European Association of Co-operative Banks Groupement Européen des Banques Coopératives Europäische Vereinigung der Genossenschaftsbanken

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1 Mr. Hans Hoogervorst Chairman International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Brussels, 25 th November 2015 VH/MM/B16 IASB Exposure Draft ED/2015/3 Conceptual Framework for Financial Reporting Dear Mr. Hoogervorst, The European Association of Co-operative Banks (EACB) welcomes the opportunity to comment on the Exposure Draft for a Conceptual Framework for Financial Reporting. Please find our remarks to the ED questionnaire on the following pages. We will remain at your disposal, Yours sincerely, Hervé Guider Managing Director Volker Heegemann Head of Legal Department The voice of 4,200 local and retail banks, 78 million members, 205 million customers EACB AISBL Secretariat Rue de l Industrie B-1040 Brussels Tel: (+32 2) Fax (+32 2) Enterprise lobbying register secretariat@eacb.coop

2 The European Association of Co-operative Banks (EACB) is the voice of the cooperative banks in Europe. It represents, promotes and defends the common interests of its 28 member institutions and of co-operative banks in general. Co-operative banks form decentralised networks which are subject to banking as well as co-operative legislation. Democracy, transparency and proximity are the three key characteristics of the co-operative banks business model. With locally operating banks and outlets co-operative banks are widely represented throughout the enlarged European Union, playing a major role in the financial and economic system. They have a long tradition in serving 205 million customers, mainly consumers, retailers and communities. The co-operative banks in Europe represent 78 million members and employees and have a total average market share of about 20%. For further details, please visit

3 General Comments We support the idea to update the Conceptual Framework and generally support many of the proposed changes, which will result in improvements compared to the current framework. We nevertheless have doubts about the new principles suggested for the definition of a liablity. They result in an overwhelmingly economic approach, which in our opinion is misleading and not the right basis for the definition of a liability in general. Moreover, we fear that these approaches would impact the current Research Project Financial Instruments with Characteristics of Equity and lead to a more restrictive approach on equity. We believe, instead, that aim of that project should not be to impair or delete the measures of IAS 32 and IFRIC 2 on cooperative shares (see also BCIN 26), nor prevent a wider recognition of such instruments. Definition of Liabilities / Substance over Form We appreciate the efforts of the IASB to provide a clearer definition of liabilities in this ED. However, we are seriously concerned about the elements illustrating no practical ability to avoid the transfer under 4.32 ss: While we understand that the IASB does not envisage, at this moment in time, a substantial change of IAS 32 and IFRIC 2, we are nevertheless concerned by the introduction of these new elements into the definition of liabilitie in the Exposure Draft of the Conceptual Framework for Financial Reporting, which in our opinion will enlarge the notion of a liability considerably and thus could generate much potential for substantial future changes of IAS 32. In our opinion the conceptual framework should rather address some principles than focus on specific cases like under 4.32 to This would allow to create a principle that encompasses situations as described under IFRIC 2, where a request for redemption can only be neutralized, if the cooperative has the unconditional right to refuse redemption According to the Exposure Draft a liability is a present obligation of the entity to transfer an economic resource as a result of past events. To fulfil this definition, two criteria have to be met: 1. The obligation has arisen from past events and 2. The entity has no practical ability to avoid a transfer. The present obligation from past events is already part of the existing framework. The practical ability to avoid a transfer is new in the Exposure Draft. While we generally appreciate the concept of a present obligation as presented in the exposure draft, we have serious concerns regarding the practical ability aspect. It seems that in 4.32 ss. the Board suggests a new overall concept of a present obligation, which goes beyond current definitions.

4 1. We believe that the wording, substance and practical consequences of para has to be simplified and reconsidered, as it does not take into account the important effects that could be triggered on institutions capital base in terms of practical implementation of the prescriptions. First of all, we believe that the wording of 4.32 is in a way too narrow: The fact that any action necessary to avoid the transfer [ ] would have economic consequences significantly more adverse than the transfer itself does not allow the general conclusion that in such a case the entity has no practical ability to avoid a transfer. In fact, significantly adverse economic consequences may, lead to practical inability, but the judgment of whether in fact there is really no practical ability may require a much broader assessment, even of economic aspects, than 4.32 suggests. The depth of the assessment, the time horizon, the possible scenarios: the current wording does not seem to reflect the complexity of these considerations. Moreover, the question is how such a far-reaching principle can be applied in practice and up to which limits. Finally, there may be cases where reasons for the action necessary to avoid a transaction lie beyond purely economic aspects. Especially for regulated entities also prudential aspects may be relevant and despite highly adverse economic consequences a transfer will not be made. We understand that ara seems to catch the case of economic compulsion, but unfortunately in a rather broad way. We therefore believe that the general principle in 4.32 may require further reflections in order to avoid any disproportionate consequences. 2. We oppose the introduction of the definition in para 4.34 as an underlying principle for all liabilities in the conceptual framework: "Many obligations are legally enforceable as a consequence of a contract, legislation or similar means. Obligations can also arise, however, from an entity s customary practices, published policies or specific statements that require the transfer of an economic resource. If the entity has no practical ability to act in a manner inconsistent with those practices, policies or statements, the entity has an obligation. The obligation that arises in such situations is often described as a constructive obligation." In fact, the wording in para 4.34 may be appropriate for some kind of provisions (IAS 37); it is not a feasible overall-definition for liabilities. In addition, meaning 1 An entity has no practical ability to avoid a transfer if, for example, the transfer is legally enforceable, or any action necessary to avoid the transfer would cause significant business disruption or would have economic consequence significantly more adverse than the transfer itself. It is not sufficient that the management of the entity intends to make the transfer or that the transfer is probable.

5 of wordings such as "specific statements" could be interpreted widely. Therefore, we believe that the para 4.34 has to be revised. Most cooperative banks have customary practices to redeem cooperative member shares. The Conceptual Framework seems to allow past practice to override cooperative banks legal rights to refuse redemption of member shares in IFRIC 2. However, financial instruments are determined by law or contract. The legal rights constitute the basis for identifying the economic substance of a financial instrument and therefore the practical ability to avoid a transfer. Customary practices in the past will not necessarily determine the entity s future action; but the entity s future action will be determined by law or contract. With the new phrase practical ability to avoid a transfer the IASB switches from a legal based perspective to the entirely economic perspective. Although, we welcome the IASB s decision to reintroduce substance over form as a necessary component of reliability (faithful representation), we do suggest that the drafting is revisited, so as to eliminate any possible misinterpretation that legal arrangements should be disregarded and that the economic substance of transactions would be considered independently from those. We strongly believe, that the economic substance cannot be considered independently of the legal aspects of an item in the financial statements. 3. Finally, we note that the IASB believes that the Conceptual Framework should provide concepts with general application and should not provide different or additional concepts for application to particular types of organizations, such as co-operatives (BCIN 26). Consequently, we don t understand the reasons to introduce a new sentence at the end of the paragraph 4.47 nevertheless, the definition of equity in this (draft) Conceptual Framework applies to all entities. This precision could be confusing, especially in the context of the CF that does not override specific standards. Other Aspects We have also some comments on the following other subjects: Question 1a - importance of providing information needed to assess management s stewardship of the entity s resources It seems difficult to give adequate and relevant information that would meet the needs to assess management s stewardship of the entity s resources for the maximum number of primary users (1.8). Question 1b - notion of prudence We fully support this concept (2.18) and think that we should not only use it under conditions of uncertainty.

6 Question 16 - Business activities We do not agree with the IASB when it consider that business activities do not affect the presentation and disclosure, including how to classify assets, liabilities and items of equity, income and expenses. On the contrary, we consider,that, notably for cooperative business, how an entity conducts its business activities could affect the distinction between liabilities and equity. Questions 17 and 14 The financial statement are prepared from the perspective of the entity as a whole, instead of from the perspective of any particular group of investors, lenders or other creditors (3.9). In this context, we don t think that the CF contains sufficient discussion on long-term investment (Q17), and we fully support that the CF should include the rebuttable presumption that items of income or expenses included in OCI in one period will be reclassified into the statement of profit or loss for that future period (Q14).