Hedge Accounting Exposure Draft

The IASB has issued their Exposure Draft on hedge accounting, with comments due on 9 March 2011.

The ACT agrees with the overall objectives of the exposure draft, being to align hedge accounting more closely with the risk management activities, establish a more objective-based approach to hedge accounting, and address inconsistencies and weaknesses in the current hedge accounting standard (IAS 39).

We agree with the IASB’s approach of moving from what was a very rules based accounting standard to a more principles based standard. However we don’t believe the IASB has gone far enough in this matter and has included some rules to patch up issues that exist in specific industries or sectors under IAS 39 but are not fit for all.

A summary of key proposals:

• Effectiveness testing – 80-125% bright line has now been removed
• Hedging with options – time value can be deferred in OCI so less profit and loss volatility
• Can now hedge a layer of an item or group (could only do this previously for cash flow hedges)
• Derivatives can now be hedged items when with combined with a non-derivative
• Can net hedge account (however all items must affect profit and loss in the same period so hedge accounting net cashflows from sales and purchases won’t typically be allowed
• Rebalancing of hedge relationships required and is an adjustment to a continuing hedge relationship, rather than a de-designation and new hedge relationship under IAS 39
• Voluntary de-designation of hedge relationships not permitted if risk management objectives haven’t changed
• Presentation of fair value hedge accounting adjustment presented as a separate line item in the balance sheet
• Presentation of net hedges shown as a separate line item in the profit and loss
• All fair value movements on hedged item and hedging instrument taken to OCI (previously only for cash flow hedges)
• Basis adjustment (e.g. from OCI to stock) was a policy choice but is now mandatory
  Refer: http://www.ifrs.org/NR/rdonlyres/05439229-8491-4A70-BF4A-714FEA872CAD/0/... for a copy of the IASB’s exposure draft

The ACT is currently drafting a response to the Exposure Draft and would welcome your input and comments on issues that concern your specific company or industry.

We specifically would like some feedback on the following areas (for details of each issue refer [IFRS 9 Issues – Request for feedback]):

• Disclosure of commercially sensitive information
• Mandatory rebalancing
• De-designation of hedging relationships prohibited

Please email technical@treasurers.org by 28 February.