Ralph A. Rogers, Jr.
Senior Vice President & Chief Accounting Officer
Aflac
1932 Wynnton Road
Columbus, GA 31999
September 14, 2009
International Accounting Standards Board
30, Cannon Street
London EC4M 6XH
United Kingdom
Dear Sir/Madam:
RE: Financial Instruments: Classification and Measurement
Aflac appreciates the efforts of the IASB to develop a set of high quality financial standards for
use in financial reporting on a global basis. Aflac is particularly pleased to see that this process
has as a goal to reduce the complexity of current reporting requirements and to incorporate a
principles-based approach to financial reporting standards.
Aflac believes the proposed standard supports the objective set forth by the IASB. In general,
Aflac supports the proposed exposure draft and would offer a few comments on specific aspects
of the proposal.
Aflac markets and underwrites supplemental insurance contracts. The contracts are for relatively
small face amounts and are individually underwritten. Because Aflac writes a large number of
small face amount policies, it is able to manage its risk effectively and has minimal exposure to
disintermediation risk. These contract characteristics combined with the very stable and
predictable cash flows, dictates that Aflac manage its investments to produce a stream of
earnings to support its obligations to policyholders. This process involves not only the
investment income earned but also the management of the cash flows of our investments and
insurance obligations.
Question 1
Does amortised cost provide decision-useful information for a financial asset or financial liability
that has basic loan features and is managed on a contractual yield basis? If not, why?
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Response 1
We believe that, for companies such as Aflac, amortized cost does provide decision-useful
information to the user of its financial statements. Aflac manages its investment portfolio on a
contractual yield basis and its portfolio consists primarily of instruments that have basic loan
features. This proposal will produce financial statements that are representative of operations of
Aflac and represent the manner in which it manages its business. Financial statements that
reflect the manner in which the company is managed are more useful to investors and others in
understanding the success of management’s decisions and activities to produce value for
stockholders and to fulfill its obligations to other stakeholders.
Question 2
Do you believe that the exposure draft proposes sufficient, operational guidance on the
application of whether an instrument has ‘basic loan features’ and ‘is managed on a contractual
yield basis’? If not, why? What additional guidance would you propose and why?
Response 2
We support the Board’s guidance on this point.
Question 3
Do you believe that other conditions would be more appropriate to identify which financial
assets or financial liabilities should be measured at amortised cost? If so,
(a) what alternative conditions would you propose? Why are those conditions more appropriate?
(b) if additional financial assets or financial liabilities would be measured at
amortised cost using those conditions, what are those additional financial assets or financial
liabilities? Why does measurement at amortised cost result in information that is more decisionuseful than measurement at fair value?
(c) if financial assets or financial liabilities that the exposure draft would measure at amortised
cost do not meet your proposed conditions, do you think that those financial assets or financial
liabilities should be measured at fair value? If not, what measurement attribute is appropriate and
why?
Response 3
As an alternative, Aflac supports the classification of certain hybrid securities at amortized cost.
Aflac has invested in Tier 1, Upper Tier 2 and Lower Tier 2 securities of major financial
institutions around the world. These securities were purchased and are managed for the
investment return from the interest income and for the cash flows from the expected interest
income and principal payments. Some of these securities have a stated or fixed maturity date
and would qualify for the amortized cost model. Others have an expected maturity date which is
driven by economic factors. To date, each of these securities owned by Aflac which have an
economic maturity date have been repaid on the expected repayment date even though it may
have been economically advantageous to the issuer to extend the maturity of the security. These
securities have traded and performed as a fixed maturity security. Therefore, Aflac believes a
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provision should be provided to allow these securities to be reported and accounted for on an
amortized cost basis as are other securities which have basic loan features and are managed on a
contractual yield basis. If the Board does not believe this should be permitted on a prospective
basis, Aflac would encourage the Board to allow a “grandfathering” of this type of security
owned as of July 1, 2009, and require disclosure of this election and the relevant information
regarding this election. For Aflac these securities were acquired with a certain expectation as to
their performance and financial reporting and accounting. To date the securities owned by Aflac
have performed as expected; however, based upon this proposal, there will be a deviation in the
expected financial reporting and accounting resulting from a change in the related financial
reporting principles which is not in keeping with actual results to date.
Aflac is proud of its transparency in its financial reporting. At present, Aflac posts a list of these
securities each quarter on its web site along with the market values, amortized cost, par value,
and credit ratings for each of these securities. There is sufficient information available for the
investor or other interested party to be fully informed regarding the securities owned by Aflac.
Question 4
(a) Do you agree that the embedded derivative requirements for a hybrid contract with a financial
host should be eliminated? If not, please describe any alternative proposal and explain how it
simplifies the accounting requirements and how it would improve the decision-usefulness of
information about hybrid contracts.
(b) Do you agree with the proposed application of the proposed classification approach to
contractually subordinated interests (ie tranches)? If not, what approach would you propose for
such contractually subordinated interests? How is that approach consistent with the proposed
classification approach? How would that approach simplify the accounting requirements and
improve the decision usefulness of information about contractually subordinated interests?
Response 4
Aflac supports the Board’s position on embedded derivatives. We ask that the Board reconsider
its conclusions related to subordinated interests. We believe that a subordinated tranched security
should not automatically be excluded from the amortized cost classification. If an investment’s cash
flows are considered reliable by the company to the point of using the investment to back product
liabilities, then that should be an indicator that it is managed on a contractual yield and should qualify for
amortized cost treatment. If a distinction should be made related to subordinated interest, it should be
based on whether the security is above or below investment grade.
Question 5
Do you agree that entities should continue to be permitted to designate any financial asset or
financial liability at fair value through profit or loss if such designation eliminates or
significantly reduces an accounting mismatch? If not, why?
Response 5
Aflac agrees that entities should continue to be permitted to designate any financial asset or
financial liability at fair value through profit or loss if such designation eliminates or
significantly reduces an accounting mismatch.
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Question 6
Should the fair value option be allowed under any other circumstances? If so, under what other
circumstances should it be allowed and why?
Response 6
Aflac does not believe that the fair value option should be extended under any other
circumstances. Aflac is not aware of a need for additional exceptions.
Question 7
Do you agree that reclassification should be prohibited? If not, in what circumstances do you
believe reclassification is appropriate and why do such reclassifications provide understandable
and useful information to users of financial statements? How would you account for such
reclassifications, and why?
Response 7
Aflac generally agrees with the concept except where the accounting standards have been
changed such that the reporting entity would in its judgment have made a different determination
had it known that the new accounting and reporting principles would be adopted. To the extent
that management believes the reclassification provides a view of the operations and financial
position which is consistent with the management of the operations and assets and liabilities, it
should be allowed upon the adoption of the new accounting standard that is promulgated to make
a reclassification as appropriate. Adequate disclosure of the change and the reason it is more
appropriate than continuing the former classification should be required. In addition, Aflac
believes that the Board should permit reclassifications in very limited circumstances such as the
downgrade of a security to below investment grade. Full disclosure of these reclassifications
should be provided. Aflac currently follows this policy for certain of its securities.
Question 8
Do you believe that more decision-useful information about investments in equity instruments
(and derivatives on those equity instruments) results if all such investments are measured at fair
value? If not, why?
Response 8
Aflac believes fair value is the appropriate basis for reporting equity investments because the
primary purpose for investing in these vehicles is the generation of appreciation in value and not
current income. Typically, equity instruments are not held for the generation of investment
income since the periodic return, such as a dividend, is not nearly as attractive as the return on an
instrument that has the features of a basic loan instrument. In order to compensate for the lack of
periodic return, the investor is expecting the value of the equity instrument to increase as a result
of the performance of the entity which issued the instrument. This growth in value should be
reflected in operating earnings.
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Question 9
Are there circumstances in which the benefits of improved decision-usefulness do not outweigh
the costs of providing this information? What are those circumstances and why? In such
circumstances, what impairment test would you require and why?
Response 9
Aflac is not aware of a circumstance in which the benefits of providing of this information would
not out weigh the costs of providing this information.
Question 10
Do you believe that presenting fair value changes (and dividends) for particular investments in
equity instruments in other comprehensive income would improve financial reporting? If not,
why?
Response 10
Aflac believes that any equity investment is held for the production of economic gain for its
stockholders. In order to reflect that economic gain in its operations, the income received from
and the increases and decreases in the fair value of that investment must be included in the
operating earnings of the period in which they occurred. To include them in equity indicates the
gains or losses are the result of stockholder transactions. Aflac does not believe this provides a
faithful representation of the results for the period under measurement.
Question 11
Do you agree that an entity should be permitted to present in other comprehensive income
changes in the fair value (and dividends) of any investment in equity instruments (other than
those that are held for trading), only if it elects to do so at initial recognition? If not,
(a) how do you propose to identify those investments for which presentation
in other comprehensive income is appropriate? Why?
(b) should entities present changes in fair value in other comprehensive income only in the
periods in which the investments in equity instruments meet the proposed identification principle
in (a)? Why?
Response 11
Aflac’s response to question 10 is also applicable to this question.
Question 12
Do you agree with the additional disclosure requirements proposed for entities that apply the
proposed IFRS before its mandated effective date? If not, what would you propose instead and
why?
Response 12
Aflac agrees with the disclosure requirements proposed.
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Question 13
Do you agree with applying the proposals retrospectively and the related proposed transition
guidance? If not, why? What transition guidance would you propose instead and why?
Response 13
Aflac believes the retrospective application of the proposed standard is appropriate and can be
accomplished in a reasonable fashion.
Question 14
Do you believe that this alternative approach provides more decision-useful information than
measuring those financial assets at amortised cost, specifically:
(a) in the statement of financial position?
(b) in the statement of comprehensive income? If so, why?
Response 14
Aflac does not believe that this alternative approach would provide useful information to
financial statement users. Having an alternative approach would only add confusion to the
financial reporting between companies. It would not add value or credibility to the financial
statements. It would not add to the understanding of how management manages the company’s
operations and creates value.
Question 15
Do you believe that either of the possible variants of the alternative approach provides more
decision-useful information than the alternative approach and the approach proposed in the
exposure draft? If so, which variant and why?
Response 15
Aflac supports the approach proposed in the exposure draft. From Aflac’s perspective the other
variants do not provide information about the company’s operations that is as useful as the
proposed approach.
Aflac appreciates the opportunity to comment on the exposure draft and is generally supportive
of the IASB’s proposed financial reporting standard.
Sincerely,
Ralph A. Rogers, Jr.
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