23 May 2018
European Financial Reporting Advisory Group
35 Square de Meeûs
B-1000 Brussels
Belgium
Re: Comments on the Discussion Paper
Equity Instruments - Impairment and Recycling
1.

The Accounting Standards Board of Japan (“we”) welcome the opportunity toprovide our comments on the European Financial Reporting Advisory Group’s(“EFRAG”) Discussion Paper Equity Instruments - Impairment and Recycling (the“DP”), issued in March 2018.

2.

Recycling of other comprehensive income (“OCI”) items is one of the areas which
we have continuously supported and asked for in our discussions with the IASB.

Inthis context, we highly commend and strongly support EFRAG’s initiative toconsider the recycling and impairment of equity instruments designated at fair value
through other comprehensive income (“FVOCI”).
3.

Unlike the requirements under IFRS 9 Financial Instruments, we think that it would
be ideal to develop definitions or criteria to determine the scope of equity instruments
to be carried at FVOCI, rather than to permit an option, in order to enhance therelevance of profit or loss.

Nevertheless, we understand that the scope of equity

instruments to be carried at FVOCI is not the main issue in the DP and, accordingly,
our comments on the specific questions in the DP assume that the scope of equity
instruments to be carried at FVOCI will not be changed from that in the existing IFRS
9.
4.

Our comments on the specific questions in the DP are provided in the Appendix ofthis letter.

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5.

We hope that our comments on EFRAG’s DP eventually contribute to improvements
in global accounting standards.

If you have any questions, please feel free to contactus.

Yours sincerely,

Yukio OnoChairman
Accounting Standards Board of Japan2

Appendix1.

Unlike the requirements under IFRS 9, we think that it would be ideal to develop
definitions or criteria to determine the scope of equity instruments to be carried atFVOCI, rather than to permit an option, in order to enhance the relevance of profit
or loss.

Nevertheless, we understand that the scope of equity instruments to becarried at FVOCI is not the main issue in the DP and, accordingly, our commentson the specific questions in the DP assume that the scope of equity instruments tobe carried at FVOCI will not be changed from that in the existing IFRS 9.

Question 1
Q1.1

What are your views on the arguments presented in paragraphs 2.3 - 2.10? Do

you consider that the reintroduction of recycling would improve the depiction of thefinancial performance of long-term investors?

Alternatively, do you consider that theexisting requirements of IFRS 9 provide an adequate depiction? Please explain.
2.

We think that the any item that is included in OCI should subsequently be recycled
to profit or loss, because this enables profit or loss to have the following features,
which would ensure the relevance of profit or loss as a measure of performance of anentity:(a) Profit or loss depicts the return when the uncertainty about the expected returnin the light of the objective of the investments has been sufficiently reduced.
(b) Profit or loss becomes “all-inclusive” so that the accumulated amount of profit
or loss over all accounting periods equals that of the cash flows over allaccounting periods.
In this context, we agree with the analyses in the DP, which support the recycling ofaccumulated OCI to profit or loss for equity instruments designated at FVOCI whensuch equity instruments are sold or impaired.

3.

The DP notes that the performance of entities that operate in a long-term investment
business model would be better reflected in the financial statements by recycling.
However, we are not convinced that recycling should be limited to equity instrumentsthat an entity holds as part of its long-term investments, based on the view stated in
the preceding paragraph.
34.

In addition, the DP notes that some argue that recycling of accumulated OCI to profit
or loss when equity instruments are sold does not properly reflect the performance inthe period of disposal, because the accumulated gain or loss would relate toperformance over the entire holding period. While we agree that the profit or loss
recognised in the period of disposal may not have predictive value, we arenevertheless convinced that recycling of accumulated OCI to profit or loss whenequity instruments are sold is relevant for the following reasons:(a) Paragraph 2.7 of the IASB’s Conceptual Framework for Financial Reporting(“the IASB’s Conceptual Framework”) states that “financial information iscapable of making a difference in decisions if it has predictive value,confirmatory value or both”.

Profit or loss recognised on disposal has

confirmatory value because it reflects the fact that the equity instrument has beensold.

We think that information which reflects the fact that the equity

instrument has been sold has more confirmatory value and thus would be more
useful than information which merely reflects the fact that the fair value of theequity instrument has changed during the period by holding the equity
instrument.
(b) Because disclosures regarding the amounts which are reclassified from OCI toprofit or loss (in accordance with paragraph 92 of IAS 1 Presentation ofFinancial Statements) are provided, users should be able to assess the so-called“quality of earnings” by comparing the total profit or loss amount and the amountthat was recycled from accumulated OCI to profit or loss.

Question 2
Q2.1

What are your views on the arguments presented in paragraphs 2.11 - 2.17?

Do you consider that, from a conceptual standpoint, recycling should be accompanied
by some form of impairment model?
5.

Please explain.

We think that recycling relating to equity instruments designated as FVOCI shouldbe accompanied by the recognition of impairment losses through profit or loss.

6.

We view the accounting for equity instruments carried at FVOCI as a typical exampleof dual measurement, that is, different measurement bases are selected for thestatement of financial position and the statement of profit or loss, as stated inparagraph 6.85 of the IASB’s Conceptual Framework.
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Our understanding is thatthe measurement basis selected for the statement of financial position would be fairvalue and the measurement basis selected for the statement of profit or loss would behistorical cost.
7.

It is established practice to recognise impairment losses through profit or loss when
the historical cost of an asset is no longer recoverable, under the assumption that itprovides more relevant information.

We note that this view is acknowledged inparagraph 6.7(c) of the IASB’s Conceptual Framework.

Question 4Q4.1

What should be, in your view, the general objective and main features of arobust model for equity instruments (relevance, reliability, comparability…)?
Q4.2

Which, if either, of the two models do you prefer?

Please explain.

Q4.3

Do you have suggestions for a model other than those presented in the DP?

Ifso, please describe it and explain why it would meet characteristics such as relevance,reliability and comparability.
8.

We note that IAS 39 Financial Instruments: Recognition and Measurement, which
required recycling when equity instruments classified as available-for-sale (“AFS”)
financial assets were impaired, did not specifically prescribe the objective ofrecognising impairment losses in profit or loss.

9.

If impairment losses were to be recognised in profit or loss under IFRS 9 for equity
instruments carried at FVOCI, we think the objective of such recognition would be
similar to the view presented in paragraph 2.14 of the DP, that is, to reflect theexpected overall return from the investment in equity instruments in profit or loss, byrecognising the effects of identifiable adverse changes in the issuer’s economicconditions.

10. In the light of the objective discussed in the preceding paragraph, we think that thetwo models discussed in the DP can be analysed as follows:(a) The “revaluation model” is unlikely to meet the objective stated in the preceding
paragraph because any decline in fair value below the original acquisition cost
would be recognised in profit or loss immediately, regardless of whether such5decline in fair value has been caused by identifiable adverse changes in theissuer’s economic conditions.
(b) The impairment model which requires considering a threshold such as a“significant or prolonged” decline in fair value is more likely to meet theobjective stated in the preceding paragraph, although a “significant or prolonged”
decline in fair value may not necessarily depict the effects of identifiable adversechanges in the issuer’s economic conditions.
11. Regarding the trigger for recognising impairment losses, we think a threshold thatwould result in providing relevant information to users, in the light of the objective
discussed in paragraph 9 of this letter, needs to be determined.
12. Historically, accounting standards in our jurisdiction have set the threshold forrecognising impairment losses at a level where it is considered that the uncertainty
of incurring losses has been sufficiently reduced, that is, it is irreversible, and havenot permitted the reversal of impairment losses.
13. Recognising impairment losses based on this relatively high threshold is more likely
to result in meeting the objective discussed in paragraph 9 of this letter.
Nevertheless, we acknowledge that some may view that this approach results inrecognising impairment losses too late.

On the other hand, if a relatively lower

threshold were to be used as the trigger for recognising impairment losses, we think
the resulting impairment losses may include losses that are not necessarily consistent
with the objective discussed in paragraph 9 of this letter.

Question 5Q5.1

Do you support the inclusion of quantitative impairment triggers in animpairment model?

If so, should an IFRS Standard specify the triggers, or should

management determine them?
Q5.2 If you do not support quantitative impairment triggers, how would you ensurecomparability across entities and over time?
14. We acknowledge that there had been practical problems regarding theimplementation of the “significant or prolonged” criterion included in IAS 39 for theimpairment of equity instruments classified as AFS financial assets.
6Accordingly,

we agree that improvements are needed if an impairment model based on the“significant or prolonged” criterion were to be re-introduced.
15. We think that introducing a quantitative threshold regarding the significance or thelength of the decline in fair value in the IFRS Standard may reduce the burden ofentities making judgements and thus may make the impairment model more
operational.

At the same time, uniform judgements based on a quantitative

threshold may not result in a faithful representation because it may prevent entities
from reflecting the economic substance of the specific situation.
16. We think that it is important to consider the trade-off between uniformity andflexibility discussed in the preceding paragraph.

Specifically, if a quantitative

threshold were to be introduced, we think a rebuttable presumption should beintroduced to ensure that entities will and can provide financial information that isuseful.

Question 6Q6.1

How should subsequent recoveries in fair values be accounted for?

Pleaseexplain.
Q6.2

If subsequent recoveries in fair values are recognised in profit or loss, which of

the approaches in paragraphs 5.2 - 5.10 do you support and why?
17. We think that issues regarding the accounting for subsequent recoveries in fair values
should be addressed together with the impairment model.
18. As discussed in paragraph 12 of this letter, if we set the threshold for recognising
impairment losses at a level where it is considered that the uncertainty of incurring
losses has been sufficiently reduced, we do not think that subsequent recoveries
should be recognised.
19. On the other hand, as discussed in paragraph 13 of this letter, if we set the thresholdfor recognising impairment losses at a relatively lower level, we think the objectiveof recognising impairment losses becomes less clear and, accordingly, it would be
difficult to determine whether and when the reversal of impairment losses should berecognised.

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