International Accounting Standards Board
January 27, 2022

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United KingdomJapanese Bankers Association
Comments on the International Accounting Standard Board’s Request for Information
Post-implementation Review of IFRS 9 - Classification and Measurement
The Japanese Bankers Association (the “JBA”)1 is pleased to provide comments on the Request forInformation Post-implementation Review of IFRS 9 – Classification and Measurement published by
the International Accounting Standards Board (the “IASB”).

We hope that our comments will contribute to your further discussions.

Responses to specific questions

Question 1–Classification and measurement
Do the classification and measurement requirements in IFRS 9:(a) enable an entity to align the measurement of financial assets with the cash flow characteristicsof the assets and how the entity expects to manage them? Why or why not?
(b) result in an entity providing useful information to the users of the financial statements about theamount, timing and uncertainty of future cash flows? Why or why not?

(Comment)(a) We do not consider that these requirements enable such an alignment.
(b) We do not consider that these requirements result in an entity providing useful information toinvestors.

(Rationale)
One of the core activities of financial institutions is asset and liability management (ALM) which is
not intended to make short-term profits. As interest rates and stock prices are inversely correlated, the1The Japanese Bankers Association is an organization that represents the banking industry in Japan. Its
members are banks and bank holding companies operating in Japan.

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ALM portfolios of Japanese financial institutions may include interest rate products (e.g. fixedincome) and equity products (e.g. equity index funds).
Under IAS 39, both of these instruments were classified as available-for-sale securities, and unrealised
gains or losses at period-end could be recognised in other comprehensive income (OCI). Under IFRS
9, interest rate products (e.g. fixed income) are designated at fair value through other comprehensive
income (FVOCI) and unrealised gains or losses at period-end can be recognised in OCI consistent
with IAS 39. However, under IFRS 9, most stock investment trusts are designated at fair value throughprofit or loss (FVPL) and unrealised gains or losses at period-end are recognised in profit or loss,
because they are classified as debt instruments2 and do not meet the solely payments of principal andinterest (SPPI) test. As a result, changes in the fair value of financial instruments held for ALM
purposes occurring during the period are divided into OCI and profit or loss. Therefore, theperformance of ALM activity will not be appropriately reflected in the financial statements.
Since stock investment trusts held in the ALM portfolio would increase the volatility in profit or loss
because they are designated at FVPL and unrealised gains or losses will be recognised in profit or loss,
it would be difficult for financial institutions to continue holding such investment trusts for risk
management and other purposes. This may, in turn, trigger a decline in stock prices across the stock
markets. Therefore, this treatment is one of the issues Japanese financial institutions take into accountwhen considering whether to apply IFRS.
Essentially, so long as a financial instrument is not held for trading (i.e. not held to make short-term
profits), recognising unrealised gains or losses at period-end in profit or loss does not result in an
appropriate presentation of operating results and thus is unlikely to provide useful information toinvestors.
We request the IASB to consider allowing all financial instruments held in the ALM portfolio that is
not intended to make short-term profits to be designated at FVOCI.

Question 3–Contractual cash flow characteristics(a) Is the cash flow characteristics assessment working as the Board intended? Why or why not?
Please explain whether requiring entities to classify and measure a financial asset considering
the asset’s cash flow characteristics achieves the Board’s objective of entities providing usersof financial statements with useful information about the amount, timing and uncertainty offuture cash flows.
If, in your view, useful information could be provided about a financial asset with cash flowsthat are not SPPI applying IFRS 9 (that is, an asset that is required to be measured at fair value

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Refer to the JBA’s “Comments on the Discussion Paper Financial Instruments with Characteristics ofEquity issued by the International Accounting Standards Board (“IASB”)” of December 28, 2018.
https://www.zenginkyo.or.jp/fileadmin/res/abstract/opinion/opinion301238.pdf

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through profit or loss applying IFRS 9) by applying a different measurement approach (that is,using amortised cost or fair value through OCI) please explain:(i) why the asset is required to be measured at fair value through profit or loss (that is, why,
applying IFRS 9, the entity concludes that the asset has cash flows that are not SPPI).
(ii) which measurement approach you think could provide useful information about the asset
and why, including an explanation of how that approach would apply. For example, please
explain how you would apply the amortised cost measurement requirements to the asset(in particular, if cash flows are subject to variability other than credit risk). (See Section 7for more questions about applying the effective interest method.)(Comment)(a) We believe that the assessment is not working as the IASB intended.

(Rationale)
Since, as a result of the cash flow characteristics assessment, investments that are not intended to makeshort-term profits are designated at FVPL, it does not appropriately represent operating results.

(1) Stock investment trusts held for the ALM purpose
As commented in our response to Question 1, stock investment trusts are classified as debt
instruments but do not meet the SPPI test (contractual cash flows that are solely payments ofprincipal and interest on the principal amount outstanding) as they are composed of equities, andtherefore are designated at FVPL. Recognising in profit or loss period-end unrealised gains or losses
on financial instruments that are not held for making short-term profits does not appropriately
represent an entity’s operating results. To address this issue, the IASB should allow such stock
investment trusts to be designated at FVOCI by reviewing the SPPI criterion or by focusing on therequirement to classify and measure financial assets based on the business model test.

(2) Investments in private equity funds, etc.
Similarly to the case referred to in (1) above, investments in private equity funds, etc. are designatedat FVPL because, while their legal form is stock, they are classified as debt instruments but do notmeet the SPPI test as they are composed of stock.
Financial institutions invest in private equity funds with the intention of making a long-term
investment to support the growth of investees. If such investments are designated at FVPL and are
required to make short-term profits, it will undermine the benefits of long-term investments andwill make it difficult for investors to, for example, firmly provide hands-on support for the long-3

term growth of investees. To address this issue, the OCI option should at least be applied toinvestments in private equity funds, etc. However, such a solution is impractical given the definitionof debt instruments. The IASB therefore should consider revising IFRS 9 to include some of suchfinancial instruments in the scope of application of the OCI option.

(Supplementary comment) Theoretical analysis for expanding the scope of application of the OCIoptionDue to the existence of structured products (e.g. compound financial instruments), it would bedifficult to allow the application of the OCI option to all debt instruments that do not meet theSPPI test and thus are designated as FVPL. Nevertheless, those debt instruments that areevidently similar to equity products should qualify for the application of the OCI option.

Specifically, allowing reporting entities to elect the OCI option for those “financial instrumentsthat meet the definition of a financial liability but are deemed as equity” (puttable instrument)3
would ensure relevance (paragraphs 2.6 to 2.10 of the Conceptual Framework for FinancialReporting (“Conceptual Framework”)) and faithful representation (para. 2.12-2.19 of theConceptual Framework).

As stated in paragraphs BC7 and BC70 of IAS 32, mutual funds and investments in cooperatives are deemed to be largely equivalent to ordinary shares for accounting purposes. By
applying the accounting treatment similar to ordinary shares (equity instruments) to suchinvestments, entities will be able to separately identify investment trusts for making short-term
profits and those held for ALM purposes. This would ensure “relevance” (“relevant financial
information is capable of making a difference in the decisions made by users.”) and “faithfulrepresentation” (“includes all information necessary for a user to understand the phenomenon
being depicted”).

When developing the Conceptual Framework, the IASB introduced the concepts of “long-terminvestment” (paragraphs BC0.34-0.36) and “long-term investment as a business activity”(paragraphs BC0.37-0.39), indicating its direction to incorporate the concept of long-term
investment in developing the standards. From this viewpoint, recognising in profit or loss
short-term fair value changes on investments, etc. that are intended to provide a long-term
support for the growth of investees would not achieve “faithful representation.” However,
applying the OCI option would help entities to provide “relevant” information.

Question 4–Equity instruments and other comprehensive income(a) Is the option to present fair value changes on investments in equity instruments in OCI working
as the Board intended? Why or why not?

3IFRS 9 specifies in paragraph BC5.21 that puttable instruments do not meet the definition of an equity
instrument.

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Please explain whether the information about investments in equity instruments prepared
applying IFRS 9 is useful to users of financial statements (considering both (i) equity
instruments measured at fair value through profit and loss; and (ii) equity instruments to which
the OCI presentation option has been applied).
For equity instruments to which the OCI presentation option has been applied, please explain
whether information about those investments is useful considering the types of investments
for which the Board intended the option to apply, the prohibition from recycling gains andlosses on disposal and the disclosures required by IFRS 7.
(b) For what equity instruments do entities elect to present fair value changes in OCI?
Please explain the characteristics of these equity instruments, an entity’s reason for choosing
to use the option for those instruments, and what proportion of the entity’s equity investment
portfolio comprises those instruments.
(c) Are there any unexpected effects arising from the option to present fair value changes oninvestments in equity instruments in OCI? How significant are these effects?
Please explain whether the requirements introduced by IFRS 9 had any effects on entities’
investment decisions. If yes, why, how and to what extent? Please provide any availableevidence supporting your response which will enable the Board to understand the context andsignificance of the effects.
In responding to (a)–(c), please include information about recycling of gains and losses (seeSpotlight 4).

(Comment)(a) We support the OCI presentation option in that applying the option enables the same accounting
treatment as the one applied to available-for-sale securities under IAS 39. We however do notsupport the prohibition of recycling when the option has been applied.

(Rationale)
We consider that applying recycling to those equity instruments that are not held for trading but areheld for the long term will enhance the relevance of profit or loss that represents an entity’sperformance.
Requiring recycling of all OCI items without exception is a consensus view of all Japanese entities asdetailed in the comment letter of the Accounting Standards Board of Japan (“ASBJ”) submitted to theEuropean Financial Reporting Advisory Group (“EFRAG”) regarding the Discussion Paper Equity

5Instruments - Impairment and Recycling.4(Comment)(b) Japanese financial institutions apply the OCI presentation option to all equity instruments exceptfor those equities held for trading. They hold such equities for cross-shareholding purposes, suchas to strengthen the relationship with customers.

(c) Compared to IAS 39, there are no unexpected effects. However, investment trusts and otherinvestments in funds for which unrealised gains or losses at period-end were recognised in OCI
under IAS 39 are now designated at FVPL under IFRS 9, giving rise to unintended profit or loss
and thereby increasing the volatility in changes in profit or loss.

(End)

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