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In its public consultation on long-term investing activities business models, EFRAG identified the following main types of long-term investors:
(a) insurance companies, primarily life insurers and pension funds
(b) development banks and entities with public-interest objectives,
(c) long-term investors, which manage and own sufficiently ‘stable assets’ to be able to build an investment strategy based on a long-term horizon, and
(d) others with long-term commitments, such as nuclear facilities operators, which must acquire financial assets to meet future decommissioning costs.
Those investors identified several key characteristics of their business models:
(a) their long-term investment strategy is financed by ‘stable liabilities’; ‘stable liabilities’ are described as liabilities with a predictable profile and characteristics of the cash flows (tested by actuaries and risk management stress tests). This stability is considered to be the primary characteristic of a long-term business model;
(b) where their investments are subject to market price risk, this risk is secondary in the evaluation of their financial position, because the stability of their liabilities provides great flexibility in recovering the value of their assets; and
(c) the primary indicator of their performance is their long-term investment return.
Subject to the general limitations and constraints inherent in such type of consultations and subject to further work to be performed by EFRAG in its due process, EFRAG recommends:
(a) that any accounting requirements applicable to long-term investment entities should not ignore the interaction between the liabilities and the related assets when selecting measurement bases and defining performance reporting requirements.
(b) considering symmetrical treatment of the changes in assets and liabilities, as this is critical to faithfully represent the asset-liability management.
(c) including the long-term liability-driven investment business model in IFRS 9 and considering what specific accounting requirements should be available to best depict it as well as whether some consequential amendments to other standards dealing with assets should be made (e.g. investment properties), so that asset and liability management can be best reflected, either in a fair value through OCI or a fair value through profit or loss option.