AIB Group
Group Financial Control
Bankcentre,
Ballsbridge,
Dublin 4,
Ireland
Sir David Tweedie
International Accounting Standards Board
30 Cannon Street
LONDON EC4M 6XH
United Kingdom
31st July 2009
Exposure Draft ED/2009/3
Derecognition: Proposed amendments to IAS 39 & IFRS 7
Dear Sirs,
Allied Irish Banks, p.l.c. welcomes the opportunity to respond to the above Exposure
Draft.
While supporting a review of the derecognition rules of IAS 39, we do not believe the
proposed solution represents an improvement, nor do we believe the proposal to be
operational. We believe more time is required to developing a robust and sustainable
standard for the complex topic of derecognition. We are concerned about the removal
of the ‘risks and rewards’ approach to derecognition and believe that the focus on
‘control’ is too simplistic and may risk the creation of structuring opportunities to
avoid ‘control’.
As noted in our response to the specific questions, we believe that the accounting
treatment for repurchase agreements under the proposed approach would be much
more complex than the current IAS 39 requirements, would be less transparent and
result in the provision of less decision-useful information in the financial statements.
Question 1 - Assessment of “the Asset” and ‘continuing involvement’ at reporting
entity level
Do you agree that the determination of the item (i.e. the Asset) to be evaluated for
derecognition and the assessment of continuing involvement should be made at the
level of the reporting entity (see paragraph 15A, AG37A and AG47A)? If not, why?
What would you propose instead, and why?
Answer 1 – Yes, we agree with the proposal to determine the asset to be derecognised
at the reporting entity level. We believe it would be helpful if clarification was
provided on the application of the derecognition rules to internal transactions,
Allied Irish Banks, p.l.c.
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including provision of examples showing the impact on entities within the group
(subsidiaries and SPEs) and on the group consolidated accounts.
Question 2 - Determination of “the Asset” to be assessed for derecognition
Do you agree with the criteria proposed in paragraph 16A for what qualifies as the
item (i.e. the Asset) to be assessed for derecognition? If not, why? What criteria
would you propose instead, and why?
Answer 2 -We agree with the criteria proposed in paragraph 16A. This is similar to
the asset criteria currently included in IAS 39.
Question 3 - Definition of ‘transfer’
Do you agree with the definition of a transfer proposed in paragraph 9? If not, why?
How would you propose to amend the definition instead, and why?
Answer 3 - We agree with the definition of “transfer”. The definition clearly states
that a transfer does not automatically mean derecognition. This is important as a
transfer may take place but with continuing involvement. In this case this would not
result in derecognition.
Question 4 - Determination of ‘continuing involvement’
Do you agree with the ‘continuing involvement’ filter proposed in paragraph 17A(b),
and also the exceptions made to ‘continuing involvement’ in paragraph 18A? If not,
why? What would you propose instead, and why?
Answer 4 – Yes, we agree that if an entity transfers an asset and has no continuing
involvement in it, that the asset should be derecognised. However, we are concerned
about the removal of the ‘risks and rewards’ approach to derecognition, without it
being replaced with requirements that reflect the economic substance of transactions.
Question 5 – ‘Practical ability to transfer for own benefit’ test
Do you agree with the proposed ‘practical ability to transfer’ derecognition test in
paragraph 17A(c). If not, why? What would you propose instead, and why?
(Note: Other that the ‘for the transferee’s own benefit’ supplement, the ‘practical
ability to transfer’ test proposed in paragraph 17A(c) is the same as the control test in
IAS39).
Do you agree with the ‘for the transferee’s own benefit’ test proposed as part of the
‘practical ability to transfer’ test in paragraph 17A9c)? If not, why? What would you
propose instead, and why?
Answer 5 - We question how operational the test will be in practice. We do not agree
with the proposed treatment for repurchase transactions. As these are predominantly
secured financing transactions, we believe that derecognition of the asset and
recognition of a derivative (measured at fair value through profit or loss) is counterintuitive and does not reflect the economic substance of the transaction.
Allied Irish Banks, p.l.c.
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Question 6 – Accounting for retained interests
Do you agree with the proposed accounting (both recognition and measurement) for
an interest retained in a financial asset or a group of financial assets in a transfer that
qualifies for derecognition (for a retained interest in a financial asset or group of
financial assets, see paragraph 21A; for an interest in a financial asset or group of
financial assets retained indirectly through an entity, see paragraph 22A)? If not,
why? What would you propose instead, and why?
Answer 6 -Yes, we agree as it may be difficult for the lessee to have enough
information to ascertain the interest rate implicit in the lease especially if the lease is a
long lease and the residual value is uncertain. However, we would like to note that
the fact that the credit standing of the lessee needs to be taken into account in using
the incremental borrowing rate may lead to problems as regards comparability
between entities. The interest rate implicit in the lease is probably the more
preferable option but if this is not available we see no reason why the incremental
borrowing rate should not be used.
Question 7 – Approach to derecognition on financial assets
Having gone through the steps/tests of the proposed approach to derecognition of
financial assets (Questions 1-6), do you agree that the proposed approach as a whole
should be established as the new approach for determining the derecognition of
financial assets? If not, why? Do you believe that the alternative approach set out in
the alternative views should be established as the new derecognition approach instead,
and, if so, why? If not, why? What alternative approach would you propose instead,
and why?
Answer 7 - While supporting a review of the derecognition rules of IAS 39, we do not
believe the proposed solution represents an improvement, nor do we believe the
proposal to be operational. On balance, the alternative approach is more persuasive
than the proposed approach and merits further consideration when developing a
robust and sustainable standard for the complex topic of derecognition. We are
concerned about the removal of the ‘risks and rewards’ approach to derecognition and
believe that the focus on ‘control’ is too simplistic and may risk the creation of
structuring opportunities to avoid ‘control’.
As noted in our response above, we believe that the accounting treatment for
repurchase agreements under the proposed approach would be much more complex
than the current IAS 39 requirements, would be less transparent and result in the
provision of less decision-useful information in the financial statements.
Question 8 – Interaction between consolidation and derecognition
In December 2008, the Board issued an exposure draft ED 10 Consolidated Financial
Statements. As noted in paragraphs BC28 and BC29, the Board believes that its
proposed approach to derecognition of financial assets in this exposure draft is similar
to the approach proposed in ED 10 (albeit derecognition is applied at the level of
assets and liabilities, whereas consolidation is assessed at the entity level). Do you
agree that the proposed derecognition and consolidation approaches are compatible?
If not, why?
Allied Irish Banks, p.l.c.
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Answer 8 – Yes, we agree that the proposed derecognition and consolidation
approaches are compatible apart from the requirement to test for derecognition at
reporting entity level.
Question 9 - Derecognition of financial liabilities
Do you agree with the proposed amendments to the principle for derecognition of
financial liabilities in paragraph 39A? If not, why? How would you propose to amend
the principle instead, and why?
Answer 9 – Yes, we agree with the proposed amendments for the derecognition of
financial liabilities which are not significantly different from current requirements.
Question 10 – Transition
Do you agree with the proposed amendments to the transition guidance in paragraphs
106 and 107? If not, why? How would you propose to amend that guidance instead,
and why?
Answer 10 - We agree with the proposed amendments to the transition guidance in
paragraphs 106 and 107.
Question 11– Disclosures
Do you agree with the proposed amendments to IFRS7? If not, why? How would you
propose to amend those requirements instead, and why?
Answer 11 –Yes, we agree with the proposed amendments to IFRS 7 as these
amendments would allow users to understand better the relationship between
transferred financial assets that remain on the balance sheet and the associated
liabilities. Enhancing the disclosure requirements for derecognised financial assets
may allow users to better assess the risk exposure of an entity resulting from its
continuing involvement in derecognised assets. However, we believe that some
aspects of the disclosures may be difficult to operate in practice, for example those
involving transferred assets that are derecognised. In general, we support greater
transparency, which in our view means better quality rather than simply more
disclosure. To be relevant, the information disclosed must also be useful and
understandable. The usefulness of the information may be different, depending on the
business model of the entity.
If you require clarification with regard to the above, please do not hesitate to contact
us.
Yours sincerely
____________________
Marian Sweeney
Group Financial Control
Allied Irish Banks, p.l.c.
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