IFRS 9 Hedge Accounting Exposure Draft - ACT comments to IASB

The ACT agrees with the overall objectives of the December 2010 IFRS 9 Hedge Accounting Exposure Draft (ED), 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.

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’.

This results in unnecessary complexity and, in some instances, the accounting driving the risk management activities instead of the other way around. Proposals to which this comment applies include hedge accounting for net positions, mandatory rebalancing of hedge relationships, prohibition of voluntary de-designation of hedge relationships and the accounting mechanics for fair value hedges.

We believe the disclosure requirements are seeking to be helpful to the investor community. However there is a danger that as proposed, on their own they are positively misleading. Users of accounts 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. The exposure draft focuses on those items that have been hedge accounted, however the items not hedge accounted or not hedged at all can far outweigh the size and impact of those that have.

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’ particularly if competitors don’t have to report under International Financial Reporting Standards (IFRS). Even some users of accounts that we consulted thought that the disclosures had gone too far in potentially disadvantaging companies against their competitors. Overall though, the ED is one step in the right direction.

For the full response see the attached PDF

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