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First of all, there are concerns from both users and preparers about the accounting for own credit risk on financial liabilities designated at Fair Value (FV) through profit and loss. The effects are counterintuitive in times of crisis and therefore misleading for users of financial statements. Investors are increasingly questioning the credibility of financial statements, since profits are recognised as credit spreads widen and the volatility in reported results increases as credit spreads fluctuate. Stock market analysts typically adjust reported results to remove the effects of own credit and financial institutions present non-GAAP measures on this basis in order to provide more relevant information to markets.
This concern is being addressed by IFRS 9, which requires fair value movements due to own credit risk to be recognised in Other Comprehensive Income (OCI) rather than Profit and Loss (P&L).
Given the urgency of the issue, the EBF would urge the IASB to make this change available immediately for early adoption under current IAS 39, without linking it to the adoption of other IFRS 9 provisions. There is widespread consensus on this topic from a broad cross section of stakeholders and the issue can be easily resolved by making relatively minor amendments to IAS 39 on a timely basis.
The members of the EBF are of the view that the introduction of a third measurement category (Fair Value through Other Comprehensive Income) must not undermine the business model principle of IFRS 9 or the objective of the IASB to improve financial reporting and reduce the complexity of IAS 39.
Members of the Federation are not convinced that introducing a third category without other significant changes to both IFRS and US GAAP would result in meaningful convergence. For example, without changes to the treatment of foreign exchange gains and losses on Fair Value through OCI financial assets, the most significant measurement difference between IFRS and US GAAP would remain. Indeed a similar looking presentation with unresolved technical differences will result in more confusion than clear, easily understandable differences. The banking industry does not support the development of a standard that would represent little improvement on IAS 39 for the sake of convergence.
The EBF believes that the use of the third category should be limited. Its members do not believe that the third category is necessary to accommodate liquidity and balance sheet management portfolios in most circumstances. Such portfolios can be appropriately classified using the two category model in IFRS 9 as issued, perhaps with additional guidance if this is considered necessary to clarify the requirements as banks understand them. The objective of the underlying business model will need to be analysed in detail, which was not necessary under IAS 39 when the ‘Available For Sale’ category was effectively the default classification. The introduction of a third category must not invalidate the basic principle introduced by IFRS 9 in assessing the business model objective.
The banking industry believes that the introduction of a third category would require careful articulation to avoid changing the underlying principles of IFRS 9.
In many cases, the EBF believes that the objective of business models that underlie liquidity portfolios and many balance sheet management portfolios, is to hold financial instruments to collect cash flows.
Examples where banks believe portfolios should qualify for amortised cost measurement include liquidity portfolios required by regulators, liquidity portfolio held for business needs of the ‘held to collect’ business model, and Asset Liability Management (ALM) portfolios that support amortised cost business which are managed in terms of responding to internal and external changes rather than to changes in the market value of the instruments should qualify for amortised cost.
In summary, there is a range of different business activities adopted by different banks in practice, so it is necessary to look qualitatively at the business model to understand the business objective and how this is achieved. It is right that there is no quantitative bright line for sales in IFRS 9, as it is not possible to predict sales levels in such a business model as conditions can change. Nevertheless, one would expect that sales volumes would be modest over periods of time and that any 'spikes' could be explained by underlying movements in the hold to collect business models, or disposals for credit purposes. Therefore, the EBF believes that the current wording in IFRS 9 is operational. The introduction of a third category to IFRS 9 must not lead to the narrowing of the scope of items measured at amortised cost in the banking sector.
The EBF is concerned that it may be more complicated than first envisaged to ensure that existing macro hedge accounting practices can continue to apply during the period between the implementation of IFRS 9 and the finalisation of the revised macro hedge accounting requirements. Since it is crucial for the phased approach to work, the banking industry suggests that the IASB give this issue sufficient priority and would be pleased to assist in identifying issues to be resolved when the staff draft of the revised hedge accounting standard is available.
Considering the delay in finalising Phase II of the financial instruments project and the re-opening of Phase I, the EBF would suggest further postponement to the mandatory implementation date of IFRS 9.