International Accounting Standards Board Mr. Hans HOOGERVORST Chairman 0f the Board 30 Cannon Street London EC4M 6XH United Kingdom Transmitted by email to: commentletters@iasb.org Paris, 28 th March 2013 BPCE s response to the Exposure Draft "Classification and Measurement Limited Amendments to IFRS 9" Dear Sir, BPCE welcomes the IASB invitation for comments on the Exposure Draft "Classification and Measurement Limited Amendments to IFRS 9". Groupe BPCE is the second largest banking group in France in terms of retail banking. BPCE welcomes the IASB s decision to consider making limited amendments to IFRS 9 Financial instruments (2010) in order to better take care of the interaction with the future IFRS on insurance contracts and in order to achieve a convergence with the FASB classification and measurement model. However, we still have a number of concerns regarding the proposai, explained in detail in our answers to the questions in the ED set out in the Appendix. Our main concern relates to specific financial instruments that fail the contractual cash flow characteristics assessment whereas we consider that amortised cost measurement would provide more useful information than measurement at fair value. It is the case in particular of financial assets with regulated rates features. These assets linked to "Livret A" deposits, represent assets amounting to 222.5 Billion euros in French Banks balance sheets in 2011 (of BPCE SociØtØ anonyme directoire et conseil de surveillance, au capital de 467 226 960 euros. FRANCE GROUPE RCS Paris N 493 455 042. SiŁge social : 50, avenue Pierre MendŁs France - 75201 Paris Cedex 13. OQO BPCE TØl. : 01 5840 41 42-0140 39 60 00. www.bpce.fr paprennrf OFFICtEL
which one third is located in BPCE group). These financial instruments are not "structured instruments" with leverage, and are clearly held to collect their cash fiows. Should we have to record these assets at Fair Value through profit and loss, it would generate a very significant volatility in our financial statements, not justified by economic substance. We have explained in details the issue in our response to question 1. Finally, we encourage the Board to take the opportunity 0f the narrow scope amendment to las 39 related to novation of derivatives to allow the early application of the "own credit" provisions through 1AS39 in order not to further delay the benefit of changes in own credit provisions in the presentation of financial statements. If you wish to discuss our comments further, you may contact Nicolas Patrigot (+ 33 1 58 40 75 93). Yoursfaithfully, Richard Vinadier Directeur des ComptabilitØs Groupe Pi-
Appendix I Detailed comments Contractual cash flow characteristics assesment Question I 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 flot be more than insignificantly different from the benchmark cash flows? If not, why and what would you propose instead? We welcame the possibility to use amortised cost for instruments with minar interest rate mismatch features. However, the comparison of the cash fiows of the instrument with those of a benchmark instrument in order ta be able ta use amortised cost, may prave ta be complex and burdensome. We wauld welcame a simplified appraach or a waiver 0f the demonstration when the mismatch appears insignificant and corresponds ta common practices (difference of spread between the benchmark instrument and the instrument with interest rate mismatch features is insignificant). We share the concern expressed by EFRAG regarding a number of financial instruments for which amortised cast wauld be the relevant measurement attribute, even though they may not pass the contractual cash flow characteristics assessment. Our main concern relates ta Livret A assets and the issue of regulated interests rates (as referred ta in BC44 0f the ED). We have in France specific financial instruments where the financial institutions act as intermediaries collecting deposits from custamers and handing them over ta a gavernment agency. This government agency, acting an behalf of the State, is in charge of using these funds in order ta finance activities 0f general interest. These financial instruments are not "structured instruments" with leverage, and are clearly held to collect their cash fiows. The bans ta the gavernment agency yield the same interest rate as the depasits received from customers (plus an intermediation fee). This rate is regulated by the French government. In order ta fix the rate, the govern ment: 3
- Uses a formula based on financial markets interest rates and parameters (e.g. Eonia, Euribor, and inflation). This formula also includes specific spreads, caps and floors imposed by the specific regulation. This formula aims at giving an idea of the level around which the rate should be fixed. - Then, the government has discretion to modify the rate obtained from applying the formula. In practice, the government often uses this possibility, and regulates the rate of the Livret A. We consider, as mentioned in the staff paper "Agenda paper 6B - 15 October 2012 Sweep issue - regulated interest rates", that the IASB should create a narrow scope exception for instruments with state-regulated bans, whenever these instruments are held in order to collect their cash fiows (held to collect business model) and not structured instruments with leverage. However, the scope exception should not be limited to fully regulated jurisdictions, as it seems to be recommended in paragraph 14 of the staff paper. We would welcome an exemption related to specific regulated "sub-markets" coexisting with broader market based on "financial market interest rates", as long as these instruments are held to collect cash flows and do not incorporate any structure or leverage. In these sub-markets, the regulated ban is itself a benchmark, and is observable by ail the parties as the State discloses this rate whenever it is changing. This is the case for the "livret A" rate, which is used to index other instruments. lndeed, some instruments refer to this rate to describe their remuneration. For example, we can find instruments paying "livret A" rate + 0,50%. These instruments are withing the above-mentioned "sub-market", in which the livret A rate is the benchmark. A sub-market should in our view fulfil 3 conditions to be granted the exemption: - The rate should not be leveraged (for that specific point, the "double / double" test should be re-introduced) - The rate should be itself a benchmark for other instruments referring to this rate for their own fixing - The rate should be observable Another point is related to the decision flot to open the possibility of bifurcation to the assets side, whereas it is possible on the liability side doesn t appear to us logical as we would have expected a similar treatment on both sides of the Balance Sheet. It cannot be justified by its complexity, once it is has been accepted it on the liability side. It could have remained optional, fair value through profit and loss being the measurement by default for assets with embedded derivatives. In some instances, where the business model is a collection of cash flows based on the contractual terms, the bifurcation of assets better reflects the business model and the
management intention. The valorisation of credit spread induced by the fair value through profit and loss measurement, introduces a lot of volatility that doesn t correspond to the business model and can be misleading for the users of our financial statements. 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? Specific operational additional guidance does not appear to be needed, the guidance should remain principle based. 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? See question 1. 5
Business Model Assessment 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 fiows 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) interests revenue, credit impairment and any gain or Ioss on derecognition are recognised in profit or loss in the same manner as for financial assets measured at amortised cost; and (b) ail other gains and losses are recognised in OCI? If not, why? What do you propose instead and why We welcome the accounting mechanism of this third category, as it is closed to the one we asked for in 2008, in order to converge with the US GAAPs: debts instrument at fair value through OCI should only be impaired based on their credit risk deterioration, not based on their fair value. Question 5 Do you beiieve 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 fiows 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 welcome the creation of a third category (FVOCI) by the IASB. It appropriately reflects the performance of financial assets that are managed so as to maximise return from a combination of contractual cash fiows and fair value gains. We also welcome the possibility, for the regulatory liquidity buffer (Cf. example 4), under Bale III to be classified in amortised cost as long as it meets - the SPPI test - and the business model test, implying constrain on the buffer management: liquidity testing via repurchase agreement instead of sales and in any case infrequent sales. However we still regret that the fair value through P&L category is the default category. We wouid have preferred to clearly define the business model required for amortised cost (already done) and fair value through P/L (held for trading), leaving the FVOCI as the default category. We also regret that the FVOCI with P/L recycling is not opened to equity instruments, limited to FVPL and FV OCI without recycling. We think that FVOCI with recycling would have been the appropriate category for equity instruments which are not held for trading, for example financial
assets in insurance companies invested in order to meet commitments on the liability side or equity instruments included in the Iiquidity buffer ( 2a assets). 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 flot, why and what would you propose instead? We welcome the Board s decision to extend the fair value option to assets at fair value through 001 in order to eliminate or significantly reduce an accounting mismatch. 7
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 (le including ail chapters)? If flot, 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 wouid be an appropriate period and why? We agree that IFRS 9 should be applied at a single date on a whole basis once compieted rather than on a phase by phase basis which wouid be detrimental to the comparability among IFRS reporting entities. We would like also to stress the interactions between IFRS 4 and IFRS 9. We consider it would be important to be able to apply those 2 standards in the same timeframe, which may delay the application of IFRS 9, considering the current state of play for IFRS 4. Presentation of own credit gains or losses on financiai liabilities Question 8 Do you agree that entities shouid be permitted to choose to early appiy only the own credit provisions in IFRS 9 once the completed version of IFRS 9 is issued? If flot, why and what do you propose instead? We would welcome the possibility to record in 001 own credit spread for iiability at Fair value through P/L, as soon as possible. To wait for a final completed version of IFRS 9, endorsed by EEC would imply a lot a delay. We would prefer an amendment to las 39. First-time adoption Question 9 Do you believe there are considerations unique to first-time adopters that the IASB shouid consider for the transition to IFRS 9? If so, what are those considerations? No comment. HI.