ACT submit comments on hedge accounting component of draft IFRS 9 to the IASB The ACT welcomes the IASB's attempt in the Hedge Accounting exposure draft to ensure the accounting disclosures reflect the economic realities more faithfully. Nonetheless we regret that it is still over complicated and too rule-based. Stuart Siddall, Chief Executive of the ACT, commented that:
Overall it is definitely a step in the right direction in attempting to align accounting with the economic activity of hedging. It is still unnecessarily complicated and in some instances the accounting may drive the risk management activities instead of the other way around. Some disclosure requirements are excessive and commercially too sensitive and others could positively mislead users of the financial statements. Stuart Siddall, Chief Executive
Over-elaborate rules, not allowing the principles to be applied sensibly, need reconsideration. For example the detailed rules mean that many companies will be unable to net hedge account for foreign denominated sales and purchases. Whilst the disclosure requirements are seeking to be helpful to the investor community there is a danger that on their own they are misleading. Users of financial statements need information to understand the total picture of financial risks that the company is exposed to, what has been hedged and of those, what has been hedge accounted. This exposure draft focuses on those items that have been hedge accounted. The items that have been hedged but have not been hedge accounted for, or those not hedged at all, can far outweigh the size and impact of those that have been hedge accounted. We believe disclosing only part of the picture is positively misleading. The requirements to disclose forward projections of sales of products and services and purchases of commodities and material, together with details of derivatives hedging these (including hedge amounts and hedged rates) has sparked anxiety amongst treasurers. Companies are not happy about 'giving the game away' to competitors, particularly if the competitors don't themselves have to report under International Financial Reporting Standards (IFRS) or their exposures are lost among others in consolidated group financial statements. The full submission to the IASB is available at www.treasurers.org/ifrs9/actresponse. A summary of key points in the ACT's comments to the IASB include: Positives
- 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 designate a layer of the nominal amount of an item (e.g. debt) as a hedged item. Previously the treasurer had to specify which specific debt instrument was being hedge accounted which was inflexible if the debt was restructured
- A risk component (e.g. commodity risk) can now be designated as a hedged item. Under IAS 39 only foreign exchange risk could be separated from non-financial items
- Derivatives can now be hedged items when combined with a non-derivative
- Negatives:
- Hedge accounting a net position is now allowed, however not for the typical corporate situation of hedging foreign denominated sales and purchase cashflows (because they don't impact the profit and loss in the same reporting period). The revision does not go far enough and we are recommending that sales and purchases should be allowed with the adjustments in and out of OCI to be done on a gross basis.
- Rebalancing of hedge relationships (an adjustment to a continuing hedge relationship, rather than a de-designation and new hedge relationship under IAS 39) is mandatory. We agree with the concept of rebalancing as it does not require a new hedge relationship with the resultant documentation, hedge effectiveness etc. However we do not believe it should be mandatory but at the entity's discretion. The treasurer deciding to rebalance the hedge because of external changes in the market should be the driver not the other way around
- Voluntary de-designation of hedge relationships is not permitted unless risk management objectives have changed. We disagree and think there should be some flexibility
- Fair value hedge accounting adjustments are to be presented as a separate line item in the balance sheet. This could add numerous complicating lines to a corporate's balance sheet and we believe the detail should be in the notes to the accounts
- Gains or losses arising from a net position hedge will be shown as a separate line item in the income statement. We believe this number will be misleading to readers of the accounts as they will think it is the entire FX (as an example) impact, rather than only those items which have been hedge accounted on a net basis. Referring to the net hedging point above we believe the adjustments should be made on a gross basis to the underlying items (e.g. sales and purchases) which is consistent with the accounting treatment for items hedge accounted on a gross basis
- All fair value movements on hedged items and hedging instruments will be taken to OCI before being taken to profit and loss (previously this was only for cash flow hedges). This adds unnecessary complexity
- Basis adjustment (e.g. from OCI to stock) was a policy choice but is now mandatory. From an operational perspective this will difficult to incorporate as stock systems were not designed to cope with derivative gains/losses
