International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
10 July 2010
Re: Exposure Draft “Fair Value Option in Financial Liabilities”
The Roche Group has a turnover of CHF 49 bn. a year (EUR 32 bn.) derived from our worldwide healthcare
business - pharmaceuticals and diagnostics - and employs over 80,000 worldwide. We have a market
capitalisation (end 2009) of CHF 151 bn. (EUR 102 bn.) We have been preparing our consolidated financial
statements according to IFRS/IAS since 1990 and therefore have a substantial interest in how these
develop, so we appreciate this opportunity to comment on the proposals.
We are happy with the general principle proposed, that the portion of the fair value change that is attributable
to changes in the credit risk of a financial liability under the fair value option (FVO) should not be presented
directly in profit or loss (P&L.) That support has to be qualified, however, in respect of several subsidiary
concerns summarized below.
(a) Although we see no inherent need for symmetry between financial assets and financial liabilities per se,
the lack of symmetry does increase the risk of accounting mismatches. Solutions would need to be
built into the standard to permit reporting in a way which gives a meaningful picture of performance.
(b) It is a crucial weakness of the ED that no conceptual justification is advanced for limiting the proposed
approach on own credit risk in financial liabilities measured at fair value to those under the FVO. The
approach would be equally relevant in our view for derivatives not held for trading when it would help
prevent occasional mismatches.
(c) Neither is there as yet any conceptual basis for the two-step approach proposed, the recording in OCI
and the inability to reclassify on settlement or other extinguishment. The proposals on these respects
can therefore only be regarded as arbitrary until a proper debate has taken place on fundamental
issues related to performance reporting such as (a) the notion of performance and the impact of
business models on it, (b) the content of performance statement(s) and (c) reclassification. We
would accept recording in OCI (except in mismatch situations) but insist on reclassification to P&L,
according to our own (and many other people’s) understanding of these concepts. We believe also
that the two-step approach to recording in OCI proposed in the ED would be excessively
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complicated, out of line with procedures in all other standards and potentially exacerbate the
increasing clutter in the financial statements.
(d) Our comments are made without being able to take into account how hedge accounting may be changed
in future and are therefore provisional with regard to any interrelationship with hedging.
F. Hoffmann-La Roche AG
Cherrie Chiomento Alan Dangerfield
Head of Finance – Accounting Finance - Accounting and External Reporting -
and External Reporting External Relations
Specific responses to the questions asked in the ED
Q.1 Do you agree that for all liabilities designated under the fair value option, changes in the credit
risk of the liability should not affect profit or loss? If you disagree, why? and
Q.2 Or alternatively, do you believe that changes in the credit risk of the liability should not affect
profit or loss unless such treatment would create a mismatch in profit or loss (in which case,
the entire fair value change would be required to be presented in profit or loss)? Why?
We do indeed agree that, generally, changes in the fair value of financial liabilities under the fair value option
(FVO) due to changes in own credit risk should not affect the P&L. We believe, however, that there are
cases – albeit infrequent – where this might lead to an accounting mismatch. In such infrequent cases where
the carrying value of another financial instrument is directly linked to the issuer’s credit risk and changes in it
presented in P&L, the effects of corresponding changes in the fair value of the liability should also be
recognized in P&L if this reduces an accounting mismatch. As an example one might envisage a financial
liability under the FVO hedged in respect of own credit risk by a derivative, which depending on
circumstances may be an asset or a liability. Since all changes in the fair value of derivatives must be taken
to P&L, a meaningless mismatch would be created in these circumstances if the effects of changes in own
credit risk on the FVO liability were not similarly taken to P&L.
Actually, we do not understand why conceptually the proposed treatment for changes in own credit risk is
limited to FVO liabilities: if such a treatment for changes in own credit risk were also allowed on derivatives
not held for trading, the above mismatch problem would not arise. Furthermore, until we see what the Board
will finally propose for hedge accounting, our views on this point can only be tentative.
Q.3 Do you agree that the portion of the fair value change that is attributable to changes in the
credit risk of the liability should be presented in other comprehensive income? If not, why?
Based on our perception of performance and OCI, we agree with the proposal, except in the infrequent
cases of mismatch mentioned above..However, we much regret the Board’s continuing reluctance to
examine the crucial question of the definition of performance and its corollaries, the P&L vs. OCI distinction
and reclassification: in the absence of resolution of these matters the present proposal can only be regarded
as arbitrary and lacking in any conceptual foundation. It is also worth making the point in favour of
presentation in OCI that the revaluation in respect of own credit risk has little if any predictive value for future
Q.4 Do you agree that the two-step approach provides useful information to users of financial
statements? If not, what would you propose instead and why? and
Q.5 Do you believe that the one-step approach is preferable to the 2-step approach? If so, why?
We do not support mandatory presentation of the two steps in the P&L. This does not correspond to the
accepted direct approaches to reporting in other standards and would create, unjustifiably, a further method
of recording. It would also help to avoid further “clutter” and overloading of the financial statements
Q.6 Do you believe that the effects of changes in the credit risk of the liability should be
presented in equity (rather than in other comprehensive income)? If so, why?
No, we agree with the Board’s analysis that these remeasurements are not transactions with owners.
However, we do have some doubts about revaluations of put options on non-controlling interests and
recommend the Board to consider such transactions a little more closely in this respect.
Q.7 Do you agree that gains or losses resulting from changes in a liability‟s credit risk included in
other comprehensive income (or included in equity if you responded „yes‟ to Question 6)
should not be reclassified to profit or loss? If not, why and in what circumstances should
they be reclassified?
Here again we much regret the Board’s lack of progress on the matter of performance (cf. Q.3 above.) The
proposal not to reclassify is therefore arbitrary and without conceptual foundation. On the basis of our own
perception of the concepts of performance, OCI and reclassification, the settlement of the liability would
change the nature of the accumulated gain or loss from changes in own credit risk such that it would qualify
for reporting in P&L. It would also correct the distorting anomaly which would otherwise arise. A gain or loss
on premature settlement of a financial liability at amortised cost would flow into P&L while that on a financial
liability at fair value through P&L. We would therefore strongly argue for its reclassification on settlement or
other extinguishment of the liability.
Q.8 For the purposes of the proposals in this exposure draft, do you agree that the guidance in
IFRS 7 should be used for determining the amount of the change in fair value that is
attributable to changes in a liability‟s credit risk? If not, what would you propose instead and
Q.9 Do you agree with the proposals related to early adoption? If not, what would you propose
instead and why? How would those proposals address concerns about comparability? and
Q.10 Do you agree with the proposed transition requirements? If not, what transition approach
would you propose instead and why?
We agree with the Board’s proposals.