Comment letter analysis

The staff presented the Board with the analysis of comment letters on the Exposure draft ED/2010/4 Fair Value Option for Financial Liabilities. The Board did neither discuss the issues in detail nor did it take any decisions during this meeting. The Board will start the process of re-deliberations on one of the following meetings.

In general, the majority of constituents supported the general approach taken by the Board. Nonetheless, the comment letters expressed the following four concerns over the general approach:

1. Meaning of the phrase 'changes in a liability's credit risk' (and lack of consistent definition of credit risk)
2. Asymmetry between measurement of financial asset and financial liabilities;
3. Interaction of the proposals with other projects (notably Financial Statement Presentation), and
4. Lack of convergence between IASB and FASB.

Responding to a question, the staff clarified that despite expressing concerns about asymmetry in measurement, most constituents seemed to pragmatically accept the solution proposed.

The constituents agreed with the proposal that the effects of changes in a liability's credit risk should not affect profit or loss unless the liability is held for trading. Nonetheless, some respondent noted that such approach could create additional mismatches in narrow circumstances when both assets and liabilities are subject of the same credit risk (e.g. state bodies that borrow from a market as state and grant the funds further to other state institutions). The Board members noted that although these circumstances should be sufficiently narrow and isolated, they would have material effect on particular entities and a targeted solution could be found to avoid those mismatches.

The majority of constituents agreed to present the effects of changes in a liability's credit risk in the Other Comprehensive Income (OCI). The option to present these changes directly in equity did not attract sufficient support. Nonetheless, several constituents expressed their concern about the lack of principle on what items are presented in the OCI and asked the Board to undertake a comprehensive review of OCI as part of the Financial Statement Presentation project.

The staff also noted that some constituents (from one particular jurisdiction) supported the frozen credit spread approach.

Majority of constituents did not support the two-step approach or the prohibition of recycling from OCI to profit or loss on realisation. Many constituents noted that recycling would ensure consistency between early settlement of financial liabilities held at amortised costs and financial liabilities to which fair value option is applied. One Board member noted that constituents understand the OCI as distinction between realised and unrealised, a concept that was abandoned by the Board. Other Board member disagreed as he noted that currency transaction reserve is being recycled and thus the Board did not provide any concept or principle which to apply.

Finally, the staff noted that constituents supported using the default IFRS 7 method but suggested to the Board to make the objective clearer so that alternative methods could be used. In addition, constituents supported possibility to apply requirements of the ED early, but without adopting the rest of the requirements of IFRS 9 as the ED is built on IAS 39 requirements.