17 October 2014
Hans Hoogervorst
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Dear Mr. Hoogervorst:
re: Comments on Discussion Paper“Accounting for Dynamic Risk Management:a Portfolio Revaluation Approach to Macro Hedging”
The Corporate Accounting Committee (CAC) of the Securities Analysts Associationof Japan (SAAJ) is pleased to comment on Discussion Paper “Accounting for Dynamic
Risk Management: a Portfolio Revaluation Approach to Macro Hedging” (hereinafterreferred to as DP) put out by the International Accounting Standards Board (IASB). The
SAAJ is a not-for-profit organization providing investment education and examination
programs for securities analysts. Its certified members number 26,000. The CAC is astanding committee of the SAAJ composed of 15 members, most of whom are users
including equity and credit analysts, and portfolio managers, while a few others are
academicians and public accountants. The CAC writes comment letters to global standard
setters, including the IASB and the Accounting Standards Board of Japan (ASBJ), andexchanges opinions with organizations including the ASBJ and Financial Services Agency.
Before drafting this comment letter, the SAAJ sponsored a study session on the DP,
inviting an ASBJ staff member as a lecturer. Some 62 of our certified members participated.
A questionnaire was subsequently sent to each and 33 responded, making for a 53%
response rate. This comment letter fully takes into account the views expressed in thequestionnaire replies as well as discussion among CAC members. The survey results areattached as an Appendix. For this survey, respondents were asked if they were (1) financial
statement users, (2) preparers, or (3) “other” (including public accountants and consultants).
This was because opinions regarding the DP were expected to be influenced byrespondents’ job categories and also because certified members of the SAAJ work invarious fields within financial institutions and other organizations. The result was (1)136.5 % financial statement users, (2) 24.2% preparers, and (3) 39.4% “other”. Responses tosome questions exhibited differences according to job categories.
General Comments
The CAC commends the IASB’s endeavor to solve the problems of current hedge
accounting and to present the actual results of open portfolio based dynamic risk
management to financial statements. However, it is not clear whether the DP is pursuing(1) achieving short-term improvements in hedge accounting, or (2) proposing a genericmodel to be broadly applicable to businesses, typically by banks, which make profits byinvesting deposits taken in assets that carry different interest rate risks (duration) and credit
risks. The IASB needs to determine which of the two directions to pursue.
If the direction is determined to be (1) above, then the nomenclature of the DP isquite misleading and it should be renamed, for example, “Improvements in Macro Hedge
Accounting” when the exposure draft is put out. In this case, many issues discussed in the
DP will be useless in the exposure draft. If the direction is determined to be (2) above, newaccounting standards including FVTOCI valuation of derivatives and principles todetermine duration of core demand deposits, that are scarcely discussed in the DP, need to
be fully developed in order to gain support from financial statement users and preparers.
The CAC’s views on specific questions are explained below.
Question 1—Need for an accounting approach for dynamic risk management
Do you think that there is a need for a specific accounting approach to represent
dynamic risk management in entities’ financial statements? Why or why not?
The CAC thinks the actual results of dynamic risk management at financial
institutions are not satisfactorily reflected in current financial statements and that current
note disclosure is insufficient. This is primarily because current hedge accounting requires
a one-to-one designation between the hedged item and the hedging instrument. As dynamic
risk management can be an important competitive edge for financial institutions, better
presentation of the actual results of dynamic risk management in financial statements
would provide decision useful information. In this regard, the CAC agrees that there is aneed for a specific accounting approach.
In our survey, 79% of respondents supported the need for new accounting standards
and no major differences according to job categories were observed (see Question 2 in the
Appendix).
Question 2—Current difficulties in representing dynamic risk management in entities’2financial statements(a) Do you think that this DP has correctly identified the main issues that entities
currently face when applying the current hedge accounting requirements to dynamic
risk management? Why or why not? If not, what additional issues would the IASB needto consider when developing an accounting approach for dynamic risk management?
(b) Do you think that the PRA would address the issues identified? Why or why not?
Albeit many financial institutions dynamically manage risks on a portfolio
basis, they have to record artificial one-to-one designation between the hedged
item and the hedging instrument as required by current accounting standards.
The portfolio revaluation approach (PRA), on the other hand, intends to present
the actual results of dynamic risk management based on portfolios. The CAC
basically supports the PRA because it regards it as having the potential forusers to understand the relationship between source of profits andcorresponding risks more easily. The improvement in understandability,
however, depends on presentation of financial statements and note disclosures.
Detailed disclosure, including, for example, hedged positions and their pricesensitivity, is required.
In our survey, 73% of respondents thought the PRA would make it easy tounderstand the source of profits and corresponding risks. Only 50% with apreparer’s background, however, supported the PRA. They are concerned that
the PRA could increase volatility of net income even when risks are actually
reduced (see Question 3 in the Appendix)
Question 4—Pipeline transactions, EMB, and behaviouralisation
Behaviouralisation(c) For the purposes of applying the PRA, should the cash flows be based on a
behaviouralised rather than on a contractual basis (for example, after considering
prepayment expectations), when the risk is managed on a behaviouralised basis? Please
explain your reasons, taking into consideration operational feasibility, usefulness of theinformation provided in the financial statements and consistency with the Conceptual
Framework.
Question 5—Prepayment risk
When risk management instruments with optionality are used to manage prepayment
risk as part of dynamic risk management, how do you think the PRA should consider
this dynamic risk management activity? Please explain your reasons.
Question 9—Core demand deposits

3(a) Do you think that core demand deposits should be included in the managed portfolio
on a behaviouralised basis when applying the PRA if that is how an entity would
consider them for dynamic risk management purposes? Why or why not?
Conventional dynamic risk management uses expected or behaviouralised cash
flows, rather than contractual terms, for such instruments like core demand deposits andmortgages with prepayment option. The CAC supports the use of behaviouralised cash
flows in the PRA in view of consistency with the purpose of the PRA which is to present
the results of dynamic risk management to financial statements.
There is serious concern, however, that too lenient use of behaviouralised cash flows
would lead to arbitrary abuses by preparers. The CAC thinks the scope of behaviouralised
cash flows should be cautiously defined and the majority of its members opined pipelinetransactions and EMB should not be included in the scope. The CAC expects the IASB toclearly define such scope.
The use of behaviouralised cash flows for demand deposits and mortgages in generalis a gigantic jump from current accounting standards. Accordingly, robust accounting
standards on how to estimate and reflect future behavior need to be developed
simultaneously if the use of behaviouralised cash flows is extended to those mentioned
above.
In our survey, 76% of respondents supported the use of behaviouralised cash flows.
Only 40% of those with a preparer’s background supported this and 60% of them answered“Cannot decide at this moment”, citing behaviouralised cash flows should not berecognized as net income. (see Question 10 in the Appendix).
Question 15—Scope(a) Do you think that the PRA should be applied to all managed portfolios included in
an entity’s dynamic risk management (ie a scope focused on dynamic risk management)or should it be restricted to circumstances in which an entity has undertaken risk
mitigation through hedging (ie a scope focused on risk mitigation)? Why or why not? If
you do not agree with either of these alternatives, what do you suggest, and why?
In our survey, 61% of respondents supported a scope focused on dynamic risk
management while 35% supported one focused on risk mitigation. Respondents with auser’s background gave slightly more support to scope focused on risk mitigation than
average (see Question 7 in the Appendix).
Supporters of a scope focused on risk mitigation opined that limited scope would
help understand the effects of dynamic risk management better.
Supporters of a scope focused on dynamic risk management contended that limiting4the scope would be practically difficult and that judgment could be arbitrary. Further, somecontended that this approach would enable them to understand the results and state ofdynamic risk management from a broader perspective including the decision not to hedge.
The CAC thinks scope solely depends upon which direction the DP is to pursue, as
discussed in General Comments above. If the DP is to pursue (1) achieving short-term
improvements in hedge accounting, then the scope should be focused on risk mitigation.
On the other hand, if the DP is to pursue (2) proposing a generic model to be broadly
applicable to businesses, typically by banks, then the scope should be focused on dynamic
risk management.
Question 15—Scope(c) Please provide comments on the operational feasibility of applying the PRA for eachof the scope alternatives. In the case of a scope focused on risk mitigation, how could theneed for frequent changes to the identified hedged sub-portfolio and/or proportion beaccommodated?
In our survey, 50% supported a sub-portfolio approach, 10% a proportional approach,while 40% answered “Cannot judge at this moment”, regarding a scope focused on risk
mitigation (see Question 8 in the Appendix).
Reasons to support a sub-portfolio approach include coherence to risk mitigation
scope and relative simplicity. Many voiced, however, concerns that both approaches might
induce arbitrary applications and that information provided might not be decision useful.
The CAC thinks further deliberation is needed in this regard.
Corresponding to the second part of Question 15(c), we asked “Do you think it
would be practically possible to apply a risk mitigation approach to portfolios that arechanging dynamically every moment?” The responses were evenly divided between “Yes”,“No”, and “Cannot judge at this moment”. Half of those respondents with a preparer’s
background answered “No”, suggesting practical difficulties of the approach (see Question
9 in the Appendix).
Question 18—Presentation alternatives(a) Which presentation alternative would you prefer in the statement of financial
position, and why?
The CAC thinks that all three approaches addressed in the DP are still insufficient
but with a slight preference for the “separate lines for aggregate adjustments” approach.
The CAC proposes disclosing a breakdown of major items in the notes which would takethe advantage of the “line-by-line gross up” approach in the “separate lines for aggregate5adjustments” approach.
In our survey, 39% of respondents supported the “separate lines for aggregate
adjustments” approach. This approach gathered a majority (60%) of support from amongusers (see Question 6 in the Appendix).
Question 18—Presentation alternatives(b) Which presentation alternative would you prefer in the statement of comprehensive
income, and why?
The CAC strongly believes actual net income should be presented in the statement ofcomprehensive income. Stable net income can be useful for managerial accounting but the
CAC regards it as an unreliable figure for use in financial accounting.
In our survey, 86% of respondents supported the actual net income presentation
while none supported the stable net income presentation (see Question 5 in the Appendix).
Question 26—PRA through OCI
Do you think that an approach incorporating the use of OCI in the manner described inparagraphs 9.1–9.8 should be considered? Why or why not? If you think the use of OCI
should be incorporated in the PRA, how could the conceptual and practical difficulties
identified with this alternative approach be overcome?
The whole purpose of dynamic risk management is to stabilize net interest income
after dynamic risk management (NII after DRM). NII after DRM includes DRM which
belongs to the current period, while DRM revaluation gains & losses and derivative trading
gains & losses that relate to future periods are included in net income, not in NII after
DRM. As a result, with stable NII after DRM, net income can be quite volatile. The CAC
regards this as the most serious vulnerability in the DP. Many survey respondents with apreparer’s background pointed this out as their major concern (see our comments on
Question 2 above).
Presenting DRM revaluation gains & losses and derivative trading gains & losses
that relate to future periods in other comprehensive income, not in net income, will resolve
this vulnerability. Specifically, this means to move “Revaluation effect from dynamic risk
management” in the tables on pp. 71-72 of the DP to OCI. As “Revaluation effect fromdynamic risk management” includes gains & losses from derivative instruments, the
CAC’s proposal seems to contradict current standards where derivative instruments’valuation gains & losses are included in net income (FVTPL). The rationale behind
FVTPL valuation is that derivatives are typically short-term contracts and due dates willsoon come when gains & losses are realized and that derivatives typically have observable6

market prices. Most, if not all, derivatives used in PRA are rolled over when due. In otherwords, they are de facto long-term contracts which make OCI valuation acceptable to mostconstituents as an exception to the current standards regarding derivatives valuation.
As explained in the answer to Question 1, several CAC members think all assets andliabilities should be measured by fair value for the business model used by financial
institutions. For these members, the use of OCI is the first step to realize full fair value
accounting and they expect the IASB to seriously and sincerely deliberate the issue.
Paragraph 1.33 of the DP states “The PRA is not a full fair value model because
managed exposures are only revalued for the risk that is being managed; managed
exposures are not being remeasured at fair value.” A few CAC members are concerned that
expansion of the scope of PRA will potentially lead to de facto full fair value accounting
while several others think, as far as financial institutions are concerned, full fair value
accounting is desirable.
In this context, a question in the survey asked “Do you think PRA is substantially thesame with full fair value accounting?” Opinions are divided into 33% “Yes”, 42% “No”,
and 24% “Cannot decide at this moment” (see Question 4 in the Appendix).
If you have any questions or need further elaboration, please do not hesitate tocontact Sei-Ichi Kaneko, Executive Vice President, SAAJ (s-kaneko@saa.or.jp).
Sincerely yours,

Keiko Kitamura
Chair
Corporate Accounting Committee

7

APPENDIX

Results of SAAJ Survey on“Accounting for Dynamic Risk Management”

Background and methodology
The Securities Analysts Association of Japan (SAAJ) sponsored a study session on
IASB’s discussion paper (DP) “Accounting for Dynamic Risk Management: a Portfolio
Revaluation Approach to Macro Hedging”, inviting a lecturer from the AccountingStandards Board of Japan (ASBJ). Some 62 of our certified members participated in thesession held on 6 August. A questionnaire was subsequently sent to each participant and 33
responded, making for a 53% response rate. The respondents were also invited to makecomments. The survey, although small in size, focused on a cohort with the samebackground (certified members of the SAAJ) and same knowledge level (participation in
the study session). This focus and very high response rate gives credibility to the reliabilityof the survey. As the DP is highly technical, Q5 to Q10 were put as optional questions.
Survey questions and answers
Q1: Amongst the following three categories, what is the closest to your job description?
(a) Financial statement user: analyst, investment manager, investment banker, etc.
(b) Financial statement preparer: accounting, financing, investor relations, cash
management, risk management, etc.
(c) Other: public accountant, information services provider, consultant, etc.
(a) Financial statement user

12

36.4%

(b) Financial statement preparer

8

24.2%

(c) Other

13

39.4%

33

100.0%

Total

Q2: Do you think new accounting standards are required in order to present the results ofdynamic risk management which uses open portfolios that change over time?
(a) Yes2678.8%(b) No2

6.1%

8(c) Cannot judge at this moment
Total
User

5

15.2 %

33

100.0%

Preparer

Other

(a)

9

75.0%

7

87.5%

10

76.9%

(b)

1

8.3%

0

0.0%

1

7.7%

(c)

2

16.7%

1

12.5%

2

15.4%

Sub-total

12100.0%

8

100.0%

13

100.0%

Q3: The DP discusses the use of the portfolio revaluation approach (PRA) for dynamic risk
management of interest rate and other risks often used by financial institutions.
Do you think the PRA will make it easy to understand the source of profit andcorresponding risks that are dynamically managed based on the asset and liability
matching principle?
(a) Yes2472.7%(b) No39.1%(c) Cannot judge at this moment

6

18.2%

33

100.0%

Total
User

Preparer

Other

(a)

10

83.3%

4

50.0%

10

76.9%

(b)

2

16.7%

1

12.5%

0

0.0%

(c)

0

0.0%

3

37.5%

3

23.1%

Sub-total

12100.0%

8

100.0%

13

100.0%

Q4: Paragraph 1.33 of the DP states “The PRA is not a full fair value model because themanaged exposures are only revalued for the risk that is being managed; the managed
exposures are not being remeasured at fair value.”On this, some raise concern that expansion of the scope of the PRA will lead to defacto full fair value accounting. Do you think the PRA is substantially the same withfull fair value accounting?

(a) Yes

11

33.3%

9

(b) No1442.4%(c) Cannot judge at this moment

8

24.2%

33

100.0%

Total
User

Preparer

Other

(a)

3

25.0%

3

37.5%

5

38.5%

(b)

7

58.3%

3

37.5%

4

30.8%

(c)

2

16.7%

2

25.0%

4

30.8%

Sub-total

12100.0%

8

100.0%

13

100.0%

Q5: The DP addresses the following two alternative presentations of the PRA in thecomprehensive income statement.
(A) Actual net income presentation: present actual net income using interest revenue,
interest expense, and net interest from dynamic risk management.
(B) Stable net interest income presentation: present stable net interest income with anassumption that the aim of dynamic risk management is to stabilize net interest
income.
Which one of the above do you think would provide the most useful information for
financial statement users?
(a) Actual net income presentation

19

86.4%

(b) Stable net income presentation

0

0.0%

(c) Cannot judge at this moment

3

13.6%

22

100.0%

Total
User

Preparer

Other

(a)

9

90.0%

4

80.0%

7

100.0%

(b)

0

0.0%

0

0.0%

0

0.0%

(c)

1

10.0%

1

20.0%

0

0.0%

Sub-total

10100.0%

5

100.0%

7

100.0%

Q6: The DP addresses the following three alternatives for the presentation of therevaluation adjustments arising from the PRA in the statement of financial position.
(A) Line-by-line gross up: the carrying amounts of the exposures included within the
managed portfolio would be adjusted to reflect the revaluation for the managed risk.

10(B) Separate lines for aggregate adjustments to assets and liabilities: separate line
items would be presented for both the revaluation adjustments for the revalued
exposures that are assets and those that are liabilities.
(C) Single net line item: the net revaluation adjustment for all exposures subject to the
PRA would be presented in a single line item in the statement of financial position.
Which one of the above do you think would provide the most useful information for
financial statement users?
(a) Line-by-line gross up

6

26.1%

(b) Separate lines for aggregate adjustments to assets
and liabilities

9

39.1%

(c) Single net line item

3

13.0%

(d) Cannot judge at this moment

5

21.7%

23

100.0%

Total

User

Preparer

Other

(a)

3

30.0%

1

16.7%

2

28.6%

(b)

6

60.0%

1

16.7%

2

28.6%

(c)

1

10.0%

0

0.0%

2

28.6%

(d)

0

0.0%

4

66.7%

1

14.3%

Sub-total

10100.0%

6

100.0%

7

100.0%

Q7: The DP addresses the following two scopes for the PRA.
(A) A scope focused on dynamic risk management: the presence of any one of thethree elements of dynamic risk management (risk identification, analysis, andmitigation through hedging) would result in application of the PRA. All risk
exposure dynamically managed would be covered.
(B) A scope focused on risk mitigation: the PRA would be applied only when all threeelements are undertaken. Only the hedged portion would be covered.
Which one of the above do you think would provide the most useful information for
financial statement users?
(a) A scope focused on dynamic risk management

8

34.8%

(b) A scope focused on risk mitigation

14

60.9%

11

(c) Cannot judge at this moment
Total
User

1

4.3%

23

100.0%

Preparer

Other

(a)

2

22.2%

2

40.0%

4

44.4%

(b)

6

66.7%

3

60.0%

5

55.6%

(c)

1

11.1%

0

0.0%

0

0.0%

Sub-total

9100.0%

5

100.0%

9100.0%

Q8: The DP addresses the following two approaches for a scope focused on risk mitigation.
(A) Sub-portfolio approach: the application of the PRA would be limited to the
sub-portfolios that are managed dynamically for which risk mitigation or hedging
activities have been undertaken.
(B) Proportional approach: a hedged position is determined as a proportion of the
dynamically managed portfolio to which the PRA would be applied.
Which one of the above do you think would provide the most useful information for
financial statement users?
(a) Sub-portfolio approach

10

50.0%

(b) Proportional approach

2

10.0%

(c) Cannot judge at this moment

8

40.0%

20

100.0%

Total
User

Preparer

Other

(a)

4

44.4%

2

50.0%

4

57.1%

(b)

2

22.2%

0

0.0%

0

0.0%

(c)

3

33.3%

2

50.0%

3

42.9%

Sub-total

9100.0%

4

100.0%

7

100.0%

Q9: Notwithstanding approach (A) or (B) in Q8, application of the scope focused on risk
mitigation to portfolios whose risk exposures are changing every moment would
require complex operation in identifying the hedged portion. Do you think it would bepractically possible to apply the risk mitigation approach to portfolios that arechanging dynamically every moment?

12

(a) Yes733.3%(b) No733.3%(c) Cannot judge at this moment

7

33.3%

21

100.0%

Total
User

Preparer

Other

(a)

3

37.5%

2

33.3%

2

28.6%

(b)

2

25.0%

3

50.0%

2

28.6%

(c)

3

37.5%

1

16.7%

3

42.9%

Sub-total

8100.0%

6

100.0%

7

100.0%

Q10: In dynamic risk management for such instruments like mortgage loans withprepayment option and core demand deposits, behaviouralised, rather thancontractual, cash flows are used.
Do you think behaviouralised cash flows should be used in applying the PRA?
(a) Behavioralised expectations such as prepayments
should be taken into account

16

76.2%

(b) Contractual cash flows should be used

1

4.8%

(c) Cannot judge at this moment

4

19.0%

21

100.0%

Total
User

Preparer

Other

(a)

7

77.8%

2

40.0%

7

100.0%

(b)

1

11.1%

0

0.0%

0

0.0%

(c)

1

11.1%

3

60.0%

0

0.0%

Sub-total

9100.0%

5

100.0%

7

100.0%

13