Response 1 - Mazars

Deadline for completion of this Invitation to Comment:

Midday, Monday 26 June 2023

Please submit to: [email protected]

We appreciate the IASB's efforts to provide greater certainty regarding the application of the derecognition criteria following the publication of the IFRS Interpretation Committee's tentative agenda decision Cash Received via Electronic Transfer as Settlement of a Financial Asset (IFRS 9). This tentative agenda decision has created uncertainty in the UK over the practical application of the derecognition requirements of IFRS 9. Unfortunately, we do not believe that the proposals achieve the necessary certainty.

We further note that the issue was first raised through the IFRS Interpretation Committee process but was then identified as part of the PIR. Users of financial statements do not appear to be concerned about existing and possibly diverse reporting practice in this area. In our view the costs involved to achieve exact alignment with the IFRS Interpretation Committees tentative agenda decision are disproportionately higher than the benefits of consistency in this area. The time lag between the initiation of payments and the cash is received or paid out, is generally short. Any unusual delay will be identified through the bank reconciliation process.

We therefore support a pragmatic solution by the IASB which in our view would entail a practical expedient that covers financial assets and goes beyond electronic payment transfers. Unless greater certainty is provided by the IASB, it will fall on preparers and their auditors to form a view on whether existing practices are compatible with IFRS 9 and the IFRS Interpretation Committee tentative agenda decision, potentially risking diversity in practice.

We believe the UKEB's alternative proposal is a more pragmatic solution to address the uncertainty about the practical application of the derecognition requirements in IFRS 9. However, in our view the practical expedient should not be limited to electronic payment systems and should also cover financial assets, ie the receipt of cash.

That said, any practical expedient should be conditional, including that the time between payment instruction and legal release from the obligation to pay the creditor will be short; that the settlement risk is insignificant; and that the entity has the ability to pay the cash.

Equivalent conditions could potentially be developed in respect of financial assets. However, we would definitely welcome the need to clarify, following the September 20212 IFRS-IC TAD, on whether the interim balances (such as cash-in-transit) would meet the cash or cash equivalent criteria.

We are concerned about the impact of new paragraph B3.1.2A which requires settlement date accounting in relation to the recognition and derecognition of financial assets and liabilities. We disagree with paragraph BC10 in the ED that states IFRS 9 already requires the application of settlement date accounting, except for regular way purchase and sale of financial assets and this amendment is a clarification (paragraph BC22(a)).

IFRS 9 contains requirements in relation to the recognition and derecognition of financial assets and it is not clear how the settlement date requirements of paragraph B.3.1.6 are intended to fit with other IFRS 9 recognition and derecognition requirements. For example, paragraph B3.1.2(a) requires that unconditional payables and receivables are recognised when the entity becomes party to the contract and as a consequence has a legal right to receive or a legal obligation to pay cash. Settlement date accounting as defined in paragraph B3.1.6 refers to (a) a recognition of an asset on the day it is received by the entity and (b) the derecognition of an asset and the recognition of a gain or loss on disposal on the day that an asset is delivered by the entity. These requirements refer to different issues and how they are expected to be applied together is not clear. In our view paragraph B3.1.2A is better removed.

References to settlement should instead be explained or defined in the context of cash payments or receipts. This would also avoid questions around the application of settlement date accounting for financial liabilities, as the settlement date accounting requirements in paragraph B3.1.6 only apply to assets.

We support the amendments in that they provide some clarification and enhanced certainty regarding the accounting for financial instruments with ESG linked features. Nevertheless, in our view the amendments do not resolve all issues and may result in new application problems.

Paragraph B4.1.8A helpfully clarifies that compensation for basic lending risk can include different elements, ie it is not just compensation for time value of money, liquidity risk, administrative costs and a profit element.

In our view ESG linked financial instruments compensate a lender for reputational risks or could be a market driven, ie lenders have to offer these products in order to remain competitive. The amendments do not explain why compensation or indeed negative compensation for such risks or objectives, would or would not fall under basic lending risks.

Paragraph B4.1.8A further states that features that compensate for risk and market factors that are not typically considered to be basic lending risks are excluded from basic lending risks, even if such contractual terms are common in the market. This requirement is difficult to interpret, as it seems contradictory. In the context of ESG features it is likely that such products will become common in the market, but the amendments are still not clear on whether and if so when such features would typically be considered basic lending risks

Paragraph B4.1.8A also introduces the concept of alignment of the change in cash flows with direction and magnitude of a change in basic lending risk. In relation to ESG features it is difficult to interpret whether they would meet that condition or not.

We believe it may be impossible for the IASB to develop a set of conditions or criteria that can be consistently applied to decide on whether certain loan features are basic or not. Therefore we suggest that the IASB enhances its examples to illustrate and explain how the concept of basic lending risk would be applied in the context of ESG features. The clarifications in relation to the elements of basic lending risk and the exclusion of profit or revenue share related features contained in paragraph B4.1.8A should also be retained.

Paragraph B4.1.10A requires that the contingent feature must be specific to the debtor. We concur that there is a need to restrict when contingent features can be considered basic, however in our view, aligned with the definition of a derivative, the IASB should explore whether the contingency could be specific to a party to the contract instead.

ESG related features may not be specific to the contracted borrower, but for example to a group of entities to which the contracted borrower belongs. Nevertheless, defining what qualifies as "specific to a debtor”, could have unintended consequences.

We note that for the purpose of the definition of a derivative "party” is not defined either and this has not been identified as an application problem. Instead of explicitly defining "borrower” or “party”, we suggest that the IASB includes an example to explain the concept.

Additionally, consideration could also be given to “increased costs” clauses, and on the wording retained by the amendment (against the use of “magnitude” for example) We also note that in the UKEB letter, the clarification suggested deals only with "direction" and not with "magnitude".

Generally we believe in the context of ESG this could provide relevant information, however, we are not convinced that a general widening of the scope to groups or other group entities, is the best solution. See our response to Question 5 above.

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We believe proposals to specifically address ESG related features in financial assets should be finalised and made available for application with urgency.

Proposed paragraph B4.1.16A introduces a description for “non-recourse” features. In our view this description is narrower than it should be and also departs from how “non-recourse” is typically interpreted without this amendment. Non-recourse financial assets are those with no or limited recourse to specific assets in the case of default only, rather than over the life and in case of default.

The factor identified in paragraph B4.1.17A(a) would not seem relevant in the context assessing the debtors' legal and capital structure, although we don't dispute that it is a relevant factor in relation to non-recourse features. In addition it would be helpful if the IASB could clarify whether the factors to consider are required conditions or simply indictors.

The IASB is proposing to clarify in paragraph B4.1.20 that tranches have non-recourse features. We do not disagree. Nevertheless, it would be helpful for the IASB to clarify that a financial asset that is considered basic applying the conditions applicable to contractually linked instruments, will also be deemed basic in relation to the non-recourse requirements, because the contractually linked requirements are more restrictive than those for non-recourse financial assets.

The clarification in paragraph B4.1.20A that transactions do not contain multiple contractually linked instruments when the lending transaction is from a single creditor should be extended to include groups of creditors with the same ranking, to cover typical structures.

Paragraph B4.1.23 helpfully clarifies that the pool of underlying assets can include assets outside the scope of the classification requirements of IFRS 9. It would be helpful for the IASB to clarify the intention behind “equivalent to payments of principal and interest”. For example if lease receivables are the underlying assets there could be exposure to the residual value of the leased assets, a feature that would not normally be deemed compatible with the classification as solely payments of principal and interest.

Paragraph 11B (c) requires the disclosure of the cumulative gain or loss recognised in other comprehensive income for equity instruments measured at fair value through other comprehensive income. In our view this is the most relevant information for users. Although we do not oppose the new disclosure requirement, the benefit that users could derive from it, seems small.

We note that consideration could be given to the need for derecognised assets during the period to disclose the information of the accumulated OCI since recognition of the asset and not only the variation in OCI of the period

We do not support the extension of the disclosure requirement to financial liabilities, as the new proposed requirements in relation to contingent events specific to a debtor are related to the classification of financial assets, not financial liabilities.

We concur that for a lender the proposed disclosures in relation to financial assets could be extensive. In our view disclosure of the carrying amount of financial assets subject to contingent events, separately identifying those that are measured at amortised costs and those that are measured at fair value should suffice.

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