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Deloitte comment letter on FRED 54

Published on: 02 May 2014

We have published our comment letter on the Financial Reporting Council’s (FRC's) Exposure Draft of changes to Financial Reporting Standard (FRS) 102 in order to allow a wider range of debt instruments to be measured at amortised cost (FRED 54).  Overall, we support the FRC's proposals.

The existing rules in section 11 of FRS 102 have been widely criticised as too restrictive, forcing some common debt instruments (and in particular, some for which measurement at amortised cost would be permitted by IAS 39 or IFRS 9) to be measured at fair value through profit or loss.  In response to this, the FRC published FRED 54, which sets out proposed amendments to address these issues.

Although overall we support the proposals, we do still have some concerns.  In particular:

  • The proposed new rule regarding linkage to inflation does not clearly rule out classification of instruments where such a link is leveraged as basic.
  • In our view, the existing rules regarding investments in preference shares require all such investments to be accounted for at fair value through profit or loss.  This applies regardless of whether these preference shares are in substance debt rather than equity, which is not a position that we support.
  • Where an issuer has the option to redeem debt early but must pay a penalty (in excess of compensation for lost interest, which would be allowed), the proposals would require measurement of this instrument at fair value through profit or loss. Where such an option exists only to provide a disincentive for early prepayment (for example, in the case of some UK mortgages), we do not believe that fair value measurement is necessary as measurement at amortised cost would adequately reflect the risks associated with this instrument.

Apart from these specific issues, we urge the FRC to maintain their stated position in the exposure draft that not all instruments are basic just because they are common, and to resist calls from vested interests to widen the classification boundaries further.

Further comments and a full response to all questions raised in the invitation to comment are contained within the comment letter which can be downloaded below.


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