IAS39: ASB Responds to ACT Informal Comments

In November 2001, the Association submitted a report to the ASB on proposed amendments to IAS 39 with a view to the arguments put forward by the Association being considered by the ASB during formal submissions to the IASB. The ACT analysis was based on the experience and expertise of both the ACT IAS39 Working Group and respondents from the treasury departments of leading companies presently reporting under IAS, UK and US GAAP.

The ASB has now come back with comments on how the IASB may react to the views put forward by the ACT and the aspects of IAS39 where progress in line with the thinking of treasury professionals is most likely to be made. A brief summary of the ACT’s key points, together with highlights of the related ASB commentary in bold, is provided below:

Proposals to MAINTAIN existing approach of IAS39

• Held-to-maturity financial assets, loans and receivables (originated by the enterprise and not held for trading) and other liabilities (apart from derivative liabilities) to be valued at amortised cost
• Cross-currency swaps to be eligible for hedge accounting even where neither leg is denominated in an entity’s reporting currency (where adequately supported by hedge designation and hedge effectiveness testing)
• The ability of a central group treasury unit to hedge net foreign exchange risks across several entities to be retained (i.e. where the risk hedged and the designated hedging instrument may be booked in different group legal entities without the need for subsequent booking "back-to-back" transactions with individual subsidiary companies)

ASB comment: It is the ASB’s understanding that the IASB intends to maintain the existing approach in these areas.

Deferral of fair value adjustments on cash flow hedges of forecast transactions and subsequent initial adjustment by the deferred amount of any asset or liability recognised on completion of the forecasted transaction (referred to as ‘basis adjustment’) to be retained. [In contrast to the FAS133 approach which requires the deferred amount to remain in, and be amortised from, equity.]

ASB comment: The ASB briefing supported the view of the ACT. However, at the November 2001 IASB meeting, it was tentatively decided that "basis adjustment" would be discontinued. The next opportunity to raise this issue will be at the exposure draft stage.

Availability of cash flow hedge accounting for "highly probable" forecast revenue cash flows to remain. [However, it is proposed that the current guidance suggesting that cash flows may only be regarded as "highly probable" if anticipated within a short term (under two year) planning horizon be amended to allow the time horizon to be linked to a company’s formal planning and budgeting cycle which may incorporate, for example, a 3 year or 5 year corporate plan.]

ASB comment: The ASB is not aware that time horizons have been specifically discussed in relation to this issue. This point may be worth pursuing if it would have a significant positive impact though there may be some cynicism as to whether longer term projections can be "highly probable". As the text refers to "normally those expected in the short term", there may be value in seeking clarification of what exceptions to this rule are foreseen.

Availability of hedge accounting for non-derivatives used to hedge future foreign currency revenue streams, subject to hedge effectiveness testing to remain e.g. use of a foreign currency borrowing to hedge future foreign currency revenues. [As opposed to the FAS133 approach which restricts the designation of hedges against future foreign exchange revenue streams to either a net investment or a firm commitment hedge.]

The broad definition of a "hedged risk" to be such that each sub-component of each type of risk can be hedged, provided that its impact is measurable. [FAS133 restricts the definition of hedged risk to the entire risk of change in fair value or entire currency risk, with the exception of permitting the hedging of interest rate risk based on specified benchmark rates.]

ASB comment: It is the ASB’s understanding that the IASB intends to maintain the existing approach in these areas.