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Andrew Spooner, Deloitte Global IFRS Financial Instruments lead partner

IASB proposes improvements to hedge accounting

The International Accounting Standards Board (IASB) has published an exposure draft on accounting for hedging activities. The draft proposes requirements that will enable companies to reflect their risk management activities better in their financial statements, and help investors to understand the effect of those activities on future cash flows.

Commenting on the proposals Andrew Spooner, Deloitte Global IFRS Financial Instruments lead partner, told Hedgeweek, “Corporate Treasurers have long felt frustrated that their risk management approach is not always fairly presented in the financial results. These proposals will bring down many of the barriers to entry to hedge accounting and make the exercise of complying less burdensome for all. Those that have the greatest to gain will be those companies that hedge non-financial items, like mining and exploration groups, utilities, airlines and manufacturers that purchase raw materials.
“The proposals will allow the hedge designation for accounting purposes to be more aligned with risk management strategy and thereby reduce what is often cited as artificial volatility in earnings. Also, any company that uses financial options to hedge will benefit from less profit or loss volatility in executing certain hedge strategies. Everyone else has little to lose.”
The proposed model is principle-based, and will more closely align hedge accounting with risk management activities undertaken by companies when hedging their financial and non-financial risk exposures. The proposals also include enhanced presentation and new disclosure requirements.
The exposure draft builds on proposals contained in the IASB’s discussion paper ‘Reducing Complexity when Reporting Financial Instruments’, published in March 2008. The exposure draft forms part of the IASB’s project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’, and when its proposals are confirmed they will be incorporated into IFRS 9 Financial Instruments.
The exposure draft ‘Hedge Accounting’ is open for comment until 9 March 2011 and can be accessed via the ‘Comment on a proposal’ section of the IASB website.
During the consultation period, the IASB will undertake further outreach to seek views on the proposals. The IASB will reconsider the proposals with a view to completing the new hedge accounting requirements in the first half of 2011. In addition to the general hedge accounting proposals in the exposure draft, the IASB is continuing to discuss portfolio macro hedge accounting.
Spooner adds, “A long standing issue the IASB has not yet solved is macro-hedge hedging the net interest margin for banks.  We’ll have to wait until next year for these proposals, which we expect will build on the hedging principles issued today. Finding a solution for macro-hedging will remain critical for acceptance of the new financial instruments standard in Europe.”
The exposure draft is open for comment until 9 March 2011 and can be accessed via the ‘Comment on a proposal’ section of

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