ED/2009/3 - Derecognition
Introduction
1. The ABI is the voice of the insurance and investment industry. Its members constitute over 90 per cent of the insurance market in the UK and 20 per cent across the EU. They control assets equivalent to a quarter of the UK’s capital. They are the risk managers of the UK’s economy and society. Through the ABI their voice is heard in Government and in public debate on insurance, savings, and investment matters.
General Comments
2. Our Association welcomes the opportunity to respond to the Board’s Exposure Draft and we comment in general terms and not the detailed consultation questions. This is a complex subject and the Exposure Draft does not make for an easy understanding of what the real issues at stake and dangers are, nor about how urgent changes to standards are required. To what extent the proposed changes will genuinely make for better accounting treatment in scenarios that have been found to be troublesome? If the changes are being driven instead more by deficiencies with US standards the right way to rectify this, while promoting convergence, would be to make shorter-term changes to the US standards and allow a converged standard to be developed in more considered fashion.
3. It is unsatisfactory that this strand of work is being pursued in what appears to be a disjointed way from the current main workstream on reform to IAS39. Also unclear is the extent to which these proposals will provide accounting treatment that is aligned with that promoted under the Board’s ED10 on Consolidated Financial
Statements.
4. Alternative views are presented by a substantial minority of the Board membership.
It is unsatisfactory that this is the state of affairs at point of presentation of an
Exposure Draft rather than in a Discussion Paper. It is unclear that either side have made a convincing case. Is it therefore necessary to proceed in the near term?
5. The proposals in the Exposure Draft do strike us as being complex and rules-based, being dependent on things like a ‘practical ability to transfer’ test but still requiring interpretation of matters such as the nature of ‘continuing involvement’ and whether on transfer a ‘normal warranty’ has provided by the vendor. On the matter of complexity we note that the Alternative Approach does have merit in so far as it

appears less complex. However, we do not think it is supportable on that ground alone.
6. We do consider that ‘risks and rewards’ is a vital concept which should not be downplayed in favour of a primacy of control. We are also concerned about structuring possibilities and see a risks and rewards perspective as a necessary safeguard against premature derecognition. We would not therefore consider as a drawback the critique put forward by those Members advocating the Alternative
View (in AV3) that the Majority View while purporting to be based on control is, instead, driven by a risks and rewards rationale and overlaid with a control notion.
7. The Alternative Board Members also criticise the majority view on the grounds (AV7) that it leads to different accounting for identical contractual rights and obligations only depending on whether and how the asset was previously owned. Whether or not the asset was previously owned and controlled will be of considerable significance to the way those exposures might be restructured and thus the real exposures via different routes might be superficially similar but different in reality.
Some users of accounts would in any event consider it right that the accounting treatment should potentially differ based on previous history of recognition since they would expect financial reporting to involve accounting for the consequences of past actions and transactions of which the past acquisition of an asset is clearly such.
8. We are also concerned that the Board’s proposals may have the unintended consequences of wrongly derecognising significant holding of assets from insurers’ balance sheets. Examples are assets subject to arrangements such as securities lending and repos, and those held in relation to unit-linked insurance and investment contracts and to participating contracts. Full details of this concern are set out in the
CFO Forum’s response to your consultation.
9. These concerns, and the specific one below about BC10, lead us to suggest that the
Board should re-think and re-consult about its proposals. Further, we note that the
Board’s project arose as a response to the financial crisis. Hence we think it is particularly important that it is clear that its proposals would resulted in demonstrably better accounting for the specific circumstances that the crisis highlighted; better, that is, than the current IFRS requirements, as well as compared with other proposals such by the Alternative Board Members and by any other commentators in the course of this consultation. Lastly, we suggest that field-testing may help to give the extra confidence needed for this complex area, that all relevant circumstances have been considered.
Specific Comment on the Basis of Conclusions
10. We are somewhat troubled by the thinking outlined in BC10. A definition is worked up of sale of an asset based on criteria for derecognition in accounts rather than a causative relationship being recognised the opposite way round. If an entity no longer has access to economic benefits of an asset that asset should be written down in value or written off but this is logically different to derecognition. Whether
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the entity has sold the asset is a legal question based on contractual agreement with another party. Where this fine distinction matters is in cases where corresponding liabilities exist and premature derecognition of both asset and liability could be seriously misleading as to the continuing real risks and rewards at stake for the entity.
11. The thinking in BC10 also does not fit well the case of a contract for difference which through changes in prevailing market prices might fall to be accounted for as a liability rather than as previously an asset, or vice versa but which clearly does not merit being derecognised prior to its expiry and final settlement.
31 July 2009
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