Page 1 of 14Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
14 July 2023Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure DraftAmendments to the Classification and Measurement of Financial Assets(Proposed amendments to IFRS 9 and IFRS 7)
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide our comments on this Exposure Draft (ED).The HKICPA appreciates the IASB’s endeavours to address the stakeholders’ concernsraised in the post-implementation review of IFRS 9 Financial Instruments concerning theclassification and measurement of financial assets with ESG-linked features and thetentative agenda decision regarding the accounting for the settlement of a financial assetor a financial liability using an electronic payment system.We have carefully reviewed the ED and performed outreach with local stakeholders. Weprovide detailed comments in the Appendix and summarise our primary concerns andrecommendations below.Classification of financial assets – contractual terms that are consistent with a basiclending arrangementWe have significant concerns over the proposed amendments to the solely payments ofprincipal and interest (SPPI) requirements. We consider that the proposed amendmentsdo not establish clear principles for assessing whether the financial instruments withESG-linked or similar features meet the SPPI requirements. The two new conceptsintroduced by the ED for the SPPI assessment, namely ‘aligned with the direction andmagnitude’ in B4.1.8A and ‘contingent event specific to the debtor’ in B4.1.10A, havenot been clearly defined or explained. Moreover, questions have been raised as to howthese two concepts interact with each other and with the existing requirements in IFRS
9.Another key concern is that the proposals were drafted with ESG-linked features in mindbut they are not ring-fenced to ESG features only. If the proposals were applied to othernon-ESG related contractual terms, they could change the current classification of thosefinancial instruments and result in unintended consequences.In addition, we question the objectives and usefulness of the related proposeddisclosures regarding the changes in contractual cash flows of financial instruments.These proposed disclosures focus solely on contingent events specific to debtors, whilePage 2 of 14other events that could also change the contractual cash flows of the financialinstruments are not considered. The lack of clarity on the meaning of ‘contingent eventspecific to debtors’ may also lead to inconsistent practices. Preparers from the bankingindustry have expressed concerns that the proposed disclosures would be onerous andcostly to implement and questioned whether the benefits of providing the disclosureswould outweigh the costs of preparing them.Given these concerns, we strongly recommend the IASB take immediate action toevaluate the implications of the proposals on the current classification of financial assets,regardless of whether they have ESG-linked features, and consider whether this is theintention of the proposals. If the IASB were to proceed with the proposals, werecommend that the IASB provide more clarity on the conceptual rationale for and theapplication of the two new concepts, namely ‘aligned with the direction and magnitude’and ‘contingent event specific to the debtor’. In this context, we believe that providingexamples to demonstrate the application of these concepts on accounting for financialassets with common ESG-linked features, as well as non ESG-linked financial assets,would be helpful in mitigating potential diversity in application.Non-recourse features and contractually linked instruments (CLI)
Our respondents expressed concerns regarding the narrow description of ‘non-recourse’ features proposed in B4.1.16A. They noted that it could be read to apply onlyto cases where there is a contractual recourse to cash flows of the specified assetsduring the life of the financial asset and in the case of default. However, in currentpractice, non-recourse consideration could also apply when a creditor’s claim is limitedto specific assets or other cash flows, either contractually or in substance, and whetherover the life of the instrument or in the case of default.They also considered that it is inappropriate to include ‘non-recourse’ as a feature ofCLI in B4.1.20 which would essentially treat CLI as a subset of financial assets withnon-recourse features. This is because these two types of instruments are subject todifferent assessment criteria that cannot be reconciled by treating one type ofinstrument’s being a subset of the other without the IASB providing clear guidance asto which assessment criteria should be used.In light of the above, we recommend that the IASB clarify the description of ‘non-recourse’ feature in B4.1.16A, and the key differences between ‘non-recourse’ and CLIby providing examples that incorporate typical features of non-recourse and CLI usedin current practice. We have suggested some improvements that could help to clarifythe proposals in the Appendix to this letter.Derecognition of a financial liability settled through electronic transferThe terms ‘settlement date’ and ‘settlement date accounting’ are currently used in IFRS9 with reference to ‘regular way purchase or sale of financial assets’ only. However, theway B3.1.2A is currently drafted in the ED seems to extend the ‘settlement dateaccounting’ to other transactions that are not regular way purchases or sales. If the IASBintends to apply settlement date accounting to other transactions, we recommend theIASB provide guidance and examples to demonstrate how to apply it to transactionsother than regular way purchases or sales. Otherwise, the IASB should revisit thewording in B3.1.2A (and as a consequence B3.3.8 since that paragraph also refers tosettlement date accounting) to avoid confusion when applying the proposedamendments. We provide an example of possible changes to wording in our detailedresponse to Question 1 in the Appendix.Page 3 of 14To ensure consistent application of the proposal for the derecognition of financialliabilities settled through electronic transfer, we suggest that the IASB provideclarifications on the application of the three criteria in B3.3.8. We also suggest that theIASB clarify whether the criteria are applicable when the cash used for settlement willcome from an overdraft or similar facility with a negative balance.If you have any questions regarding the matters raised in this letter, please contactCarrie Lau (carrie@hkicpa.org.hk) or Kennis Lee (kennislee@hkicpa.org.hk), AssociateDirectors of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 4 of 14Work undertaken by the HKICPA in forming its views:
The HKICPA:
(a)
issued an Invitation to Comment on the ED on 23 March 2023 to its members andother stakeholders;
(b)
sought input from its Financial Instruments Advisory Panel, Insurance AdvisoryPanel and Small and Medium-sized Practitioners Committee and its TechnicalIssues Working Group, which mainly comprise technical and industry experts fromlarge as well as small and medium accounting firms; and(c)
developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB EDQuestion 1: Derecognition of a financial liability through electronic transfer
1.We generally support providing an exception to the general derecognitionrequirements for financial liabilities that are settled through electronic transfers.However, we have the following comments and suggestions.A.Recognition and derecognition of a financial asset or financial liability usingsettlement date accounting [B3.1.2A]
2.Our respondents noted that the proposal in B3.1.2A would change the currentpractice of derecognising a financial liability that is settled by cheque becauseentities would be required to derecognise the financial liability on the date whenthe cheque is cleared by the bank, instead of when the cheque is issued to thecreditor. Some respondents questioned whether such a change would faithfullyrepresent the substance of the current economic phenomenon as financialliabilities are generally considered as being settled once debtors have issued thecheques to their creditors. This is considering the fact that in our jurisdiction it isnot often that cheques would be dishonoured or cancelled by the drawer after thecheques have been issued.
3.We acknowledge the market concerns about the need to change the timing forderecognising financial liabilities settled by cheques. However, we understandfrom BC22 of the ED that the intention of the proposal is to clarify that an entity isrequired to apply settlement date accounting when recognising or derecognisingfinancial assets and financial liabilities (except for regular way exception) so as toimprove consistent application of the requirement. On this basis, we believe thatthe proposal would help resolve the diversity in practice. To increase the marketreceptiveness to the proposed amendments and raise public awareness of theirimpact, we recommend the IASB provide relevant educational material on theimpact of the proposals on cheque payments. We also suggest the IASB considerproviding sufficient time for the market to implement the change when it determinesthe effective date of the amendments.
4.A few respondents highlighted that the terms ‘settlement date’ and ‘settlement dateaccounting’ are currently used in IFRS 9 with a reference to a ‘regular purchase orsale of a financial asset’ only. IFRS 9 provides special accounting (trade date orsettlement date accounting) for regular way purchases or sales because of thenature of such transactions as explained in BA.4. Accordingly, the concept ofsettlement date accounting is irrelevant to other types of transactions under theAppendixPage 5 of 14extant IFRS 9 including derecognition of financial liabilities and those involvingderivatives.These respondents are concerned that B3.1.2A seems to extend the ‘settlementdate accounting’ to other types of transactions that are not even sales or purchasesor which are not ‘regular way’. If that is the case, these respondents questionedhow the settlement date accounting should be applied to such transactions, e.g.transactions with interest rate swaps and other net settled derivatives where thereis no subsequent settlement by transferring some financial assets for thoseinstruments. Currently, without B3.1.2A, those derivatives are recognised under
3.1.1 which is not an application of ‘settlement date accounting’.
5.Some respondents noted from the Basis for Conclusions of the ED that the IASBdid not indicate any intention to change the existing recognition and derecognitionprinciples of financial assets and financial liabilities in IFRS 9. These respondentssuggested the IASB consider taking out the entire paragraph of or redraftingB3.1.2A to avoid any confusion or potential impact to other IFRS 9 requirements ifthe primary purpose of the amendments is to provide an exception (i.e. B3.3.8) forentities to derecognise their financial liabilities before the settlement date forpayment transactions settled through electronic transfers.
6.We understand that one of the aims of adding B3.1.2A is to resolve the diversity inpractice regarding settlement of financial liabilities using electronic paymentsystems as explained in the ED. By means of issuing the amendments, the IASBcan duly consider an appropriate effective date for entities to change their currentpractice. From this point of view, we do not object to this proposal.
7.However, in light of the respondents’ concerns in paragraphs 4 and 5 above, werecommend the IASB consider the following suggestions to avoid any confusion orunintended misinterpretation of the requirements:
(a) If the IASB intends to apply the ‘settlement date accounting’ to transactionsother than regular way purchases or sales, we suggest the IASB provideguidance and practical examples to demonstrate how to apply settlement dateaccounting to transactions other than regular way purchases or sales such asnet settled derivatives. Furthermore, we noted that the current drafting inB3.1.2A shows that settlement date accounting applies to both financialassets and financial liabilities but ‘settlement date accounting’ as described inparagraph B3.1.6 only refers to financial assets. Therefore, we consider thatB3.1.6 should be expanded accordingly to cover financial liabilities.(b) If the IASB does not intend to change the application of the recognition andderecognition requirements in IFRS 9, we recommend the IASB revisit thewording in B3.1.2A to ensure that they are aligned with the general principlesof recognition and derecognition of financial assets and financial liabilities asset out in 3.1.1, 3.2.3 and 3.3.1 of IFRS 9. A possible redrafting of B3.1.2Awould be as follows:
‘When recognising or derecognising a financial asset or financial liability, anentity shall apply the general relevant requirements in this Standard(specifically paragraph 3.1.1 in the case of recognition of financial assets andfinancial liabilities, section 3.2 in the case of derecognition of financial assetsand section 3.3 in the case of derecognition of financial liabilities) an entityshall apply settlement date accounting (see paragraph B3.1.6) unlessparagraph B3.1.3 applies or an entity elects to apply paragraph B3.3.8.’Page 6 of 14A consequential redrafting of B3.3.8 would be as follows:
‘Notwithstanding the requirement in paragraph B3.1.2A to apply settlementdate accounting, an entity is permitted (…)’We would also suggest that the IASB review any references in the Basis forConclusions of the ED for similar issues regarding the application ofsettlement date accounting to financial liabilities.B. Derecognising a financial liability settled through electronic transfer before thesettlement date [B3.3.8-B3.3.10]
8.Our respondents raised the following comments regarding the proposal for thederecognition of financial liabilities before the settlement date:
(a) It is unclear whether B3.3.8(a) is considered to be met when an entity issubject to a penalty if it withdraws, stops or cancels a payment instruction andwhether this depends on the size of the penalty.(b) It is unclear what ‘practical ability’ in B3.3.8(b) means and how to assess it,e.g. whether it can be based on an entity’s intention and past practice; andhow it is different from ‘ability’ as referred to in B3.3.8(a).(c) Some respondents suggested deleting the last sentence in B3.3.9 ‘settlementrisk would not be insignificant if the completion of the payment instruction issubject to the entity’s ability to deliver cash on the settlement date’, as theyconsidered that this sentence confuses criteria (a) and (b) of B3.3.8 (i.e. theability of the entity to stop the payment instruction or deliver cash) with criterion(c) (i.e. settlement risk).(d) The proposed requirements are unclear regarding whether and how theexception to derecognising a financial liability applying B3.3.8 would apply incases where the cash, which is used to settle the financial liability in theelectronic transfer system, comes from an overdraft or other similar facilitywith a negative balance. It is noted that paragraph B3.3.8 refers to ‘settled withcash’ and (b) of that paragraph refers to ‘access the cash’. This raises aquestion as to whether ‘cash’ is defined as in IAS 7.6 as ‘cash on hand anddemand deposits’ and so only refers to positive cash balances, or the broaderdefinition in IAS 7.8 which acknowledges that ‘bank overdrafts which arerepayable on demand form an integral part of an entity’s cash management’and ‘[i]n these circumstances, bank overdrafts are included as a componentof cash and cash equivalents’ and so can include negative balances. It wouldbe useful for the IASB to clarify this aspect and whether the fact that theoverdraft facility is committed or uncommitted would make a difference to theability to use the election in B3.3.8.
9.We generally agree with our respondents’ comments in paragraph 8 and thereforerecommend the IASB provide clarifications with guidance and examples to addressthose comments so as to avoid the potential diversity in application in those areas.
10.Furthermore, given the significance of settlement risk as one of the criteria forapplying the exception under B3.3.8, we recommend the IASB consider defining‘settlement risk’ in Appendix A of IFRS 9 instead of explaining the term in BC33.Page 7 of 14Question 2: Classification of financial assets – Contractual terms that areconsistent with a basic lending arrangement
11.We appreciate the endeavours of the IASB to address the issue concerning theclassification and measurement of financial assets with ESG-linked features, whichare increasingly prevalent in the market. However, we are concerned that theproposed amendments to the SPPI requirements do not achieve the objective ofestablishing clear principles for assessing whether financial instruments with ESGfeatures meet the SPPI requirements. In addition, the proposals were drafted withESG-linked features in mind but they are not ring-fenced to ESG features only. Ifthe proposals were applied to other non-ESG related contractual terms, they couldchange the current classification of those financial instruments and result inunintended consequences.
12.Overall, we consider that the proposed amendments in B.4.1.8A and B4.1.10Aintroduce new criteria for assessing whether the contractual cash flows areconsistent with a basic lending arrangement and they are not merely a clarificationof the existing SPPI requirements. As such, we are concerned about the use of theword ‘clarification’ in the Basis for Conclusions of the ED which also implies thatcertain past classification treatments would be errors.A.Element of interest in a basic lending arrangement [B4.1.8A]
13.Most respondents were concerned about the proposal requiring entities to assessboth the direction and magnitude of the change in basic lending risks or costs whendetermining whether the contractual cash flows are consistent with a basic lendingarrangement because it would be difficult to model the change and assess thereasonableness of such a change against movements in the market. There isinsufficient evidence in the market to demonstrate how ESG factors correlate withcredit risk and other basic lending risks.
14.Some respondents noted that there appears to be an inconsistency within B4.1.8A.In assessing the elements of interest, although the IASB clarified that an entityshould not focus on ‘how much’ compensation it receives, the proposal requiresan entity to consider the ‘magnitude’ of the change in basic lending risks or costswhen determining whether the contractual cash flows are consistent with a basiclending arrangement in the same paragraph.
15.We acknowledge the challenges in assessing both the direction and magnitude ofthe change in basic lending risks or costs in the absence of adequate marketinformation. Accordingly, we recommend that the IASB clarify the core principleand supplement the principle with guidance and examples on how to apply it toinstruments with different ESG characteristics.
16.In addition, we recommend that the IASB:
(a) clarify how the concept of ‘magnitude’ as introduced in B4.1.8A interact withthe existing ‘leverage’ concept stipulated in B4.1.9 in assessing a basiclending arrangement; and(b) move the last sentence in B4.1.8A ‘A change in contractual cash flows isinconsistent with a basic lending arrangement if it is not aligned with thedirection and magnitude of the change in basic lending risks or costs.’ toB4.1.10A as it relates to a change in contractual cash flows and it would bemore appropriate to include it in B4.1.10A instead of B4.1.8A.Page 8 of 14B.Contractual terms that change the timing or amount of contractual cash flows[B4.1.10A]
17.Our respondents expressed concerns about the proposed requirement that‘contingent event must be specific to the debtor’ in order for a change in contractualcash flow to be consistent with a basic lending arrangement for the followingreasons:
(a) Even though the consideration of contingent events is an extant requirementof IFRS 9, the term ‘contingent event’ is not defined and it could be very broad.In practice, many financial instruments with contractual terms that introducevariability to contractual cash flows are currently considered as compatiblewith SPPI, regardless of whether they are considered contingent events underB4.1.10. For example, an instrument with fall-back clauses triggered by thedisappearance of the relevant benchmark rate is considered compatible withSPPI. If these events are considered to be contingent events, that instrumentwould fail to meet the SPPI requirements under B4.1.10A as they are notspecific to debtors.(b) It is unclear as to why the contingent event has to be specific to debtors butnot lenders, given that the elements of interest are meant to compensate thelenders for undertaking lending risks and costs and thus interest can alsoinclude a profit margin for lenders as stipulated in B4.1.7A. In practice, manyloan contracts include clauses that are specific to lenders to protect theirinterests, e.g. a lender’s contractual right to adjust the amount to be receiveddue to new tax provisions or compensation for additional costs. Therefore, theproposal could change the current practice, as these loans would fail to satisfythe SPPI requirements under the proposals.(c) Some respondents commented that the meaning of ‘specific to the debtor’lacks clarity, particularly in terms of whether it is only restricted to ‘the debtorachieving a contractually specified target’ as indicated in B4.1.10A. They alsoquestioned whether a contingent event relating to a debtor’s asset would beconsidered as ‘specific to the debtor’ under the proposal. For example, it isnot clear whether a provision in a collateralised lending arrangement thatcould accelerate repayment of the loan if the quality of the collateraldeteriorates (e.g. a significant drop in the fair value of the property that issubject to a mortgage loan) would be considered a contingent event that is‘specific to the debtor’, or a contingent event that is specific to ‘an asset of thedebtor’ (being the property) as opposed to the debtor as a whole. Anotherexample that highlights this issue is when a debtor is required to repay themargin loan earlier if the value of securities held in this debtor’s marginaccount falls below a specified threshold and the debtor is unable to add morefunds to raise the equity in his account to the required level. It is not clearwhether such a contingent event relating to the debtor’s asset (being theshares) would be considered as ‘specific to the debtor’.(d) B4.1.10A states that to meet the SPPI requirements, an instrument’s cashflows resulting from the occurrence of a contingent event must not representan investment in the debtor. The ED only provides an example on what couldbe an ‘investment in the debtor’ in BC 70 but does not provide a clear definitionor explanation of the concept. A few respondents considered that the term‘investment in the debtor’ is broad and can be interpreted in different ways,leading to inconsistent practices. For instance, it is unclear whether anPage 9 of 14instrument that adjusts its interest rate upwards or downwards by a fixednumber of basis points when a certain level of profits or revenue is reachedwould be considered ‘a share of the debtor’s revenue or profit’ under BC 70.One school of thought is that the adjustment to the interest rate constitutes ashare of the debtor’s revenue or profit because it affects the share of profit forordinary shareholders. Others contend that it is not a share of the debtor’srevenue or profit because the participation in higher profits is limited by thefixed adjustments to the interest rates. The fact that BC 69 of the ED statesthat ‘contractual cash flows that change based on the level of a debtor’srevenue or profits in a specific period would not generally be considered to beconsistent with a basic lending arrangement’ is likely to add further confusionto this issue.
18.In light of the above concerns, we consider that more clarity on what constitutes‘contingent events’ is necessary to ensure consistent application and avoid anyunintended consequences. In particular, if the IASB intends to exclude contingentevents associated with the time value of money or prepayment features (BC 69 ofthe ED), we consider that the proposed requirements should explicitly state this.Furthermore, the IASB should provide a clear rationale on why a contingent eventmust be specific to the debtor in order to be consistent with a basic lendingarrangement and provide more guidance on what ‘specific to the debtor’ and‘investment in the debtor’ intend to encompass under the proposal. Given that theproposed requirement of ‘contingent event specific to the debtor’ could affect theclassification of certain financial instruments currently meeting the SPPIrequirements, we strongly recommend the IASB evaluate the implications of theproposal on the current classification of financial instruments, regardless ofwhether they have ESG-linked features, and consider whether this is the intentionof the proposal.
19.In addition, the application of the SPPI requirements is closely linked to theamortised cost measurement in IFRS 9. In our previous submission to the IASB1,we highlighted several application issues with amortised cost measurement. Inparticular, diversity in practice exists in applying the effective interest method tofloating rate instruments due to the lack of clarity on the scope and definition ofwhat constitutes a floating rate instrument under B5.4.5 of IFRS 9. Given thegrowing prevalence of ESG-linked instruments that will be subject to amortisedcost measurement once the proposed amendments are finalised, we stronglyrecommend that the IABS commence the pipeline project Amortised CostMeasurement as soon as practicable.C.New examples of applying the proposed requirements [B4.1.13-14]
20.Many respondents considered that the two new examples in B4.1.13-14 are notsufficiently clear in demonstrating how instruments with ESG-linked features areassessed for SPPI requirements under the proposal and how paragraphs B4.1.8Aand B4.1.10A interact.
21.For example, B4.1.13 illustrates that the instrument is SPPI compatible purelybecause the contingent event is specific to the debtor (B4.1.10A), withoutconsidering the direction and magnitude of the change in basic lending risks orcosts (B4.1.8A). There is a risk that this example will be cited as providing adefinitive answer in its own right without the need to look at any other requirementsin the SPPI assessment.1 See paragraph 19 of the HKICPA’s submission to the IASB on PIR of IFRS 9 – Classification andMeasurement on 13 January 2022.Page 10 of 14
22.Given the above, we consider that further guidance and examples are needed toexplain the application of B4.1.8A and B4.1.10A, in particular, the concepts of‘aligned with the direction and magnitude’ and ‘contingent event specific to thedebtor’, and how they interact.Question 3: Classification of financial assets – Financial assets with non-recoursefeatures
23.We generally welcome the IASB’s proposals to address the market’s need for clearguidance on ‘non-recourse’ financial assets.
24.However, some respondents from the banking industry expressed concerns thatthe description of ‘non-recourse’ in B4.1.16A appears to be too narrow. B4.1.16Aseems to limit the assessment only to those cases where there is contractualrecourse to cash flows of the specified assets during the life of the financial assetand in the event of default. However, in current practice, the non-recourseguidance has been applied to cases where a creditor’s claim is limited to specifiedassets or other cash flows, either contractually or in substance, regardless of whenthe limit to specified assets applies, i.e. during the life of the instrument only, in theevent of default only or both.These respondents have also highlighted that many banking facilities currentlyconsidered as non-recourse arrangements seldom have terms that stipulate thatthe lender can only receive cash flows generated directly from a specified assetthroughout the life of the loan. Instead, in a typical special purpose entity (SPE)
structure, the lender may receive cash flows from the SPE’s other operations orthe sponsor could put in more equity over the life of the loan or raise further loansfrom which repayments could be made to the original lender. In the event of default,the lender would contractually have recourse only to a specified asset. It is unclearwhether the above arrangement could be considered as an ‘in substance’ non-recourse loan in terms of B4.1.16A.
25.The above comments suggest that there are some entities which may probably beapplying a wider definition of ‘non-recourse’ than the IASB proposal. To supportconsistent application of the requirements, we recommend the IASB clarify thedescription of ‘non-recourse’ in B4.1.16A and explain how it should be applied tothe bank facilities indicated above.
26.In addition, we have the following comments and recommendations to improve theclarity of the assessment in B4.1.17A.(a) The IASB should clarify how the two factors set out in B4.1.17A should beapplied, in particular, whether a qualitative and/or a quantitative assessmentwould be needed under the proposal.(b) In addition to the two factors in B4.1.17A, there are a number of other factorsused by current practice for assessing whether the contractual cash flows ofa financial asset with non-recourse features are SPPI (e.g. consideration ofLoan-to-Value (LTV) ratios). We recommend the IASB explore those factorsand incorporate them into B4.1.17A where appropriate so that the market hasmore guidance and reference on how to perform the ‘look-through’assessment to evaluate whether the non-recourse features are SPPI.Page 11 of 14Question 4: Classification of financial assets – Contractually linked instruments
27.Our respondents have provided the following comments to improve the clarity ofthe proposed amendments in B4.1.20:
(a) Many respondents considered that the last sentence in B4.1.20 (i.e. ‘... whichmeans the tranches have non-recourse features (see paragraph B4.1.16A’).)
inappropriately links the assessment criteria for non-recourse features withthose for CLI. They considered that:
the drafting of B4.1.20 seems to imply that the presence or absence ofnon-recourse features depends on whether there is a waterfall paymentstructure, which is inconsistent with the extant guidance on financialassets with non-recourse features. BC 89 of the ED states that non-recourse feature means that the holders have recourse only to the cashflows from the underlying pool of financial instruments, which is unrelatedto the seniority and payment ranking of different tranches; and it is inappropriate to include ‘non-recourse’ as a feature of CLI which wouldessentially treat CLI as a subset of financial assets with non-recoursefeatures. This is because these two types of instruments are subject todifferent assessment criteria that cannot be reconciled by treating one typeof instrument’s being a subset of the other without the IASB providing clearguidance as to which assessment criteria should be used.Instead of including ‘non-recourse’ as a feature of CLI that might lead toconfusion as to what requirements in IFRS 9 (i.e. non-recourse or CLI) shouldbe applied, we consider that it would be useful to clarify the key differencesbetween ‘non-recourse’ and CLI by providing examples that incorporatetypical features of non-recourse and CLI used in current practice. See alsodiscussions in paragraph 28 below relating to our comment on the example inB4.1.20A.(b) We also suggest the IASB consider changing ‘disproportionate allocation oflosses’ to ‘disproportionate allocation of cash flows’ in B4.1.20 as thecontractual terms of CLI in the market normally set out the holders’ right tocash flows instead of losses.
28.A few respondents have the following comments on the example in B4.1.20A:
(a) The fact pattern is over-simplified as the example does not consider thecharacteristics of CLI, such as the prioritisation of payments, whether thesenior and junior debt instruments are entitled to cash flows from the samespecified assets, and whether there is any linkage between the junior andsenior debt instruments, before arriving at the conclusion that the transactiondoes not contain CLI. This may create the confusion that transactions withonly senior and junior debt instruments would automatically be assessed ashaving ‘non-recourse’ features and not containing CLI.(b) It is unclear how the example could be applied to situations where, at inceptionof the lending arrangement, there are multiple tranches with cash flowentitlements from the same specified assets and a disproportionate allocationof cash flows, but only one tranche is issued to the market and the mezzaninetranche is issued at a later date.Page 12 of 14(c) Questions also arise as to whether the classification needs to be re-assessedif the debtor subsequently disposes of the junior tranche of an instrument thathas been assessed as CLI at inception.To clarify the key differences between ‘non-recourse features’ and CLI, werecommend the IASB consider adding an example with a similar fact pattern asB4.1.20A but in that example there is linkage between the junior and seniortranches and prioritisation of payments, which then requires the entity to apply theCLI requirements. Building on those examples, the IASB can further elaboratewhether the classification should be re-assessed when there is a change incircumstances (e.g. the scenarios as mentioned in (a), (b) and (c) of this paragraph)
by applying the relevant existing guidance in IFRS 9 where appropriate.Question 5: Disclosures – Investments in equity instruments designated at fairvalue through other comprehensive income (FVTOCI)
29.We generally agree with the proposal to expand the disclosure requirements thatmandate entities to disclose changes in the fair value of equity instruments,including those instruments that have been derecognised in the reporting period.This aligns with the IASB’s objective of providing more transparent andcomprehensive information about the performance of equity instrumentsdesignated at FVTOCI.
30.Nevertheless, some respondents from the banking industry believe that disclosingthe fair value of equity instruments on an aggregated basis instead of an individualbasis, as proposed in 11A(c), may obscure relevant information and reduce theunderstandability of individual equity instruments to users of the financialstatements.Question 6: Disclosures – Contractual terms that could change the timing oramount of contractual cash flows
31.Our respondents expressed mixed views on the proposed disclosures regardingthe contractual terms that could change the timing or amount of contractual cashflows. Respondents who agreed with the proposed disclosures considered that theproposal could help users of financial statements to ascertain the impact of acontingent event specific to the debtor on an entity’s future cash flows. Otherrespondents (including preparers from the banking industry) have raised thefollowing concerns:
(a) Some respondents raised concerns regarding the objective and usefulness ofthe proposed disclosures as they concentrate solely on contingent eventsspecific to debtors but not others that could also change the contractual cashflows of the financial instruments. They also considered that the lack of clarityon the meaning of ‘contingent event specific to the debtor’ (refer to ourresponses to Question 2 above) may lead to inconsistent practices.(b) The proposed qualitative and quantitative disclosures would be onerous andcostly to implement, especially for entities such as financial institutions thathave a large number of financial instruments containing diverse contingentterms that are specific to debtors as well as a myriad of sustainable financeproducts with various ESG-linked features. The disclosure of quantitativeinformation regarding the range of changes to contractual cash flows resultingfrom these terms would also be challenging. Hence, the costs of implementingPage 13 of 14the proposal may outweigh the benefits that users of financial statementswould obtain.(c) The proposal may overlap with the requirements in the following accountingstandards that require entities to provide information about the expectedtiming and amount of contractual cash flows of financial instruments:
Disclosure of maturity analysis of financial instruments under IFRS 7Financial Instruments: Disclosures Disclosure of information about covenants and how they could affect thesettlement of liabilities under paragraph 76ZA of Amendments to IAS 1Non-current Liabilities with Covenants(d) A respondent questioned the necessity of the proposed disclosures in 20B ofthe ED for financial liabilities measured at amortised cost, given the origin ofthe issue relates to the classification of financial assets, not financial liabilities.This respondent was concerned that excessive disclosures could overburdenthe financial statements which would not be useful for decision making.(e) Given the concerns raised above, a respondent suggested that the IASB deferthe consideration of the proposed disclosures in 20B of the ED to theAmortised Cost Measurement project.
32.In light of the above concerns, we recommend that the IASB reconsider the costsand benefits of the proposed disclosures. In particular, it is important to reconsiderwhether including financial liabilities into the scope of the proposal would bringsignificant benefits, given other standards have already set out similar disclosurerequirements regarding the expected timing and amount of contractual cash flows.If the inclusion of financial liabilities is necessary, we suggest that the IASB clarifyhow the proposal would interact with other existing disclosures in IFRS 7 and IAS
1.
33.We also recommend that the IASB:
(a) clarify how the quantitative disclosure requirement should be determined if asensitivity analysis or a quantification of the likely effect of the contingentevents is not required (BC103 of the ED); and(b) provide examples of contingent events that would be captured under theproposed disclosures to clarify which types of financial instruments would besubject to the disclosures.Question 7: Transition
34.As explained above, some respondents considered that the proposals in the EDmight change the classification and measurement of existing financial instruments.They were concerned that the proposed requirements would create significantpractical challenges to preparers, especially financial institutions and entities withlending as their main business, as these entities would need to reassess theclassification and measurement of all the instruments held. Also, some financialinstruments which have been measured at amortised cost might need to bemeasured at FVTPL under the proposals. It would be challenging for entities toapply the proposals retrospectively.
35.In view of the above, we recommend the IASB first understand and assess thepotential impact that would be brought by the proposed requirements to the marketPage 14 of 14and then further consider the practicability and the extent of retrospectiveapplication when developing the transition provisions.
36.In terms of voluntary early adoption of the amendments, we recommend that theIASB consider allowing an entity to early adopt the amendments on theclassification of financial assets, without early adopting the amendments on thederecognition of financial liabilities for the following reasons:
(a) The proposals on the classification of financial asset and the derecognition offinancial liability are conceptually separate and they do not interact with eachother; and(b) The above suggestion would help entities that wish to early adopt theamendments on classification of financial assets for their ESG-linkedinstruments but need more time to assess the practical implications ofapplying the exception to derecognise financial liabilities before settlementdate under B3.3.8 and to address preparers’ concern in changing the longstanding diversity in practice as described in paragraph 3 above.~ End ~
IASB Exposure Draft Amendments to the Classification and Measurement of Financial Assets (Proposed amendments to IFRS 9 and IFRS 7
下载原件Page 1 of 14Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
14 July 2023Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure DraftAmendments to the Classification and Measurement of Financial Assets(Proposed amendments to IFRS 9 and IFRS 7)
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditing,ethics and sustainability disclosures for professional accountants in Hong Kong. We aregrateful for the opportunity to provide our comments on this Exposure Draft (ED).The HKICPA appreciates the IASB’s endeavours to address the stakeholders’ concernsraised in the post-implementation review of IFRS 9 Financial Instruments concerning theclassification and measurement of financial assets with ESG-linked features and thetentative agenda decision regarding the accounting for the settlement of a financial assetor a financial liability using an electronic payment system.We have carefully reviewed the ED and performed outreach with local stakeholders. Weprovide detailed comments in the Appendix and summarise our primary concerns andrecommendations below.Classification of financial assets – contractual terms that are consistent with a basiclending arrangementWe have significant concerns over the proposed amendments to the solely payments ofprincipal and interest (SPPI) requirements. We consider that the proposed amendmentsdo not establish clear principles for assessing whether the financial instruments withESG-linked or similar features meet the SPPI requirements. The two new conceptsintroduced by the ED for the SPPI assessment, namely ‘aligned with the direction andmagnitude’ in B4.1.8A and ‘contingent event specific to the debtor’ in B4.1.10A, havenot been clearly defined or explained. Moreover, questions have been raised as to howthese two concepts interact with each other and with the existing requirements in IFRS
9.Another key concern is that the proposals were drafted with ESG-linked features in mindbut they are not ring-fenced to ESG features only. If the proposals were applied to othernon-ESG related contractual terms, they could change the current classification of thosefinancial instruments and result in unintended consequences.In addition, we question the objectives and usefulness of the related proposeddisclosures regarding the changes in contractual cash flows of financial instruments.These proposed disclosures focus solely on contingent events specific to debtors, whilePage 2 of 14other events that could also change the contractual cash flows of the financialinstruments are not considered. The lack of clarity on the meaning of ‘contingent eventspecific to debtors’ may also lead to inconsistent practices. Preparers from the bankingindustry have expressed concerns that the proposed disclosures would be onerous andcostly to implement and questioned whether the benefits of providing the disclosureswould outweigh the costs of preparing them.Given these concerns, we strongly recommend the IASB take immediate action toevaluate the implications of the proposals on the current classification of financial assets,regardless of whether they have ESG-linked features, and consider whether this is theintention of the proposals. If the IASB were to proceed with the proposals, werecommend that the IASB provide more clarity on the conceptual rationale for and theapplication of the two new concepts, namely ‘aligned with the direction and magnitude’and ‘contingent event specific to the debtor’. In this context, we believe that providingexamples to demonstrate the application of these concepts on accounting for financialassets with common ESG-linked features, as well as non ESG-linked financial assets,would be helpful in mitigating potential diversity in application.Non-recourse features and contractually linked instruments (CLI)
Our respondents expressed concerns regarding the narrow description of ‘non-recourse’ features proposed in B4.1.16A. They noted that it could be read to apply onlyto cases where there is a contractual recourse to cash flows of the specified assetsduring the life of the financial asset and in the case of default. However, in currentpractice, non-recourse consideration could also apply when a creditor’s claim is limitedto specific assets or other cash flows, either contractually or in substance, and whetherover the life of the instrument or in the case of default.They also considered that it is inappropriate to include ‘non-recourse’ as a feature ofCLI in B4.1.20 which would essentially treat CLI as a subset of financial assets withnon-recourse features. This is because these two types of instruments are subject todifferent assessment criteria that cannot be reconciled by treating one type ofinstrument’s being a subset of the other without the IASB providing clear guidance asto which assessment criteria should be used.In light of the above, we recommend that the IASB clarify the description of ‘non-recourse’ feature in B4.1.16A, and the key differences between ‘non-recourse’ and CLIby providing examples that incorporate typical features of non-recourse and CLI usedin current practice. We have suggested some improvements that could help to clarifythe proposals in the Appendix to this letter.Derecognition of a financial liability settled through electronic transferThe terms ‘settlement date’ and ‘settlement date accounting’ are currently used in IFRS9 with reference to ‘regular way purchase or sale of financial assets’ only. However, theway B3.1.2A is currently drafted in the ED seems to extend the ‘settlement dateaccounting’ to other transactions that are not regular way purchases or sales. If the IASBintends to apply settlement date accounting to other transactions, we recommend theIASB provide guidance and examples to demonstrate how to apply it to transactionsother than regular way purchases or sales. Otherwise, the IASB should revisit thewording in B3.1.2A (and as a consequence B3.3.8 since that paragraph also refers tosettlement date accounting) to avoid confusion when applying the proposedamendments. We provide an example of possible changes to wording in our detailedresponse to Question 1 in the Appendix.Page 3 of 14To ensure consistent application of the proposal for the derecognition of financialliabilities settled through electronic transfer, we suggest that the IASB provideclarifications on the application of the three criteria in B3.3.8. We also suggest that theIASB clarify whether the criteria are applicable when the cash used for settlement willcome from an overdraft or similar facility with a negative balance.If you have any questions regarding the matters raised in this letter, please contactCarrie Lau (carrie@hkicpa.org.hk) or Kennis Lee (kennislee@hkicpa.org.hk), AssociateDirectors of the Standard Setting Department.Sincerely,Cecilia KweiDirector of Standard SettingPage 4 of 14Work undertaken by the HKICPA in forming its views:
The HKICPA:
(a)
issued an Invitation to Comment on the ED on 23 March 2023 to its members andother stakeholders;
(b)
sought input from its Financial Instruments Advisory Panel, Insurance AdvisoryPanel and Small and Medium-sized Practitioners Committee and its TechnicalIssues Working Group, which mainly comprise technical and industry experts fromlarge as well as small and medium accounting firms; and(c)
developed its views through its Financial Reporting Standards Committee, havingreflected on its respondents’ views. The Committee comprises preparerrepresentatives from various industry sectors, regulators, as well as technical andindustry experts from small, medium and large accounting firms.Detailed comments on the IASB EDQuestion 1: Derecognition of a financial liability through electronic transfer
1.We generally support providing an exception to the general derecognitionrequirements for financial liabilities that are settled through electronic transfers.However, we have the following comments and suggestions.A.Recognition and derecognition of a financial asset or financial liability usingsettlement date accounting [B3.1.2A]
2.Our respondents noted that the proposal in B3.1.2A would change the currentpractice of derecognising a financial liability that is settled by cheque becauseentities would be required to derecognise the financial liability on the date whenthe cheque is cleared by the bank, instead of when the cheque is issued to thecreditor. Some respondents questioned whether such a change would faithfullyrepresent the substance of the current economic phenomenon as financialliabilities are generally considered as being settled once debtors have issued thecheques to their creditors. This is considering the fact that in our jurisdiction it isnot often that cheques would be dishonoured or cancelled by the drawer after thecheques have been issued.
3.We acknowledge the market concerns about the need to change the timing forderecognising financial liabilities settled by cheques. However, we understandfrom BC22 of the ED that the intention of the proposal is to clarify that an entity isrequired to apply settlement date accounting when recognising or derecognisingfinancial assets and financial liabilities (except for regular way exception) so as toimprove consistent application of the requirement. On this basis, we believe thatthe proposal would help resolve the diversity in practice. To increase the marketreceptiveness to the proposed amendments and raise public awareness of theirimpact, we recommend the IASB provide relevant educational material on theimpact of the proposals on cheque payments. We also suggest the IASB considerproviding sufficient time for the market to implement the change when it determinesthe effective date of the amendments.
4.A few respondents highlighted that the terms ‘settlement date’ and ‘settlement dateaccounting’ are currently used in IFRS 9 with a reference to a ‘regular purchase orsale of a financial asset’ only. IFRS 9 provides special accounting (trade date orsettlement date accounting) for regular way purchases or sales because of thenature of such transactions as explained in BA.4. Accordingly, the concept ofsettlement date accounting is irrelevant to other types of transactions under theAppendixPage 5 of 14extant IFRS 9 including derecognition of financial liabilities and those involvingderivatives.These respondents are concerned that B3.1.2A seems to extend the ‘settlementdate accounting’ to other types of transactions that are not even sales or purchasesor which are not ‘regular way’. If that is the case, these respondents questionedhow the settlement date accounting should be applied to such transactions, e.g.transactions with interest rate swaps and other net settled derivatives where thereis no subsequent settlement by transferring some financial assets for thoseinstruments. Currently, without B3.1.2A, those derivatives are recognised under
3.1.1 which is not an application of ‘settlement date accounting’.
5.Some respondents noted from the Basis for Conclusions of the ED that the IASBdid not indicate any intention to change the existing recognition and derecognitionprinciples of financial assets and financial liabilities in IFRS 9. These respondentssuggested the IASB consider taking out the entire paragraph of or redraftingB3.1.2A to avoid any confusion or potential impact to other IFRS 9 requirements ifthe primary purpose of the amendments is to provide an exception (i.e. B3.3.8) forentities to derecognise their financial liabilities before the settlement date forpayment transactions settled through electronic transfers.
6.We understand that one of the aims of adding B3.1.2A is to resolve the diversity inpractice regarding settlement of financial liabilities using electronic paymentsystems as explained in the ED. By means of issuing the amendments, the IASBcan duly consider an appropriate effective date for entities to change their currentpractice. From this point of view, we do not object to this proposal.
7.However, in light of the respondents’ concerns in paragraphs 4 and 5 above, werecommend the IASB consider the following suggestions to avoid any confusion orunintended misinterpretation of the requirements:
(a) If the IASB intends to apply the ‘settlement date accounting’ to transactionsother than regular way purchases or sales, we suggest the IASB provideguidance and practical examples to demonstrate how to apply settlement dateaccounting to transactions other than regular way purchases or sales such asnet settled derivatives. Furthermore, we noted that the current drafting inB3.1.2A shows that settlement date accounting applies to both financialassets and financial liabilities but ‘settlement date accounting’ as described inparagraph B3.1.6 only refers to financial assets. Therefore, we consider thatB3.1.6 should be expanded accordingly to cover financial liabilities.(b) If the IASB does not intend to change the application of the recognition andderecognition requirements in IFRS 9, we recommend the IASB revisit thewording in B3.1.2A to ensure that they are aligned with the general principlesof recognition and derecognition of financial assets and financial liabilities asset out in 3.1.1, 3.2.3 and 3.3.1 of IFRS 9. A possible redrafting of B3.1.2Awould be as follows:
‘When recognising or derecognising a financial asset or financial liability, anentity shall apply the general relevant requirements in this Standard(specifically paragraph 3.1.1 in the case of recognition of financial assets andfinancial liabilities, section 3.2 in the case of derecognition of financial assetsand section 3.3 in the case of derecognition of financial liabilities) an entityshall apply settlement date accounting (see paragraph B3.1.6) unlessparagraph B3.1.3 applies or an entity elects to apply paragraph B3.3.8.’Page 6 of 14A consequential redrafting of B3.3.8 would be as follows:
‘Notwithstanding the requirement in paragraph B3.1.2A to apply settlementdate accounting, an entity is permitted (…)’We would also suggest that the IASB review any references in the Basis forConclusions of the ED for similar issues regarding the application ofsettlement date accounting to financial liabilities.B. Derecognising a financial liability settled through electronic transfer before thesettlement date [B3.3.8-B3.3.10]
8.Our respondents raised the following comments regarding the proposal for thederecognition of financial liabilities before the settlement date:
(a) It is unclear whether B3.3.8(a) is considered to be met when an entity issubject to a penalty if it withdraws, stops or cancels a payment instruction andwhether this depends on the size of the penalty.(b) It is unclear what ‘practical ability’ in B3.3.8(b) means and how to assess it,e.g. whether it can be based on an entity’s intention and past practice; andhow it is different from ‘ability’ as referred to in B3.3.8(a).(c) Some respondents suggested deleting the last sentence in B3.3.9 ‘settlementrisk would not be insignificant if the completion of the payment instruction issubject to the entity’s ability to deliver cash on the settlement date’, as theyconsidered that this sentence confuses criteria (a) and (b) of B3.3.8 (i.e. theability of the entity to stop the payment instruction or deliver cash) with criterion(c) (i.e. settlement risk).(d) The proposed requirements are unclear regarding whether and how theexception to derecognising a financial liability applying B3.3.8 would apply incases where the cash, which is used to settle the financial liability in theelectronic transfer system, comes from an overdraft or other similar facilitywith a negative balance. It is noted that paragraph B3.3.8 refers to ‘settled withcash’ and (b) of that paragraph refers to ‘access the cash’. This raises aquestion as to whether ‘cash’ is defined as in IAS 7.6 as ‘cash on hand anddemand deposits’ and so only refers to positive cash balances, or the broaderdefinition in IAS 7.8 which acknowledges that ‘bank overdrafts which arerepayable on demand form an integral part of an entity’s cash management’and ‘[i]n these circumstances, bank overdrafts are included as a componentof cash and cash equivalents’ and so can include negative balances. It wouldbe useful for the IASB to clarify this aspect and whether the fact that theoverdraft facility is committed or uncommitted would make a difference to theability to use the election in B3.3.8.
9.We generally agree with our respondents’ comments in paragraph 8 and thereforerecommend the IASB provide clarifications with guidance and examples to addressthose comments so as to avoid the potential diversity in application in those areas.
10.Furthermore, given the significance of settlement risk as one of the criteria forapplying the exception under B3.3.8, we recommend the IASB consider defining‘settlement risk’ in Appendix A of IFRS 9 instead of explaining the term in BC33.Page 7 of 14Question 2: Classification of financial assets – Contractual terms that areconsistent with a basic lending arrangement
11.We appreciate the endeavours of the IASB to address the issue concerning theclassification and measurement of financial assets with ESG-linked features, whichare increasingly prevalent in the market. However, we are concerned that theproposed amendments to the SPPI requirements do not achieve the objective ofestablishing clear principles for assessing whether financial instruments with ESGfeatures meet the SPPI requirements. In addition, the proposals were drafted withESG-linked features in mind but they are not ring-fenced to ESG features only. Ifthe proposals were applied to other non-ESG related contractual terms, they couldchange the current classification of those financial instruments and result inunintended consequences.
12.Overall, we consider that the proposed amendments in B.4.1.8A and B4.1.10Aintroduce new criteria for assessing whether the contractual cash flows areconsistent with a basic lending arrangement and they are not merely a clarificationof the existing SPPI requirements. As such, we are concerned about the use of theword ‘clarification’ in the Basis for Conclusions of the ED which also implies thatcertain past classification treatments would be errors.A.Element of interest in a basic lending arrangement [B4.1.8A]
13.Most respondents were concerned about the proposal requiring entities to assessboth the direction and magnitude of the change in basic lending risks or costs whendetermining whether the contractual cash flows are consistent with a basic lendingarrangement because it would be difficult to model the change and assess thereasonableness of such a change against movements in the market. There isinsufficient evidence in the market to demonstrate how ESG factors correlate withcredit risk and other basic lending risks.
14.Some respondents noted that there appears to be an inconsistency within B4.1.8A.In assessing the elements of interest, although the IASB clarified that an entityshould not focus on ‘how much’ compensation it receives, the proposal requiresan entity to consider the ‘magnitude’ of the change in basic lending risks or costswhen determining whether the contractual cash flows are consistent with a basiclending arrangement in the same paragraph.
15.We acknowledge the challenges in assessing both the direction and magnitude ofthe change in basic lending risks or costs in the absence of adequate marketinformation. Accordingly, we recommend that the IASB clarify the core principleand supplement the principle with guidance and examples on how to apply it toinstruments with different ESG characteristics.
16.In addition, we recommend that the IASB:
(a) clarify how the concept of ‘magnitude’ as introduced in B4.1.8A interact withthe existing ‘leverage’ concept stipulated in B4.1.9 in assessing a basiclending arrangement; and(b) move the last sentence in B4.1.8A ‘A change in contractual cash flows isinconsistent with a basic lending arrangement if it is not aligned with thedirection and magnitude of the change in basic lending risks or costs.’ toB4.1.10A as it relates to a change in contractual cash flows and it would bemore appropriate to include it in B4.1.10A instead of B4.1.8A.Page 8 of 14B.Contractual terms that change the timing or amount of contractual cash flows[B4.1.10A]
17.Our respondents expressed concerns about the proposed requirement that‘contingent event must be specific to the debtor’ in order for a change in contractualcash flow to be consistent with a basic lending arrangement for the followingreasons:
(a) Even though the consideration of contingent events is an extant requirementof IFRS 9, the term ‘contingent event’ is not defined and it could be very broad.In practice, many financial instruments with contractual terms that introducevariability to contractual cash flows are currently considered as compatiblewith SPPI, regardless of whether they are considered contingent events underB4.1.10. For example, an instrument with fall-back clauses triggered by thedisappearance of the relevant benchmark rate is considered compatible withSPPI. If these events are considered to be contingent events, that instrumentwould fail to meet the SPPI requirements under B4.1.10A as they are notspecific to debtors.(b) It is unclear as to why the contingent event has to be specific to debtors butnot lenders, given that the elements of interest are meant to compensate thelenders for undertaking lending risks and costs and thus interest can alsoinclude a profit margin for lenders as stipulated in B4.1.7A. In practice, manyloan contracts include clauses that are specific to lenders to protect theirinterests, e.g. a lender’s contractual right to adjust the amount to be receiveddue to new tax provisions or compensation for additional costs. Therefore, theproposal could change the current practice, as these loans would fail to satisfythe SPPI requirements under the proposals.(c) Some respondents commented that the meaning of ‘specific to the debtor’lacks clarity, particularly in terms of whether it is only restricted to ‘the debtorachieving a contractually specified target’ as indicated in B4.1.10A. They alsoquestioned whether a contingent event relating to a debtor’s asset would beconsidered as ‘specific to the debtor’ under the proposal. For example, it isnot clear whether a provision in a collateralised lending arrangement thatcould accelerate repayment of the loan if the quality of the collateraldeteriorates (e.g. a significant drop in the fair value of the property that issubject to a mortgage loan) would be considered a contingent event that is‘specific to the debtor’, or a contingent event that is specific to ‘an asset of thedebtor’ (being the property) as opposed to the debtor as a whole. Anotherexample that highlights this issue is when a debtor is required to repay themargin loan earlier if the value of securities held in this debtor’s marginaccount falls below a specified threshold and the debtor is unable to add morefunds to raise the equity in his account to the required level. It is not clearwhether such a contingent event relating to the debtor’s asset (being theshares) would be considered as ‘specific to the debtor’.(d) B4.1.10A states that to meet the SPPI requirements, an instrument’s cashflows resulting from the occurrence of a contingent event must not representan investment in the debtor. The ED only provides an example on what couldbe an ‘investment in the debtor’ in BC 70 but does not provide a clear definitionor explanation of the concept. A few respondents considered that the term‘investment in the debtor’ is broad and can be interpreted in different ways,leading to inconsistent practices. For instance, it is unclear whether anPage 9 of 14instrument that adjusts its interest rate upwards or downwards by a fixednumber of basis points when a certain level of profits or revenue is reachedwould be considered ‘a share of the debtor’s revenue or profit’ under BC 70.One school of thought is that the adjustment to the interest rate constitutes ashare of the debtor’s revenue or profit because it affects the share of profit forordinary shareholders. Others contend that it is not a share of the debtor’srevenue or profit because the participation in higher profits is limited by thefixed adjustments to the interest rates. The fact that BC 69 of the ED statesthat ‘contractual cash flows that change based on the level of a debtor’srevenue or profits in a specific period would not generally be considered to beconsistent with a basic lending arrangement’ is likely to add further confusionto this issue.
18.In light of the above concerns, we consider that more clarity on what constitutes‘contingent events’ is necessary to ensure consistent application and avoid anyunintended consequences. In particular, if the IASB intends to exclude contingentevents associated with the time value of money or prepayment features (BC 69 ofthe ED), we consider that the proposed requirements should explicitly state this.Furthermore, the IASB should provide a clear rationale on why a contingent eventmust be specific to the debtor in order to be consistent with a basic lendingarrangement and provide more guidance on what ‘specific to the debtor’ and‘investment in the debtor’ intend to encompass under the proposal. Given that theproposed requirement of ‘contingent event specific to the debtor’ could affect theclassification of certain financial instruments currently meeting the SPPIrequirements, we strongly recommend the IASB evaluate the implications of theproposal on the current classification of financial instruments, regardless ofwhether they have ESG-linked features, and consider whether this is the intentionof the proposal.
19.In addition, the application of the SPPI requirements is closely linked to theamortised cost measurement in IFRS 9. In our previous submission to the IASB1,we highlighted several application issues with amortised cost measurement. Inparticular, diversity in practice exists in applying the effective interest method tofloating rate instruments due to the lack of clarity on the scope and definition ofwhat constitutes a floating rate instrument under B5.4.5 of IFRS 9. Given thegrowing prevalence of ESG-linked instruments that will be subject to amortisedcost measurement once the proposed amendments are finalised, we stronglyrecommend that the IABS commence the pipeline project Amortised CostMeasurement as soon as practicable.C.New examples of applying the proposed requirements [B4.1.13-14]
20.Many respondents considered that the two new examples in B4.1.13-14 are notsufficiently clear in demonstrating how instruments with ESG-linked features areassessed for SPPI requirements under the proposal and how paragraphs B4.1.8Aand B4.1.10A interact.
21.For example, B4.1.13 illustrates that the instrument is SPPI compatible purelybecause the contingent event is specific to the debtor (B4.1.10A), withoutconsidering the direction and magnitude of the change in basic lending risks orcosts (B4.1.8A). There is a risk that this example will be cited as providing adefinitive answer in its own right without the need to look at any other requirementsin the SPPI assessment.1 See paragraph 19 of the HKICPA’s submission to the IASB on PIR of IFRS 9 – Classification andMeasurement on 13 January 2022.Page 10 of 14
22.Given the above, we consider that further guidance and examples are needed toexplain the application of B4.1.8A and B4.1.10A, in particular, the concepts of‘aligned with the direction and magnitude’ and ‘contingent event specific to thedebtor’, and how they interact.Question 3: Classification of financial assets – Financial assets with non-recoursefeatures
23.We generally welcome the IASB’s proposals to address the market’s need for clearguidance on ‘non-recourse’ financial assets.
24.However, some respondents from the banking industry expressed concerns thatthe description of ‘non-recourse’ in B4.1.16A appears to be too narrow. B4.1.16Aseems to limit the assessment only to those cases where there is contractualrecourse to cash flows of the specified assets during the life of the financial assetand in the event of default. However, in current practice, the non-recourseguidance has been applied to cases where a creditor’s claim is limited to specifiedassets or other cash flows, either contractually or in substance, regardless of whenthe limit to specified assets applies, i.e. during the life of the instrument only, in theevent of default only or both.These respondents have also highlighted that many banking facilities currentlyconsidered as non-recourse arrangements seldom have terms that stipulate thatthe lender can only receive cash flows generated directly from a specified assetthroughout the life of the loan. Instead, in a typical special purpose entity (SPE)
structure, the lender may receive cash flows from the SPE’s other operations orthe sponsor could put in more equity over the life of the loan or raise further loansfrom which repayments could be made to the original lender. In the event of default,the lender would contractually have recourse only to a specified asset. It is unclearwhether the above arrangement could be considered as an ‘in substance’ non-recourse loan in terms of B4.1.16A.
25.The above comments suggest that there are some entities which may probably beapplying a wider definition of ‘non-recourse’ than the IASB proposal. To supportconsistent application of the requirements, we recommend the IASB clarify thedescription of ‘non-recourse’ in B4.1.16A and explain how it should be applied tothe bank facilities indicated above.
26.In addition, we have the following comments and recommendations to improve theclarity of the assessment in B4.1.17A.(a) The IASB should clarify how the two factors set out in B4.1.17A should beapplied, in particular, whether a qualitative and/or a quantitative assessmentwould be needed under the proposal.(b) In addition to the two factors in B4.1.17A, there are a number of other factorsused by current practice for assessing whether the contractual cash flows ofa financial asset with non-recourse features are SPPI (e.g. consideration ofLoan-to-Value (LTV) ratios). We recommend the IASB explore those factorsand incorporate them into B4.1.17A where appropriate so that the market hasmore guidance and reference on how to perform the ‘look-through’assessment to evaluate whether the non-recourse features are SPPI.Page 11 of 14Question 4: Classification of financial assets – Contractually linked instruments
27.Our respondents have provided the following comments to improve the clarity ofthe proposed amendments in B4.1.20:
(a) Many respondents considered that the last sentence in B4.1.20 (i.e. ‘... whichmeans the tranches have non-recourse features (see paragraph B4.1.16A’).)
inappropriately links the assessment criteria for non-recourse features withthose for CLI. They considered that:
the drafting of B4.1.20 seems to imply that the presence or absence ofnon-recourse features depends on whether there is a waterfall paymentstructure, which is inconsistent with the extant guidance on financialassets with non-recourse features. BC 89 of the ED states that non-recourse feature means that the holders have recourse only to the cashflows from the underlying pool of financial instruments, which is unrelatedto the seniority and payment ranking of different tranches; and it is inappropriate to include ‘non-recourse’ as a feature of CLI which wouldessentially treat CLI as a subset of financial assets with non-recoursefeatures. This is because these two types of instruments are subject todifferent assessment criteria that cannot be reconciled by treating one typeof instrument’s being a subset of the other without the IASB providing clearguidance as to which assessment criteria should be used.Instead of including ‘non-recourse’ as a feature of CLI that might lead toconfusion as to what requirements in IFRS 9 (i.e. non-recourse or CLI) shouldbe applied, we consider that it would be useful to clarify the key differencesbetween ‘non-recourse’ and CLI by providing examples that incorporatetypical features of non-recourse and CLI used in current practice. See alsodiscussions in paragraph 28 below relating to our comment on the example inB4.1.20A.(b) We also suggest the IASB consider changing ‘disproportionate allocation oflosses’ to ‘disproportionate allocation of cash flows’ in B4.1.20 as thecontractual terms of CLI in the market normally set out the holders’ right tocash flows instead of losses.
28.A few respondents have the following comments on the example in B4.1.20A:
(a) The fact pattern is over-simplified as the example does not consider thecharacteristics of CLI, such as the prioritisation of payments, whether thesenior and junior debt instruments are entitled to cash flows from the samespecified assets, and whether there is any linkage between the junior andsenior debt instruments, before arriving at the conclusion that the transactiondoes not contain CLI. This may create the confusion that transactions withonly senior and junior debt instruments would automatically be assessed ashaving ‘non-recourse’ features and not containing CLI.(b) It is unclear how the example could be applied to situations where, at inceptionof the lending arrangement, there are multiple tranches with cash flowentitlements from the same specified assets and a disproportionate allocationof cash flows, but only one tranche is issued to the market and the mezzaninetranche is issued at a later date.Page 12 of 14(c) Questions also arise as to whether the classification needs to be re-assessedif the debtor subsequently disposes of the junior tranche of an instrument thathas been assessed as CLI at inception.To clarify the key differences between ‘non-recourse features’ and CLI, werecommend the IASB consider adding an example with a similar fact pattern asB4.1.20A but in that example there is linkage between the junior and seniortranches and prioritisation of payments, which then requires the entity to apply theCLI requirements. Building on those examples, the IASB can further elaboratewhether the classification should be re-assessed when there is a change incircumstances (e.g. the scenarios as mentioned in (a), (b) and (c) of this paragraph)
by applying the relevant existing guidance in IFRS 9 where appropriate.Question 5: Disclosures – Investments in equity instruments designated at fairvalue through other comprehensive income (FVTOCI)
29.We generally agree with the proposal to expand the disclosure requirements thatmandate entities to disclose changes in the fair value of equity instruments,including those instruments that have been derecognised in the reporting period.This aligns with the IASB’s objective of providing more transparent andcomprehensive information about the performance of equity instrumentsdesignated at FVTOCI.
30.Nevertheless, some respondents from the banking industry believe that disclosingthe fair value of equity instruments on an aggregated basis instead of an individualbasis, as proposed in 11A(c), may obscure relevant information and reduce theunderstandability of individual equity instruments to users of the financialstatements.Question 6: Disclosures – Contractual terms that could change the timing oramount of contractual cash flows
31.Our respondents expressed mixed views on the proposed disclosures regardingthe contractual terms that could change the timing or amount of contractual cashflows. Respondents who agreed with the proposed disclosures considered that theproposal could help users of financial statements to ascertain the impact of acontingent event specific to the debtor on an entity’s future cash flows. Otherrespondents (including preparers from the banking industry) have raised thefollowing concerns:
(a) Some respondents raised concerns regarding the objective and usefulness ofthe proposed disclosures as they concentrate solely on contingent eventsspecific to debtors but not others that could also change the contractual cashflows of the financial instruments. They also considered that the lack of clarityon the meaning of ‘contingent event specific to the debtor’ (refer to ourresponses to Question 2 above) may lead to inconsistent practices.(b) The proposed qualitative and quantitative disclosures would be onerous andcostly to implement, especially for entities such as financial institutions thathave a large number of financial instruments containing diverse contingentterms that are specific to debtors as well as a myriad of sustainable financeproducts with various ESG-linked features. The disclosure of quantitativeinformation regarding the range of changes to contractual cash flows resultingfrom these terms would also be challenging. Hence, the costs of implementingPage 13 of 14the proposal may outweigh the benefits that users of financial statementswould obtain.(c) The proposal may overlap with the requirements in the following accountingstandards that require entities to provide information about the expectedtiming and amount of contractual cash flows of financial instruments:
Disclosure of maturity analysis of financial instruments under IFRS 7Financial Instruments: Disclosures Disclosure of information about covenants and how they could affect thesettlement of liabilities under paragraph 76ZA of Amendments to IAS 1Non-current Liabilities with Covenants(d) A respondent questioned the necessity of the proposed disclosures in 20B ofthe ED for financial liabilities measured at amortised cost, given the origin ofthe issue relates to the classification of financial assets, not financial liabilities.This respondent was concerned that excessive disclosures could overburdenthe financial statements which would not be useful for decision making.(e) Given the concerns raised above, a respondent suggested that the IASB deferthe consideration of the proposed disclosures in 20B of the ED to theAmortised Cost Measurement project.
32.In light of the above concerns, we recommend that the IASB reconsider the costsand benefits of the proposed disclosures. In particular, it is important to reconsiderwhether including financial liabilities into the scope of the proposal would bringsignificant benefits, given other standards have already set out similar disclosurerequirements regarding the expected timing and amount of contractual cash flows.If the inclusion of financial liabilities is necessary, we suggest that the IASB clarifyhow the proposal would interact with other existing disclosures in IFRS 7 and IAS
1.
33.We also recommend that the IASB:
(a) clarify how the quantitative disclosure requirement should be determined if asensitivity analysis or a quantification of the likely effect of the contingentevents is not required (BC103 of the ED); and(b) provide examples of contingent events that would be captured under theproposed disclosures to clarify which types of financial instruments would besubject to the disclosures.Question 7: Transition
34.As explained above, some respondents considered that the proposals in the EDmight change the classification and measurement of existing financial instruments.They were concerned that the proposed requirements would create significantpractical challenges to preparers, especially financial institutions and entities withlending as their main business, as these entities would need to reassess theclassification and measurement of all the instruments held. Also, some financialinstruments which have been measured at amortised cost might need to bemeasured at FVTPL under the proposals. It would be challenging for entities toapply the proposals retrospectively.
35.In view of the above, we recommend the IASB first understand and assess thepotential impact that would be brought by the proposed requirements to the marketPage 14 of 14and then further consider the practicability and the extent of retrospectiveapplication when developing the transition provisions.
36.In terms of voluntary early adoption of the amendments, we recommend that theIASB consider allowing an entity to early adopt the amendments on theclassification of financial assets, without early adopting the amendments on thederecognition of financial liabilities for the following reasons:
(a) The proposals on the classification of financial asset and the derecognition offinancial liability are conceptually separate and they do not interact with eachother; and(b) The above suggestion would help entities that wish to early adopt theamendments on classification of financial assets for their ESG-linkedinstruments but need more time to assess the practical implications ofapplying the exception to derecognise financial liabilities before settlementdate under B3.3.8 and to address preparers’ concern in changing the longstanding diversity in practice as described in paragraph 3 above.~ End ~