The ACT supports the main principles behind IAS39 that derivatives should be measured at fair value, but that subject to effectiveness testing and designation hedge accounting may be applied, with any ineffectiveness recognized in earnings. Our concerns, which we have been making since the early days of IAS39, centre round the objective that normal commercial hedging carried out as standard treasury best practice should not be caught out by the rules and fail to qualify as hedges. We do not wish the accounts to give a misleading picture of routine treasury activity, nor do we wish to see the accounting process introduce excessive administration or costs. Worst of all we would not wish to find that Corporates are actually changing their hedging policies to their commercial detriment simply on account of the accounting presentation.
We believe that convergence of IAS with USGAAP should be a general objective where this can be achieved without compromising the fundamentals behind IAS. Thus if there are opportunities to bring the two sets of standards together in some of the specific detail this will be welcomed. The more differences there are the more effort and costs need to be expended by companies subject to both regimes. For those with European standards applicable for their prime reporting there may even be the risk that the accounting will drive their commercial actions which could put them at a competitive disadvantage. Where differences remain this could lead to a lack of transparency if companies engage in convoluted work arounds to achieve what they regard as a fair accounting treatment.
We welcome the Exposure Draft on Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk. We very much support the move to a basis which is closer to how large organizations actually manage their risk portfolios. Nonetheless we advocate that this portfolio approach should go further and allow the net of the portfolio of assets and liabilities to be the hedged item instead of an amount of the asset or of the liability equal to the net amount.
