Comments from ACCA to the International Accounting Standards Board, July 2010.
ACCA is pleased to have this opportunity to comment on the exposure draft (ED) on the above subject. We note that the ED does not consider the extent of application of the fair value option for financial liabilities, but clearly this is not yet covered by IFRS9 and is an important issue in the replacement of IAS39.
In our view amortised cost should be the default measurement basis for all financial liabilities (other than derivatives). Cost is the basis for liabilities that best reflects the entity's actual borrowing expense. It also addresses most directly the accountability of the company to its owners for their stewardship of the business. We therefore broadly agree with the requirements in IFRS9 for amortised cost for financial instruments with cash flows of interest and repayment of principal and which are also managed on that basis, and for fair value for any liabilities which are held for trading. We accept that where there might otherwise be an accounting mismatch then there should be a fair value option.
This ED does not appear to be changing the scope of application of the fair value option for liabilities. We agree with that. We are, however, concerned that this implies that bifurcation of embedded derivatives will apply to liabilities, but not to assets. This apparent inconsistency needs to be justified and if bifurcation is right for liabilities why it is right in principle that there should be an option to state the whole contract at fair value instead.
The ED's key proposal is that the credit standing element of any change in fair value (FV) should be recognised in Other Comprehensive Income (OCI). We have significant concerns about the lack of clarity over the general principle of what items should be shown in OCI as compared to profit and loss for the period. Nor is there yet a general basis for the distinction between recyclable and non-recyclable elements of OCI.
Questions 1,2 and 3 are responded to together.
Question 1
Do you agree that for all liabilities designated under the fair value option, changes in the credit risk of the liability should not affect profit or loss? If you disagree, why?
Question 2
Or alternatively, do you believe that changes in the credit risk of the liability should not affect profit or loss unless such treatment would create a mismatch in profit or loss (in which case, the entire fair value change would be required to be presented in profit or loss)? Why?
Question 3
Do you agree that the portion of the fair value change that is attributable to changes in the credit risk of the liability should be presented in other comprehensive income? If not, why?
As discussed above we note that there is no general rationale for what is in P&L and what in OCI to guide the treatment in this case. We are not convinced that the gain or loss on own debt is very helpful information in most cases. It seems broadly that items go into OCI when they are less relevant to an entity's performance in the period. We are therefore supportive of this treatment for these sorts of gains or losses.
However if the FV option has been adopted to try to avoid an accounting mismatch, then splitting the fair value change on the liability is going to defeat the original purpose in terms of a mismatch in earnings. We therefore support the proposal in Question 2.
Questions 4 and 5 are responded to together.
Question 4
Do you agree that the two-step approach provides useful information to users of financial statements? If not, what would you propose instead and why?
Question 5
Do you believe that the one-step approach is preferable to the two-step approach? If so, why?
The 'one step' approach is preferable. This is on the grounds of simplicity and also that the two step version looks like recycling which generally seems undesirable.
Question 6
Do you believe that the effects of changes in the credit risk of the liability should be presented in equity (rather than in other comprehensive income)? If so, why?
No. We support a single performance statement incorporating all increases or decreases in net assets except for those transactions with owners providing new capital or returns of capital by way of repayment or dividend.
Question 7
Do you agree that gains or losses resulting from changes in a liability's credit risk included in other comprehensive income (or included in equity if you responded 'yes' to Question 6) should not be reclassified to profit or loss? If not, why and in what circumstances should they be reclassified?
We have noted above that there is no rationale for disaggregating comprehensive income into what is part of profit for the year and what is OCI. Only if the basis for disaggregation of comprehensive income is on the basis of realised/unrealised profits will recycling make sense. Otherwise recycling does not produce meaningful information on an entity's performance in a period. However when a liability stated at fair value is redeemed or cancelled there should be an appropriate reclassification within equity.
Question 8
For the purposes of the proposals in this exposure draft, do you agree that the guidance in IFRS 7 should be used for determining the amount of the change in fair value that is attributable to changes in a liability's credit risk? If not, what would you propose instead and why?
Yes it seems right to use a consistent method of identification whether for recognition or disclosure purposes.
Question 9
Do you agree with the proposals related to early adoption? If not, what would you propose instead and why? How would those proposals address concerns about comparability?
We support the proposed treatments including early application. There should be a specific date for the changeover from IAS39 to IFRS9, but only when all the parts are in place and companies have had a chance to see and assess the new standard as a whole. As the timetable on the various elements of the IAS39 replacement slips, 2013 is starting to look unrealistic as the compulsory switchover date. We are also aware of the raft of new or revised standards that are being proposed including IFRS9 and therefore would reserve our view on the implementation date on those grounds as well. We understand IASB will be consulting separately on this.
Question 10
Do you agree with the proposed transition requirements? If not, what transition approach would you propose instead and why?
We support these and the full restatement of comparative figures.