3 September 2008
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH,
United Kingdom
Dear Sirs:
Consejo Mexicano para la Investigación y Desarrollo de Normas de Información
Financiera (CINIF) the accounting standards setter body in Mexico, welcomes the
opportunity to submit our comments on the Discussion Paper, Reducing Complexity
in Reporting Financial Instruments. Seth forth below you will find our comments to
the specific questions that are included in the discussion paper.
Question 1
Do current requirements for reporting financial instruments, derivative instruments and
similar items require significant significant change to meet the concerns of preparers
and their auditors and the needs of users of financial statements? If not, how should
the IASB respond to assertions that current requirements are too complex?
A significant change is required to align the recognition requirements in a more logical
and simpler way. The present standards are too complex since, trying to reach diverse
objectives, some standards have been built on top of others and some of them are or
seem to be contradictory and create confusion. What is needed is standards that will
permit comparability among transactions and therefore among financial statements,
that is based in a principle rather that rules.
It is important to develop a new way of reporting financial instruments that match the
requirements of preparers and users of financial information. We believe these
changes will reduce misinterpretations and accounting errors.
Eliminating a rules-based mixed measurement model could also simplify the way
information is reported nowadays. We agree that it will be easier for users and
preparers to understand and compare the results of different entities.
Question 2
a) Should the IASB consider intermediate approaches to address complexity arising
from measurement and hedge accounting? Why or why not?
Intermediate approaches to solve complexity problems in reporting financial
instruments are needed since it is urgent to have a good solution of the problems
faced, even if it is not the long term perfect solution, if anything in financial reporting
can be perfect. What is needed are less complex standards and a comprehensive
principle based measurement, aligning the treatment of similar issues, so that these
can be better understood by preparers, be easier to audit and be understandable with
less effort by users of financial information. Something that has to be considered is that
complexity leads to errors in preparation, audit and interpretation of the financial
information.
b)Do you agree with the criteria set out in paragraph 2.2? If not, what criteria would you
use and why?
We agree with the criteria set out in paragraph 2.2 and do not have any other criteria to
suggest.
Question 3
Approach 1 is to amend the existing measurement requirements. How would you
suggest the existing measurement requirements should be amended? How are your
suggestions consistent with the criteria for any proposed intermediate changes as set
out in paragraph 2.2?
We agree with fair value measurement, even though it may create volatility of earnings.
Financial markets are volatile and this is not adequately reflected in earnings, which
may cause skepticism on the quality of financial reporting. Fair value measurement will
also resolve impairment issues. We believe that using a cost-based approach would be
only adequate for instruments that are not quoted in an active market and whose cash
flows are not volatile. Also, even if an instrument is not quoted, the market interest
rates could be used to determine its fair value and its credit risk will have to be
evaluated separately.
The financial information has to reflect the effect of the trading or investment decisions
taken by management. If management is worried with the volatility in earnings
generated by a financial instrument, this can be addressed with a hedge.
We do not understand the last sentence of paragraph 2.49c), that indicates that a
specified percentage of the gains or losses would be recognized in earnings and the
remainder in other comprehensive income. Our question is how the above mentioned
percentage would be determined.
Regarding paragraph 2.50, we do not agree that the choice of recognizing the gains or
losses in earnings or in other comprehensive income be made instrument by
instrument, at inception. This will go against comparability, since the same kind of
instrument could have a different recognition from one transaction to the next one. We
believe that if an option should be granted it should be for all the instruments that an
entity has and if there is a change it will be accounted as a change in accounting
policy.
Question 4
Approach 2 is to replace the existing measurement requirements with a fair value
measurement with some exceptions:
a) What restrictions would you suggest on the instruments eligible to be measured
at something different than fair value? How are your suggestions consistent
with the criteria set out in paragraph 2.2?
We believe that the restriction for an instrument to be measured a something different
than fair value should be if the instrument is not quoted in an active market. In such
case, amortized cost could be used as an alternative measure. This means that
amortized cost should be the last resource to measure the instrument and the
instrument should be subject to impairment tests.
The only condition that would permit the use of amortized cost would be that the future
cash flows of the instrument be very stable, this means that volatility be avoided.
However the fair value of an instrument can be determined with reference to the market
interest rate, except for measuring credit risk, which will have to be measured
separately.
An issue that has to be considered if the option of high volatility and low volatility of
future cash flows is used, would be to determine the threshold from low to high volatility
and vice versa. The problem is that the threshold would be determined based on a rule
rather than on a principle.
We also believe that the possibility of using amortized cost should not be allowed to
entities in the financial sector, since these entities are the ones that should show the
fair value of their financial assets, which are the major part of their assets.
b) How should instruments that are not measured at fair value be measured?
At amortized cost, with the interest based on the interest quoted in the market for
similar instruments and with credit risk measured separately. These instruments should
be subject to impairment tests.
c) When should impairment losses be recognized and how should the amount of
impairment losses be recognized?
Impairment should be recognized immediately when circumstances require it to be
recognized. Generally it will be for changes in credit risk or macroeconomic factors that
would indicate the financial instrument is impaired. Other market situations should be
considered. There is already a generally accepted methodology in that regard.
d) Where should unrealized gain and losses be recognized on instruments
measured at fair value? Why? How are your suggestions consistent with the
criteria set out in paragraph 2.2?
All the gains and losses on instruments measured at fair value should be recognized in
earnings, specifically in financial gains and losses. This is the only alternative that is
aligned to measuring the instruments at fair value, even if this methodology generates
volatility in earnings. If due to the volatility issue it is decided to recognize the gains and
losses in other comprehensive income, the statement of income should be expanded to
include the other comprehensive income in the same statement, that would present the
total comprehensive income for the period.
e) Should reclassifications be permitted? What types of reclassifications should be
permitted and how should they be accounted for? How are your suggestions
consistent with the criteria set out in paragraph 2.2?
We believe there should be no reason for reclassification if only one category of
financial instruments at fair value is used. However, if several categories are used, we
believe that only a change in the characteristics of the instruments should lead to a
change of category and it should not be a matter of a decision to be taken by
management, except if the change is to a category of fair value measurement trough
profit and loss. Fewer options will result in a better measurement of the financial
instruments and in the interpretation of the related information.
Question 5
Approach 3 sets out possible simplifications on hedge accounting:
a) Should hedge accounting be eliminated? Why or why not?
We believe that hedge accounting should not be eliminated. However its recognition
should be consistent with the risk management policies of the entity. Therefore hedge
accounting should not give an answer that is contradictory to the entity’s risk
management policy. This should be the best way to reflect the risks the entity is facing
and how these are being managed.
b) Should fair value hedge accounting be replaced?
i)
Which methods should the IASB consider, and Why?
We do not believe there is a better method to replace fair value hedge accounting. The
fair value option is a suitable alternative, since it would reflect the risk management
strategy of the entity, by taking into consideration its overall position regarding financial
instruments. The effects of changes in the value should continue to be recognized
through earnings.
ii)
Are there any other methods not discussed that should be considered by
the IASB? If so, what are they and how are they consistent with the
criteria set out in paragraph 2.2?
As the effects of the hedging instrument compensate the effect of the hedged item in
earnings, we do not believe there should be any other method to be considered.
Question 6
Section 2 also discusses how the existing hedge accounting models might be
simplified.
a) What suggestions would you like to make to the IASB regarding how the
existing hedge accounting models could be simplified?
If the hedged item in a fair value hedge is carried at fair value as is the hedging
instrument, the main test for designation should be a qualitative test. Quantitative tests
would not be required. A qualitative test should also be required for cash flow hedges
and a quantitative test should be made if the results of the qualitative test are not
conclusive.
b) would your suggestions include restrictions that exist today? If not, why are
those restrictions unnecessary?
We believe that to avoid frequent changes from designation or de-designation of a
hedging relationship, once the designation has been made it should not be revoked
unless there is a change in circumstances or the hedged item is realized or settled. A
proper documentation is a key element to support why a hedging relationship was
established.
c) Existing hedge accounting requirements could be simplified if partial hedges
would not be permitted. Should partial hedges be permitted and, if so, why?
Please also explain why you believe the benefits of partial hedges justify the
complexity.
Partial hedges should be permitted if they are clearly effective, which would then
require periodic effectiveness tests. We believe that once a partial hedge has been
designated, such designation should not be revoked.
d) What other comments or suggestions do you have with regard to how hedge
accounting might be simplified why maintaining discipline over when a hedging
can qualify for hedge accounting and how the application of the hedge
accounting models affect earnings?
We believe that hedge accounting should reflect the risk management strategies of the
entity. Therefore what should be clearly documented is the purpose of the hedging
relationship. This documentation should emphasize the qualitative purpose of the
hedging and such purpose should be consistent with the expected effects of the
hedging relationship.
Regarding partial hedges, the documentation requirements should be more strict than
those for other hedging relationships, specially in measuring the effectiveness of the
hedging relationship.
Once a hedging relationship has been established, effectiveness should be measured
every period and ineffectiveness should be recognized immediately in earnings.
Question 7
Do you have any other intermediate approaches for the IASB to consider other than
those set out in Section 2? If so, what are they and why the IASB should consider
them?
We do not have any other intermediate approach for the IASB to consider.
Question 8
To reduce today’s measurement-related problems, section 3 suggests that the longterm solution is to use a single method to measure all types of financial instruments
within the scope of a standard for financial instruments. Do you believe that using a
single method to measure all types of financial instruments within the scope of a
standard for financial standards is appropriate? Why or why not? If you do not believe
that all types of financial instruments should be measured using only one method in the
long term, is there another approach to address measurement-related problems in the
long term? If so, what it is?
We agree that using a single method of measurement for all the financial instruments is
appropriate, since it will eliminate complicated rules and exceptions to the rules. Also
having a measurement method based on a principle rather than on a set of rules is
more straightforward. We do anticipate that such method will be the fair value method
for measuring all the financial instruments.
Having fewer criteria will result in fewer problems in preparing and interpreting the
financial information, which will be more useful for the users of the financial statements.
Also, using fair value will solve several problems regarding how to determine
impairment of financial instruments.
The only other approach we consider could be used is the cost method, that could be
used in limited circumstances, when it would not differ substantially from fair value and
could be used for high volumes of transactions, where using fair value would be
complicated, for instance accounts receivable, that have a short term cash flow that is
not expected to fluctuate.
Question 9
Part A of Section 3 suggests that fair value seems to be the only measurement
attribute that is appropriate for all types of financial instruments within the scope of a
standard for financial instruments.
a) Do you believe that fair value is the only measurement attribute that is
appropriate for all types of financial instruments within the scope of a standard
for financial instruments?
We believe that fair value is the only measurement attribute that is applicable to all
financial instruments.
b) If not what measurement attribute other than fair value is appropriate for all
types of financial instruments within the scope of a standard for financial
instruments? Why do you think that measurement attribute is appropriate for all
types of financial instruments within the scope of a standard for financial
instruments? Does the measurement attribute reduce today’s measurementrelated complexity and provide users with what is necessary to asses the cash
flow prospects for all types of financial instruments?
Other measurement could be used if the information to determine the fair value is not
reliable or inexistent. This could happen for certain instruments that are not quoted in
active markets. However other ways of measuring the instrument could be used to
determine an equivalent of fair value. For instance, references to similar financial
instruments could be made to determine fair value. Also market rates could be used.
Maybe the credit risk is the one that should be evaluated separately. Also, for certain
types of financial assets and liabilities, which are short term and have no highly volatile
future cash flows, the historical cost could be used, as it would be similar to its fair
value.
Therefore we believe that measuring all the financial instruments at its fair value or
equivalent would be appropriate, since it would simplify the preparation, audit and
analysis of the financial statements, based on a principle.
With all the financial instruments measured at fair value or similar values, the user of
the financial statements would find it easier to analyze them, since all financial items
would show in the balance sheet the expected cash flows. In the statement of earnings
the analysis would be somewhat more complicated, as the user will have to asses the
realized and the unrealized gains or losses, but it is a matter of disclosure. It will not be
more complex as it is today where gains and losses are reported based on a set of
complex rules and not based on a principle.
Question 10
Part B of section 3 sets out concerns about fair value measurement of financial
instruments. Are there any significant concerns about fair value measurement of
financial instruments other than those identified in Section 3? If so, what are they and
why are they matters for concern?
We agree that the main concerns to effectively apply fair value measurement would be
the lack of objective information to determine the fair value of certain instruments.
However there would be cases where some kind of information could be gathered from
other sources to overcome the problem or would be isolated cases.
Question 11
Part C of section 3 identifies four issues that the IASB needs to resolve before
proposing fair value measurement as a general requirement for all types of financial
instruments within the scope of a standard for financial instruments.
a) Are there other issues that you believe the IASB should address before
proposing fair value measurement as a general requirement for all types of
financial instruments within the scope of a standard for financial instruments. If
so, what are they? How should the IASB address them?
We believe that all the issues to achieve an adequate recognition have been identified
in the four questions included in part C of section 3. The difficulties in determining fair
value are similar to those that would be faced to determine impairment in value of a
financial instrument. Therefore the problem is not new, it is just a difficult issue or
issues.
The best way to address these issues is with adequate presentation and disclosure.
This could require separate presentation of certain items in the financial statements
and/or disclosure of the methodology to value certain items and the amounts involved.
b) Are there any issues identified in part C of Section 3 that do not need to be
resolved before proposing a general fair value measurement requirement? If so,
what are they and why do they not need to be resolved before proposing fair
value as a general measurement requirement?
We believe that the exceptions to the use of fair value would be minimal and would
have a sound basis for having an exception, such as measuring short term financial
assets and liabilities at cost, when these do not have highly volatile future cash flows.
The scope is clear that it will exclude items such as insurance contracts that are dealt
in another standard, even if fair value is specified in such standard.
Question 12
Do you have any other comments for the IASB on how it could improve and simplify the
accounting for financial instruments?
We believe that an area where complexity could be reduced is in the separation and
accounting for embedded derivatives. This is a topic that is not addressed in the
discussion paper. There are complex issues that also have a different recognition by
the IASB and the FASB standards, therefore convergence is needed.
We do have a comment on paragraph A8 of Appendix A, which uses in the definition of
a financial instrument the word “financial instrument” in the subparagraphs c) and d). It
is incorrect to define a word with the same word. We suggest to include in
subparagraph a) “Cash and other monetary assets and liabilities (such as accounts
receivable, loans receivable, accounts payable, loans payable, etc.)” and in
subparagraph c) make reference to “monetary items”. We believe that this definition, if
used in future documents is clearer.