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20 January 2011

EFRAG commented on the IASB Exposure Draft Hedge Accounting


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EFRAG issued its draft comment letter on the IASB Exposure Draft Hedge Accounting. Comments are invited by 2 March 2011.


EFRAG finalised its draft comment letter to the IASB in response to the Exposure Draft Hedge Accounting (the ED), issued in December 2010. The ED proposes significant changes to hedge accounting for hedges of individual and closed groups of items. Proposals for hedges of open portfolios (also known as macro hedging) are expected later this year.
 
Overall, EFRAG agrees with the direction of the proposals in the ED. In particular, EFRAG agrees with the direction of the proposed objective to reflect, in the financial reporting, the extent and effects of an entity’s risk management activities. EFRAG believes that this approach has the benefit of being consistent with the role of the business model in the classification of financial instruments. In EFRAG’s view, the hedge accounting model proposed in the ED provides a number of significant improvements that will make hedge accounting more accessible, including the following:
  • The proposals have introduced new complexities, particularly in the rebalancing of hedge relationships and the treatment of the time value of options. However, EFRAG believes that the benefits of these proposals outweigh their cost and complexity.
  • The proposals remove a number of the restrictions to hedge accounting in IAS 39 Financial Instruments: Recognition and Measurement. In EFRAG’s view, there are important improvements relating to assessing hedge effectiveness, the possibility to designate derivatives, risk components and net positions as hedged items, and the possibility to apply hedge accounting to components of non-financial items.
  • EFRAG believes that the proposed disclosure objectives are appropriate, but have certain concerns about the detailed requirements.
EFRAG also has a numbers of concerns. The most significant of these are, as follows:
  • EFRAG believes that the IASB will need to consider the various phases of the IAS 39 replacement as a whole before finalising the resulting standards.
  • EFRAG believes that a number of issues require further consideration because they could create an inconsistency with risk management practices. These include the eligibility of instruments at amortised cost as hedging instruments; non-contractually specified inflation risk as a hedged item; credit risk as a risk component; hedging of risks not affecting profit or loss; and a benchmark component in hedging a debt instrument with a negative indexation to the benchmark (the sub-LIBOR issue).
  • The proposals rely heavily on judgement and the link to risk management. To ensure that this link is truly achieved, EFRAG believes that the IASB should conduct field-tests and outreach activities to ensure that proposals are operational.
  • Given the importance of macro hedging, we believe that the IASB should not finalise a standard on the general hedge accounting model, before developing a model for macro hedging.
Press release


© EFRAG - European Financial Reporting Advisory Group

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