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									         COMMENTS ON THE EXPOSURE DRAFT ED/2009/03:
   DERECOGNITION. PROPOSED AMENDMENTS TO IAS 39 AND IFRS 7



The ED sets on Paragraph 17A the circumstances under which an entity shall
derecognise the Asset:

(a) the contractual rights to the cash flows from the Asset expire;

(b) the entity transfers the Asset and has no continuing involvement
in it; or

(c) the entity transfers the Asset and retains a continuing involvement in
it but the transferee has the practical ability to transfer the Asset for
the transferee’s own benefit.

In case the transference includes the contractual right to sell the asset, paragraph AG
52L of the implementation guide provides some examples to determine if the transferee
has the practical ability to transfer the asset; in this situation the transferor should
derecognize the asset and the transferee should recognize it. Specifically, the
implementation guide includes two illustrative examples for repurchase agreements and
securities lending:
     The asset is readily obtainable in the market (e.g. instruments publicly traded in
        an active market), in this case the transferee is considered to have the practical
        ability set out in IAS 39, paragraph 17A c), and therefore the transferor should
        derecognize the asset, and the transferee should recognize it.
     The asset is not readily obtainable in the market (e.g. loans or ordinary shares
        not publicly traded in an active market). In such situation, when the repo
        contract is to be physically settled, the transferee is not considered to have the
        practical ability set out in IAS 39, paragraph 17A c), and therefore the transferor
        should not derecognize the asset and the transferee should not recognize it.

As almost all repo contracts allow the transferee to sell the asset and the collateral are
traded in active markets, the approval of the amendments on IAS 39 would imply a
substantial change in accounting these contracts. In the actual situation the transferor
does not derecognize the asset, nor the transferee recognize it. Under the proposed
amendment, the transferor will have to book a real sell combined with a forward
obligation to buy back the collateral, and therefore the transferee will recognize the
financial asset on its books and account a forward obligation to sell it at maturity date.
The impact of this accounting review would be the following:


TRANSFERS OF FINANCIAL ASSETS OF THE TRADING BOOK

Impact for the Transferor
    When the derivative is valued at its fair value, the transferor has to book the
       agreed interests to pay in advance, instead of accruing them until maturity.

Impact for the Transferee
    When the derivative is valued at its fair value, the transferee has to book the
     agreed interests to receive in advance, instead of accruing them until maturity.


TRANSFERS OF FINANCIAL ASSETS OF THE AVAILABLE FOR SALE
PORTFOLIO

Impact for the transferor
    Recycle to P&L the AFS reserve accounted for the transferred asset.
    When the derivative is valued at its fair value, the transferor has to book the
       agreed interests to pay in advance, instead of accruing them until maturity.

Impact for the transferee
    Book in the AFS reserve the difference between the amount paid for the asset
       and its fair value until maturity.
    When the derivative is valued at its fair value, the transferee has to book the
       agreed interests to receive in advance, instead of accruing them until maturity.


TRANSFERS OF FINANCIAL ASSETS OF THE HOLD TO MATURITY
PORTFOLIO

According to the current financial rules, derecognition of a financial asset, which is in
the hold to maturity portfolio, implies derecognition of the whole portfolio. This makes
unfeasible the transferences of these assets.


THE EFFECT ON CAPITAL REQUIREMENTS

The ED modifies the current capital requirements. The application of this amendment
would free capital requirements for the transferor (entity that gives the financial asset)
and would penalize the transferee (entity that receives the financial asset).


THE GOAL OF REPURCHASE AND SECURITIES LENDING AGREEMENTS

The repurchase and securities lending transactions should be excluded from the
proposed amendments to IAS 39 due to the following reasons:

       - The goal of these transactions is to provide liquidity to the transferor and not to
       benefit from the possible sale of the asset. These transactions are time deposits
       with a significant credit risk reduction by means of assets that are used as
       collateral.

       - As a deposit, in this type of transaction the refund of the initial amount
       includes the interest agreed, which means that both transactions have similar
       characteristics.

       - In general, in these transactions the price settlement process is not as accurate
       as it is on a firm sale, since their aim is to facilitate liquidity through a deposit.
- The transferor keeps the benefit of the assets because it has been previously
dealt that the transferee will pay him the interests or dividends obtained from the
assets in the period in which the transferor has the assets as collateral.

- Nowadays it is common to join a transfer agreement to other type of contracts
(GMRA or GMSLA) by which the transferor is obliged to make a deposit
(usually cash and remunerated) in favour of the transferee, in case the given
financial assets diminish in its market value in relation to the money given in the
initial transaction and vice versa. It means that it is conceptually a guaranteed
deposit transaction.

- Therefore, the consequences on the profit and loss account, on the capital
requirements and the difficulties associated to the hold to maturity portfolio
could be so important that it could make impossible or costly putting into
practise these transactions which, in fact, are of great value for the exchanging of
liquidity between entities.

								
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