31 July 2009
Sir David Tweedie
International Accounting Standards Board
30 Cannon StreetLondon EC4M 6XH
United Kingdom
Dear Sir David:

re: Comments on Exposure Draft “Derecognition”
The Corporate Accounting Committee (CAC) of the Securities Analysts Association ofJapan (SAAJ) is pleased to comment on the exposure draft, “Derecognition”, put out by
the International Accounting Standards Board (the Board). The SAAJ is a not-for-profit
organization providing investment education and examination programs for securities
analysts. Its certified members exceed 22,000. The CAC is a standing committee of theSAAJ composed of 12 members, most of whom are users including equity and credit
analysts, and portfolio managers, while a few others are academicians and publicaccountants.

General remarks
The exposure draft tries, to the extent possible, to eliminate ‘risks and rewards’ and‘continuing involvement’ concepts that exist in current standards as requirements inderecognizing financial products, and proposes to focus on the concept of ‘control’. This
helps simplify the derecognition standards which should basically be applauded but theexposure draft includes unacceptable problems from a practical point of view which arecaused by too much adherence to the ‘control’ concept. The exposure draft also presents
an alternative approach. The CAC prefers the original approach to the alternative one.
The alternative approach comes to recognize a lot of derivative positions associated with
derecognized financial products, and it is very hard, if not impossible, to verify theappropriateness of fair value measurement of these derivatives.
The exposure draft achieves its objective to simplify the accounting standards, but, atthe same time, causes several serious problems in terms of practical application andsome important revisions are thus deemed necessary. Repos (sales and repurchasetransactions), stock lending (stock lending transactions), and securitization are
examples where serious problems arise.

1Repos and stock lending (Question)
The CAC is opposed to paragraph 17A(c) and AG52L of the exposure draft as they
regard repos and stock lending as securities sales and purchases.
Economically, repos are secured borrowings and stock lending is lending/borrowing
securities (sometimes repos are also used for bond lending/borrowing). The exposure
draft proposes treating repos and stock lending as sale/purchase transactions, forcing
accounting entries that do not reflect economic reality.
The exposure draft rests on the view that a repo can be notionally construed as asynthetic position of selling a bond and taking a long position in the relevant futures.
However, a repo and the synthetic position are completely different transactions. In arepo, which is essentially borrowing with collateral, the financing rate will be uniquelydetermined, reflecting current financial markets. In the synthetic position, as thetiming of transaction and counterparties are different, there is no guarantee that theeffective rate is the same with that of a repo. In other words, one who wishes to borrowmoney through a synthetic position is trying to get a better rate than available in a repo.
Economically, this is arbitrage trading, the nature of which is completely different fromthat of a repo. It should be added that, legally, a repo is typically written in a single
contract, while the synthetic position is composed of two different contracts.
Under current accounting conventions regarding repos, a bond can have more than one
owner at a given time. Apparently, the Board regards this as a problem that needs to berectified. However, these are daily occurrences in the financial markets. For example,assume the CAC effects a short sale of stock A, which the Board buys. From the tradedate to the delivery date, the Board owns a stock that does not exist. Apparently, it isabsurd that a security is owned by more than two parties, or some people own securities
that do not exist. However, the financial markets are based upon trust whereby suchphenomena are not a problem because they will be resolved sooner or later by thedelivery of the relevant securities. The accounting standards reflect such

trust andpermit the current accounting treatment.
The following problems would occur if repos and stock lending are regarded as
selling/buying transactions. The first is market liquidity. If profit and loss are to berecognized at the time of each transaction, practically nobody would engage in thesetransactions and market liquidity would dry up. In the Tokyo market at end-2008, bondrepos (gensaki) outstanding totaled 27 trillion yen; in addition, very short term
(typically overnight) repos outstanding totaled 64 trillion yen. The two combined
account for more than 50% of the Tokyo short-term money market. Liquidity in thesetransactions is a lifeline of the Japanese economy.

2The second problem lies in corporate valuation. If financial instruments used in repos
and stock lending are derecognized, the balance sheet looks slimmer and some financial
ratios will improve. Time consuming adjustments will be needed to obtain datacompatible to the past and to other companies.
The third problem is the flip side of the second one. Companies may be induced to‘window dress’ their balance sheets by using repos and stock lending. Not only tostreamline their balance sheets, but they may also be tempted to realize profits bylending stocks with unrealized gains.
The exposure draft focuses on the concept of ‘control’ and tries to eliminate, to theextent possible, ‘risks and rewards’ and ‘continuing involvement’ concepts to simplify
the derecognition standards. The CAC does not deny this approach, but thinks flexible
judgment is needed where this approach ends up with practically unreasonable
standards. The CAC, therefore, proposes rewriting paragraph 17A(c) and/or AG52L, insuch a way that repos and stock lending will not be regarded as sales.

Impact on securitization business
Some members, who are sell-side analysts and an accountant, have raised concern thatthe exposure draft may excessively suppress the securitization business. Thesemembers expressed the following opinions.
● The key element of securitization has been bankruptcy remoteness. Like US GAPP,
the exposure draft should incorporate a rule to allow derecognition when bankruptcy
remoteness is secured.
● The exposure draft will create a fat balance sheet which will result in increased
financial leverage. As the prudential regulators are tightening the grip on leverage, if
the proposals in the exposure draft are actually adopted as new accounting standards,
the incentive for securitization will be decisively lost. The IASB should maintain close
communication with the prudential regulators to monitor the potential impact on thesecuritization business.
● The exposure draft would practically annihilate securitization products with apreferred/subordinated structure. Partially keeping the ‘risks and rewards’ concept, thelarger of the risks or rewards retained by the originator should be kept on the balance
sheet of the said originator, while the rest should be allowed to be derecognized, subject
to very detailed notes.

Disclosure (Question 11)
The CAC supports the disclosure requirements in the exposure draft as a whole, but3

the following opinions have been voiced by some members regarding some specificissues.
● As the definition of transfer is substantially broadened (paragraph 9 of the proposed
IAS 39), it should be scrutinized so that the scope of disclosure will not be expanded
meaninglessly.
● If financial products used for repos and stock lending are to be derecognized, thendetailed disclosure, including type, name, amount, and terms and conditions, isnecessary.
If you have any questions or need further elaboration, please do not hesitate to contact
Sei-Ichi Kaneko, Executive Vice President, SAAJ (s-kaneko@saa.or.jp).
Sincerely yours,Keiko Kitamura
Chair
Corporate Accounting Committee

4