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ED/2009/3 Derecognition – Response by the Association of Investment
Companies (‘AIC’)

Introduction

The AIC is the trade body representing over 350 investment companies, managing
assets of approximately £60bn.         Our Members are closed-ended investment
companies whose business is to invest in a diversified portfolio of shares and
securities, property and other assets to provide returns for their shareholders.
Investment companies are one of the main forms of collective investment vehicle
available to UK investors, along with unit trusts and OEICs.

Our Members are domiciled both in the UK (investment trusts, Venture Capital Trusts)
and offshore (predominantly in the Channel Islands); with the vast majority listed on
the London Stock Exchange.

Derecognition

Generally speaking derecognition has not proven to be a problematic issue for our
Members and, with the exception of securities lending described below, we are not
envisioning that the proposed amendments will change this.

However, we would make the following general comments on the proposed
amendments:

       •   Paragraph AG34 states “If a transfer of a financial asset does not qualify
           for derecognition by the transferor, the transferee does not recognise the
           transferred asset as its asset.” It is not clear to us that the transferee is
           necessarily going to know whether the transferor has derecognised the
           asset or not. What happens, for example, if the transferor, in its year end
           results following discussion with its advisers, changes its position (from
           derecognition to no derecognition or vice versa)?
       •   Paragraph 19A states that where the transfer meets the derecognition
           criteria the transferor shall recognise any new assets obtained in the
           transfer. Does this apply even where the assets obtained are not
           derecognised by the party transferring the assets to the transferor
           (perhaps because the transferor does not have the practical ability to
           transfer the asset for its own benefit)?
       •   As explained in paragraph BC51, the IASB appears to be stating that a
           legal prohibition on the transferee’s right to transfer a financial asset can
           be ignored if the asset is readily obtainable by virtue of it being actively
           traded on an accessible market. Surely if the parties have agreed to a
           prohibition being in place then it is there for a reason and it cannot simply
           be ignored. There could be many reasons why the prohibition exists, and
           the transferee cannot simply pretend it doesn’t, purely on the basis that the
           asset is of fungible type that can be readily purchased.
Securities Lending

As many investment companies are long-term holders of their securities, they may be
securities lenders. The terms ‘stock lenders’ and ‘stock lending’ are often used in the
UK and historically many investment companies have lent stock. So much so, that
the treatment in financial statements and the relevant disclosures are covered in
paragraphs 77 and 78 respectively of the AIC’s Statement of Recommended Practice:
Financial Statements of Investment Trust Companies and Venture Capital Trusts
(Issued January 2009) (‘SORP’).

As stated in the SORP, although legal title to the securities passes from the
investment company during the transaction, the economic benefit remains and taken
as a whole the arrangement has the substance of a secured loan of the securities in
return for a fee.

Paragraph BC6 of ED/2009/3 describes an asset’s essential characteristics as:

     a) an asset represents future economic benefits that are expected to flow to the
        entity; and
     b) the right to the expected future economic benefits is controlled by the entity.

The AIC believes that the lending company retains the right to future economic
benefits (for example, it continues to receive any dividends paid and has 100%
exposure to any increase or decrease in the fair value of the stock lent) and it has the
right to call back and dispose of the stock lent.

However, paragraphs BC 60 and 61 make it clear that, in accordance with the
proposed amendments, stock lent will generally have to be derecognised. It is
acknowledged that such treatment will have a major impact on the reported financial
position of many entities. The IASB also believes this treatment will improve financial
reporting. The AIC met with the IASB recently to discuss this issue further and it was
confirmed that derecognition will indeed be the expected outcome if the proposed
amendments are implemented.

Given the nature of an investment company and the expectations of shareholders
and other stakeholders, the AIC strongly believes that such derecognition would
render the financial statements of an investment company less meaningful, opaque
and confusing to users. The investment company will have a continuing involvement
in securities lent and, under the proposed amendments, much of the information
currently shown on the face of the primary statements will be shown instead in the
notes to the accounts – this is clearly not helpful to shareholders. We would also ask
why this change is being made – what wrong is being righted? Unless a major
problem is being addressed, we believe this change should not be made.

We agree with the view expressed in paragraph AV4 that the transferee’s right to
receive a dividend does not represent a future economic benefit to the holder if it has
an obligation to pay the amount to a third party. This is of course precisely the
circumstances of stock lending.
The AIC also has a concern that implementing the proposed amendments could have
a significant impact on the behaviour of market participants; perhaps resulting in
reduced stock lending activity which in turn may affect market liquidity.

The AIC recommends that the IASB reconsiders its conclusions with regard to stock
lending with a view to agreeing that the current treatment continues to be appropriate.
The AIC also recommends that the IASB does not, in any event, implement the
proposed changes until it has assessed the likely consequences of so doing and
prepared a full cost benefit analysis incorporating those consequences.

If you wish to discuss any aspect of this response please do not hesitate to contact
me (Dir tel: 020 7282 5605; e-mail: john.stevens@theaic.co.uk).

Yours sincerely

John Stevens
Finance Director


                                            Accounting issues/ derecognition ED 2009 3 response July 09

								
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