Geoffrey Whittington / John Smith
The International Accounting Standards Board
30 Cannon Street
London
EC4M 6XH
Copy: Magnus Orrell
08 July 2003
Dear Geoffrey and John
IAS 39: “INTERNAL” CONTRACTS AND HEDGES
At our meeting with the IASB on June 27th we agreed to set out example entries for hedges put in place through a treasury centre or otherwise on an aggregate or net basis with regard to paragraph 134 IAS 39.
We continue to have the concerns about process, risk, cost and reporting in companies achieving hedges as set out in our letter of June 6th (copy herewith) and in previous correspondence.
The purpose of this letter is to exemplify our proposed approach which we believe is fully
consistent with the principles involved, which we support.
In particular we understand and accept the Board's position that no gain or loss should be generated at the group level through internal derivatives. The paper below shows that no 'internal' profit is generated by any entity in any period under our suggested treatment.
The first suggested remedy for our concerns that we propose is adding brief language into paragraph 134 (ED 126B) to recognise that hedge accounting at a group level may be achieved by adding an additional layer of documentation and effectiveness assessment to complete the chain of hedge documentation from the hedged cash flows to an external hedging instrument.”
The alternative remedy is to retain IGC 134-1-b (plus appendix) in its present form - many corporates rely on this, and amending or deleting it would be a significant change (and may of course require re-exposure).
We hope that the attached paper will clarify the matter and look forward to hearing further from you on this important point.
Yours sincerely
Jon Boyle
Chairman, Technical Committee
John Grout
Technical Director
Richard Raeburn
Chief Executive