International Accounting
Standards Board
30, Cannon Street, London EC4M 6XH, United Kingdom
19 September 2008
Comments of the Discussion Paper
of Reducing Complexity in
Reporting Financial Instruments
Dear Sirs,
The Bank of Russia has considered the Discussion Paper of Reducing Complexity in
Reporting Financial Instruments being published by the IASB for comments and informs the
following.
Question 1. (paragraphs 1.5, 1.10 of the Discussion Paper)
It is required to change current requirements for reporting financial instruments to meet
the concerns of preparers and their auditors and the needs of users of financial statements.
Measurement by the entity of identical financial instruments classified in different
categories (Financial asset at fair value through profit and loss and Held-to-maturity
investments) must not lead to different book value of instruments (evaluation by fair value or
amortized cost).
We are of the opinion Held-to-maturity investments must be presented in financial
statement by fair value. The results of their revaluation (in order to avoid excessive volatility of
financial results in the income statement) should be presented in other comprehensive income
and loss (equity).
In connection with this it is pertinent to consider eliminating some restrictions on
reclassification between such two categories of financial instruments as Financial assets at fair
value through profit and loss and Held-to-maturity investments. Alternatively it is possible to
eliminate category Held-to-maturity investments and include such financial assets in category
Available for sale financial assets.
Questions 2, 3 (paragraphs 2.35, 2.37, 2.56 of the Discussion Paper)
Intermediate approach address complexity arising from measurement and hedge
accounting could be taken to reduce today’s complexity for preparers, their auditors and users of
financial statements in shot-term outlook.
All instruments that are traded in active markets (however defined) must be measured at
fair value.
It’s appropriate to consider fair value hedge accounting only for those assets and
liabilities, which are not measured at fair value.
The approach of measurement of financial instrument (by fair value or by amortized cost)
mustn’t change depending on the change of his form to the hedged item.
Current financial results mustn’t depend on volume of documents.
Questions 5, 6 (paragraphs 2.77 - 2.85 of the Discussion Paper)
As it defined in IAS 39 Financial Instruments: Recognition and Measurement (p.88) one
of the essential condition for a hedging relationship to be eligible for hedge accounting, is that
the hedging instrument must be expected to be highly effective in offsetting changes in fair value
or cash flows of the hedged item according to strategy of risk management.
Central banks often carry out hedging operations as part of their’s monetary policy and
they could lead to a loss. In our view IFRSs must contain special requirements for Central banks
because their hedging operations don’t meet the effectiveness qualification requirements.
Alternatively we suggest eliminating some or all of the effectiveness qualification requirements
for hedging.
Questions 4, 7
In our opinion other intermediate approach (toward approaches set out in Section 2 of the
Discussion Paper) that addresses to complexity arise from measurement of financial instruments
is the following:
Approaches of generation such categories of financial instruments as Financial asset at
fair value through profit or loss and Loans and receivables should remain unchanged.
Such categories of financial instruments as Available-for-sale financial assets and Heldto-maturity investments should be consolidated in one category. Results of revaluation by fair
value of such financial instruments should be presented in other comprehensive income and loss
(equity).
Questions 8, 9 (paragraphs 3.1, 3.9, 3.23, 3.29 of the Discussion Paper)
Assuming, that Discussion Paper uses the term fair value to represent a current value that,
in many situations, is an exit value, which accounts interest income and credit losses. We think
that fair value is more appropriate estimation for all financial assets, which are in the scope of
the standard for financial instruments, except for category of Loans and receivables
Question 10 ( paragraph 3.67 of the Discussion Paper)
As noted in Discussion Paper fair value estimates for instruments with high and
changeable credit risk are not less subjective than present measures at amortized cost. In both
2
cases earnings are affected by changes in estimates that may be enough subjective. Proposed fair
value estimation for instruments with high and changeable credit risk don’t reduce complexity
arising from measurement of such financial assets and conversely may lead to raise of
complexity. It is especially relevant for credit organization.
We propose not to change currently available estimation by amortized cost to such
category of financial assets as loan and receivables.
Question 11 (paragraphs 3.72-3.77 of the Discussion Paper)
We suggested remain unchanged effective approach of measuring financial liabilities ( by
fair value or by amortized cost). Otherwise prepares of the financial statements and their auditors
will face the rise of complexity in measurement (for example in credit organization financial
liabilities measured at amortized cost may amount to 90% of all liabilities).
In accordance with proposed in the Discussion Paper accounting treatment decrease of
credit rating of organization produce positive financial result (as financial liabilities must be
presented at fair value).
We are of the opinion that application of fair value measurement to all financial liabilities
with presenting the results in income statement, may lead the user of financial statement to
wrong decision, because decrease in credit rating of issuer artificially may make unrealized
gains. Furthermore such gains may be a source for dividend payments to holders of the issuer
and it may lead to liquidity problems.
Alternatively presentation of additional information about fair value of all financial
liabilities taking into account credit risk in notes to the financial statement may be considered.
Question 12 (additional comments of the Discussion Paper)
1. In IAS 39 Financial Instruments: Recognition and Measurement (IG B1) gold bullion
is determined as commodity. In IAS 2 Inventories (p.9) it is specified, that inventories are
measured at lower cost and net realizable value. Classification of gold as a commodity for
central banks is inexpedient as inventories characterize material assets which are intended for
sale during the appropriate activity, or for use in the process of manufacturing or rendering of
services, while in central banks precious metals, along with hard currency, are part of Currency
Reserves.
Central banks carry out management of Currency Reserves on a cumulative basis.
Decisions on realization of operations with monetary gold are made by central banks within the
framework of general strategy on management of Currency Reserves. Therefore operations with
precious metals and hard currency, that are included in Currency Reserves, have much in
common.
3
Consequently in our opinion precious metals in central banks could not be treated as
commodity and operations with them for central banks could be considered as operations with
financial instruments.
2. According to IAS 1 Presentation of Financial Statements (p.8) a complete set of
financial statement also comprises a cash flow statement. Central bank is an issuing bank. As a
result of currency issue in the accounting period information in cash flow statement would not
comply with central banks’ tasks. Therefore cash flow statement is more likely to mislead the
user, than help him to make the right conclusion.
We are of the opinion that as far as cash flow statement of central banks doesn’t reach
their’s objectives, we propose to eliminate the requirement to make cash flow statement by
central banks.
3. Central bank jointly with the Ministry of Finance regulates cash turnover and part of
non-cash turnover over whole country, has certain relations with the Government, cooperate with
the wide range of counterparties inside and outside of the country. As a result it is quite a
complex task to define related parties.
We are of the opinion that there must be made some amendments to IFRSs about
definition of related parties for central banks.
4. We are of the opinion that there should be made some explanations about the following
situation concerning the part of presentation of financial assets in the consolidated financial
statements:
Subsidiary under it’s business activity acquire block of securities, which are classified as
Financial assets at fair value through profit or loss. Later parent company buy this block of
securities from subsidiary and classifies these securities in it’s separate financial statements as
Available-for-sale financial assets in accordance with it’s own strategy of financial assets
management.
We are of the opinion that in consolidated financial statements mentioned securities
should be classified as Available-for-sale financial assets since strategy of the financial assets
management in group depends on the strategy of parent company and do not on the subsidiary’s
strategy.
Yours sincerely,
R. Erokhina
Deputy Chief Accountant of the Bank of Russia Director of Accounting and Reporting Department
4