Exposure Draft (ED/2012/4), Classification and Measurement - Limited Amendments to IFRS 9

Transcription

1 27 March 2013 International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Re: Exposure Draft (ED/2012/4), Classification and Measurement - Limited Amendments to IFRS 9 Ladies and Gentlemen: Citigroup ( Citi ) appreciates the opportunity to respond to the Exposure Draft: Classification and Measurement - Limited Amendments to IFRS 9. Overall, we are supportive of the proposals in the Exposure Draft (ED), and agree with the objective of classifying financial assets based on a business model and cash flow characteristics test. We are specifically supportive of the introduction of a third measurement category, fair value through other comprehensive income (FVOCI), not only as it closer aligns the proposed model with the model proposed by the Financial Accounting Standards Board (FASB), but also because we believe the resulting accounting best reflects information around financial assets which are managed both in order to collect contractual cash flows and for sale. Citi acknowledge the extensive efforts the International Accounting Standards Board (IASB) has made in order to develop an accounting model for the classification and measurement of financial instruments, especially the joint efforts with the FASB in seeking to develop a converged model. In our view, the proposed model achieves a high level of convergence with the FASB model. One area of potential concern, which we elaborate on further below, is the seemingly narrow scope of assets which may qualify for amortised cost based on the current wording and application guidance in the ED. We understand that it was not the Board s intent to significantly reduce the scope of instruments qualifying for amortised cost under IFRS 9 compared to the current guidance in IAS 39. With some minor clarifications to the guidance, our view is that the proposals will be practicable and result in improvements to existing IFRS 9. Our further comments are outlined in greater detail through responses to the specific questions raised in the ED, included in the following attachment.

2 We would be pleased to discuss our comments with you at your convenience. Please feel free to call me in New York at (212) or David Minarik in London at Sincerely, Robert Traficanti Deputy Controller and Global Head of Accounting Policy Cc: Financial Accounting Standards Board 2

3 Question 1 Do you agree that a financial asset with a modified economic relationship between principal and consideration for the time value of money and the credit risk could be considered, for the purposes of IFRS 9, to contain cash flows that are solely payments of principal and interest? Do you agree that this should be the case if, and only if, the contractual cash flows could not be more than insignificantly different from the benchmark cash flows? If not, why and what would you propose instead? In our view, amortised cost should be limited to assets which are deemed to be plain vanilla lending instruments. But we agree that a financial asset with a modified economic relationship between principal and consideration for time value of money and credit risk could be considered to contain cash flows that are solely payments of principal and interest. We also agree that this should be the case when the cash flows from an asset with a modified economic relationship are sufficiently similar to those of an asset whose contractual cash flows are clearly solely payments of principal and interest, defined in the ED as the benchmark instrument. Question 2: Do you believe that this Exposure Draft proposes sufficient, operational application guidance on assessing a modified economic relationship? If not, why? What additional guidance would you propose and why? The additional application guidance is helpful to illustrate the objective of the cash flow characteristics test, however additional examples would ensure that what is meant by more than insignificantly different is clear and avoid inconsistent application in practice. We therefore recommend including two examples illustrating when the cash flows from a modified economic relationship are deemed insignificantly different and when not. We would also recommend clarifying in paragraph B4.1.9A that an economic relationship is not always modified solely due to an interest rate reset feature, but only when the interest rate reset feature results in an interest rate that is reset where the frequency of the reset does not match the tenor of the interest rate (i.e. interest rate mismatch features). There are various lending products where the interest rate would reset after a certain period, however the frequency of reset would match the tenor of the interest rates (e.g. a fixed rate mortgage loan which resets to the Bank s variable rate after 2 years). Based on the current wording, it is not entirely clear that such instruments are outside the scope of the guidance in par B4.1.9A B4.1.9E. In our view, it would be very helpful if the final standard makes mention of liquidity risk, and clarifies to what extent a premium for liquidity risk may form part of the interest rate and still pass the cash flow characteristics test. 3

4 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? Please see question 2 above. Question 4: Do you agree that financial assets that are held within a business model in which assets are managed both in order to collect contractual cash flows and for sale should be required to be measured at fair value through OCI (subject to the contractual cash flow characteristics assessment) such that: (a) interest revenue, credit impairment and any gain or loss on derecognition are recognised in profit or loss in the same manner as for financial assets measured at amortised cost; and (b) all other gains and losses are recognised in OCI? If not, why? What do you propose instead and why? We agree with the introduction of a FVOCI category. We also agree with the resulting accounting as proposed in the ED, and believe that a fair value carrying amount in the statement of financial position and amortised cost information being provided in profit or loss provides useful information for financial assets managed in a business model both to collect contractual cash flows and for sale. 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? As stated before, we support a business model for assets managed both to collect contractual cash flows as well as for sale and, in our view, it is well defined and described in the ED. However, we are somewhat concerned that the business model for instruments managed solely to collect contractual cash flows, is currently defined in a narrow manner, mostly due to the guidance around permissible sales activity. 4

5 We would recommend that the guidance around permissible sales out of an amortised cost category be broadened. Whereas in our view, the business model test for FVOCI has a balanced composition of assets managed to collect contractual cash flows and those managed for sales, the current business model for amortised cost seems to allow sales in only very limited scenarios. The risk is not only that assets qualifying for amortised cost under IAS 39 may not qualify for amortised cost under IFRS 9, but also that such instruments will be required to be measured at FVOCI when amortised cost provides the most useful information for such assets. Currently, the proposed ED would allow sales when the credit quality of the financial asset no longer meets the entity s documented investment policy. However, also in line with an entity s documented investment and risk policy, sales may also occur for reasons other than credit. Such sales may be due to entity limits set on exposure to a particular country/jurisdiction, industry or obligor, and may be summarized as sales due to concentration risk. It is also worth noting that these risks and limits are assessed on a combined basis across various financial instruments, including for example derivative exposures, not just loan assets. And although these sales occur in response to concentration limits, they are also in line with a documented investment strategy, different from sales made under a business model where assets are managed to be sold but, in line with the IASB s expectation as stated in BC16, less frequent than sales out of the other measurement categories in IFRS 9. We would therefore recommend the application guidance be enhanced to clarify that sales due to concentration risk can be consistent with a business model whose objective is to hold assets in order to collect contractual cash flows. We would also recommend that the final standard be more explicit that a combination of factors rather than a single factor, will determine an asset s classification. Although that is stated in B4.1.2B, the guidance seems to imply that the level of sales is the strongest factor to consider. 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 agree with extending the fair value option to assets that would otherwise be mandatorily measured at FVOCI. 5

6 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? We 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 entire completed version of IFRS 9. We also agree with the six-month period between issuance of the final standard and when the prohibition becomes effective. 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 strongly agree that entities should be allowed to early adopt only the own credit provisions in IFRS 9. However, we would prefer that the provision be made available sooner through IAS 39 or IFRS 9 (2010) if a delay is expected in finalizing the remaining phases of IFRS 9. Question 9: Do you believe there are considerations unique to first-time adopters that the IASB should consider for the transition to IFRS 9? If so, what are those considerations? No 6