Tony Burke Director, Industry Policy & Strategy AUSTRALIAN BANKERS ASSOCIATION INC. Level 3, 56 Pitt Street, Sydney NSW 2000 p. +61 (0)2 8298 0409 f. +61 (0)2 8298 0402 www.bankers.asn.au 19 March 2013 Mr Hans Hoogervorst Chairman International Accounting Standards Board 30 Cannon Street London EC3M 6XH UNITED KINGDOM Dear Mr Hoogervorst, ED/2012/4 Classification and Measurement: Limited Amendments to IFRS 9 The Australian Bankers Association s (ABA) supports the Board s efforts to improve IFRS 9 Financial Instruments (October 2010) and clarify its classification and measurement requirements for financial instruments. We are supportive of the proposals in the recently issued Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9 ( the exposure draft ) with our comments on the specific questions raised by IASB addressed in the appendix. We would like to highlight that IFRS 9 (including proposals in the exposure draft) currently prohibits recycling of fair value gains or losses on equity instruments but this exposure draft proposes recycling for debt instruments measured at fair value through OCI. We believe two different models will add complexity but not improve the quality of financial reporting. We recommend that the accounting requirements for equity instruments are amended to align them to debt instruments measured at fair value through OCI until the IASB resolves the use of OCI and recycling in its Concepts project. We also recommend that own credit adjustments on liabilities designated at fair value through profit or loss should be recycled to profit or loss whenever an entity repays an amount different from contractual amount. This will ensure consistency whenever a liability is extinguished early whether it is measured at amortised cost or measured at fair value through OCI. Yours sincerely, Tony Burke ABA-#115497-v3-IFRS_9_ED_comment_letter_-_March13
Australian Bankers Association Inc 2 APPENDIX RESPONSE TO SPECIFIC QUESTIONS Contractual cash flow characteristics assessment: a modified economic relationship between principal and consideration for the time value of money and the credit risk 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? We agree that a financial asset with a modified economic relationship could be considered to contain cash flows that are solely payments of principal and interest. However, we think the threshold should be changed to be the same test as for determining whether a liability contains an embedded derivative, because it is already understood and would create symmetry for determining those instruments (whether an asset or a liability) that must be carried at fair value. 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 consider the guidance of not more than insignificant is sufficient to understand the assessment. We suggest including examples on the application of the modification test where the cash flows subsequently change. As stated in Question 1, we prefer a symmetrical test similar to the one used for determining whether liabilities contain embedded derivatives under IFRS 9. 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? Yes we agree, but recommend including more examples.
Australian Bankers Association Inc 3 Business model assessment: the fair value through other comprehensive income measurement category for financial assets that contain contractual cash flows that are solely payments of principal and interest 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 support the proposal to introduce a measurement category for certain financial assets at fair value through OCI. Existing IFRS 9 classification and measurement framework does not currently accommodate the banking industry holding financial assets for liquidity purposes or selling for reasons such as opportunistic circumstances, increased capital requirements, etc. We consider the new category will eliminate inconsistencies when certain assets managed under this business model (primarily liquidity portfolios) are accounted for differently to other investments such as those held solely for short-term profit taking. We welcome the proposed measurement mechanics for the new category, i.e. reporting fair value information in the balance sheet and amortised cost information in profit or loss, and believe it will align reporting of financial assets performance to the objectives of holding such investments. However, we do not think the new business model adequately addresses many other common reasons for selling that we consider should be carried at fair through OCI. We would like to highlight that prohibiting equity instruments designated at fair value through OCI from recycling their gains or losses on derecognition is inconsistent with the objectives of business models under which such equity instruments are often managed. For example, it appears inconsistent that a fair value gain or loss realised on sale of an equity instrument held for both strategic and dividend yield/ capital appreciation purposes would not be reclassified to profit or loss. In addition this prohibition is inconsistent with the proposals in the exposure draft in relation to debt instruments measured at fair value through OCI for which recycling of gains or losses on derecognition is required. We encourage the IASB to align the accounting treatment for these equity instruments with those applicable to debt instruments measured at fair value through OCI, until the IASB resolves the use of OCI and the recycling issue in its Concepts project.
Australian Bankers Association Inc 4 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 believe the Exposure Draft provides sufficient application guidance on how to distinguish between the three business models. While the guidance assists in clarifying the treatment for financial assets held as part of the liquidity portfolio, it does little to clarify the treatment for financial assets that may be sold for many other reasons (such as opportunistic circumstances, increased capital requirements, etc) including those sold for no apparent reason at all. We recommend including more examples to address these situations. 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 that the fair value option should be extended to financial assets that would otherwise be mandatorily measured at fair value through OCI. The fair value option will allow banks to eliminate potential accounting mismatches that could arise due to mandatorily measuring debt instruments at FVTOCI and hence result in more relevant financial information. However, we consider the fair value option proposals should be aligned with the US FASB proposals that provide an unrestricted ability to use the fair value option. Early application 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 with the proposal that an entity early adopting IFRS 9 after the completed version is issued should be required to apply the completed version of the standard as this would ensure higher level of comparability. We also agree with the six-month transition period. We believe this will provide an important relief for those entities who are preparing to early adopt IFRS 9 before the completed version is issued while ensuring no large scale divergence in reporting takes place in the industry. We suggest extending the mandatory application date to periods beginning on or after 1 January 2016 to allow preparers sufficient time for implementing the final standard.
Australian Bankers Association Inc 5 Presentation of own credit gains or losses on financial liabilities 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 welcome the proposal to allow early application of own credit presentation requirements. The requirement to recognise changes in own credit in profit and loss has been identified as an anomaly in the accounting standards by investors and we believe it should be addressed as quickly as possible. However, we believe that recycling of gains or losses from changes in a liability s credit risk to profit or loss should be required whenever an entity repays an amount other than the contractual amount. This would ensure consistency with: the accounting for extinguished liabilities carried at amortised cost where the difference between the carrying amount and the consideration paid is recognised in profit or loss (IFRS 9: 3.3.3), and the recycling requirements proposed in the exposure draft in relation to financial assets (debt instruments) at fair value through OCI. We would encourage the IASB to adopt a consistent principles based approach to the financial instruments accounting standard that results in recognition of all realised gains or losses through profit or loss. First-time adoption 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? We do not have any specific comments regarding first-time adoption.