Two More Business Models Regarding Long-term Investing Activities Identified by EFRAG

A public consultation for business models for long-term investing activities was launched by the European Financial Reporting Advisory Group (EFRAG) in May 2013. There were two reasons for this consultation. The first was the European Green Paper that discussed ways for supporting long-term investment and the second was the amendments to IFRS 9 proposed by the International Accounting Standards Board (IASB) in November 2012. EFRAG has now released the results and findings of the consultation.

The most important finding of the consultation was the identification of two business models for long-term investing activities:

i. "Asset-driven" business model

ii. "Liability-driven" business model

According to the results, the asset-driven model was popular among the entities with public-interest objectives and long-term development banks. EFRAG believes that they favor this model because they usually have cheap and easy access to the stable financial resources to achieve their objectives of public-interest.

The liability-driven model was found with the pension funds, entities with long-term commitments, and insurers. The distinguishing feature of this model is entrance into long-term liabilities first and then finding suitable assets to generate returns to meet these liabilities.

EFRAG has not yet decided whether asset-driven model should affect the accounting requirements for financial liabilities, and financial and other assets. However, EFRAG is of the opinion that IFRS 9 Financial Instruments and other accounting standards do not properly reflect the liability driven business model.

EFRAG has given a suggestion that the use of other comprehensive income (OCI) should be extended to a broader set of asset classes. It suggests that this can be done by introducing an option to report short term-changes that are not relevant primary measures of performance outside profit or loss. EFRAG has also stated that development of an appropriate impairment model will be needed to extend the use of OCI for this purpose.