Hedge Accounting: “Drop FRED23 and move straight to IAS39”, ACT urge ASB
ACT Derivatives Accounting Working Group (DAWG) Response to Consultation
As corporate treasurers typically have the key responsibility for managing financial instruments within UK listed companies, the response to FRED 23 of the Technical Committee of The Association of Corporate Treasurers (ACT), their professional body, is of particular interest.
The ACT’s Technical Committee is totally in agreement with the Accounting Standards Board’s (ASB’s) stated strategy of ensuring an orderly transition from existing UK standards to international accounting standards. It is for this very reason that the ACT believes the best interests of UK listed companies would be served through FRED23 not being applied and for companies to move direct to IAS39 in accordance with the European timetable rather than that proposed by FRED23.
In its response to the ASB, the ACT states that it does not “see any sense” in listed companies implementing FRED23 when the implementation of IAS39 will follow on so soon afterwards. If FRED23 were issued in January 2003, there would be at least a six-month period before its adoption, in say July 2003. Listed companies will need to have made preparations for the implementation of IAS39 from 2004. Therefore, for listed companies, the ACT believes that it is more logical to move straight to IAS39 implementation, rather than to adopt FRED23 approximately six months earlier. A requirement to apply FRED23, closely followed by IAS39, with the possibility of two restatements, could have a damaging effect on perceptions of the accounting profession.
The ACT supports the introduction of a standard on hedge accounting that is more in line with both International (IAS39) and US (FAS133/8) practice. The proposed accounting principles are in line with many of the treasury policies, procedures and controls that companies already have in place and will enforce rigorous documentation of hedging activities within a stated risk management framework.
The ACT encourages the ASB to define what is meant by “highly probable” in relation to cash flows and to draft such a definition to reflect the practical reality of budget and planning cycles. Again, such an approach will further align accounting with good treasury management practice.
Richard Raeburn, Chief Executive of the ACT said “We hope that the ASB will respond to our pragmatic view of the advantages for listed companies of moving straight to IAS39 implementation and drop the plan to apply FRED23 for a brief interim period”
Notes to editors
- For more information on the ACT or to commission an article please visit the ACT Press Room
- The response of the ACT to FRED23 has been developed by the ACT Derivatives Accounting Working Group and approved by the Technical Committee.
- Full copy of the ACT Response
- The ASB's proposals are set out in FRED23 ‘Financial instruments: Hedge accounting’. The ASB would welcome comments on any aspect of the FRED by 16 September 2002.
