EFRAG's comments reflect the results of the field test carried out by EFRAG in partnership with the ANC, ASCG, FRC and OIC.
EFRAG has divided its comments in two parts:
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First, an overview of the implementation difficulties, including fatal flaws and requests for additional guidance. These relate to the use of net positions, the tensions between economic hedges and hedge accounting, the treatment of basis risk in cross currency interest rate swaps, the own use exception and the treatment of time value and forward points.
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Second, an input to the IASB’s effect analysis. The field test has confirmed a series of common hedging strategies for which hedge accounting is not permitted, although the objective set for the IASB’s project was to reflect risk management practices. EFRAG acknowledges that the IASB has deliberated in its due process every related limitation to the hedge accounting model. However the IASB’s reasoning in its basis for conclusions has remained somewhat limited. EFRAG strongly recommends that the IASB reviews its reasoning for maintaining the proposed limitations when finalising its effect analysis of the project, so that constituents may share full understanding of why lifting those limitations would impair good quality financial reporting. The issues relate to the application of hedge accounting to a net position with foreign currency risk, the treatment of credit risk and the sub-LIBOR issue. Comments also relate to the disclosure requirements.
Finally EFRAG has analysed the consequences of the IASB’s decoupling approach to the review of hedge accounting, separating its project on macro-hedging for open portfolios from the general hedge accounting requirements. EFRAG holds the view that IAS 39 requirements applicable to macro-hedging should remain applicable in their entirety – cash-flow macro-hedging included – until the IASB completes its now separate project on macro-hedging, so that macro-hedging of open portfolios practices are not subject to successive changes from current practice, in other words that the transition from IAS 39 to IFRS 9 can be completed in one go. EFRAG is undertaking a supplementary short consultation with European stakeholders on this issue, so as to complete its conclusions and recommendations to the IASB with a supplementary letter that it plans to issue in March.
Press release
Final comment letter
© EFRAG - European Financial Reporting Advisory Group
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