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04 October 2010

EBF response to the FASB on the revision to the accounting for derivative instruments and hedging activities


Default: Change to:


The EBF has significant concerns with the approach adopted by the FASB because there is no reflection of business practices and the proposed requirement will not reduce complexity, improve transparency or be acceptable to most users of financial statements.


Key points:
• The EBF continues to support the convergence objective, however not at the expense of quality. Adverse impact on the decision on equivalence and mutual recognition of IFRS and US GAAPs must be avoided.
• Financial instruments accounting should be based on a mixed measurement model. Support for classification criteria that differentiate between financial instruments measured at amortized cost and those measured at fair value.
Reclassification should be required if the business model for a particular instrument portfolio has changed as a consequence of external events.
• Fair Value Option (FVO) should be available. Own credit changes on FVO liabilities should be moved out of the P&L, unless this would cause an accounting mismatch. Entities should have an option either to bifurcate the embedded derivative or to carry the whole financial instrument at fair value with changes in profit and loss.
• An impairment model for financial assets should be based on an expected loss approach over the life of the portfolio where estimates of the losses should reflect all existing information. Any model should be applicable to open portfolios. Expected loss allowances should be amortized over the life of the portfolio. Changes in estimations should be treated symmetrically with initial estimations.
• Support for the removal of the quantitative assessment of hedge effectiveness and for the adoption of a qualitative analysis to assess effectiveness. However unless the FASB reconsiders the types of risk eligible for hedging for accounting purposes, the practical benefit of the proposals is limited
• Hedge accounting should permit the hedging of a portion of a financial instrument’s contractual cash flow. The hedged item should be permitted to include a net exposure comprised of financial assets, financial liabilities and derivatives. The FASB should incorporate the IASB recent deliberations on macro hedging into the proposal.
• Disagreement with the proposal to prohibit the voluntary designation of hedge accounting relationship.


© EBF


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