31 July 2009
Sir David Tweedie
Chairman
International Accounting Standards Board
30 Cannon Street
London EC 4M 6XH
UNITED KINGDOM
commentletters@iasb.org.uk
Dear Sir David
ED/2009/3 Derecognition
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 is concerned about the positioning of this project in relation to the IASB’s response to the global financial crisis, the project on the replacement of IAS 39 ‘Financial Instruments: Recognition and Measurement’ and work being undertaken by the FASB. We believe that work on derecognition should be deferred until a compelling reason for change is demonstrated such as the outcome of the IAS 39 project and FASB’s derecognition project. Deferral of the project will also minimize duplication of activity and avoid the need to revisit the proposals in the short-term.
In general, the G100 supports the development of a single principle for determining when financial instruments should be derecognized. The ‘risks and rewards’ criteria currently used as the primary filter for determining whether financial assets are derecognized is well understood and represents the economic substance of the transaction. This approach has been proven robust in practice. There seems no compelling reason to change the approach to a ‘control’ criterion. Whilst the change will be unlikely to impact existing securitization arrangements for most corporates, it does have some important implications for the financial sector, where the new model would require that repurchase agreements and collateralized lending be accounted for as a sale, which does not reflect the substance of such transactions.
Our responses to the following questions are based on the presumption that the Board will proceed with the proposals.
| Q1 |
Assessment of ‘the Asset’ and ‘continuing involvement at reporting
entity level Do you agree that the determination of the item (the Asset) to be evaluated for derecognition and the assessment of continuing involvement should be made at the level of the reporting entity (see paragraphs 15A, AG37A and AG47A)? If not, why? What would you propose instead, and why?
Yes. The G100 agrees that the decisions about derecognition and
continuing involvement should be made at the reporting entity level. |
| Q2 |
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 (ie the Asset) to be assessed for derecognition? If not, why? What criteria would you propose instead, and why?
Yes. The G100 supports the approach taken in the ED which is consistent
with current IAS 39 requirements which have worked well in practice.
However, given the dissenting views and alternative approach, this is an
issue that may need to be revisited once the IAS 39 project is
finalized. |
| Q3 |
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? Yes. The definition is broader and will capture
those transactions that are economically transfers of assets for
reassessment. |
| Q4 |
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? The G100 considers that where an entity
transfers an asset and has no continuing involvement the asset should be
derecognized. However, as we do not see a significant distinction
between the application of a continuing involvement test and a control
test based on risks and rewards we believe that the proposed approach
should be reconsidered. |
| Q5 |
‘Practical ability to transfer for own benefit’ test Do you agree with the proposed ‘practical ability to transfer’ derecognition rest in paragraph 17A(c)? If not, why? What would you propose instead, and why? Do you agree with the ‘for the transferee’s own benefit’ test proposed as part of the ‘practical ability to transfer’ test in paragraph 17A(c)? If not, why? What would you propose instead, and why? The G100 considers that while the test is likely to be difficult
to apply in practice the ‘practical ability to transfer’ is an important
consideration particularly where the transferor retains some continuing
involvement with the asset. |
| Q6 |
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?
The G100 considers that it is appropriate for the retained part of the
asset to be measured on the same basis as the whole asset was measured
before derecognition. |
| Q7 |
Approach to derecognition of financial assets Having gone through the steps/tests of the proposed approach to derecognition of financial assets (Q1-6), 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? The G100 considers that he alternative
approach should be considered as part of a longer-term project since it
addresses issues that are broader than those arising in response to the
global financial crisis. The G100 considers that if the proposals
proceed the proposed approach is clearly preferable to the alternative
approach. |
| Q8 |
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? Should the Board consider any other aspects of the proposed approaches to derecognition and consolidation before it finalises the exposure drafts? If so, which ones, and why? If the Board were to consider adopting the alternative approach, do you believe that the approach would be compatible with the proposed consolidation approach? The G100 considers that
compatibility between the consolidation and derecognition models is
highly desirable but not essential. |
| Q9 |
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 that principle instead, and why?
Yes. |
| Q10 |
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? Yes. The G100 agrees with
permitting early adoption of the proposals and prospective application.
However, the G100 is concerned about the approach adopted to introducing
new disclosure requirements. We believe that additional disclosures
should only be introduced after rigorous cost-benefit analysis. |
| Q11 |
Disclosures Do you agree with the proposed amendments to IFRS 7? If not, why? How would you propose to amend those requirements instead, and why? The G100 has serious concerns about the volume, complexity and relevance of disclosures and the processes adopted to determine whether they are needed and provide decision-useful information. An extensive list of disclosures has been added in response to the global financial crisis resulting in significant burdens for companies, both in terms of costs and practicalities of obtaining the information. |
Yours sincerely
Tony Reeves
National President