September 16 , 2009
Sir David Tweedie
Chairman
International Accounting Standards Board
30 Cannon Street
London, EC4M 6XH
United Kingdom
Re: Exposure Draft on Financial Instruments: Classification and Measurement
Dear Sir David Tweedie,
Thank your for offering the Agricultural Bank Of China an opportunity to comment on the
Exposure Draft on Financial Instruments: Classification and Measurement.
We appreciate IASB’s efforts to reduce complexity in reporting financial instruments and
to improve the transparency of accounting information. We believe that simplifying the
classification of financial instruments into two primary categories and simplifying the
accounting requirements for embedded derivatives will reduce complexity in reporting
financial instruments greatly. We agree with this reform direction. However, on some
parts of the exposure draft, for instance, ‘basic loan features’ and ‘managed on a
contractual yield basis’, we suggest the Board give a more precise definition and provide
more sufficient and operational guidance.
We disagree to measure all of the investments in equity instruments at fair value. We
suggest the Board consider the circumstances under which fair value of the investments in
equity instruments can not be reliably obtained, which is typical in the emerging economies.
We strongly recommend the investments in equity instruments that do not have a quoted
market price in an active market and whose fair value can not be reliably measured and
the derivatives that linked to and must be settled by delivery of such unquoted equity
investment, shall be permitted to be measured at cost.
Please refer to the attachment for our comments on specific questions.
.
Sincerely yours,
Pan Gongsheng[Signed]
Executive Vice President, Agricultural Bank Of China, China
Comments of Agricultural Bank Of China on the
IASB
Exposure Draft Financial Instruments: Classification
and Measurement
Q1
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?
A1: We agree with the ED’s proposal.
We believe that amortized cost can provide decision-useful
information for a financial instrument that meets both conditions.
Q2
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?
A2: We don’t agree with the proposal.
We believe that both ‘basic loan features’ and ‘is managed on a
contractual yield basis’ are very important concepts in classification and
measurement for financial instruments. More sufficient and operational
guidance should be provided. We suggest:
(a) Establish clear and strict definitions of ‘basic loan features’ and
‘is managed on a contractual yield basis’ in order to avoid too general
criterion. We notice relevant guides in the appendix. However, providing
operation guidelines and illustrated examples only in the appendix is not
enough. We suggest make definite relevant principles in the body of the
standard, for instance, what criteria are for ‘basic’, what specific features
are included for ‘loan features’ and what the meaning of ‘contractual
yield’ is and etc.
(b) Add guidance that is beneficial to practical operations in order to
avoid confusion in practical operations. We believe application guidelines
and examples in the appendix remain to be supplemented.
● For the ‘basic loan features’ condition, cases that are common
but can not be easily judged should be added. Such cases include, but not
limited to, inflation-linked bonds, dual-currency bonds, perpetual debt
instruments and etc.
● For the ‘is managed on a contractual yield basis’ condition,
operational guidance should be provided in view of the actual situation in
practice. Examples in the current appendix (see paragraph B12, B13) list
two extremes for a business model. However, operation in practice is not
so clear-cut, sometimes financial instruments are managed by entities on
multiple basis. Take an entity holding an investment in debt instruments
in an active market for instance. The entity wants to hold the instruments
for the purpose of receiving interests and principle. When the entity
suffers a great loss from the declining price of the instruments, it may
choose to sell them to meet the liquidity requirements. In this case, how
to judge if the investment in debt instruments ‘is managed on a
contractual yield basis’ needs more operation guidelines.
(3) A business model should not be extended to be determined on the
base of units inside the entity (see paragraph B10). There is usually one
unit who manages all debt investments in bank in China. Those debt
investments are composed of two groups. One group is managed on a
contractual yield basis while the other is not. So we need to apply more
than one business models in one unit in our bank.
Q3
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
decision-useful 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?
A3: We do not believe that other conditions would be more appropriate to
identify which financial assets or financial liabilities should be measured
at amortized cost.
Q4
(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?
A4: We agree that the embedded derivative requirements for a hybrid
contract with a financial host should be eliminated.
We do not agree with the proposed application of the proposed
classification approach to contractually subordinated interests. We
suggest the Board still preserve the classification and measurement
approach to contractually subordinated interests according to the principle
in paragraph 3 and paragraph 4 in order to maintain the consistency of the
principles.
Q5
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?
A5: We agree that entities 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.
.
Q6
Should the fair value option be allowed under any other
circumstances? If so, under what other circumstances should it be
allowed and why?
A6: We do not think that fair value option should be allowed under other
circumstances.
Q7
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?
A7: We believe that reclassification should be prohibited.
Q8
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?
A8: We do not agree that more decision-useful information about
investments in equity instruments will result if all such investments are
measured at fair value, because it is not operational to measure the
investments in equity instruments (and the derivatives that linked to and
must be settled by delivery of such unquoted equity investment), that do
not have a quoted market price in an active market and whose fair value
can not be reliably measured, at fair value. Please refer to the answer to
question 9 to see the relevant reasons.
Q9
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?
A9: We believe that under the circumstance that fair value can not be
reliably measured，uncertainty resulting from measuring instruments at
fair value may significantly reduce the usefulness of information,
especially when equity instruments market is not well developed or
investments in equity instruments (and derivatives on those equity
instruments) do not have an active market. For instance, it is quite
difficult to value the equity investments in unlisted companies at fair
value. Both the choice of valuation model and the acquisition of relevant
inputs are highly subjective, which may have negative effect on reliability
and comparability of accounting information. Also, complexity of
valuation will increase the cost of entities greatly.
We suggest retain relevant provisions in current IAS 39—to measure
equity instruments (and the derivatives that linked to and must be settled
by delivery of such unquoted equity investment), that do not have a
quoted price in an active market and whose fair value can not be reliably
measured, at cost. We also suggest preserve current practices of
impairment testing approach for such instruments. But impairment losses
should be allowed to be reversed in recovery in order to be consistent
with principles of treatment of impairment losses for other financial
instruments.
Q10
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?
A10: We believe that presenting fair value changes for particular
investments in equity instruments in other comprehensive income would
improve financial reporting. However, presenting dividends on such
investments in other comprehensive income and allow no transfers of fair
value changes recognized in prior periods from other comprehensive
income to profit or loss upon the disposal will impair the usefulness of
financial reporting rather than improve financial reporting.
We suggest that for financial instruments that present fair value
changes in other comprehensive income, the dividends shall be permitted
to be recognized in current profit or loss and the accumulated fair value
changes upon the disposal shall be permitted to be transferred into current
profit or loss.
Q11
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?
A11: We agree with the ED’s proposal.
As ‘held for trading or not’ is an important criterion for
determining whether an investment in equity instruments shall be
classified as a financial asset measured at fair value through profit or loss
or a financial asset measured at fair value through other comprehensive
income. We suggest the Board give a more precise definition and
guidance of ‘ held for trading’ and ‘not held for trading’ in order to avoid
arbitrary classification for equity instruments in practice.
Q12
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?
A12: We agree with the ED’s proposal.
Q13
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?
A13: We suggest though the exposure draft changes the classification for
financial instruments from four categories into two categories, the scope
of financial instruments measured at amortized cost or fair value should
not be significantly changed， Therefore, circumstances that need to
apply the proposals retrospectively should be quite few, and retroactive
adjustments may not be made.
Q14
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?
A14: We do not believe that this alternative approach provides more
decision-useful information.
Q15
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?
A15: We do not 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.