Submission to the IASB - Embedded Derivatives

21 January 2009

Sir David Tweedie
International Accounting Standards Board
30 Cannon Street
London EC 4M 6XH
UNITED KINGDOM
commentletters@iasb.org.uk

Dear Sir David

“Embedded Derivatives”

IFRSs The Group of 100 (G100) is an organization of chief financial officers from Australia’s largest business enterprises with a purpose of advancing Australia’s financial competitiveness. The G100 is pleased to provide comments on the Exposure Draft (ED).

The G100 supports the intention of the IASB in seeking to address evolving issues and concerns in a timely manner but believes the modified due process should provide constituents with sufficient time to prepare a more considered response.

The G100 strongly believes that issuing IFRSs with retrospective effect creates an unwelcome precedent. However we acknowledge that retrospective application could be justified where companies are being relieved of an existing onerous requirement or it is clarifying an issue of application/interpretation of an existing requirement.

The G100 is also concerned that under Australian requirements the Australian Accounting Standards Board (AASB) cannot issue an IFRS equivalent Accounting Standard (which is a legislative instrument) with retrospective application. A consequence is that Australian companies with reporting periods ending before the resulting IFRS amendments are issued by the IASB and adopted by the AASB (thereby incorporated into Australia law) are at risk of not being fully IFRS compliant in respect of these disclosures. For example, this may impair the ability of Australian companies achieving compliance with IFRSs as published by the IASB and have potentially negative impacts on the cost of debt raised in international markets.

Q1	The ED pThe ED clarifies that an entity must assess whether an embedded derivative is required to be separated from a host contract when the entity reclassifies a hybrid (combined) financial asset out of the fair value through profit or loss category. Do you agree with that clarification? If not, why? What would you propose instead, and why? Yes. It is appropriate for the assessment to coincide with the reclassification.
Q2	The ED requires the assessment to be made on the basis of the circumstances that existed when the entity first became a party to the contract. Do you agree with that proposal? If not, why? What would you propose instead, and why? Yes.
Q3	The ED proposes that if the fair value of an embedded derivative that would have to be separated cannot be reliably measured, the entire hybrid (combined) financial instrument must remain in the fair value through profit or loss category. Do you agree with that proposal? If not, why? What would you propose instead and why? Yes.
Q4	Do you agree with the proposed effective date? If not, why? What would you propose instead, and why? No. See below.
Q5	Are the transition requirements appropriate? If not, why? What would you propose instead, and why? Although the G100 agrees with what the IASB is seeking to achieve it is not clear whether the amendments will achieve that outcome in a fair manner for all entities. Notwithstanding our concerns about retrospective application, if the IASB is proposing to make the changes retrospective from 15 December 2008 it would seem consistent to make the amendments effective from when an entity could have undertaken the reclassification (1 July 2008). In the absence of legal impediments this would be acceptable as the proposals set out to achieve what the IASB had intended but did not specifically address in the amendments made to IAS 39 and IFRS 7 in October 2008.

Yours sincerely

Tony Reeves
National President