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Accounting for macro hedging

Description

Background

The International Accounting Standards Board is working on a project to simplify and improve the usefulness of financial statements, by developing accounting requirements for hedging within the context of open portfolios that are more closely aligned with a company's risk management activities. The project addresses situations in which entities use a dynamic risk management strategy to manage their risks. Dynamic risk management of open portfolios introduces complexity to the accounting for such hedges that cannot be accomodated within the IFRS 9 hedge accounting guidance for closed portfolios; hence the need for a separate project.

In developing the project, a valuation approach is being explored in which, for accounting purposes, the hedged risk position is identified and re-measured for changes in the hedged risk, recognising the gain or loss in profit or loss.

While initially part of IFRS 9 Phase III: Hedge Accounting, the project was decoupled from the IFRS 9 project into a separate project in May 2012. At the same IASB meeting, it was decided that the next step would be to issue a Discussion Paper, rather than an Exposure Draft.

IASB Discussion Paper

On 17 April 2014, the IASB published its Discussion Paper, Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging. Under the portfolio revaluation approach there would be no change in the measurement of risk management instruments; these would remain at fair value through profit or loss. The risk-managed exposures would be revalued with respect to the managed risk (e.g. three month LIBOR) and the resulting revaluation adjustment would be recognised in the statement of financial position and the income statement. The revaluation adjustment and the fair value of the risk management instruments offset each other to the extent that the hedge is effective. Open risk positions would thus have a net impact on profit or loss, depending on the scope of the proposals.

EFRAG draft comment letter

EFRAG published its draft comment letter on 1 July 2014, with responses requested by 10 October 2014.

Given the complex nature of the Discussion Paper, EFRAG raises an unusual number of questions to constituents in the draft comment letter. To aid the gathering of input and responses, EFRAG would welcome discussions with constituents in advance of formal responses, particularly to explore the operationality of some of the identified proposals.

Outreach events

As part of a series of joint outreach events aimed at gathering input from the user community, EFRAG, The European Federation of Financial Analyst Societies (EFFAS)/ The Belgian Association of Financial Analysts (BVFA/ABAF) and the IASB held an event to discuss the Discussion Paper and user understanding of macro hedging in Brussels on 7 July 2014.

EFRAG final comment letter

EFRAG issued its final comment letter on 30 October 2014. In that letter EFRAG highlighted the needs of different industries for a macro hedge accounting solution.

EFRAG rejected the alternatives proposed by the DP as remeasuring all portfolios that are dynamically managed was not considered decision-useful. In addition, such a solution would result in overriding the amortised cost measurement attribute. EFRAG asked the IASB to develop a hedge accounting solution with the aim of addressing the accounting mismatch between fair valued hedging derivatives and hedged items at amortised cost. In addition, macro hedging should remain consistent with IFRS 9.  Further a cash flow hedge model was advised to consider as banks manage their interest rate risk on a cash flow basis, not on a fair value basis. Finally, EFRAG noted an impact assessment is needed during further development of the approach.

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