HEAD OFFICE
International Accounting Standards Board,
September 14, 2009
30 Cannon Street, London EC4M6XH,
United Kingdom
SUBJECT: ‘COMMENTS ON EXPOSURE DRAFT FINANCIAL INSTRUMENTS
CLASSIFICATION AND MEASUREMENT’
Sir,
The Institute of Chartered Accountants of Pakistan welcomes the opportunity to offer
comments on the above mentioned exposure draft.
Please find enclosed the comments of the relevant Committee of the Institute for your
perusal.
If you require any further clarification, please do not hesitate to contact us.
Yours faithfully,
Muhammad Asif Iqbal
Director Technical Services
The Institute of Chartered Accountants of Pakistan
asif.iqbal@icap.org.pk
(Established under the Chartered Accountants Ordinance, 1961-X of 1961)
Chartered Accountants Avenue, Clifton, Karachi-75600 (Pakistan) Ph: (92-21) 111 000 422 Fax: 9251626
Website: http://www.icap.org.pk E-mail: info@icap.org.pk
‘ICAP COMMENTS ON EXPOSURE DRAFT FINANCIAL INSTRUMENTS: CLASSIFICATION
AND MEASUREMENT’
Question 1:
Does amortized cost provide decision-useful information for a financial asset or financial liability
that has basic loan features and is managed on a contractual yield basis? If not, why?
Answer:
Yes: There seems to be no logic in measuring financial assets or financial liability at fair value
when they have basic loan features and they are managed as well as their performances are
evaluated on the basis of contractual cash flows that are generated when held and issued. It
appears that such instruments are not held or issued for a purpose that can be linked to market, so
measuring them at amortized cost would be appropriate.
Question 2:
Do you believe that the exposure draft proposes sufficient, operational guidance on the application
of whether an instrument has ‘basic loan features’ and ‘is managed on a contractual yield basis’? If
not, why? What additional guidance would you propose and why?
Answer:
The ED provides sufficient guidance for understanding “basic loan features”, but in case of
“managed on a contractual yield basis”, further guidance/clarification seems to be required. As
stated in paragraph B 10 whether financial instruments are managed on a contractual yield basis
depends not on management’s intention how an individual instrument should be managed, but on
how management manages the instruments generally, so in case of an entity which has currently
instruments of same class but it has classified some at amortized cost and other at fair value it will
not be easy to apply the requirements of “managed on a contractual yield basis”. Therefore, the
Board should provide further explanation on such situation.
Question 3:
Do you believe that other conditions would be more appropriate to identify which financial assets or
financial liabilities should be measured at amortized cost? If so,
(a) what alternative conditions would you propose? Why are those conditions more
appropriate?
b) if additional financial assets or financial liabilities would be measured at amortized cost using
those conditions, what are those additional financial assets or financial liabilities? Why does
measurement at amortized cost result in information that is more decision-useful than
measurement at fair value?
(c) if financial assets or financial liabilities that the exposure draft would measure at amortized cost
do not meet your proposed conditions, do you think that those financial assets or financial liabilities
should be measured at fair value? If not, what measurement attribute is appropriate and why?
Answer:
No: we do not suggest other conditions.
Question 4:
(a) Do you agree that the embedded derivative requirements for a hybrid contract with a financial host
should be eliminated? If not, please describe any alternative proposal and explain how it simplifies
the accounting requirements and how it would improve the decision-usefulness of information
about hybrid contracts?
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(b) Do you agree with the proposed application of the proposed classification approach to
contractually subordinated interests (ie tranches)? If not, what approach would you propose for
such contractually subordinated interests? How that is approach consistent with the proposed
classification approach? How would that approach simplify the accounting requirements and
improve the decision usefulness of information about contractually subordinated interests?
Answer:
(a) For simplification purpose, it is a good suggestion that host-contract should be evaluated on its
entirety and derivative embedded in the host contract should not be assessed separately. To
classify and measure hybrid contracts, which fall in scope of IAS 39, the ED has proposed that
same criteria should be followed which are applicable on classification and measurement of
financial assets and financial liabilities. These criteria are amortized cost and fair value, so it means
some hybrid-contracts which have derivatives embedded in them will be measured at amortized
cost, if they meet requirements of basic loan feature and are managed on a contractual yield-basis.
Measuring hybrid-contracts with embedded derivatives at amortized cost does not seem to be
appropriate because due to change in value of underlying the amortized cost would not reflect
proper value of the contract. So, suggestion would be to allow fair valuing embedded derivates
when host contract is not fair valued.
(b) Yes: we agree that the tranche which does not have basic loan feature and provide credit
protection should be measured at fair value.
Question 5:
Do you agree that entities should continue to be permitted to designate any financial asset or
financial liability at fair value through profit or loss if such designation eliminates or significantly
reduces an accounting mismatch? If not, why?
Answer:
Yes: we agree with suggestion as it would reduce accounting mismatch and allow consistency.
Question 6:
Should the fair value option be allowed under any other circumstances? If so, under what other
circumstances should it be allowed and why?
Answer:
Fair value option should be allowed for embedded derivatives when host-contract is not fair valued.
Question 7:
Do you agree that reclassification should be prohibited? If not, in what circumstances do you
believe reclassification is appropriate and why do such reclassifications provide understandable
and useful information to users of financial statements? How would you account for such
reclassifications, and why?
Answer:
Yes: We agree that reclassification should be prohibited.
Question 8:
Do you believe that more decision-useful information about investments in equity instruments (and
derivatives on those equity instruments) results if all such investments are measured at fair value?
If not, why?
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Answer:
Applying fair value measurement on investments in unquoted equity instruments would be possible
and practicable in countries where both sophisticated data and financial analysts are freely
available and can be assessed by entities at reasonable cost, but in countries like Pakistan where
availability of sophisticated data is an issue, it will not be easy to fair value such investments. If
entities are forced to follow fair value method, they would have to develop valuation models, which
would be time plus cost consuming and many entities may not afford it. Further, chances are that
the results of valuation models will vary from entity to entity. It means same instrument will have
different value from one to other entity, so our suggestion would be to continue allowing cost less
impairment method for unquoted equity instruments.
Question 9:
Are there circumstances in which the benefits of improved decision-usefulness do not outweigh the
costs of providing this information? What are those circumstances and why? In such
circumstances, what impairment tests would you require and why?
Answer:
As discussed above, cost of providing the required information outweigh benefits.
Question 10:
Do you believe that presenting fair value changes (and dividends) for particular investments in
equity instruments in other comprehensive income would improve financial reporting? If not, why?
Answer:
Yes: we agree that it would be appropriate to present fair value changes and dividends for
particular investments in OCI as it would eliminate partial accounting treatment which is currently
available in case of AFS where changes in fair values are taken to equity, later recycled to profit
and loss account at the time of de-recognition, and dividend is taken to profit and loss account.
Question 11:
Do you agree that an entity should be permitted to present in other comprehensive income
changes in the fair value (and dividends) of any investment in equity instruments (other than those
that are held for trading), only if it elects to do so at initial recognition? If not,
(a) how do you propose to identify those investments for which presentation in other
comprehensive income is appropriate? Why?
(b) should entities present changes in fair value in other comprehensive income only in the periods
in which the investments in equity instruments meet the proposed identification principle in (a)?
why?
Answer:
Yes: we agree with proposed amendment.
Question 12:
Do you agree with the additional disclosure requirements proposed for entities that apply the
proposed IFRS before its mandated effective date? If not, what would you propose instead and
why?
Answer:
Yes: we agree with proposed amendment.
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Question 13:
Do you agree with applying the proposals retrospectively and the related proposed transition
guidance? If not, why? What transition guidance would you propose instead and why?
Answer:
Yes: we agree that the proposal should be applied retrospectively.
Question 14:
Do you believe that this alternative approach provides more decision-useful information than
measuring those financial assets at amortised cost, specifically:
(a)
(b)
in the statement of financial position?
in the statement of comprehensive income?
If so, why?
Answer:
It appears that the alternative approach will make the requirements for classification of financial
assets more complicated instead of making them less-complex, which is one of reasons of revising
IAS 39, so it should not be considered for implementation.
Question 15:
Do you believe that either of the possible variants of the alternative approach provides more
decision-useful information than the alternative approach and the approach proposed in the
exposure draft? If so, which variant and why?
Answer:
No, the Board should not consider any of possible variants of the alternative approach.
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