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IAS 39 Amendments – Novation of derivatives and continuation of hedges accounting


On 28 February 2013, the International Accounting Standards Board (IASB) published an Exposure Draft of proposed amendments to IAS 39 Financial Instruments: Recognition and Measurement and corresponding amendments in the forthcoming hedge accounting chapter in IFRS 9 Financial Instruments.

The objective of the proposed amendments was to provide an exception to the requirement for the discontinuation of hedge accounting in IAS 39 and IFRS 9 in circumstances when a hedging instrument is required to be novated to a central counterparty as a result of laws or regulations. These legislative changes were prompted by a G20 commitment to improve transparency and regulatory oversight of over-the-counter derivatives in an internationally consistent and non-discriminatory way. In Europe such legislative change was introduced through the European Market Infrastructure Regulation (EMIR) on OTC derivatives, central counterparties (CCPs) and trade repositories which was adopted in 2012.

The IASB published the Exposure Draft with a short (30-day) comment period as the IASB was aware that these new laws or regulations could come into effect in some jurisdictions very soon.

In its final comment letter, EFRAG welcomed the IASB's responsiveness in providing relief from having to discontinue hedge accounting when entities novate hedging instruments to central counterparties.

However, EFRAG believed the proposed amendments were too restrictive as many novations that take place in response to laws or regulations (for example in the cases when legislation or implementing regulation would require only certain existing OTC derivatives to be cleared through central counterparties or when entities have already started to novate OTC derivatives before they are legally required to do so) would not qualify for the relief. For those reasons, EFRAG believed the IASB should remove the condition that the novation is required by laws or regulations as this condition unnecessarily restricts the scope of the relief. EFRAG believed that all voluntary novations with a central counterparty should be included in the relief, because the economic impact of a novation to a central counterparty is the same, regardless whether the novation is required by law, done in anticipation of a legal requirement, done to obtain regulatory relief or done on a purely voluntary basis.

EFRAG also noted that diversity in practice existed regarding the interpretation of the derecognition requirements as applied to novations, namely that certain novations do not lead to derecognition. Without expressing a view on whether this was an appropriate interpretation, EFRAG noted that the wording of the Exposure Draft would prohibit such interpretation. Therefore, rather than requiring retrospective application, EFRAG believed the IASB should include an effective date with early application permitted and only require prospective application.

On 27 June 2013, the IASB issued the Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting (the 'Amendments to IAS 39'), which provided relief from discontinuing hedge accounting when novation of a hedging instrument to a central counterparty meets certain criteria.

The Amendments to IAS 39 were effective for annual periods beginning on or after 1 January 2014, with earlier application permitted.

On 15 July 2013, EFRAG issued its Endorsement Advice and Effects Study Report relating to the Amendments for use in the European Union and European Economic Area. EFRAG supported the adoption of the Amendments and recommended their endorsement.

EFRAG's recommendation was explained in the letter to the European Commission, and the accompanying Basis for Conclusions and the Effects Study Report on the costs and benefits of implementing the Amendments.

The Amendments were endorsed on 19 December 2013 and published in the Official Journal on 20 December 2013.

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