September 18, 2008

Opinion on "Reducing Complexity in Reporting Financial Instruments"
Japanese Bankers Association
The Japanese Bankers Association would like to express its thanks for thisopportunity to comment on the Discussion Paper " Reducing Complexity in Reporting
Financial Instruments " published by the International Accounting Standards Board.
It is hoped that the following comments will assist the Board as it works to deliberate
the project.
Section1: Problems related to measurement
Question1
Do current requirements for reporting financial instruments, derivative instruments andsimilar items require significant change to meet the concerns of preparers and theirauditors and the needs of users of financial statements? If not, how should the IASB
respond to assertions that the current requirements are too complex?
Major changes like the "long-term solutions" outlined in this discussion paper are
unnecessary.
Even if we grant that current rules are too complex, the primary reason for this has
little to do with the rules themselves and more to do with the financial instruments they
regulate, which (compared to things like inventory assets or fixed assets) come in wide
varieties of objectives, types, terms, and counter values and in many cases are based oncomplex schemes and trading terms. Where we merely push ahead with thesimplification of accounting rules, it would be to make it more difficult to understandfrom the accounting information what is actually happening with wide varieties ofcomplex financial instruments and the companies that hold them. We would needlessly
invite misunderstanding among the users of financial statements, and that is why such
simplification is inappropriate. The damage from inappropriate financial statements
carries risks that exceed the benefits to be derived from simplification.
Therefore, IASB should meet criticisms that "current rules are too complex" by
responding that this view is "mistaken" and educating critics about why the complexity
is "unavoidable." However, there is room for partial simplification and greater
flexibility in hedge accounting requirements and practical measurement of theoreticalvalue, and IASB should make improvements on those points.
Section2: Intermediate approaches to measurement and related problems
Question2(a) Should the IASB consider intermediate approaches to address complexity arisingfrom measurement and hedge accounting? Why or why not? If you believe that the1

IASB should not make any intermediate changes, please answer questions 5 and 6,
and the questions set out in Section 3.
(b) Do you agree with the criteria set out in paragraph 2.2? If not, what criteria would
you use and why?
(a) There is room for partial simplification and greater flexibility in hedge accounting
requirements and practical measurement of theoretical value, and "intermediateapproaches" should be investigated within that scope. However, we are opposed to
studying all of the "intermediate approaches" outlined in this discussion paper
because we are against inappropriately reducing the number of measurement
categories for financial instruments, inappropriately codifying measurement at fairvalue and inappropriately eliminating hedge accounting.
(b) Among the standards presented in Paragraph 2.2, we are as a general principle infavour of (a), (c), and (d), but opposed to (b). In particular, within (b), we cantolerate the portion that reads, "It must not result in measuring instruments otherthan at fair value if they are required to be measured at fair value today," but thewording "Ideally, a change should increase the number of financial instruments
measured at fair value" is inappropriate (especially if the increase is substantial)
and should be deleted. With respect to the scope of measurement at fair value, we
think that the current rules should in general be maintained. Our main reasons arethat the current rules are able to express the substances related to wide varieties ofcomplex financial instruments and to the companies that hold them, and they are
already familiar to most. (See our response to Questions 8 and 9.)
Question3
Approach 1 is to amend the existing measurement requirements. How would you suggest
existing measurement requirements should be amended? How are your suggestions
consistent with the criteria for any proposed intermediate changes as set out in paragraph
2.2?
With respect to Approach 1, we propose that there should be virtually no amendmentof existing measurement requirements. In other words, categories like "held-to-maturity
investments" and "available-for-sale financial assets" express the substances related towide varieties of complex financial instruments and to the companies that hold themand are each required, as they are in existing measurement requirements, in order toavoid useless confusion from a practical standpoint.
There may be room for partial amendment, for example, simplification or relaxationof tainting rules, but it is putting the cart before the horse to completely eliminate the"held-to-maturity" category for the purpose of simplification if this entails the full
elimination of tainting rules.
Absorbing the "held-to-maturity" category into the "available-for-sale" category andintegrating the two is said in the paper not to be a problem because there is no impact on
net profit/loss, but there are impacts on net assets and financial instrument balance sheet,and this change would fail to express the substances, so the damages are greater than thebenefits. In addition, absorbing and integrating the "available-for-sale" category (and"held-to-maturity" category) into the "trading" category is said not to be problematic
because there is no impact on pricing of net assets and financial instruments on thebalance sheet (in some cases), but there is an impact on net profit/loss and this change
would fail to express the substances, so the damages are greater than the benefits.
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Furthermore, "requiring all instruments that are traded in active markets to be measured
at fair value" ignores the differences between this and holding to maturity. It would failto express the substances and is therefore an inappropriate amendment. On the other
hand, if there are virtually no amendments to the existing measurement requirements, allof the standards for intermediate modifications articulated in Paragraph 2.2 except for
the inappropriate portion of (b) ("Ideally, a change should increase the number offinancial instruments measured at fair value") are consistent.
Question4
Approach 2 is to replace the existing measurement requirements with a fair value
measurement principle with some optional exceptions.
(a) What restrictions would you suggest on the instruments eligible to be measured at
something other than fair value? How are your suggestions consistent with thecriteria set out in paragraph 2.2?
(b) How should instruments that are not measured at fair value be measured?
(c) When should impairment losses be recognised and how should the amount of
impairment losses be measured?
(d) Where should unrealised gains and losses be recognised on instruments measured atfair value? Why? How are your suggestions consistent with the criteria set out inparagraph 2.2?
(e) Should reclassifications be permitted? What types of reclassifications should bepermitted and how should they be accounted for? How are your suggestions
consistent with the criteria set out in paragraph 2.2?
It should be noted that we are opposed to Approach 2 itself and will therefore not beanswering the specific questions in (a) through (e) because they assume agreement with
Approach 2. Approach 2 says that "some financial instruments within the scope of astandard for financial instruments would be allowed to be measured using a cost-based
method," which at first glance appears similar to existing requirements andmethodologies and therefore justifiable. However, although Approach 2 adopts a fairvalue method as the measurement principle, an instrument within the scope of astandard for financial instruments would be allowed to be measured using a cost-based
method if it meets exception criteria," which creates a cavalier hierarchy that would
invite needless misunderstanding and is therefore inappropriate. In any case, theimportant points will be the specific instruments to which exceptions are applied and thespecific requirements for applying them, and for this to be appropriate there would need
to be detailed rules on par with existing rules, which would do little to reduce thecomplexity of accounting standards.
Question5
Approach 3 sets out possible simplifications of hedge accounting.
(a) Should hedge accounting be eliminated? Why or why not?
(b) Should fair value hedge accounting be replaced? Approach 3 sets out three possible
approaches to replacing fair value hedge accounting.
(i) Which method(s) should the IASB consider, and why?
(ii) Are there any other methods not discussed that should be considered by the
IASB? If so, what are they and how are they consistent with the criteria set out
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in paragraph 2.2? If you suggest changing measurement requirements underapproach 1 or approach 2, please ensure that your comments are consistent
with your suggested approach to changing measurement requirements.
(a) Hedge accounting should not be eliminated. We support the opinion of financial
statement preparers found in the latter half of Paragraph 2.33 that "[when]disclosing the effects of hedging activities in financial statements...the resulting
volatility in earnings does not reflect the economic consequences of hedging
activities." This is particularly the case for financial institutions that make wide useof derivatives to which hedge accounting is applied. Excessive and artificial
volatility in net profit/loss is inappropriate not only for financial statement
preparers, but also for financial statement users.
(b)(i) We support the approach in Paragraph 2.35 (b) to "permit recognition outside
earnings of gains and losses on financial instruments designated as hedging
instruments." This is the approach used in the existing Japanese standards andit is familiar to us.
(ii) At the current point in time, we do not see anything of particular importancethat we should identify.
Question6
Section 2 also discusses how the existing hedge accounting models might be simplified.
At present, there are several restrictions in the existing hedge accounting models tomaintain discipline over when a hedging relationship can qualify for hedge accounting
and how the application of the hedge accounting models affects earnings. This section
also explains why those restrictions are required.
(a) What suggestions would you make to the IASB regarding how the existing hedge
accounting models could be simplified?
(b) Would your suggestions include restrictions that exist today? If not, why are those
restrictions unnecessary?
(c) Existing hedge accounting requirements could be simplified if partial hedges were
not permitted. Should partial hedges be permitted and, if so, why? Please also
explain why you believe the benefits of allowing partial hedges justify thecomplexity.
(d) What other comments or suggestions do you have with regard to how hedge
accounting might be simplified while maintaining discipline over when a hedging
relationship can qualify for hedge accounting and how the application of the hedge
accounting models affects earnings?
(a) Financial institutions that perform risk management for financial instruments on a
portfolio basis should be allowed to apply hedge accounting that is suited to their
management approach. (We support the argument in Paragraph 2.89.)(b) This includes the existence of restrictions. There is a need for certain reasonable
restrictions on hedge accounting, for example designation and documentation ofhedges. However, excessively strict and detailed requirements are inappropriate
from the perspective of cost-effectiveness. Given the potential size of the damages,
restrictions should have sufficient rationality.
(c) Partial hedges should be recognized. There are many different kinds of risk to behedged (for example, interest-rate risk, credit risk, foreign-exchange risk) and4depending upon the type of risk there may not necessarily be sufficient means ofhedging (sufficiently effective means of hedging) that would warrant theapplication of hedge accounting. There are also risks that cannot be hedged at all(liquidity risk, etc.). Were partial hedges not to be recognized, then as noted in
Paragraph 2.72, it would be more difficult to make use of hedge accounting.
Ensuring the utility of selective, dynamic hedge operations, including thedetermination of hedge ratios, is important to financial statement preparers(management, etc.) in maintaining and increasing corporate value. Were accounting
rules to have "reduced complexity" that impairs corporate value, it would be to thedisadvantage of shareholders, creditors, and other financial statement users.
(d) At the current point in time, we do not see anything else of particular importancethat we should identify (other than the responses to (a) through (c) above).
Question7
Do you have any other intermediate approaches for the IASB to consider other thanthose set out in Section 2? If so, what are they and why should the IASB consider them?
At the current point in time, we do not see anything of particular importance that
we should identify.
Section3: A long-term solution—a single measurement method for all types offinancial instruments
Question8
To reduce today's measurement-related problems, Section 3 suggests that the long-term
solution is to use a single method to measure all types of financial instruments within
the scope of a standard for financial instruments.
Do you believe that using a single method to measure all types of financial instruments
within the scope of a standard for financial instruments is appropriate? Why or why
not? If you do not believe that all types of financial instruments should be measured
using only one method in the long term, is there another approach to address
measurement-related problems in the long term? If so, what is it?
We do not consider it appropriate to use a single methodology to measure all types offinancial instrument that fall within the scope of a standard. Our main reasons are thatthe use of a single measurement approach would, in comparison with the existingmeasurement approaches, fail to express the substances related to wide varieties ofcomplex financial instruments and to the companies that hold them and would invite
misunderstanding among financial statement users while also creating needlessconfusion at the practical level.
This can be seen just from the perspective of term. Financial instruments could,
depending upon the nature of the instrument and the purpose for holding, extend
anywhere from intraday to several decades or semipermanent holding (or a highprobability of that). Similarly, from the perspective of fluctuations in cash flow andvalue, the nature of the financial instrument and the economic environment may resultin some instruments that experience (or have a high probability of experiencing)virtually no change in price from the time at which they are generated/acquired to thosewith infinite potential for price increases and those with the risk of becoming valueless.
It fails to express the substances if one tries to use a single approach to measure them,5whether that approach be fair value that assumes all instruments to be settled in cash onterm end or be acquisition cost that assumes all instruments to be retained stably overthe long term.
Furthermore, were we to apply fair value or some other single approach to themeasurement of assets, liabilities, earnings, and expenses on the financial statements,
then there would be the continued need to present to financial statement users thebreakdown of the components in the profit/loss structure and other cost information to
the same degree as currently done, an issue that is touched on in Paragraphs 3.29, 3.30,
3.49, 3.50, 3.63, 3.64, 3.82–3.84 in the discussion paper. This would likely make it
inevitable that additional, supplementary information is disclosed in footnotes, and froma general, overall perspective would be unlikely to result in a "reduction of complexity"
compared to current accounting standards and practices.
In addition, requiring the use of an one-size-fits-all, general purpose measurement offair value would in many cases entail extreme complexity or significant costs in order tomake frequent, short-term measurements of theoretical value or other forms of fairvalue with high degrees of precision. This would increase the practical issues forfinancial statement preparers, and rather than providing financial statement users withmore relevant information, could potentially make information less relevant.
We do not believe that a separate approach to long-term solutions for measurement
problems exists with respect to measurement-related accounting standards (excluding
existing accounting standards and partial improvements) (see also our response to
Question 9 (b)).
Question9
Part an of Section 3 suggests that fair value seems to be the only measurement attributethat is appropriate for all types of financial instruments within the scope of a standard
for financial instruments.
(a) Do you believe that fair value is the only measurement attribute that is appropriate
for all types of financial instruments within the scope of a standard for financial
instruments?
(b) If not, what measurement attribute other than fair value is appropriate for all typesof financial instruments within the scope of a standard for financial instruments?
Why do you think that measurement attribute is appropriate for all types of financial
instruments within the scope of a standard for financial instruments? Does thatmeasurement attribute reduce today's measurement-related complexity and provide
users with information that is necessary to assess the cash flow prospects for all
types of financial instruments?
(a) We do not believe that fair value is the only measurement attribute that is
appropriate for all types of financial instruments within the scope of a standard forfinancial instruments. (For reasons, see our responses to Questions 8 and 9 (b).)(b) We do not believe that there is a measurement attribute other than fair value that is
appropriate for all types of financial instruments within the scope of a standard for afinancial instrument and would provide a single, one-size-fits-all, general-purpose
methodology (see our response to Question 8). In other words, we believe that the
only appropriate approach is a mixture of measurement attributes as is generally thecase with current practices in which some measurement attributes are appropriately
measured in terms of fair value, while others may be properly measured on the
cost-based method, and amortization cost or some other attribute. Our main reasons
6are that the existing mixed measurement attributes are able to express thesubstances related to wide varieties of complex financial instruments and to thecompanies that hold them and are already familiar to most.
While recognizing the possibility that the current mixed measurement attributes
may not be able to (significantly) reduce the complexity involved in current
measurement, this is not a defect only in the current mixed measurement attributes(see our response to Question 8) and is unavoidable. Indeed, we do not think that
reducing complexity is the single or the most important issue or goal (see our
response to Question 1).
Furthermore, the current mixed measurement attributes generally provide users
with the information necessary to evaluate cash flow projections for virtually all
types of financial instrument (there may be room for some improvements in part,but at least this is the case compared to other major measurement attributes).
Question10
Part B of Section 3 sets out concerns about fair value measurement of financial
instruments. Are there any significant concerns about fair value measurement offinancial instruments other than those identified in Section 3? If so, what are they andwhy are they matters for concern?
Section 3 generally covers our major concerns about fair value measurement offinancial instruments. However, as a practical matter for financial statement preparers,
we would add to the issues described in Section 3 questions of the frequency ofmeasurement (accounting cycle, etc.) and the deadlines (work period for closing
account, etc.), which we also consider to be significant points in fair value measurementof financial instruments.
In other words, coverage, methodology, and precision are all important questions inmeasurement, but even if those are constant, an increase in the frequency ofmeasurement or tighter deadlines for measurement can be significant practical concerns,
and we therefore advocate a cautious approach that takes account of the substances,
impacts, and cost-benefit analysis.
Furthermore, in the future, we are concerned about the potential for similar fair value
measurement requirements to be applied (scope expanded) to other areas besides
financial instruments (for example, 3.94, A 39, A 49, A 51; some areas of fixed assets
and inventory assets) in light of the nature of instruments and categories of holding
purposes. In such cases, there would need to be some degree of consistency inmeasurement methods and precision between these new areas and financial instruments,
and we are concerned about the extent of this and whether adaptation would be possible.
Our primary concern is that this may be problematic in terms of the impact on the utility,
consistency, and practicality of accounting information.
Question11
Part C of Section 3 identifies four issues that the IASB needs to resolve before
proposing fair value measurement as a general requirement for all types of financial
instruments within the scope of a standard for financial instruments.
(a) Are there other issues that you believe the IASB should address before proposing ageneral fair value measurement requirement for financial instruments? If so, what
are they? How should the IASB address them?
(b) Are there any issues identified in part C of Section 3 that do not have to be resolved
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before proposing a general fair value measurement requirement? If so, what are
they and why do they not need to be resolved before proposing fair value as a
general measurement requirement?
(a) At the current point in time, we do not see anything of particular importance that
we should identify.
(b) At the current point in time, we do not see anything of particular importance that
we should identify.
Question12
Do you have any other comments for the IASB on how it could improve and simplify
the accounting for financial instruments?
We believe there is room for some simplification and flexibility regarding hedge
accounting requirements, practical measurement of theoretical value and information
disclosure in footnotes, but we also think that more emphasis must be placed on
cost-benefit analysis from practical perspectives and that doing so would enablesimplification and greater flexibility for some of the excessively detailed and complex
rules and procedures currently used.
End of document8