEBRABAN are the same that IASB has focused during the round-table meeting occurred by October 2013, São Paulo - Brazil. Thus, the detailed comments and answers to IASB questions for sections 5,6 and 8 on the discussion paper are included in the Appendix to this letter, where is possible to find some considerations that FEBRABAN believes are important for quality of the proposed concepts covered. We are pleased of your consideration on the comments included in this letter and in case of any questions or concerning to them, please contact FEBRABAN GT IFRS, by the electronic address informed as follows: ademiro.vian@febraban.org.br or adriano.tomo@febraban.org.br. Yours sincerely, Wilson Roberto Levorato Executive Vice President Artur Gigueira Junior Sectorial Director of Accounting and Coordinator of IFRS Workgroup

2 Appendix Section 5 Definition of equity and distinction between liabilities and equity instruments Question 10 The definition of equity, the measurement and presentation of different classes of equity, and how to distinguish liabilities from equity instruments are discussed in paragraphs In the IASB s preliminary view: (a) the Conceptual Framework should retain the existing definition of equity as the residual interest in the assets of the entity after deducting all its liabilities. (b) the Conceptual Framework should state that the IASB should use the definition of a liability to distinguish liabilities from equity instruments. Two consequences of this are i. obligations to issue equity instruments are not liabilities; and ii. obligations that will arise only on liquidation of the reporting entity are not liabilities (see paragraph 3.89(a)). (c) an entity should: i. at the end of each reporting period update the measure of each class of equity claim. The IASB would determine when developing or revising particular Standards whether that measure would be a direct measure, or an allocation of total equity. ii. recognise updates to those measures in the statement of changes in equity as a transfer of wealth between classes of equity claim. (d) if an entity has issued no equity instruments, it may be appropriate to treat the most subordinated class of instruments as if it were an equity claim, with suitable disclosure. Identifying whether to use such an approach, and if so, when, would still be a decision for the IASB to take in developing or revising particular Standards. Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why? We agree with the four topics presented above. It is vital that the new Conceptual Framework provides a clear definition of what is liability and what is equity, taking in consideration that the current definition of equity must be preserved. We believe that such improvement will eliminate the current existing conflicts between the two standards listed in this section (IAS 32 Financial Instruments: Disclosure and Presentation and IFRS 2 Share-based Payment). Furthermore the definition and distinction between liabilities and equity, another relevant point is the statement of the measurement effects of each class of equity claim (Statement of change in equity). These updated measurements recognized within equity and called "wealth transfer" according to the Discussion Paper, will allow the reporting entity to demonstrate each class equity claim reliably. So, applying this concept, the entity would transfer amounts previously recognized in other comprehensive income (OCI) directly to reserves or retained earnings, permitting an additional accounting treatment for this class of equity claim than recycling procedure (see Section 8). In our view, for some specific cases applying the approach 2B defined in Section 8, reclassification from other comprehensive income to reserves or retained earnings provides most relevant information than recycling.

3 We agree with the IASB s preliminary view to adopt the strict obligation approach, for the same reasons existing in Discussion Paper, which are: 1. This approach is consistent with the existing definition of a liability. As a result, it is also consistent with the current treatment of non-controlling interest; 2. Develop definitions of liability to make them consistent with the narrow equity approach would turn the Conceptual Framework more complex and less understandable; 3. Existence of a clearer distinction of what is liability and what is equity; 4. The measurement of the classes of equity claims would provide additional information on the effect of each class of equity claims over others; IAS 32 Financial Instruments: Presentation and Disclosure considerations. The fact that IAS 32 allows the recognition of the obligations to deliver entity s own equity instrument as a liability (derivatives or not) brings greater complexity to classify and measure such instruments. Thus the application of the strict obligation approach concepts to IAS 32 would eliminate this complexity, once it (a) makes the disclosure process more reliable, and (b) decreases the opportunities for structuring. The most subordinated (lowest ranking) class of instruments Analyzing the most subordinate class of instruments issued by an entity, our view is that there should be the strict obligation approach exception, which will allow the recognition of these instruments as equity. We have concluded that due to the specific characteristics of these obligations, the subordination level is so high/strong that it represents conceptually and economically an equity ownership (the equity claim). As a complement, our suggestion is that when IASB publishes the Exposure Draft the board should specify the most subordinated (lowest ranking) class of instruments characteristics or even provide examples, in order to offer additional guidance when applying the Conceptual Framework concepts.

4 Section 6 Measurement Question 11 How the objective of financial reporting and the qualitative characteristics of useful financial information affect measurement is discussed in paragraphs The IASB s preliminary views are that: (a) the objective of measurement is to contribute to the faithful representation of relevant information about: i. the resources of the entity, claims against the entity and changes in resources and claims; and ii. how efficiently and effectively the entity s management and governing board have discharged their responsibilities to use the entity s resources. (b) a single measurement basis for all assets and liabilities may not provide the most relevant information for users of financial statements; (c) when selecting the measurement to use for a particular item, the IASB should consider what information that measurement will produce in both the statement of financial position and the statement(s) of profit or loss and OCI; (d) the relevance of a particular measurement will depend on how investors, creditors and other lenders are likely to assess how an asset or a liability of that type will contribute to future cash flows. Consequently, the selection of a measurement: i. for a particular asset should depend on how that asset contributes to future cash flows; and ii. for a particular liability should depend on how the entity will settle or fulfil that liability. (e) the number of different measurements used should be the smallest number necessary to provide relevant information. Unnecessary measurement changes should be avoided and necessary measurement changes should be explained; and (f) the benefits of a particular measurement to users of financial statements need to be sufficient to justify the cost. Do you agree with these preliminary views? Why or why not? If you disagree, what alternative approach to deciding how to measure an asset or a liability would you support? We agree with question 11 assumptions, since the application of such concepts is aligned with current international standards and also because these concepts are already incorporated by financial statements preparers and users. The IASB s preliminary view that the application of a measurement model should observe on how a particular asset contributes to future cash flows and how a particular liability will be settled or fulfilled, represents the economic substance regarding the manner each item should be posted (*) and hence provide the most relevant information. However it is always worth to observe the policy of (a) an application of the smallest number of assessment and measurement methodologies and (b) the benefits of information should justify the cost of producing it. (*) Except the points set out in paragraph 6.19 and treated in Question 14.

5 Question 12 The IASB s preliminary views set out in Question 11 have implications for the subsequent measurement of assets, as discussed in paragraphs The IASB s preliminary views are that: (a) if assets contribute indirectly to future cash flows through use or are used in combination with other assets to generate cash flows, cost-based measurements normally provide information that is more relevant and understandable than current market prices. (b) if assets contribute directly to future cash flows by being sold, a current exit price is likely to be relevant. (c) if financial assets have insignificant variability in contractual cash flows, and are held for collection, a cost-based measurement is likely to provide relevant information. (d) if an entity charges for the use of assets, the relevance of a particular measure of those assets will depend on the significance of the individual asset to the entity. Do you agree with these preliminary views and the proposed guidance in these paragraphs? Why or why not? If you disagree, please describe what alternative approach you would support. We agree with the subsequent measurement of assets methodologies (preliminary view of the IASB), considering that concepts are already widely applied by financial institutions in Brazil. However we warn to the existing possibility of inconsistency among in place standards, for example the IAS 40 Investment Properties, which in its paragraph 32A allows the entity to apply two types of measurement, it means the cost-based s and fair value. Question 13 The implications of the IASB s preliminary views for the subsequent measurement of liabilities are discussed in paragraphs The IASB s preliminary views are that: (a) cash-flow-based measurements are likely to be the only viable measurement for liabilities without stated terms. (b) a cost-based measurement will normally provide the most relevant information about: i. liabilities that will be settled according to their terms; and ii. contractual obligations for services (performance obligations). (c) current market prices are likely to provide the most relevant information about liabilities that will be transferred. Do you agree with these preliminary views and the proposed guidance in these paragraphs? Why or why not? If you disagree, please describe what alternative approach you would support. We agree with the IASB's preliminary view for the same reasons we have agreed with the subsequent measurements of asset proposed in Question 12, i.e., the models are comply with current standards and are fully absorbed by Brazilian financial institutions on the preparation of its financial statements.

6 Question 14 Paragraph 6.19 states the IASB s preliminary view that for some financial assets and financial liabilities (for example, derivatives), basing measurement on the way in which the asset contributes to future cash flows, or the way in which the liability is settled or fulfilled, may not provide information that is useful when assessing prospects for future cash flows. For example, cost-based information about financial assets that are held for collection or financial liabilities that are settled according to their terms may not provide information that is useful when assessing prospects for future cash flows: (a) if the ultimate cash flows are not closely linked to the original cost; (b) if, because of significant variability in contractual cash flows, cost-based measurement techniques may not work because they would be unable to simply allocate interest payments over the life of such financial assets or financial liabilities; or (c) if changes in market factors have a disproportionate effect on the value of the asset or the liability (ie the asset or the liability is highly leveraged). Do you agree with this preliminary view? Why or why not? Yes, in general we agree with this IASB s preliminary view that for some financial assets and financial liabilities (for example, derivatives), to support measurement on the way in which the asset contributes to future cash flows or the way in which the liability is settled or fulfilled, may not provide the most relevant information. For these cases, we agree with a measurement approach based on market value. Nevertheless, if our understanding about IASB s concern exposed in the Discussion Paper is correct, it seems that if an entity decides to apply the Fair Value Option approach of IAS 39 Financial Instruments: Recognition and Measurement, the existing asymmetry between certain assets and liabilities measurements methods and the usefulness of the information to the user can be partially reduced. Question 15 Do you have any further comments on the discussion of measurement in this section? No. According to FEBRABAN s view, measurement amendments on Conceptual Framework as proposed in the Discussion Paper will enhance current international accounting standards.

7 Section 8 Presentation in the statement of comprehensive income profit or loss and other comprehensive income Question 19 The IASB s preliminary view that the Conceptual Framework should require a total or subtotal for profit or loss is discussed in paragraphs Do you agree? Why or why not? FEBRABAN supports the IASB's proposal to require total or subtotal for profit or loss disclosure, so the users could better understand the statement of comprehensive income components. However, the Discussion Paper text was not clear about which components would be specifically stated as total or subtotal. Therefore, to reach the objective of having a financial reporting with clearer and understandable information, our opinion is that the Exposure Draft should states further guidance on how to apply profit/loss total or subtotal breakdown. Following this concept, our view is that it is possible to enhance comprehensive income and consequently facilitate users analyzes if the entities could segregate its results between recurring and non-recurring profit and loss, regardless of whether there is or not a formalized financial performance definition. Non-recurring profit or loss are extraordinary and so do not contribute on the assessment and prediction of future cash flows. Question 20 The IASB s preliminary view that the Conceptual Framework should permit or require at least some items of income and expense previously recognised in OCI to be recognised subsequently in profit or loss, ie recycled, is discussed in paragraphs Do you agree? Why or why not? If you agree, do you think that all items of income and expense presented in OCI should be recycled into profit or loss? Why or why not? If you do not agree, how would you address cash flow hedge accounting? As stated on the Discussion Paper, the process of recycling values previously recognized in other comprehensive income (OCI) may result in an arbitrary or highly complex procedure, which can result in the generation of irrelevant information to the user. Thus, we are in favor that items already recognized in OCI should be reclassified to profit or loss when, if and only if, the reclassification results in relevant information. Actually, recycling items from OCI basically represents the effective realization of gains and losses regarding financial assets or financial liabilities remeasurements that were previously repressed in equity. Adopting an assertive opinion, FEBRABAN strongly recommends that the future Exposure Draft, which will be incorporated into IFRS, establishes Approach 2B as the general rule following the Discussion Paper suggestion.

8 Our main concern is related to values recognized in OCI that result from estimated calculations, longterm projections and highly volatile assumptions (i.e. cash-flow-based measurements), as it is the case of post-employment pension plans of defined benefit, which are remeasurement following IAS 19 Employee Benefits requirements. In our point of view for cases like this, there is no accounting reasons that justifies the reclassification from OCI to profit or loss, but in an opposite way such amounts should be transfer among classes of equity (as it is the intention of the concept of wealth transfer, Section 5), therefore assuming OCI the nature of a temporary class of equity. Question 21 In this Discussion Paper, two approaches are explored that describe which items could be included in OCI: a narrow approach (Approach 2A described in paragraphs ) and a broad approach (Approach 2B described in paragraphs ). Which of these approaches do you support, and why? If you support a different approach, please describe that approach and explain why you believe it is preferable to the approaches described in this Discussion Paper. As already externalized in Question 20 we are in favor of applying the Approach 2B, defined as "broad approach". We have built our opinion basically supported on the following issues: (a) the recycling process would be applied only to those amounts that, according to the business model, demonstrate the relevant information about reclassifying gains or losses that until than had a temporary nature, preserving the integrity of profit or loss as primary source of information; (b) recycle some OCI items does not guarantee sufficient relevant information, it would not increase the predictive value of profit or loss (paragraph 8.85(a)) of the Discussion Paper); and (c) Approach 2B is closer to the practices currently adopted by the Brazilian financial entities, so to understand and apply such criterion certainly will simplify its assimilation by the financial statements producers.