BRITISH COLUMBIA. The Best Place on Earch. Thank you for the opportunity to comment on this Statement of Principles (SOP).

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1 BRITISH COLUMBIA The Best Place on Earch November 29, Tim Beauchamp Director, Public Sector Accounting 277 Wellington Street West Toronto, ON M5V 3H2 Dear Mr. Beauchamp: RE: Statement of Principles - Financial Instruments Thank you for the opportunity to comment on this Statement of Principles (SOP). General Comments The Province of British Columbia does not support the prescriptive approach outlined in this SOP. We feel a principle-based approach that allows governments to report the substance of its transactions is more effective and useful to the users of our financial statements. We do not support the use of fair value measurement as it will introduce artificial volatility into our statements by recognizing gains and losses that may never be realized. The use of trade date rather than settlement date is too prescriptive and creates inconsistencies with Government Business Enterprises. The guidance to write off transaction costs does not reflect the substance of the transaction and should not be prescribed in the standard. The use of effective interest amortization should also not be prescribed. The SOP should follow a principle-based approach that would recommend the consistent application of a valid basis of amortization. The last trade requirements are also prescriptive and alternative methods should be made available. The definition of portfolio investments is in conflict with other standard-setters and we believe that the intent of government should be the determining factor. Synthetic instrument accounting should not be eliminated as there are situations when developing a synthetic hedge is effective. The Province of British Columbia agrees that a government should disclose information that enables users to evaluate the significance of financial instruments, the nature and extent of the risks to which government is exposed, and how government intends to manage those risks..../2 Ministryof Finance Office of the Comptroller General Mailing Address: PO Box 9413 Stn Prov Govt Victoria BC V8W 9V1 Location Address: 2'""Floor 617 Government Street VictoriaBC

2 - 2 - Conceptual Issues We do not agree that provincial and federal governments are "shared expense recovery vehicles" (paragraph.033). This paragraph raises a fundamental conceptual issue that would be more appropriately addressed in the conceptual framework rather than specific guidance. In addition, paragraphs.013 and.093 are inconsistent with the definition of a liability in PS3200. We have concerns over the apparent "backdoor" harmonization approach to international standards. International standard-setters are only now working on their conceptual frameworks. Attempts to reconcile with their standards will impede our efforts in developing a consistent standard here in Canada. Conclusion The Province of British Columbia recommends that expanded disclosure, rather than recognition, of unrealized gains and losses is more appropriate reporting for governments. The introduction of artificial volatility by recognizing gains and losses that may never be realized will compromise the credibility and reliability of public sector reporting. We believe it will create false expectations for funding availability for programs, effect funding decisions, and complicate our legislated requirement to comply with generally accepted accounting principles and maintain balanced budgets. Accounting has to be based on past transactions and events, and where government has retained discretion over its course of action, fair value recognition would be wrong. Response to Comments Requested Our following responses must be interpreted with the understanding that the province of British Columbia does not support the recognition ofunrealized gains and losses in the Summary Financial Statements and is recommending expanded note disclosure. If you have any questions concerning this submission please contact me at (250) or by e- mail: Chervl.WenezenkiYolland@gov.bc.ca. or Carl Fischer, Executive Director, Financial Reporting and Advisory Services Branch, at (250) or by Carl.Fischer@gov.bc.ca. pc: Carl Fischer, Executive Director Financial Reporting and Advisory Services Office of the Comptroller General Coos Trumpy, Deputy Minister Ministry of Finance Crown Corporation Contacts.../

3 - 3 - Response to Comments ReQuested 1. To address reporting on financial instruments, PSAB has evaluated the fundamental issues (see Appendix C: Fundamental Principles) in relation to the objectives of government reporting. Do you agree with the overall approach that an eventual standard should require the recognition and measurement of derivatives at fair values? If you disagree, explain how an alternative approach would provide external users with more relevant information and how differences would be treated when governments consolidate entities applying the AcSB standards. We disagree with a standard that would require measurement of derivatives atfair value in the Summary Financial Statements. Theprovince, in the case of debt borrowing, uses derivative products solely for the purpose of mitigating risks. Since theprovince mainly holds derivative products until maturity, measuring the derivatives atfair values would introduce artificial volatility which would undermine the credibility and reliability of public sector reporting. Fair value measurement could provide meaningful information for some users; we believe that this information could be adequately disclosed by note disclosure. If the fair values of hedging instruments and hedged items are disclosed in a note to financial statements, the external users will be served. We would propose to continue tofollow the guidance provided by "Including Results of Organizations and Partnerships Applying Fair Value Measurement (PSG-6)" until a determination has been made regarding theproject "Introduction to Public Sector Accounting Standards". In addition, we would support expanded note disclosure as discussed in our cover letter. 2. Do you agree with the principle proposed to govern recognition of financial assets and financial liabilities? We disagree. Mandating the use of Trade-date accounting is overly prescriptive and will create inconsistencies with government organizationsfollowing CICA - Accounting. This principle may also lead to overstatement offinancial assets and financial liabilities at the financial reporting date. 3. Do you agree that a government would remove a financial liability (or a portion of a financial liability) from its statement of financial position when, and only when, it is extinguished? If you disagree, are there specific reasons unique to governments that merit an approach at variance from that which applies to AcSB standards? 4. Two measurement categories are proposed: cost or amortized cost, and fair value. a) Do you agree with the definitions establishing when each category would apply (see Appendix A, paragraphs A.06 and A.07)? We agree with the definition for cost or amortized cost but do not agree with the recognition of the fair value of financial instruments in the financial statements..../

4 -4- b) Do you agree that reporting portfolio investments quoted in an active market at fair value provides more relevant information to users (see Appendix A, paragraph A.08)? We disagree. Reference to "quoted in an active market" in the definitionfor portfolio investments is prescriptive and in conflict with other standard setters. The intent of the government should be the determiningfactor. c) Do you agree that reducing the number of financial instrument categories from four to two will reduce the effort required to initially designate items without compromising the objectives of government reporting? d) Do you agree that enabling the fair value measurement option will reduce the need for hedge accounting? Are the requirements that determine when it may be applied appropriate and practical? We agree that enabling the fair value measurement option will reduce the need for hedge accounting, although paragraph A.07(c) (ii) becomes too prescriptive. e) Do you agree with the definition of transaction costs and the accounting proposed (see Appendix A, paragraph A.12)? We agree with the definition; but disagree with the accounting treatment which should reflect the substance of the transaction. 1) Do you agree that standards presently contained in PORTFOLIO INVESTMENTS, Section PS 3040and LOANSRECEIVABLE,SectionPS 3050should continue to determine the initial measurement value where the item contains concessionary terms? 5. Do you agree that the effective interest method will support consistent calculation of the amortized cost of a financial asset or a financial liability? Is this the most relevant method to apply? We disagree. Although we generally support the effective interest method, we do not agree that this should be the only option. Guidance should support the principle of amortization methods that are valid in the circumstances and consistently applied. 6. Do you agree that gains and losses (excluding those within the scope of hedge accounting) should in all cases be reported in the statement of operations? We disagree. Immediate recognition of artificial gains and lossesfrom fair value changes of financial instruments would cause artificial volatility on theprovince's financial statements making them less useful to all stakeholders..../5 - -

5 Do you agree with the principle addressing impairment of financial assets? Although, we would add thatfinancial assets carried atfair value would not preclude the needfor an assessmentfor impairment. 8. Do you agree with the principles that would apply when financial instruments are reclassified? We disagree. The disappearance of an active marketfor a portfolio investment should not indicate that a market value could not be determined and therefore, assume that thefinancial instrument no longer qualifies to be carried atfair value. Alternative fair value measurement techniques should be available. In addition, the proposed treatment of non-derivative financial instruments highlights the artificial volatility introduced by fair value measurement and the effect on key indicators such as net debt. 9. Do you agree with the principles proposed that would determine when embedded derivatives are separated from their host contract? We agree; but believe the definition should address government initiatives such as alternate service delivery, P3 's and other public works projects. 10. Do you agree with the hedge accounting principles and definitions proposed that: a) enable two types of hedging relationships: the fair value hedge and the cash flow hedge; We agree with the definitions proposed for cash flow hedges and fair value hedges, although we cannot support the accounting principles proposed. We believe note disclosure would be more informative without the downside of the reported results being misinterpreted or misleading. b) enable hedging of anticipated transactions and the principles that would apply to recognition of the associated gains and losses; c) determine the scope of instruments permitted to be used as hedging instruments and as hedged items; d) require professional judgement be applied in assessing whether a hedging instrument achieves a high correlation in offsetting changes in fair value or offsetting cash flows attributable to the risk being hedged; However, the definition of effectiveness can be highly subjective..../6

6 - 6 - e) require recording of ineffectiveness in the statement of operations; Although, we do not agree that artificial volatility should be recognized real gains or losses and hedge ineffectiveness should be recognized in theperiod incurred. f) determine the accounting for gains and losses on items that are part of a fair value hedge; g) require recognition of gains and losses directly in net debt for cash flow hedging instruments determined to be an effective hedge; and h) determine accounting for discontinued hedging relationships? 11. Do you agree with the proposals that: a) apply to disclosures of the significance of financial instruments to a government's financial position and changes in its financial position; b) apply to disclosures of hedge accounting and its impact; c) users of government financial statements should be provided with information allowing evaluation of the nature and extent of risks arising from financial instruments to which the government is exposed at the reporting date; and d) establish when items are offset and the net amount reported in the statement of financial position? 12. Synthetic instrument accounting was considered during development of these proposals (see Appendix H: Synthetic Instrument Accounting). An exception to the principles proposed individual contracts are not recognized at fair value, nor are gains and losses recognized for the contracts combined as a synthetic instrument. Measurement is premised on the assumption that the items will be held to term and perform as anticipated..../7 ----

7 - 7 - Do you agree that synthetic instrument accounting should be eliminated? We disagree. If you disagree, explain why information should be presented to external users combining items when contractual terms allow them to be managed separately. If volatility in the statement of operations is a key concern, explain why the options to use either hedge accounting or the fair value measurement option are not adequate alternatives. Since the province uses derivative products mainly for mitigating foreign currency exchange risks and are primarily held to maturity, applying synthetic instrument accounting reflects the economic substance and the correlation between derivative products and the related debt issue. There are situations where developing a synthetic hedge is more effective in managing risks. Detailed note disclosure should be adequate to provide the necessary information to users.