30 June 2010
Sir David Tweedie
International Accounting Standards Board
30 Cannon StreetLondon EC4M 6XH
United Kingdom
Dear Sir David:

re: Comments on Exposure Draft“Financial Instruments: Amortized Cost and Impairment”
The Corporate Accounting Committee (CAC) of the Securities Analysts Association ofJapan (SAAJ) is pleased to comment on the exposure draft, “Financial Instruments:

Amortized Cost and Impairment” 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 membersexceed 23,000. The CAC is a standing committee of the SAAJ composed of 14 members,
most of whom are users including equity and credit analysts, and portfolio managers,
while a few others are academicians and public accountants. Before drafting thiscomment letter, the SAAJ sponsored a study session on the discussion paper, inviting an
ASBJ (the Accounting Standards Board of Japan) staff member as a lecturer. Some 168
certified members of the SAAJ participated in the session. A questionnaire wassubsequently sent to session participants and 84 responded, making for a 50% responserate. This comment letter takes full consideration of the views expressed in thequestionnaire replies as well as discussion among CAC members. The survey results
are attached as an Appendix to this letter.

General Remarks
We are divided over the expected loss model proposed by the exposure draft because
we are not comfortable with accounting standards straying into a domain for which
prudential regulators should inherently take responsibility, namely stabilizing financial
systems. Moreover, if we had to rely on overly arbitrary assumptions for expected cash
flows, we would have difficulty making inter-company comparisons, which we think is1

the biggest problem attaching to the expected loss model.
On the other hand, the exposure draft proposes enhanced disclosure requirements,
which we highly evaluate. We believe it indispensible to further enrich disclosure
content and make the format easier for financial statement users to understand. This
would address the problem just mentioned.
Below you will find our survey results and our comments on some questions in theexposure draft.

Responses to Questions in the Exposure Draft

Question 4(a) Do you agree with the measurement principles set out in the exposure draft? If not,which of the measurement principles do you disagree with and why?

Our opinions are divided over paragraph 6 of the exposure draft, measurement
principles, defined as “amortized cost is the present value calculated using the following

inputs: (a) the expected cash flows over the remaining life of the financial instrument;and (b) the effective interest rate as the discount rate”.
We asked if the proposed expected loss model better reflected the reality of financial
institutions’ business. Survey responses were: “Yes” 31.0%, “No” 26.2%, and “Cannot
judge at this moment” 42.8%. (See Q1 of our Survey questions and answers in theAppendix.)
To the question whether the expected loss model was effective in enabling earlier
recognition of impairment, one of the objectives of the exposure draft, survey responses
were: “Yes” 40.5%, and “No” 34.5%––not a significant difference. (See Q2)
Moreover, to the question which model offered more useful decision-making
information for corporate analysis, the expected loss model or the incurred loss model
used in IAS 39, survey responses were 28.6% for the expected loss model and 25.0% for
the incurred loss model, which does not indicate any meaningful difference. The top
46.4% response was “Cannot judge at this moment”. (See Q3)
Why is the expected loss model unpopular as evidenced above? We can say that many
SAAJ respondents are not comfortable with accounting standards straying into adomain for which prudential regulators should inherently take responsibility, namely
stabilizing financial systems. Moreover, while they admit the usefulness of the expected
loss model in analyzing financial institutions, most do not think it practical to put such2

a heavy burden on all preparers as, if this model is implemented as proposed, theshort-term account receivables of non-financial institutions would have to be valued bythis mode.
Therefore, we propose to IASB that it should be stipulated that the practical
expedients in Application guidance B15-17 of the exposure draft are applicable to items
such as the short-term account receivables of non-financial institutions. Also, regarding
Question 7 (b), we would like more simplified disclosure to be considered for thosefinancial instruments to which practical expedients can be applied. We believe relieving
the preparers of non-financial institutions of the burden of cumbersome procedures willlead to better understanding and broader support of the exposure draft among a wide
range of preparers.
The survey shows that a majority (72.6%) of respondents think the biggest problem isthat assumptions for expected cash flows can be arbitrary, making inter-company
comparison difficult (See Q4). If assumptions for expected cash flows are overly
arbitrary as to make inter-company comparison difficult, it would even jeopardize thefundamental objective of the exposure draft, “to present useful information to users offinancial statements for their assessment of the amounts, timing and uncertainty offuture cash flows”. To avoid such a risk, we think there will be no way other than todisclose detailed assumptions for expected cash flows.

Question 6
Do you agree with the proposed presentation requirements? If not, why? Whatpresentation would you prefer instead and why?

We support the four line items in the comprehensive income statement presentation
as proposed in paragraph 13 of the exposure draft. They are: (a) gross interest revenue(before deduction of the expected loss), (b) the portion of initial expected losses allocatedto the period, (c) net interest revenue, and (d) gains and losses resulting from changes inestimates. To the question, “Do you think this would contribute to an improved analysis
of financial institutions?” 13.1% of respondents expect “a significant contribution” and58.3% “a slight contribution”. About 70% of respondents favor this presentation for its
usefulness in analysis. (See Q5)

3

Question 7(a) Do you agree with the proposed disclosure requirements? If not, what disclosure
requirement do you disagree with and why?

Regarding the detailed disclosure proposed in paragraphs 14-22 of the exposure draft,
we asked, “Do you think the proposed disclosure would contribute to an improved
analysis of financial institutions?” 28.6% of our respondents answered “a significantcontribution” and 51.2% “a slight contribution”. As a whole, about 80% of therespondents favor this disclosure requirement because of its usefulness in analysis. (SeeQ6)
While we highly evaluate the proposed disclosure requirements, we believe itindispensible to further enrich disclosure content and make the format easier for
financial statement users to understand in order to eliminate their deep-rooted
suspicion of arbitrary assumptions and resultant difficulty in making inter-company
comparison.

Question 7(b) What other disclosures would you prefer (whether in addition to or instead of theproposed disclosures) and why?

In order to attract support from financial statements users, we would like to propose
the following additional disclosures:As for the grouping of financial instruments into classes in paragraph 14, thedisclosure of assumption/presumptions in classifying should be mandatory.

The structure of internal ratings for financial instruments and amounts at eachrating should be disclosed.
We believe additional disclosure as proposed above would lead to more usefulness inthe analysis of financial institutions. On the other hand, we would like IASB to further
pursue simplification of disclosure content for those financial instruments to which
practical expedients can be applied in order to mitigate the burden and resistance ofpreparers at non-financial institutions as stated in Question 4 (a) above.

4Concluding Remarks
The Financial Accounting Standards Board of the US (FASB) published an exposure
draft entitled Accounting for Financial Instruments on 26 May 2010. When we asked,“Which would give more valuable information for corporate analysis, IASB’s exposure
draft or FASB’s”, only 27.4% of our respondents favored the IASB one and 29.8% theFASB one. The top 42.8% response supported “Cannot judge at this moment”. (See Q8)
In addition to such divided opinion as evidenced above, we also consider it quite
serious that there is such an enormous difference in content between IASB and FASB
exposure drafts, where the former adopts an amortized cost method and the latter amodified incurred loss model. We understand IASB and FASB are cooperating to
finalize the MOU project by June 2011. We sincerely hope that both bodies will soonalign in the area of financial instrument impairment as well.

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

5APPENDIX

Results of SAAJ Survey on‘Financial Instruments: Amortized Cost and Impairment’

Background and methodology
The Securities Analysts Association of Japan (SAAJ) sponsored a study session on
IASB’s exposure draft Financial Instruments: Amortized Cost and Impairment, invitinga lecturer from the Accounting Standards Board of Japan (ASBJ). Some 168 certified
members of the SAAJ participated in the session held on 26 May. A questionnaire wassubsequently sent to session participants and 84 responded, making for a 50% response
rate. The respondents were also invited to make comments. The survey, although smallin size, focused on a cohort with the same background (certified members of the SAAJ)
and same knowledge level (participation in the study session). This focus and very highresponse rate gives credibility to the reliability of the survey.

Survey questions and answers
Q1: The exposure draft presents new measurement principles which are defined as“amortized cost is the present value calculated using the following inputs: (a) theexpected cash flows over the remaining life of the financial instrument; and (b) theeffective interest rate as the discount rate”, and it proposes the “expected loss model”
which is completely different from the “incurred loss model” used in IAS 39. Do you
think the expected loss model better reflects the reality of financial institutions’business?
A1:
Yes.

26

31.0%

No.

22

26.2%

Cannot judge at this moment.

36

42.8%

6

Q2: One of the objectives of the exposure draft, based on experiences of the financialcrisis, is to enable earlier recognition of impairments. Do you think the expected loss
model is effective in achieving this objective?
A2:Yes.

3440.5%

No.

2934.5%

Cannot judge at this moment.

2125.0%

Q3: Which offers more useful decision-making information for corporate analysis, theexpected loss model or the incurred loss model?
A3:
The expected loss model.

2428.6%The incurred loss model.

2125.0%Cannot judge at this moment.

3946.4%Q4: In your opinion, what are the problems with the expected loss model?
A4:The burden on preparers in terms of accounting

1720.2%6172.6%

No problems.

33.6%

Cannot judge at this moment.

33.6%

treatment and disclosure.
Assumptions for expected cash flows can be arbitrary,
making inter-company comparison difficult.

7

Q5: The exposure draft proposes including the following four line items in thecomprehensive income statement: (a) gross interest revenue (before deduction of the
expected loss), (b) the portion of initial expected losses allocated to the period, (c) net
interest revenue, and (d) gains and losses resulting from changes in estimates. Do you
think this would contribute to an improved analysis of financial institutions?
A5:
Yes, a significant contribution.

1113.1%

Yes, a slight contribution.

49

58.3%

No contribution.

24

28.6%

Q6: The exposure draft requires detailed disclosure including amounts shown in thecomprehensive income statement, input and assumptions used to calculate expectedcredit loss, and quality of financial assets measured by amortized cost. Do you think theproposed disclosure would contribute to an improved analysis of financial institutions?
A6:
Yes, a significant contribution.

24

28.6%

Yes, a slight contribution.

43

51.2%

No contribution.

17

20.2%

Q7: In regard to the disclosure requirements of the exposure draft, specify items thatyou think need further improvement.
A7:
Sensitivity analysis.
Fair value (in note).
Disclosure in a common format for inter-company comparison.
Past data (including credit loss experiences) used as assumptions for expectedcredit loss. (Plural answers)8Q8: FASB has published its exposure draft which uses a modified incurred loss model.
Which of the exposure drafts, the IASB or FASB one, presents more useful informationin analyzing financial institutions?
A8:
IASB

2327.4%

FASB

2529.8%

Cannot judge at this moment.

36

42.8%

Q9: What is the closest institution to which you belong?
A9:
A.

Securities company

1011.9%

B.

Bank

15

17.8%

C.

Investment company/trust

78.3%

D.

Insurance company

1416.7%

E.

Other financial institution

44.8%

F.

Accounting/tax firm

44.8%

G.

Rating agency

33.6%

H.

Research company/systems development/media

1315.5%I.

Others such as manufacturing companies

67.1%

J.

Other

89.5%

Q10: What is the closest to your job description?
A10:
A.

Analyst, portfolio manager, risk management

2934.5%

B.

Corporate loan/risk analysis

33.6%

C.

Marketing (Institutional/retail)

56.0%

D.

Accounting/corporate finance/IR

1720.2%E.

Public accountant/tax accountant

56.0%

F.

Other

25

29.8%

9