EFRAG identifies two further business models

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

26 Oct, 2013

In May 2013, the European Financial Reporting Advisory Group (EFRAG) launched a public consultation on long-term investing activities business models. EFRAG's reason for the consultation were the European Green Paper on possible ways for supporting long-term investment and the limited amendments to IFRS 9 the IASB had proposed in November 2012, which would see the introduction of a new separate business model of "held to collect and sell". EFRAG has now communicated the input received from constituents in the consultation and corresponding recommendations to the IASB.

The main result of the consultation was the identification of two business models: the 'liability-driven' business model and the 'asset-driven' business model.

According to EFRAG, the liability-driven business model is especially found with insurers, pension funds and others entities with long-term commitments. The model is characterised by entering into a long-term liability first and then having to find appropriate assets for generating returns to match it. The asset-driven business model EFRAG found with long-term development banks and other entities with public-interest objectives as these are usually granted easy and cheap access to stable financing sources to meet their public policy objectives.

EFRAG has not yet formed a view on whether the asset-driven business model, which is not necessarily seen as as long-term as the liability-driven model, should have effects on the accounting requirements for financial and other assets and financing liabilities. However, EFRAG believes that the liability-driven model is not properly reflected in IFRS 9 Financial Instruments (and other standards).

One of the measures EFRAG is suggesting in the letter concerns extending the use of other comprehensive income (OCI) to a broader set of asset classes by introducing an option of reporting of short-term changes that are not a relevant primary measure of performance outside profit or loss. EFRAG acknowledges, however, that a decision to extend the use of OCI would require the development of an appropriate impairment model.

Please click for access to the full letter on the EFRAG website. EFRAG has also outlined these findings in its letter of comment to the European Commission concerning the Green Paper Long-term financing of the European economy.

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