Verband der Industrie- und Dienstleistungskonzerne in der Schweiz
Fédération des groupes industriels et de services en Suisse
Federation of Industrial and Service Groups in Switzerland
21 July 2009
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
Comment Letter on Exposure Draft (ED) – Derecognition, proposed amendments to IAS 39
and IFRS 7
Dear Madam, dear Sir
SwissHoldings, the Swiss Federation of Industrial and Services Groups in Switzerland,
represents 49 Swiss groups, including most of the country’s major industrial and commercial
firms. We very much welcome the opportunity to comment on the above-mentioned Exposure
Draft (ED). Our response below has been prepared in conjunction with our member companies.
We appreciate the Boards’ intention to harmonize the general principles among the different
standards. We also acknowledge that the principles in IAS 39 on derecognition should if
practicable be aligned with the principles in the final standard on consolidation. We definitely
support simplifying accounting requirements so long as they still produce decision-useful
information. Financial statement presentation should faithfully represent the economics of
transactions. In general, we are of the opinion, that the existing IAS 39 principle and decision tree
on derecognition reflects appropriately economic interrelationships by considering adequately
“risk and rewards” as well as “continuing involvement”. This leads to financial statements which
contain decision-useful information. We therefore believe that the present principles support
precisely the information needed by the capital markets. Thus the de-accentuation of “risk and
rewards” in favour of the “control” criterion will not necessarily increase information and quality of
financial statement presentation. We perceived the “risk and rewards” criterion as a strength of
IAS 39 in the past.
Specific questions in invitation to comment
Question 1 – Assessment of “the Asset” and “continuing involvement” at reporting entity
Do you agree that the determination of the item (i.e. the Asset) to be evaluated for derecognition
and the assessment of continuing involvement should be made at the level of the reporting entity
(see paragraphs 15A, AG37A and AG47A)? If not, why? What would you propose instead, and
We agree with the proposal to make the assessment and the evaluation at the level of the
reporting entity. If the reporting entity is a group, the parent should first consolidate all
subsidiaries, including any special purpose entities that have to be consolidated, and then apply
the derecognition test. Therefore the focus lies more on a complete basis and scope of
consolidation rather than on the test itself.
Question 2 – Determination of “the Asset” to be assessed for derecognition
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Do you agree with the criteria proposed in paragraph 16A for what qualifies as the item (ie the
Asset) to be assessed for derecognition? If not, why? What criteria would you propose instead,
The proposed approach in paragraph 16A allows derecognition only of a part of financial asset if
this part comprises contractually defined cash flows, such as principal or interest payments, or
proportionate cash flow of all cash flows streams of the respective financial asset. We agree with
the alternative view that this determination of types of cash flows qualifying or not qualifying for
an asset to be assessed for derecognition has been drawn and established arbitrarily and we
cannot see any conceptual basis for this principle. One could even argue that the requirement is
rule based rather than a principle of the proposed standard. We therefore prefer and support the
criteria under the alternative approach described in the ED that any rights to cash flows that can
be transferred are considered to be assets to be assessed for derecognition. In addition, this
approach will reduce complexity in accounting standards but also takes into consideration that all
kinds of contractual rights and obligations are embedded in financial instruments and therefore
each individual right to cash flows should be able to be unbundled or derecognized or re-
Question 3 – Definition of “transfer”
Do you agree with the definition of a transfer proposed in paragraph 9? If not, why? How would
you propose to amend the definition instead, and why?
It is important to note that the proposed definition of a transfer is broader than the existing
definition. Consequently, this broader definition will allow many more transactions to be eligible
for the derecognition tests. The explanation for this proposed definition of a transfer is provided in
the Basis for Conclusions principally being to ensure that all transactions economically
considered as transfers should be assessed. We agree with the proposed definition of a transfer.
Question 4 – Determination of “continuing involvement”
Do you agree with the “continuing involvement” filter proposed in paragraph 17A (b), and also the
exceptions made to “continuing involvement” in paragraph 18A? If not, why? What would you
propose instead, and why?
Although we agree with the exceptions to “continuing involvement” listed in paragraph 18A, we
doubt whether the decision tree to review the “continuing involvement” would be meaningful for
certain transactions especially in reference to their business and commercial characteristics. We
would like to mention that a sale and repurchase transaction (a so-called repo) with readily
obtainable financial assets would be derecognized under the proposed approach. We fail to
understand that such transactions should trigger derecognition whereas under the existing
model, because they fail the risks and rewards test, they have been kept on the balance sheet.
Repurchase transactions commercially serve and support the financing needs of an entity and
are not meant as a trading activity which obviously requires derecognition. On the other hand, if
the transferred financial assets are not readily available in the market place, because some loss
assumption clauses or held-harmless features are attached to it like in certain factoring contracts,
the transferor has not the ability to derecognize although most of the risk and rewards had been
assumed by the transferee and consequently would be derecognized under the existing
approach. We argue that for these transactions the risk and reward criterion and especially tests
based on it is much more business oriented and therefore better reflects the economics and the
customary background of the transactions in the financial statements. The directives of the
alternative approach are clear-cut and waive such a continuing involvement test. We second this
view and rather prefer not to undergo such filters if as a result of them significant commercial
transactions are not comprehensively and appropriately reflected and presented – according to
their business characteristics – in the financial statements. But we also like to state that the
continuing involvement test in the existing standard has led to acceptable results when the
transferor has substantially kept all the risks and rewards with the transferred assets and
therefore could not derecognize it. We are of the opinion that the risk and reward control should
not be completely eliminated as this will impact future accounting significantly for example in
transactions as mentioned above.
Question 5 – “Practical ability to transfer for own benefit” test
Do you agree with the proposed “practical ability to transfer” derecognition test in paragraph
17A(c)? If not, why? What would you propose instead, and why?
Do you agree with the “for the transferee’s own benefit” test proposed as part of the “practical
ability to transfer” test in paragraph 17A(c)? If not, why? What would you propose instead, and
As already mentioned in our general introductory comments, we support less complex
derecognition principles but we are sceptical whether the application of this test will be doable in
all circumstances, especially in cases where the transferor due to the relationship or the business
circumstances is not able to assess completely the transferee’s ability or intentions with respect
to the transferred asset. Whilst this test underpins and is in accordance with the control principle
we believe that one cannot assume that a transferor has definite information allowing him to take
the decision on derecognition which depends on assessing the transferee’s ability with respect to
the transferred asset. This test would be especially difficult to make when the transferee achieves
the ability to transfer subsequently, after the initial transaction. We suppose that it is not
reasonable to expect from the transferor that he will become aware of such developments.
Moreover we find it extremely difficult to assess the possible economic constraints a transferee
might be confronted with and be updated on the level of economic impediment he could suffer in
order to appraise whether or not to derecognize an asset. We think that these factors to consider
in assessing the ability to transfer as stated in paragraph AG52E (e) in the application guidance
would make the test difficult and subjective. This potentially could result in various entities
derecognizing financial assets differently. The existing risks and rewards approach does not
require such analysis and we believe it is therefore less open to differing interpretations.
In addition to the above, a transferee can obtain economic benefits from a financial asset in ways
other than through a transfer of the asset to a third party. For example, a transferee may be
restricted from selling the asset transferred but still receives the cash flows related to that asset.
We would agree with the alternative view that in such a case, the ability by a transferee to obtain
a financial asset’s economic benefits for the transferee’s own benefit as control over those
Question 6 – Accounting for retained interests
Do you agree with the proposed accounting (both recognition and measurement) for an interest
retained in a financial asset or a group of financial assets in a transfer that qualifies for
derecognition (for a retained interest in a financial asset or group of financial assets, see
paragraph 21A; for an interest in a financial asset or group of financial assets retained indirectly
through an entity, see paragraph 22A)? If not, why? What would you propose instead, and why?
The proposed accounting in case of loss of control is consistent with the ED Consolidated
Financial Statements. The ED Consolidated Financial Statements requires an entity when it
reduces its interest in subsidiary and the scope of consolidation for this entity changes to view
this change as giving up the previous controlling share if the entity had directly disposed of the
individual assets or liabilities, which is in line with the proposed accounting for a partial
derecognition of financial asset or a group of financial asset. However, we also admit that the
alternative approach takes the consolidation principles, as amended through IAS 27 revised,
paragraphs 34 to 37, into consideration when an interest in a financial asset or a group of
financial assets should be derecognized by recognising a complete new asset or liability at its fair
value without continuing to defer the portion of the interest retained in other comprehensive
income. Both approaches are consistent in their accounting guidelines.
Question 7 – Approach to derecognition of financial assets
Having gone through the steps/tests of the proposed approach to derecognition of financial
assets (Questions 1-6), do you agree that the proposed approach as a whole should be
established as the new approach for determining the derecognition of financial assets? If not,
why? Do you believe that the alternative approach set out in the alternative views should be
established as the new derecognition approach instead, and, if so why? If not, why? What
alternative approach would you propose instead, and why?
From an industrial preparers point of view we are much in favour of the alternative view because
it is more practical and less complex. This approach requires very little testing and as a result,
will lead to less room for interpretation among preparers, fewer inconsistencies as well as a lower
degree of uncertainty over the outcome. In addition, we also view the alternative approach as
principle based. However we have to admit that we have not fully analyzed the consequences of
the alternative view in respect of the possibility of derecognition especially concerning special
purpose entities. We have the impression that the risks and rewards model was working
satisfactorily during the past crisis-related periods and do not explicitly see an urgent need to
fundamentally change the existing approach.
Question 8 – Interaction between consolidation and derecognition
In December 2008, the Board issued an exposure draft ED 10 Consolidated Financial
Statements. As noted in paragraphs BC28 and BC29, the Board believes that its proposed
approach to derecognition of financial assets in this exposure draft is similar to the approach
proposed in ED 10 (albeit derecognition is applied at the level of assets and liabilities, whereas
consolidation is assessed at the entity level). Do you agree that the proposed derecognition and
consolidation approaches are compatible? If not, why? Should the Board consider any other
aspects of the proposed approaches to derecognition and consolidation before it finalises the
exposure drafts? If so, which ones, and why? If the Board were to consider adopting the
alternative approach, do you believe that that approach would be compatible with the proposed
We realize the Board’s wish to have the models between consolidation and recognition
and derecognition principles synchronized. We agree that the two approaches would be
compatible. The control assessment for consolidation purposes would be applied at entity
level whereas the derecognition approach is applied at the level of assets and liabilities.
As long as the entity’s financial statements are complete, based upon any derecognition
directive, we think that there is no implicit need to have the two approaches harmonized.
Therefore we believe that the risk and reward approach of the existing principles would
also be compatible with the ED 10 Consolidated Financial Statements. We also
highlighted in our comments on the ED 10 Consolidated Financial Statements that the
relation between control and return approaches was not yet clarified well enough and that
the control principle incorporates elements of the risks and rewards approach. So, in our
opinion, a perfect interaction between consolidation and derecognition is not an absolute
Question 9 – Derecognition of financial liabilities
Do you agree with the proposed amendments to the principle for derecognition of financial
liabilities in paragraph 39A? If not, why? How would you propose to amend that principle
instead, and why?
We agree with the proposed principles for derecognition of financial liabilities which define
that the elimination of the present obligation and no further transfer of economic resources
in respect of that obligation will be required.
Question 10 – Transition
Do you agree with the proposed amendments to the transition guidance in paragraphs 106 and
107? If not, why? How would you propose to amend that guidance instead, and why?
In this case, we prefer prospective application for practical reasons.
Question 11 – Disclosures
Do you agree with the proposed amendments to IFRS 7? If not, why? How would you propose to
amend those requirements instead, and why?
In general, we think that the proposed disclosures are excessive. We perceive the proposed
amendments as a list of uncertain items to allow financial statement users to substitute their
accounting judgement for that of the entity rather than focusing and enhancing information on risk
positions held by the entity. We fail to understand why disclosure would be required for
transferred assets that are derecognized but the entity has continuing involvement. In our
opinion, this kind of disclosure would increase uncertainty whether the standard has been applied
correctly or not and – indeed – would undermine the credibility of the standard in its entirety.
Moreover, there could be practical difficulties in complying with some disclosure requirements
such as the fair value of derecognised financial assets in which the entity has continuing
involvement. We believe the focus should only be on transferred assets which have not been
derecognized and consequently on the retained portion of a financial asset or a group of financial
assets that qualified for derecognition.
We thank you for the opportunity to contribute to the due process and for taking into
consideration our comments.
Federation of Industrial and Service Groups in Switzerland
Dr. Gottlieb A. Keller Dr. Peter Baumgartner
Current Chair of SwissHoldings, Chair Executive Committee
(General Counsel Roche Holding AG)
09-07-14-SH CL ED Derecognition