January 14, 2014
To the International Accounting Standards Board

Japanese Bankers Association
Comments on the International Accounting Standards Board (IASB)’s Discussion Paper“A Review of the Conceptual Framework for Financial Reporting”
We, the Japanese Bankers Association (“JBA”), are an organization that represents the banking
industry in Japan; and our members comprise banks and bank holding companies operating inJapan.
We would like to express our gratitude for this opportunity to comment on the Discussion Paper“A Review of the Conceptual Framework for Financial Reporting” (DP) published by theInternational Accounting Standards Board (“IASB”).
We respectfully expect that the following comments will contribute to your further discussion on
this issue.
1. Overall comment
Firstly, we would like to express our gratitude to the IASB for reviewing the concepts of profit orloss, OCI and other areas in this Discussion Paper (DP) in response to our comment expressed on
the “Agenda Consultation 2011”, requesting the concept of other comprehensive income (OCI)
should be re-considered.
While we are in support of the proposed treatment in the DP to distinguish profit or loss and OCI
items for presentation purposes, the IASB is requested to give careful consideration to thefollowing points: (i) the difference between profit or loss and OCI items is still unclear because
the DP does not explicitly define profit or loss, and (ii) some items which are currently classified
as OCI may not be eligible to be recognised in OCI under the new conceptual framework.
With respect to liability/equity classification, we would like to express our disagreement with thestrict obligation approach proposed in the DP. The classification of liabilities and equity is anissue which was once discussed but could not reach preliminary views and therefore was put off
for later discussions. Given this, the IASB should give careful consideration to this issue, taking
into account the impact on individual standards. There is also a concern that it is unclear whether
the remeasurement of equity claims and the concept of “a transfer of wealth” are useful forinvestors. The IASB is therefore requested to discuss this issue thoroughly through outreach tomarket participants and other activities.

12. Comments on specific questions provided in the DPQuestion 4
Elements for the statement(s) of profit or loss and OCI (income and expense), statement of cash
flows (cash receipts and cash payments) and statement of changes in equity (contributions toequity, distributions of equity and transfers between classes of equity) are briefly discussed inparagraphs 2.37–2.52.
Do you have any comments on these items? Would it be helpful for the Conceptual Framework
to identify them as elements of financial statements?
Question 19
The IASB’s preliminary view that the Conceptual Framework should require a total or subtotal
for profit or loss is discussed in paragraphs 8.19–8.22. Do you agree? Why or why not?
If you do not agree do you think that the IASB should still be able to require a total or subtotal
profit or loss when developing or amending Standards?
(Summary)We agree to the proposed guidance specifying that profit or loss should represent a total
or subtotal of income or expense and should be recognised separately from OCI in thestatement(s) of profit or loss and OCI.
However, it is requested that the IASB should define profit or loss so that it can beclearly distinguished from OCI.

(Basis, etc.)
As current IFRS does not explicitly define profit or loss and OCI, in developing
standards, a conclusion is often led in the following way; if the recognition of someitems of income and expense in profit or loss is considered to undermine the appropriate
assessment of financial performance, such items should be recognised in OCI.1 In otherwords, substantially, there is an established view that items of income and expensenecessary to appropriately assess financial performance should be included in profit orloss.

In Japan, many companies consider profit or loss as a comprehensive performancemeasure and hence incorporate profit or loss in their profitability measure, investment
efficiency measure and other measures that are extensively used. Additionally, as
paragraph 8.19 of the DP states, many investors, creditors, preparers and others aroundthe world view profit or loss as a useful performance measure and that ‘profit or loss’ is

1E.g.: Basis of conclusions to recognise changes in the discount rate of insurance contracts in OCI
ED/2013 Insurance Contracts, para. BC119: Entities should segregate the effects of changes in the discount rate that are expected
to unwind over time from other gains and losses, so that users of financial statements could better assess the underwriting andinvesting performance of an entity that issues insurance contracts.

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deeply ingrained in the economy, business and investors’ minds, as a primaryperformance measure.
Therefore, in the context of standard development as well as business practice, it isinternationally commonly accepted knowledge that profit or loss generally represents anentity’s performance in a period. Given this, clearly defining profit or loss under theConceptual Framework as “a subtotal of the most primary items of income or expense inappropriately assessing an entity’s performance”, will benefit future standard
development processes and will also improve comparability of profit or loss acrossentities.

The DP also proposes approaches to distinguish profit or loss and OCI items. As
mentioned in our comment to Question 21, we are concerned that the definition of OCI
may become ambiguous because of an unclear definition of the “relevance of profit orloss”.

(Considerations for defining “profit or loss”)
 The DP stipulates that “all items of income and expense are the result of an entity’s
financial performance and are included in total comprehensive income” (para. 8.15),
defining both profit or loss and OCI items as a result of financial performance. To
identify profit or loss items among OCI items, it is necessary to clarify which element offinancial performance constitutes profit or loss.
As previously described, market participants, etc. deem profit or loss to be “a measurethat reflects the outcome of business management; namely, return, in a period, on variousinvestments made by management”. In line with this common view, income andexpenses arising from business investments whose return is not yet recognised and forwhich an entity is continuously exposed to associated risks, should not be included inprofit or loss. Given this, for example, the definition of profit or loss under theDiscussion Memorandum “Conceptual Framework of Financial Accounting”, publishedby the Accounting Standards Board of Japan (“ASBJ”) in December 2006, can also beadopted in the case of business investments. Under the Discussion Memorandum, profitor loss is defined as “the outcome of investments under which the entity has beenreleased from various associated risks during the annual period”.
This proposed definition is working effectively in Japan and has not particularly beenrequested by market participants to be reviewed.

Question 21
In this Discussion Paper, two approaches are explored that describe which items could be3

included in OCI: a narrow approach (Approach 2A described in paragraphs 8.40–8.78) and abroad approach (Approach 2B described in paragraphs 8.79–8.94).
Which of these approaches do you support, and why?
If you support a different approach, please describe that approach and explain why you believe it
is preferable to the approaches described in this Discussion Paper.
(Summary)
Both Approaches 2A and 2B could not be supported because the definition of profit orloss is unclear. The IASB is requested to first define which items are to be included inprofit or loss. Those items of income and expense which do not meet such a definition
should be defined as items to be included in OCI.

The IASB should carry out a careful discussion in defining OCI so that designatedinvestments in equity instruments under IFRS 9 (OCI option) will not be deemed
ineligible for and thus excluded from OCI recognition.

(Basis, etc.)
Paragraph 8.40 sets out the principles that the proposed Approach 2A would apply todetermine whether items of income and expense are eligible to be recognised in profit orloss, or in OCI. Of such principles, Principle 2 stipulates that “all items of income andexpense should be recognised in profit or loss unless recognising an item in OCI
enhances the relevance of profit or loss in that period”. However, since the purpose ofprofit or loss is unclear in the absence of a definition of profit or loss, even theexpression “the relevance of profit or loss” is used here, it is difficult to assess such
relevance.
In addition, Principle 3 in the proposed Approach 2B stipulates that “an item that has
previously been recognised in OCI should be reclassified (recycled) to profit or loss
when, and only when, the reclassification results in relevant information.” Similarly, it isunclear as to how to assess this relevance in the context of what objective. Consequently,profit or loss needs to be clearly defined to determine “the relevance of profit or loss”.
In light of this, as mentioned in our comments to Questions 4 and 19, the IASB should
clarify the definition of profit or loss.

Table 8.2 of the DP stipulates that OCI recognition of changes in fair value of designatedinvestments in equity instruments is “unlikely to meet either the bridging or mismatchedremeasurement concept,” implying that this item is not eligible to be recognised in OCI.
However, as noted in Table 8.2 “except, arguably, for some strategic investments”,
policy-based equity investments made by Japanese banks which are deemed to be the“strategic investments” are assumed to be held over a long-term period for the purpose4

of maintaining overall business relationships with corporate customers. Therefore,changes in fair value of such investments should not be included in profit or loss which
is a measure of the business performance of an entity, but should be recognised in OCI
instead. The IASB is requested to give due regard so that changes in fair value ofstrategic investments for which the OCI option is elected are allowed to be continuously
recognised in OCI under the finalised Conceptual Framework.
Based on the ASBJ’s view2, items to which the OCI option is applied may be classified
as bridging items. With regard to financial liabilities designated as fair value throughprofit or loss under IFRS 9, Table 8.2 of the DP states that OCI recognition of changes infair value attributable to an issuer’s own credit risk does not fit the concept of thebridging item and places a question mark for whether it could be a mismatchedremeasurement. We presume the reason for this is that the IASB is concerned if changes
in fair value attributable to issuer’s own credit risk are concluded as not qualifying forthe concept of mismatched remeasurement, this item will have to be recognised in profit
or less, whereas if it is concluded as meeting this concept, it needs to be recycled. To beconsistent with this, it is suggested that, until a conclusion is reached, the “Bridging
item” column in Table 8.2 for this OCI option should be “Yes” or “?”.

Approaches that may result in both the above OCI options becoming ineligible for OCI
recognition under the proposed Conceptual Framework, although consensus has beenreached on the reasonableness of OCI recognition in individual accounting treatments,
cannot be considered as appropriate. Therefore, the IASB should consider acomprehensive approach which enables an entity to recognise the items set out in Table
8.2 in OCI under the Conceptual Framework as well.

Question 10The definition of equity, the measurement and presentation of different classes of equity, andhow to distinguish liabilities from equity instruments are discussed in paragraphs 5.1–5.59. In theIASB’s preliminary view:(b) the Conceptual Framework should state that the IASB should use the definition of a liability
to distinguish liabilities from equity instruments. Two consequences of this are:(i) obligations to issue equity instruments are not liabilities; and(ii) obligations that will arise only on liquidation of the reporting entity are not liabilities (seeparagraph 3.89(a)).
2See paragraphs 91 and 92 of the following :http://www.ifrs.org/Meetings/MeetingDocs/ASAF/2013/December/AP3%20Profit%20and%20Loss%2c%20Measurement%20an
d%20OCI.pdf

5(c) an entity should:(i) at the end of each reporting period update the measure of each class of equity claim. TheIASB would determine when developing or revising particular Standards whether that measure
would be a direct measure, or an allocation of total equity.
(ii) recognise updates to those measures in the statement of changes in equity as a transfer ofwealth between classes of equity claim.
Do you agree? Why or why not? If you do not agree, what changes do you suggest, and why?
(Summary)We do not agree to the above preliminary view.

(Basis, etc.)
1. Definition of liabilities and equity


The DP proposes to define liabilities and then, by using the definition of liabilities, toregard equity as the “difference between assets and liabilities”. However if equity is notdefined, it will be difficult to distinguish equity transactions from transactions thatgenerate income and expenses. In developing individual standards, this may lead tocomplication in determining whether a transaction is an equity transaction or transactionthat generates income and expenses. From this point of view, the IASB is requested toconsider defining equity. Further, the definition or presentation of equity based on laws
or regulations could also be a benchmark in determining the classification of equity andliabilities. Therefore, from the perspective of consistency of the equity presentation withapplicable law or regulation, we respectfully request to consider this point in defining

equity.
In discussing the definition of liabilities and equity, the DP refers to IAS 32 and otherexisting standards. However, it should be noted that under the IASB’s past project on“financial instruments with characteristics of equity”, many expressed concerns overcomplexity of the liabilities and equity classification under IAS 32 and other existing
standards. Therefore, the conclusion was postponed.

Under JGAAP, since the classification of equity and liabilities is based on the legal form,
preferred shares are never classified as a liability. Under IAS 32, on the other hand,conditions other than the legal form need to be assessed in some cases, giving rise toconsiderably complicated practices. For example, preferred shares with the obligation ofredemption at par in five years would be classified as a liability under IAS 32.

Given the above, in developing an exposure draft for the Conceptual Framework, theIASB is requested to define both equity and liabilities in plain words; and, based on such6

definitions, review IAS 32 to address the complexity of its equity and liabilities
classification.
2. Remeasurement of equity claims and the concept of “a transfer of wealth”
Both the remeasurement of equity claims and the concept of “a transfer of wealth”
proposed under the strict obligation approach are new concepts for the Japanese banks.
As the DP does not specify to what extent these are useful to investors and whether they
can provide information of high relevance to investors, we do not support theintroduction of these new concepts.

As an example of the transfer of wealth, the DP mentions a change in fair value under awritten option on shares recognised in equity. However, Japanese banks do notexperience such cases, and hence preparers have no clear view as to what kind oftransactions meet the condition of the wealth transfer.

If the proposed equity claim remeasurement and the concept of “transfer of wealth” areto be adopted, the IASB should give due regard to avoid causing confusion among
preparers and users by stipulating the objectives of recognition and by including
illustrations in the exposure draft to explain in what cases equity claims should beremeasured and the transfer of wealth should be recognised. Further, since these are newconcepts, in drafting the exposure draft, it is necessary to consider carefully, among otherthings, the significance and usefulness of adopting these new concepts and the degree ofimpact thereof, through carrying out outreach to investors and prepares and otheractivities.

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