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September 28, 2009
IASB
International Accounting Standards Board
1st Floor, 30 Cannon Street,
London,
United Kingdom
Subject: Comments on the exposure draft “Fair Value Measurement”
Please find enclosed our comments on the exposure draft entitled “Fair Value
Measurement.”
Overall, although we do not agree with all disclosure requirements, we endorse the draft.
Particularly, we agree with differences from Statement of Financial Accounting
Standards No.157 Fair Value Measurements (SFAS 157) that in our opinion result in
improvements over SFAS 157.
Yours truly,
Lise Croteau, FCA
VP 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 54% based on bonded debt
($36 billion), of which 29% is payable in foreign currencies and nearly 10% 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
management strategy for these risks.
Hydro-Québec hedges future revenue streams denominated in US dollars using debt
totaling 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 “FAIR VALUE MEASUREMENT”
QUESTION 11, DISCLOSURES
We do not agree with some disclosures required for fair value measurements categorised
within Level 3 of the fair value hierarchy. We think that it is enough to disclose the
methods and the inputs used in the fair value measurement and the information used to
develop those inputs as required at paragraph 57(d). However, we think that it is not
useful to disclose the effect of some changes in the inputs as required at paragraph 57(g).
At the moment an entity makes choices and discloses them, we think it is an undue
burden to give information on alternative assumptions the entity didn’t select.
Also, we do not agree with disclosures required for each class of liability measured at fair
value after initial recognition (see paragraph 59). Particularly, we do not agree to
disclose the amount of change in the fair value of the liability that is specifically
attributable to changes in the non-performance risk of that liability. We think that is not
useful to split the change in the fair value. The non-performance risk is one risk among
others. This information could be useful for financial industry but not for non-financial
firms.
Furthermore, we think that it is not necessary to disclose the difference between the
liability’s carrying amount and the amount of economic benefits the entity is required to
sacrifice to satisfy the obligation (see paragraph 59(c)). We think that the information
required with IFRS 7, particularly the information for liquidity risk, is enough.
Finally, we consider that the difference in the disclosure requirement between paragraph
57(e)(i) and paragraph 57 (f) is not clear.
QUESTION 12, CONVERGENCE WITH US GAAP
Fair value at initial recognition
We note, on the specific issue of Fair value at initial recognition, that additional
clarifications relative to US GAAP have been added regarding the use of entry prices and
exit prices (paragraph 35):
Although conceptually entry prices and exit prices are different, in
many cases an entry price of an asset or liability will equal the exit price
(eg when on the transaction date the transaction to buy an asset would
take place in the market in which the asset would be sold). In such
cases, the fair value of an asset or liability at initial recognition equals
the entry (transaction) price.
We believe that these clarifications provide useful guidance for the treatment of entry
prices and exit prices in the valuation of financial products. As a non financial firm and a
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COMMENTS ON THE EXPOSURE DRAFT “FAIR VALUE MEASUREMENT”
retail customer in financial markets, Hydro-Québec makes use of various “plain vanilla”
derivatives to manage its risks. These financial instruments are usually negotiated in
liquid markets with an initial value of zero. In this situation, an automatic requirement to
take into account entry and exit prices for the measurement of Fair value at initial
recognition would impose an undue operational burden, would not be coherent with usual
valuation practices and would not contribute a worthwhile improvement in financial
disclosure. The phrase in section 17 of FAS 157 “in many cases the transaction price will
equal the exit price” can be interpreted as allowing the use of entry price for estimating
the fair value of an asset at initial recognition when the asset would be sold in the same
market as it was purchased. However, the clarification added in paragraph 35 improves
on FAS 157 by removing any ambiguity which could have existed on that particular point
in the US GAAP.
Inputs based on Bid-ask prices
In the same vein, we also welcome the fact that on the issue of the treatment of bid-ask
prices (paragraph 55), the exposure draft maintains the flexibility provided by FAS 157 to
use mid-market prices as a practical expedient, while adding useful additional
clarifications in the case of non observable bid-ask prices:
If an input used to measure fair value is based on bid and ask prices
(eg in a dealer market), the price within the bid-ask spread that is most
representative of fair value in the circumstances shall be used to
measure fair value, regardless of where the input is categorised in the
fair value hierarchy (Level 1, 2 or 3). This [draft] IFRS does not preclude
the use of mid-market pricing or other pricing conventions used by
market participants as a practical expedient for fair value
measurements within a bid-ask spread. If a bid-ask spread for an asset
or a liability is not observable directly or indirectly (eg a bid-ask spread
for a similar asset or liability), an entity need not undertake exhaustive
efforts to estimate a bid-ask spread.
QUESTION 13, OTHER COMMENTS
We agree with the fact that this IFRS shall be applied prospectively and that the
disclosure requirements need not be applied in comparative information provided for
periods before initial application.
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