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sappi
14 September 2009
Sappi Limited
(Reg. no. 1936/008963/06)
PO Box 31560
2017 Braamfontein
South Africa
Tel +27 (0)11 407 8111
Fax +27 (0)11 403 8854
www.sappi.com
Sir David Tweedie, Chairman
International Accounting Standards Board
30 Cannon Street
LONDON EC4M 6XH
United Kingdom
Email: [email protected]
Dear Sir
EXPOSURE DRAFT ON FINANCIAL INSTRUMENTS: CLASSIFICATION AND
MEASUREMENT
Sappi Limited is pleased to comment on the International Accounting Standards Board
(the”IASB” or the “Board”)’s Exposure Draft on Financial Instruments: Classification and
Measurement (the “ED”).
Our primary basis of reporting is International Financial Reporting Standards (IFRS), but we
are required to comply with certain filing requirements of the Securities Exchange
Commission (SEC) in the United States of America due to our listing on the New York
Stock Exchange Stock Exchange. We therefore are encouraged by the Board’s
commitment to simplify the accounting for financial instruments as well as the Board’s
current projects in converging IFRS with US GAAP. We would also like to encourage that
convergence should not merely occur for the sake of convergence, but should also
produce higher quality financial statements than those that would result from applying the
two frameworks separately.
We would like to thank you for the opportunity to provide comments on this document. Our
detailed responses to the invitation to comment questions are included in Appendix A.
Please do not hesitate to contact me should you wish to discuss any of our comments.
Yours sincerely
Moses Sekgobela
Group Reporting Manager
Directors: Dr D C Cronjé (Chairman), Messrs R J Boëttger (Chief Executive Officer), D C Brink, J E Healey (USA), H C Mamsch (Germany),
J D McKenzie and M R Thompson, Drs D Konar and F A Sonn, Mses K R Osar (USA) and B Radebe, Prof M Feldberg (USA), Sir A N R Rudd (UK)
Secretaries Sappi Management Services (Pty) Ltd (Reg No 1989/001134/07)
SAPPI LIMITED SUBMISSION ON THE EXPOSURE DRAFT - FINANCIAL
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Appendix A: Invitation to comment
General comments
We note that the Board’s intention in undertaking the project on replacing IAS 39 is to
simplify the accounting for financial instruments. We are of the view that simplification
should also allow easier comparison of financial instruments across the globe. We are
therefore not supportive of allowing a number of alternative treatments of financial
instruments.
The ED asks questions on alternative treatments from the amortised cost and fair value
approaches. We support using the two approaches since we appreciate that financial
instruments would generally have different characteristics and would be held by entities for
different reasons. Allowing alternative approaches with possible variations as the ED
suggests would make it difficult to compare entities purely due to accounting policy choices.
The proposed alternative treatments are not simple and could add confusion to users of
financial statements given that the main intention of the ED is to simplify the accounting for
financial instruments. The alternative approaches introduce a concept of dual fair
value/amortised cost option which may be confusing for users of financial statements.
Users of financial instruments who may be interested in fair values of financial instruments
that are carried at cost or amortised cost can have this need met by the disclosures
required by IFRS 7.
We therefore encourage the Board to limit alternative approaches as far as possible in
order to simplify IFRS and broaden the value that users of financial instrument can derive
from comparing general purpose financial statements of different entities.
Question 1
Does amortised cost provide decision-useful information for a financial asset or financial
liability that has basic loan features and is managed on a contractual yield basis? If not,
why?
Yes. Amortised cost represents a fair reflection of the cash flows expected from a financial
asset or financial liability that an entity intends or expects to hold and recover or settle in
line with the contractual rights and obligations embodied in the asset or liability.
Accounting for temporary movements in fair value that will not affect the recoverable or
settlement value of a financial asset or liability would not enhance the decision usefulness
of the amount that the asset or liability is carried at, as at balance sheet date.
We also note that for some of the financial instruments that meet the Boards’ two
conditions for accounting at amortised cost, the fair value approximates amortised cost
most of the time.
Question 2
Do you believe that the exposure draft proposes sufficient, operational guidance on the
application of whether an instrument has ‘basic loan features’ and ‘is managed on a
contractual yield basis’? If not, why? What additional guidance would you propose and
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why?
Yes we believe that the ED outlines sufficient guidance in the application of whether an
instrument needs to be measured at amortised cost. The ED also gives examples of
instruments that the Board believes to meet the two conditions.
We accept that the Board is not expected to provide an exhaustive list of instruments as
guidance; stakeholders would need to apply the overriding principles in assessing specific
circumstances that are encountered in applying the proposed standard.
Question 3
Do you believe that other conditions would be more appropriate to identify which financial
assets or financial liabilities should be measured at amortised cost? If so,
a)
b)
c)
what alternative conditions would you propose? Why are those conditions more
appropriate?
if additional financial assets or financial liabilities would be measured at amortised
cost using those conditions, what are those additional financial assets or financial
liabilities? Why does measurement at amortised cost result in information that is more
decision-useful than measurement at fair value?
if financial assets or financial liabilities that the exposure draft would measure at
amortised cost do not meet your proposed conditions, do you think that those financial
assets or financial liabilities should be measured at fair value? If not, what
measurement attribute is appropriate and why?
We have not identified any more conditions which may be appropriate in identifying which
financial assets or financial liabilities should be measured at amortised cost.
Question 4
a)
Do you agree that the embedded derivative requirements for a hybrid contract with a
financial host should be eliminated? If not, please describe any alternative proposal
and explain how it simplifies the accounting requirements and how it would improve
the decision-usefulness of information about hybrid contracts.
We agree that eliminating the embedded derivative requirement for hybrid contract with a
financial host would simplify the accounting for hybrid contracts in line with the Board’s
intention in re-writing IAS 39.
b)
Do you agree with the proposed application of the proposed classification approach to
contractually subordinated interests (ie tranches)? If not, what approach would you
propose for such contractually subordinated interests? How is that approach
consistent with the proposed classification approach? How would that approach
simplify the accounting requirements and improve the decision usefulness of
information about contractually subordinated interests?
We agree with the proposed classification for the contractually subordinated tranches.
Since these no longer have basic loan features it would be consistent with the basic
principles of the proposed standard to account for these at fair value.
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Question 5
Do you agree that entities should continue to be permitted to designate any financial asset
or financial liability at fair value through profit or loss if such designation eliminates or
significantly reduces an accounting mismatch? If not, why?
Yes. The need to eliminate or reduce accounting mismatches continues to exist and
therefore the fair value option is also necessary. In addition, for entities that manage their
financial instruments in line with IAS 39.9 (b) (ii), the fair value option would continue to
allow such entities to present information that is of a better decision useful nature.
Question 6
Should the fair value option be allowed under any other circumstances? If so, under what
other circumstances should it be allowed and why?
We have not identified any other circumstances under which the fair value option needs to
be available to entities.
Question 7
Do you agree that reclassification should be prohibited? If not, in what circumstances do
you believe reclassification is appropriate and why do such reclassifications provide
understandable and useful information to users of financial statements? How would you
account for such reclassifications, and why?
We agree that re-classifications should be prohibited. Allowing reclassifications makes
comparability difficult and entities would be able to reclassify when the result of the initially
adopted approach is not what is desired by management while the other approach gives a
result that may be favourable.
Question 8
Do you believe that more decision-useful information about investments in equity
instruments (and derivatives on those equity instruments) results if all such investments are
measured at fair value? If not, why?
We believe that fair value provides decision useful information in most circumstances for
investments in equity instruments. Fair value derived from quoted markets represents the
price (or a good starting point in arriving at that price – many investments eventually get
sold at a premium or discount to quoted prices) at which the investments in equity
instruments can be recovered at, as at balance sheet date. This is decision useful
information to users of financial statements.
Movements in fair values of quoted equity instruments affect the recoverable value of the
investments and therefore accounting for the investments at fair value would enhance the
decision usefulness of the amount that the asset or liability is carried at, as at balance sheet
date.
However for unquoted investments in equity instruments where fair value cannot be
measured reliably, we believe the current requirements of IAS 39 are better at providing
useful information when the time and cost involved are taken into account.
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Question 9
Are there circumstances in which the benefits of improved decision-usefulness do not
outweigh the costs of providing this information? What are those circumstances and why?
In such circumstances, what impairment test would you require and why?
Yes, there are circumstances in which the benefits of improved decision-usefulness do not
outweigh the costs of providing this information.
Whereas we agree with the view that the IAS 39 requirement to calculate the recoverable
amount of investments in equity instruments that are not quoted and are carried at cost
requires an effort similar to a fair value calculation which in most cases would be classified
as requiring level 3 inputs in terms of the IFRS 7 fair value hierarchy, we note that this
requirement to calculate fair value is only necessary when there is an indication that an
impairment may have occurred. Where there is no indication of impairment, the costs of a
fair value calculation would outweigh the benefits that may be obtained from doing the
calculation.
Some entities hold ‘investments in unquoted equity investments for which a reliable fair
value measure cannot be determined’ for strategic reasons and where there is no indication
of impairment, entities should not be required to calculate a recoverable amount for such
investments. The investments would not be carried at amounts in excess of recoverable
values and therefore will not result in overstatement of assets. The costs of calculating a
value in such a case would outweigh the benefits obtained. As the investment is held for
strategic reasons there is no benefit that can be derived from writing up the value of the
investment due to temporary movements in market factors.
We therefore believe that more cost effective and decision useful information would be
provided if unquoted equity investments are carried at cost and an impairment calculation
that is similar to a fair value calculation is only performed when there is an indication that
the investment may be impaired. Where there is no objective evidence of impairment the
cost method is the simpler and cost effective measurement basis.
Question 10
Do you believe that presenting fair value changes (and dividends) for particular investments
in equity instruments in other comprehensive income would improve financial reporting? If
not, why?
For entities whose main business is to benefit from changes in fair values of equity
instruments (for example; investment entities) presenting fair value changes and dividends
in profit or loss would be appropriate. This is because the company’s performance from
core operations can be judged from its profit or loss for the period, which includes changes
in fair values of equity investments and dividends from such investments.
However for entities that do not invest in equity instruments as part of their core operations
(for example; mining or retail entities) presenting fair value changes and dividends in other
comprehensive income would be more appropriate. This is because the company’s
performance from core operations can be judged from its profit or loss for the period before
taking other comprehensive income into account. This will aid decision making by
stakeholders.
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Question 11
Do you agree that an entity should be permitted to present in other comprehensive income
changes in the fair value (and dividends) of any investment in equity instruments (other
than those that are held for trading), only if it elects to do so at initial recognition?
Yes, we agree that only when the election is made at initial recognition should changes in
fair values of equity instruments (and dividends) be presented in other comprehensive
income. As explained in the previous question, the business decision to enter into the
investment in the first place must drive how the changes in the fair value of the investments
are presented in the financial statements.
If not,
a)
how do you propose to identify those investments for which presentation in other
comprehensive income is appropriate? Why?
Only changes in the fair value and dividends received on equity instruments which the entity
has designated to be accounted for at fair value though other comprehensive income at
initial recognition and in line with the business rationale for acquiring the investment in the
equity instruments should be presented in other comprehensive income. Subsequent
changes could allow entities to report desired results in financial statement and not what
has actually occurred in line with their original business intentions and elected accounting
policies.
b)
should entities present changes in fair value in other comprehensive income only in
the periods in which the investments in equity instruments meet the proposed
identification principle in (a)? Why?
Yes. Strict principles that are in line with an entity’s intention when investing in an equity
instrument should be applied without allowing for changes that could allow entities to
change the reporting for investment in equity instrument because such changes could be
driven by the favourability of the outcome of the fair value calculation.
Business reasons for entering into equity investments can be expected to align to each
entity’s operations and therefore only changes to business intentions or strategies should
result in a change in the intention to acquire equity investments.
It is accepted that an entity’s main business strategy will not change very often and
therefore the intention on initial recognition should dictate the accounting treatment. Some
business may be such that an entity may hold an equity investment for different reasons at
initial recognition; in this case, because of an entity’s business model investments with
similar characteristics may be held for different reasons, that reason at initial recognition
should drive the accounting treatment without subsequent changes.
Question 12
Do you agree with the additional disclosure requirements proposed for entities that apply
the proposed IFRS before its mandated effective date? If not, what would you propose
instead and why?
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We do not agree with the proposed additional disclosure for entities that apply the proposed
IFRS before its mandated effective date because:



the additional disclosures are only required for entities who adopt the proposed IFRS
early and because such disclosures may involve extra investments in time and costs
they may discourage early adoption – this would go against one of the Board’s
intentions in undertaking the replacement project one of which includes simplified
accounting for financial instruments as soon as this is practicable
generally entities that adopt IFRS early only have to disclose this fact with no
additional disclosures
the additional disclosures are not in line with the principle to simplify the accounting
for financial instruments
The adoption of the proposed IFRS should follow the established practice of adopting other
IFRSs.
Entities that adopt the draft IFRS on the effective date would not have disclose the
comparison of carrying amounts at initial adoption while early adaptors would be required
to. The requirements for early adaptors will be similar to retrospective application
(disclosing comparable amounts under IAS 39 for the same period) while entities adopting
from the effective date are allowed to apply what is similar to prospective application
(without the need to disclose comparable amounts derived under IAS 39 for the same
period).
Comparison of carrying values under IAS 39 and the proposed IFRS should not be
necessary given that the new approach will be simplified and easier to use for decision
making.
Question 13
Do you agree with applying the proposals retrospectively and the related proposed
transition guidance? If not, why? What transition guidance would you propose instead and
why?
We agree with the proposed retrospective application of the proposed IFRS. With the
proposed transition guidance, the Board provides relief where retrospective application may
be impracticable and we therefore welcome the inclusion of the transition guidance.
Question 14
Do you believe that this alternative approach provides more decision-useful information
than measuring those financial assets at amortised cost, specifically:
a)
b)
in the statement of financial position?
in the statement of comprehensive income?
If so, why?
We do not believe that the alternative approach will provide more decision useful
information because:
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


It deviates from the IASB intention to simplify the accounting for financial instruments.
It will continue to confuse investors as it has the effect of allowing a dual fair
value/amortised cost approach.
It would be better for financial reporting if IFRSs move away from allowing alternative
treatments as these hinder comparison of financial statements between different
entities
The alternative approach may encourage entities to adopt policies that show results
that in reality may not be achievable because entities managing instruments on a
contractual yield basis may be encouraged to report instruments at fair values that
appear favourable albeit different amounts will be recovered from assets or required
to settle liabilities in terms of the contractual terms of the instruments.
(a)
Statement of financial position - For entities whose financial instruments meet the two
criteria to be accounted for at amortised cost there would be no need to account for
the difference between amortised cost and fair value as this is not in line with how
their operations are run or how the instruments are managed and it would not provide
any extra information essential for decision making. We also note that IFRS 7
currently requires disclosures of fair value for financial instruments as at balance
sheet date – this would continue to meet the need for users who are still interested in
fair value.
(b)
Statement of comprehensive income - The statement of comprehensive income may
report profits or losses that could potentially never be realised. Assets managed on a
contractual yield basis would be expected to be recovered at contracted cash flow
amounts. Depending on movements in market factors, the fair values may change in
any direction but in reality the financial instruments may never be recovered or settled
at those fair values but these fluctuations would be reported in other comprehensive
income. Such presentation may lead to incorrect decisions by the users of financial
statements.
Question 15
Do you believe that either of the possible variants of the alternative approach provides
more decision-useful information than the alternative approach and the approach proposed
in the exposure draft? If so, which variant and why?
Per answer to Question 14, we do not believe that the alternative approach or its variants
would provide more decision useful information nor would these alternatives or variants
simplify the accounting for financial instruments.
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