14 September 2009
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Comments on Financial Instruments: Classification and Measurement exposure draft
Dear Sir/Madam,
Ping An Insurance (Group) Company of China, Ltd. an Chinese-based public company listed
on the The Stock Exchange of Hong Kong Limited and the Shanghai Stock Exchange. We
welcome the opportunity to comment on your exposure draft Financial Instruments:
Classification and Measurement..
Comments on the 15 questions mentioned in the exposure draft
For improvement of IAS39, 15 questions are raised in Exposure Draft Financial Instruments:
Classification and Measurement. Based on our understanding of the exposure draft, we have
the following comments as to some questions.
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?
Comments: Appendix B of the exposure draft explains how to determine “managed on a
contractual yield basis”. As stated in B10, whether financial instruments are managed on a
contractual yield basis does not depend on management’s intentions, instead it depends on
how management manages the instruments.
However, the exposure draft does not provide very specific guidance as to how an entity
should prove an instrument “is managed on a contractual yield basis”. Suggest add
operation-useful guidance for the sake of implementation.
Besides, although the exposure draft eliminates the ‘tainting’ provision in IAS 39, i.e. the
exposure draft contains no proposal to prohibit an entity from measuring a financial asset at
amortized cost if the entity has previously sold other financial assets measured at amortized
cost before maturity. However, an entity would be required to separately present in the
statement of comprehensive income gains or losses arising from the de-recognition of a
financial asset or financial liability measured at amortized cost and provide additional
disclosures. As per the disclosure requirements, entities need to determine instrument by
instrument as to de-recognition. For entities having sizable financial assets, for example, bank
loans, it would impose great operational difficulties.
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?
Comments: we believe, in most cases, measurement at fair value can provide decision-useful
information.
But for some strategic equity investment, the investment purpose of an entity is to enjoy
dividend income and other benefits of strategic cooperation on an ongoing basis. In this case,
fair value (normally measured at market prices) fails to reflect the true value of the
investments for the entity.
Besides, for equity instruments (and derivatives on those equity instruments) that reliable
measurement is not available, we suggest practice of cost measurement in existing IAS 39
should be kept, please see response to question 9 for detailed reasons.
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?
Comments: for equity instruments where there is no active market, cost for measurement at
fair value is high and various internal and external costs need to be paid, and parameters used
by valuation model directly affect accuracy of fair value measurement.
If all equity instruments are required to be measured at fair value, then most probable case
will be: valuation of the same unlisted equity instrument considerably differs from one entity
to another, which reduces comparability of financial statements.
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?
Comments: As per the exposure draft, for equity investments “measured at fair value and
changes in fair value are recognized in other comprehensive income”, the dividends and
investment gains can not be presented in profit or loss. Gains or losses of these investments
can not be realized. Given currently the concept of “comprehensive income” is not widely
understood and accepted by financial statements users, this change would be material.
Besides, for strategic investments with large-value, investment overheads and business tax
expense etc. (recognized in profit or loss) incurred at the process of selling will also be sizable.
If they cannot be re-classified to profit or loss from “other comprehensive income”, then it
will cause mismatch between profit or loss and “other comprehensive income”.
Besides, for an insurer, this will lead to mismatch between expense in profit or loss and
investment gains in other comprehensive income. For example, expense of an insurer is
presented in the form of insurance reserve, retained by certain percentage of gains on
investments in participating insurance and universal insurance products , policy dividend
expense and policy account interest etc.. if the expenses are presented in profit or loss, while
some investment gains are in “other comprehensive income”, so revenue and expense is not
matched.
In view of the above, we suggest: keep other provisions of the exposure draft unchanged, and
remove provisions of “changes in fair value initially presented in other comprehensive
income should not be presented in profit or loss from equity (recycling)” and “dividends are
presented in other comprehensive income”.
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?
Comments: we agree. To make it more comparable with financial statements of other entities
that does not apply the proposed IFRS, the entities should disclose additional information.
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?
Comments: entities should be asked to apply the proposals retrospectively as this belongs to
major changes in accounting policy. Items including “undistributed profit” and “capital
reserves” will have major changes due to retrospective adjustments.
Since efforts on system upgrade and changes in internal management mode etc. due to
retrospective adjustments are considerable, suggest sufficient lead time should be given to
entities.
Question 14
Do you believe that this alternative approach provides more decision-useful information than
measuring those financial assets at amortized cost, specifically:
(a) in the statement of financial position?
(b) in the statement of comprehensive income?
If so, why?
Comments: we do not believe that the alternative approach provides more decision-useful
information.
Based on the alternative approach, all financial instruments on active market should be
measured at fair value. For insurance industry, adoption of measurement with single fair value
mode will have major conflicts with “management mode of matching assets and liabilities”
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?
Comments: we do not believe any of the possible variants provides more decision-useful
information than the alternative approach and the approach proposed in the exposure draft.
Other comments on the exposure draft
Profit distribution—part presented in other comprehensive income
B24 of the exposure draft says, for equity investments that “are measured at fair value and
changes in the fair value are presented in other comprehensive income”, an entity may
transfer the cumulative gain or loss (including dividends) within equity.
Our understanding to this provision: if changes in fair value are realized through disposal of
equity investments, realized gains and obtained stock dividends can be transferred to
“undistributed profit” from “other comprehensive income” for profit distribution. But we are
not sure if we understand this correctly.
Suggest further specify provision of this clause: what items (stock dividends, realized gains,
unrealized changes in fair value) are allowed to transfer cumulative gain or loss within equity?
When should these items be transferred (whether stock dividends can be transferred when
acquiring the right to pay/receive, or still need to wait until corresponding investments are
disposed etc)?
Best regards,
MAK, Wai Lam William
Deputy Chief Financial Officer