CCDG

COUNCIL ON CORPORATE

DISCLOSURE & GOVERNANCE

30 September 2004

D8 Comment Letters

International Accounting Standards Board

30 Cannon Street

London EC4M 6XH

United Kingdom

(By email: )

Dear Sirs,

IFRIC DRAFT INTERPRETATION D8MEMBERS’ SHARES IN CO-OPERATIVE ENTITIES

1.We are writing to provide our comments on the IFRIC Draft Interpretation D8: Members’ Shares In Co-Operative Entities.

2.Whilst we agree with the general principles of the draft proposals, we are of the view that the conditions in IAS 32 Financial Instruments: Disclosure and Presentation for determining whether a financial instrument is an equity instrument or a financial liability have not catered to the uniqueness of members’ shares in co-operative entities. In substance, members of co-operatives behave and are treated as shareholders and they are given voting and other rights which are very similar to those of shareholders of companies. Although legally, co-operatives may not have an unconditional right to refuse redemption of members’ shares, the observable behaviour in Singapore is that members of co-operatives do not see themselves as creditors of the co-operatives. Most members hold their shares as long-term investments to benefit from the accretion of income in the form of dividends and other benefits like rebates and discounts. Consequently, from the economic substance viewpoint, members’ shares in co-operative entities represent a residual interest and therefore should be classified as equity.

3.Additionally, we wish to highlight that treating members’ shares in co-operatives as liabilities will pose many practical problems for the co-operatives and we would like to share the concerns raised by constituents in Singapore as set out below:

Draft Interpretation – Paragraphs 7 and 8

4.The proposal states that, amongst other terms and conditions in determining the classification of members’ shares, members’ shares are equity if the entity has an unconditional right to refuse redemption of the members’ shares. Members’ shares without unconditional right to redemption or those shares in excess of the prohibition against redemption governed by local law, regulation or the entity’s governing charter are liabilities.

Implications

Co-operative Principle of Voluntary Membership

5.Most co-operative entities in Singapore do not have the right to refuse redemption of their members’ shares. One of the co-operative’s principles is ‘Voluntary and Open Membership’ where members are ‘free to join and leave at will, within the purposes and resources of the co-operative entity’. If co-operative entities were to amend their constitution to allow redemption subject to the co-operative’s agreement then it may go against the grain of this co-operative principle of voluntary membership.

6.The Co-operative Societies Act in Singapore (‘CSA’) does not differentiate between shares which the co-operative has a right of refusal to redemption and those shares for which the co-operative has no right of refusal.

Members are Owners of the Co-operatives

7.Co-operatives are owned by members who participate economically through the purchase of shares in the entity. The purchase of shares gives rights to members to engage in co-operatives’ activities, for example, the entitlement to vote and be elected at general meetings. The status of co-operative members is equivalent to that of shareholders in limited liability corporations. Classifying members’ shares as liabilities undermines the cardinal co-operative principles that members are owners and shareholders of the co-operatives.

8.While most co-operative entities do not have the legal right to refuse redemption, they require members to give notice of withdrawal. The notice period is limited by local legislation to a maximum of one year in primary societies and 2 years in secondary societies. (Primary societies are formed by individuals or institutions. Secondary societies are constituted only by institutional members.)

9.Although the CSA stipulates that members can cash-in their shares at par value (or at the net asset value, whichever is lower), some of our larger co-operatives provide a channel for members to sell their shares to interested parties by playing a matchmaking role. In this way, there is no share buy back or a reduction of capital as sellers are matched to buyers in the queue.

Payment of Dividends

10.Dividends payable on shares are not predetermined but decided by members at general meetings as a distribution of surpluses. There is no obligation for co-operatives to pay dividends unless there is a surplus. In contrast, interest payable for debts is fixed and co-operatives have the obligation to service through annual interest payment irrespective of whether they have a surplus or deficit in the year. Interest payments need not be approved at general meetings.

11.Should the co-operative entities’ members’ shares be classified as liabilities, the IFRS requires dividends on these shares to be expensed off to the income statement. The CSA defines ‘dividend’ as ‘a portion of the net surplus of a society distributed among members in proportion to the paid-up share capital or subscription capital held by them in the society. Under the legislation, dividends are an ‘appropriation’ item from net surplus. They are not expensed against revenue. Dividends can only be paid from net surpluses of the year, meaning that if the co-operative does not make net surpluses, it cannot pay dividends to members. Changing the classification of dividends to expenses may mean that the co-operatives can pay dividends out of revenue and they do not need surpluses to declare dividends.

Statutory Contributions under the Co-operative Societies Act in Singapore

12.Should dividends be expensed off in the Income Statement if members’ shares are considered liabilities, the available surplus for the co-operative would be reduced. Co-operative surplus is roughly equivalent to the net profit of a company. Co-operatives do not pay income tax but are required under legislation to make contributions to Central Co-operative Fund (‘CCF’) and Singapore Labour Foundation (‘SLF’). The CSA prescribes that contributions to the reserve fund, the CCF and the SLF are to be made from the surplus. A reduction of the surplus (due to dividends being expensed) would also mean reductions in these statutory contributions. Co-operatives may then have an incentive to increase dividend expenses to decrease their contributions to the reserve fund, CCF and SLF.

Bonus Certificates and Bonus Shares

13.Under the CSA, a co-operative may distribute a part of its net surplus in the form of bonus certificates or bonus shares. Under the CSA, bonus certificates can only be redeemed 5 years after date of issue while the moratorium period for bonus shares is 10 years from issue date. No interest or dividend can be paid on bonus certificates while dividends can be paid on bonus shares. It is not clear under the Draft Interpretation, how these bonus certificates and bonus shares will be categorised. Currently, such certificates and shares are considered part of co-operative equity.

Liquidation of Co-operatives

14.Under local co-operative legislation, if a co-operative is liquidated, the funds are applied first to the costs of liquidation, then to the discharge of the liabilities of the co-operative and then to the payment of share capital or subscription capital. The CSA views members’ shares as separate from the liabilities of a co-operative.

Others

15.The change in accounting treatment in classifying members’ shares as debts will affect a number of accounting ratios (e.g. gearing percentage, return on equity, assets to equity, debt to equity) which may become irrelevant and hence will make performance comparison with companies in the same industry difficult.

16.The proposed treatment of shares as debts has adverse implications on the larger financial co-operatives as they are required to meet capital requirement stipulated by the government authorities. The change will impair their ability to function effectively as a business.

Conclusion

17.The classificationof members’ shares in co-operatives as liabilities instead of equity would lead to inconsistencies with some of the provisions of the CSA and other legal requirements in Singapore. This treatment may also have implications on the statutory contributions required of the co-operative entities.

18.Should you require any further clarification, please contact Mr Ramchand Jagtiani, Deputy Director, at the Institute of Certified Public Accountants of Singapore via email at . Thank you.

Yours sincerely,

Derek How

Secretary, CCDG

Address: The Secretariat, Council on Corporate Disclosure and Governance,

c/o Accounting and Corporate Regulatory Authority, 55 Newton Road #11-03, Revenue House, Singapore 307987.

Website: Email: Fax: (65) 6354 4323