International Accounting Standards Board
30 Cannon Street
London
EC4M 6XH
10 September 2009
Dear Sirs
Financial instruments: classification and measurement
ACCA (Association of Chartered Certified Accountants) is pleased to have this
opportunity to comment on the above exposure draft (ED) which was
considered by ACCA’s Financial Reporting Committee and I am writing to give
you their views.
General points
While we have some reservations about the proposals which we have set out in
our answers below, we generally support the direction of the classification and
measurement system in the exposure draft and consider that it will provide
some much needed simplification in this area.
ACCA has supported the development of a single set of global accounting
standards and in particular the joint development of new standards between
IASB and FASB to help achieve that. We therefore regret the lack of coordination on this the most critical project for a new accounting standard.
Currently the two boards seem to be moving at different speeds and towards
different positions. FASB appear to be proposing a full fair value model for
financial instruments except for an option for own debt to be at amortised cost.
IASB are proposing a much wider category of items at amortised cost. There are
options in both proposals for changes in fair value to go through other
comprehensive income (OCI) rather than profits, but the models are very
different in their effect. These are highly significant differences which cannot be
skated over. It seems possible that IASB will have issued the first part of their
new standard on financial instruments before FASB has consulted in the US on
any proposals. This outturn of events continues the problem of demands for a
‘level playing field’ which have prompted some adverse developments in
financial reporting over the last year.
We note the reduced due process to which these proposals have been subjected
including a restricted comment period and the lack of any discussion paper of
the principles before proceeding to the ED. Clearly there are significant risks
that not all of the problems will be highlighted before the final standard is
issued. However we are well aware of the importance and urgency of the issue
and the pressure from governments for the review of the accounting standards
for financial instruments to be brought forward, and we accept therefore the
reduction in due process proposed.
It seems questionable whether the ED’s phased approach is going to be very
helpful for either preparers or users. Many preparers are going to want to see
the whole package before making their various choices and set their new
policies. There are significant risks that there will be problems with having parts
of a new standard to co-ordinate and work with parts of the old standard. For
users there is going to be a lack of comparability from the early adoption of the
first phase by some but not others. We recognise, however, as noted above, the
reasons why the phased approach has been adopted and accept it, but with the
observation that IASB may need to adjust some of this first phase when the
complete standard has been assembled.
While we acknowledge the importance, highlighted by the crisis, of the financial
reporting by banks, we would stress that the proposals should be directed
equally to the financial reporting by the much larger numbers of industrial and
commercial companies. Currently this has not been fully achieved in the ED.
ACCA’s answers to questions posed by IASB
Q1. Amortised cost as a suitable basis for designated instruments
Yes. We support a mixed model where financial instruments are stated on a
cost basis (cost, subject to amortisation and impairment where appropriate).
This is most appropriate for initial and subsequent measurement of loans and
receivables. It should also be the default measurement basis for all financial
liabilities (other than derivatives). Cost is the best accounting basis where the
financial assets are intended to be held generally over their contractual life
under the company’s business model. Cost is also the basis for liabilities that
best reflects the entity’s actual cost of borrowing. 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 ED’s proposals for amortised cost
for financial instruments with basic loan features which are also managed on a
contractual yield basis.
However we are concerned that under these proposals too many items might be
at fair value. We note concerns below in answer to Q2, Q3, Q8 and 9.
Q2. Guidance on ‘basic loan features’ and ‘managed on a contractual yield
basis’
This guidance seems largely written for banks and not for commercial or
industrial companies – for example the references to loan features and to yield
are clearly not the way that most other companies think about the majority of
their financial assets.
The meaning is not clear of the third sentence in paragraph B1 “ …. terms that
change the timing or amount of payments … are not basic loan features unless
they protect the creditor or debtor” and the related guidance in B3(c).
We are not sure how B13(b) should be interpreted in the context of business
combinations or how this will fit with impairments on an expected loss basis.
Any portfolio of existing loans that was acquired it seems would have to be
accounted for differently from originated loans and that would not seem to
produce comparability.
Q3. Other ways to determine what should be at amortised cost
We are concerned that the boundary of the amortised cost category will be too
restricted. We have noted some items in Q2 above. Apart from derivatives with
negative values, we think other financial liabilities should be at amortised cost
as a default position. Under Q5 we accept that where there might be an
accounting mismatch then there might be a fair value option. Under these
proposals some borrowings with an embedded derivative which is not a basic
loan feature, would have to be at fair value – this might apply to some sorts of
convertible loans or preference shares.
We also note under Q8 and Q9 that where fair values for financial assets are
not reliable then amortised cost should be used.
Q4(a). Embedded derivatives
We agree that requiring separation of embedded derivatives is a complex
feature of the existing IAS39. Therefore the proposed treatment is a
simplification, though we note that bifurcation will still be required for contracts
that are not financial instruments. Our concern is that for financial instruments
where there are embedded derivatives, the whole contract would be at fair
value and that this might push too many liabilities especially into the fair value
category. The ED might be altered so that the asset or liability could be retained
in amortised cost when the derivative is closely linked to the host contract along
the lines of the existing paragraph 11 of IAS39.
We would prefer that the business model of the entity would be the major
determinant of what should be at cost in this cases, together with the likely
variability of the cash flows.
Q4(b). Tranche categories
The implication of B7 and B8 would seem to be that only the most senior
tranche in “some types of transactions” could have basic loan features. That
seems to be a rather sweeping simplification especially if there are a number of
tranches. If this principle were to be applied by analogy outside these
securitisation transactions then any debt where some other creditor might have
preference might be excluded from the amortised cost category which would
seem not the right answer to us. Any form of subordination is providing some
sort of credit protection to other creditors.
Q5. Option to use fair value
We accept this option, even though optional treatments in accounting standards
are inherently undesirable. This option in the ED for items that would otherwise
be at cost to be stated at fair value, would probably not be used frequently. To
qualify items would have to be managed on a contractual yield basis, but be
required to be stated at fair value to avoid an accounting mismatch.
As noted above in Q3 we would prefer that amortised cost was the default
measurement basis for liabilities, except for derivatives, with also then this fair
value option to deal with accounting mismatches.
Q6. Option to use fair value, further cases
We agree that the current further instances where the fair value option exists in
IAS39 would not be needed under the proposals, nor do we see a need for the
fair value option in further instances.
Q7. Reclassifications
We accept that there is a balance to be struck here between trying to recognise
changed circumstances and avoiding the manipulation of the accounts to
achieve a desired result. For example instruments with basic loan features may
have been held for trading and therefore recognised at fair value, then in
changed economic conditions they can no longer be traded and are therefore to
be held and managed on a contractual yield basis. In principle it seems right
that they might need to be reclassified in these circumstances. On the other
hand we acknowledge the clarity and avoidance of possible abuse if the
classification is once and for all.
On balance we think the proper application of the principles of the distinction
should be left to the judgement of the preparers and reclassification (in both
directions) in the appropriate circumstances should be required. Clear
disclosure of the impact of, and the reason for, any reclassification should also
be mandated.
Q8 and Q9. Equity instruments with no reliable fair value
We agree that fair value is the most useful measurement basis for equity
investments. If however reliable fair values cannot realistically be obtained for
these instruments then there is no useful information to be gained by users by
providing them with arbitrary and subjective values which are unverifiable, not
based on what is likely to happen to the instrument and which may turn out to
bear little relation to actual realisation values.
This is the current position in IAS39 and we see no reason for that to change
simply because the classification system has been changed. It does not make
the fair values any more reliable.
Q10. OCI option for some equity investments
In response to the discussion paper earlier this year we supported the single
statement of performance proposed. However we regretted that the principle of
what should be in profit and what in OCI was not properly addressed by that
paper. There is therefore no overall framework of principles to guide this
standard in this regard.
While we do not think that diligent users really regard what goes through profit
in a fundamentally different way to other gains and losses, we are concerned by
the greater visibility and emphasis placed on the profit and loss account as
compared to the OCI.
We further note that this is an area of significant divergence between the IASB’s
proposals and those of the FASB.
Pending the resolution of these issues and the presentation of a single
performance statement, in our view the existing available-for-sale model should
continue for the fair value changes in equities with

Fair value changes up and down in OCI

Impairments charged to P&L if needed

Dividends in P&L

Gain/loss on disposal in P&L
The existing impairment model should be improved by

requiring impairment (except where any impairment has been
reversed after the end of the period) measured by fair value

removing the ‘prolonged or significant’ test

allowing the reversal of impairments through P&L
Q11. Should the OCI option be an open, but once-and-for-all choice
It would be better if there was some basis for the OCI option rather than leaving
it entirely open. We believe that it should be possible to limit the OCI option to
strategic investments and think that the phrase ‘not held with the primary
objective of realising a profit from increases in the value of the instrument and
dividends’ might be sufficient.
Having restricted the use of the option we would not make it a once-and-for-all
choice, but allow reclassification where the facts have changed.
Q12. Early adoption
We agree that early adoption should be allowed and the disclosures required
are appropriate. These are however appropriate disclosures to be made by all
companies when they adopt the new standard and not just those adopting
early.
Q13. Transitional provisions
We have raised among our general comments above concerns over the practical
problems raised by the phased approach that has been adopted to replacing
IAS39.
We support the retrospective application of the standard, though including the
limitations on that set out for impairment and effective interest rates, equities
previously on a cost basis and for interim periods (in paragraphs 30, 31 and 33
of the ED).
We would observe, however, that for the first time application of IAS39 by a
number of countries in 2005 a prospective application with no restatements of
comparatives was allowed. This replacement standard is being developed on an
exceptional fast track basis to allow it to be available for December 2009 year
ends. Given the short time between the publication of this standard and the end
of 2009 the restatements required by the retrospective application are likely to
be very difficult to achieve. Without prospective application for early adopters
the interest groups pressing for the rapid changes to IAS39 are unlikely to be
satisfied.
Q14. Alternative model
We would not support this model. This would restrict the amortised cost
category even further than in the ED and as noted above we are concerned that
this already too narrowly defined.
Q15. Further variants
As with Q14 in relation to the first variant, we would simply note that the whole
treatment of items in the OCI or P&L, and also how fair value changes should
be presented in financial statements should have been addressed in the
presentation of financial statements project, but was not.
We would not support the second variant as this would require all financial
instruments to be at fair value. We support a mixed model of cost and fair
value.
The alternative proposals in both Q14 and Q15 are inadequately explored or
explained in the ED. Given this we are also surprised that the Board did not ask
for comments on the alternative proposals of

FASB

Mr Leisenring

and his further suggestion in AV17
If there are any matters arising from the above please be in touch with me.
Yours sincerely
Richard Martin
Head of financial reporting