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April 28, 2011
International Accounting Standards Board (IASB)
1st Floor, 30 Cannon Street
London EC4M 6XH
United Kingdom
Via email: www.ifrs.org
Subject: Comments on the Exposure Draft, “Offsetting Financial Assets and Financial
Liabilities”
Dear Sir/Madam:
We are sending you our comments on the exposure draft “Offsetting Financial Assets and
Financial Liabilities.”
We appreciate the opportunity to comment on this exposure draft. We also applaud the
FASB and the IASB for joining forces to present a common proposal, and we highly
encourage them to pursue their efforts along these lines.
The proposals in this exposure draft on the presentation of financial assets and liabilities
in the statement of financial position are similar to the current requirements of IAS 32.
However, new disclosure requirements have been added.
In general, we have certain reservations concerning all the new disclosures required with
the replacement of IAS 39 by IFRS 9. We understand that the standard setters would like
to improve the transparency of financial statements and meet the needs of increasingly
demanding users. However, excessive information may, in our opinion, prove to be of
little help, not to mention very costly to prepare. We would therefore like to get a
reprieve and have the disclosure requirements reviewed overall within the context of the
implementation of the new IFRS 9 so as to optimize the cost-benefit constraint of such
disclosures.
Yours truly,
Lise Croteau, FCA
Vice President, Accounting and Control
Hydro-Québec
Hydro-Québec is a Crown corporation whose mission under its governing statute is to
supply power and to pursue endeavors in energy-related research and promotion, energy
conversion and conservation, and any field connected with or related to power or energy.
In Québec, electricity transmission and distribution activities are regulated by the Régie
de l’énergie (energy board).
The capital structure of Hydro-Québec is on the order of 55% based on bonded debt
($39 billion), of which 4% is payable in foreign currencies and nearly 11% is in the form
of floating-rate bonds. This represents a significant exposure to foreign exchange and
interest rate risks, which explains why the enterprise has adopted a sophisticated,
integrated management strategy for these risks.
Hydro-Québec hedges future revenue streams denominated in US dollars using debt
totalling nearly $2 billion, so as to manage a significant portion of its foreign exchange
risk exposure. Hydro-Québec also enters into swap contracts that serve as a hedge for
both the principal and interest repayments on debt. Some swaps also modify the longterm exposure to interest rate risk.
Several other types of derivative instruments are also used to manage short-term and
long-term foreign exchange and interest rate risk exposures. In addition, specific risks are
managed through derivative instruments, i.e., raw material price risks and market risks
resulting from fluctuations in energy prices.
COMMENTS ON THE EXPOSURE DRAFT, “OFFSETTING FINANCIAL
ASSETS AND FINANCIAL LIABILITIES”
QUESTION 1: OFFSETTING
CRITERIA: UNCONDITIONAL RIGHT AND INTENTION TO
SETTLE NET OR SIMULTANEOUSLY
The proposals would require an entity to offset a recognised financial asset and a
recognised financial liability when the entity has an unconditional and legally
enforceable right to set off the financial asset and financial liability and intends either:
(a) to settle the financial asset and financial liability on a net basis or
(b) to realise the financial asset and settle the financial liability simultaneously.
Do you agree with this proposed requirement? If not, why? What criteria would you
propose instead, and why?
We agree with the proposals of the exposure draft which essentially repeat the criteria
already in effect in IAS 32. These requirements ensure an adequate representation of the
future cash flows from realizing financial assets and from settling financial liabilities.
We agree in particular with the addition of the term “unconditional” in the first offsetting
criterion. This addition in fact clarifies the definition of a “legally enforceable right,”
thereby ensuring that the economic reality of transactions giving rise to financial
instruments is faithfully represented.
In addition, we believe that it could be useful to further clarify the scope of the term
“simultaneously” within the actual body of the standard. In fact, the scope of the term
“simultaneously” may be questionable. Will it be on the same day? The same hour? The
same minute? Based on the explanation in Application Guidance in Appendix C, we
fully understand that, in practice, a settlement may arise simultaneously in very rare
circumstances. In fact, except for cases where settlement is made through a clearing
house, the situations are, in our opinion, virtually non-existent. Direct clarification in the
standard would therefore be advisable.
QUESTION 2: UNCONDITIONAL RIGHT OF SET-OFF MUST BE
ENFORCEABLE IN ALL CIRCUMSTANCES
It is proposed that financial assets and financial liabilities must be offset if, and only if,
they are subject to an unconditional and legally enforceable right of set-off. The
proposals specify that an unconditional and legally enforceable right of set-off is
enforceable in all circumstances (i.e. it is enforceable in the normal course of business
and on the default, insolvency or bankruptcy of a counterparty) and its exercisability is
not contingent on a future event. Do you agree with this proposed requirement? If not,
why? What would you propose instead, and why?
See the answer to Question 1.
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COMMENTS ON THE EXPOSURE DRAFT, “OFFSETTING FINANCIAL
ASSETS AND FINANCIAL LIABILITIES”
QUESTION 4: DISCLOSURES
Do you agree with the proposed disclosure requirements in paragraphs 11–15?
If not, why? How would you propose to amend those requirements, and why?
The exposure draft proposes new disclosure requirements that are very detailed. In our
view, these provisions contribute to an information overload for financial statement users
at the expense of useful and relevant information. Moreover, the numerous additional
details stipulated will require changes to corporate information systems and result in a
heavier workload for the preparers of financial statements, without however necessarily
improving the quality of information.
For example, we noted requested disclosures that seem rather irrelevant and should, in
our view, be optional:
1. Amounts of financial assets and financial liabilities that the entity has an
unconditional and legally enforceable right to set off but that the entity does not
intend to settle net or simultaneously
In our opinion, when a company has financial assets and financial liabilities that it
has an “unconditional” right to set off but that it does not intend to settle net, the
company should not be required to inform the reader of this situation. The
amounts presented as gross amounts in the financial statements correctly reflect
the future cash flows, and the credit and liquidity risks of these financial
instruments. However, a company that considers it useful could have the option of
informing readers of such a situation in a note.
2. Amount of financial assets and financial liabilities that the entity has a
conditional right to set off
The proposals of the exposure draft state that an entity must not set off financial
assets and financial liabilities that it has a “conditional” right to set off, i.e., an
entity has a right of set-off that can be exercised only on the occurrence of a future
event. Hence why should disclosure of a situation that does not meet the criteria
prescribed by accounting standards be mandatory? In this case as well, it should
be left instead up to the entities to decide whether or not to disclose this type of
information.
In our opinion, these two examples clearly illustrate the information overload we
consider to be inappropriate.
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COMMENTS ON THE EXPOSURE DRAFT, “OFFSETTING FINANCIAL
ASSETS AND FINANCIAL LIABILITIES”
Lastly, the standard stipulates that the information required by paragraph 12 must be
presented in a tabular format, unless another format is more appropriate. We think that
the standards should always leave entities the choice of a reporting model. Financial
reporting, whether in a narrative or tabular format, should be left to the discretion of
officers and those preparing the financial statements.
In conclusion, the proposed disclosures seem to be excessively detailed and are far from
our vision of the IFRS, which seemed, in our opinion, to promote corporate discretion by
dictating a course of action rather than prescribing a detailed list of requirements.
Furthermore, the large number of additional disclosures will result in preparation costs
that may sometimes be significant and could outweigh the possible advantages of such
disclosures.
QUESTION 5—EFFECTIVE DATE AND TRANSITION
(a) Do you agree with the proposed transition requirements in Appendix A? If not, why?
How would you propose to amend those requirements, and why?
(b) Please provide an estimate of how long an entity would reasonably require to
implement the proposed requirements.
We are closely following the work of the IASB, which will issue a complete version of
IFRS 9 on the recognition and measurement of financial instruments in 2011.
As for the best time to apply the requirements of this exposure draft, we believe that we
must first read the complete version of IFRS 9 in order to know all the modifications to
be made to our systems and processes, whether such modifications are the ones stipulated
in this actual exposure draft or in other current exposure drafts related to IFRS 9 and to
IFRS 7. It will therefore be only at that time that we will be able to estimate how long an
entity would need for implementation and accordingly decide on an adequate effective
date.
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