December 21, 2010
IASB proposes hedge accounting changes
By Beatrice Arnfield
With financial reporting in the spotlight and Ernst & Young facing charges in New York for fraudulent auditing of Lehman Brothers accounts and misleading investors, Canadian Treasurer looks at changes to hedge accounting proposed by the International Accounting Standards Board (IASB).
The IASB has issued the Hedge Accounting exposure draft (ED) with the aim of improving hedge accounting. The objective of the IASB’s proposals is to “improve the ability of investors to understand risk management activities and to assess the amounts, timing and uncertainty of future cash flows,” the ED states. The IASB also wants the risk from the use of hedging instruments to be reflected in financial statements.
The IASB says that it is developing the new hedge accounting standards in response to investors who believe that the existing IAS 39 hedge accounting requirements are inadequate for their purposes.
IAS 39 was developed when hedging activities were relatively new and not as widely understood or used as they are today, the IASB says. Now that hedging risks has become common business practice, investors want to understand the risks an entity faces, the steps it is taking to manage those risks, and the effectiveness of its risk management strategies, according to the IASB. The ED has been written with the objective of helping management communicate all this information to users.
In a statement, the IASB says: “The proposals will replace the rule-based hedge accounting requirements in IAS 39 Financial Instruments: Recognition and Measurement and more closely align the accounting with risk management activities.”
“The proposed rules provide greater flexibility in the types of hedge relationships that will qualify for hedge accounting treatment,” says Blaik Wilson, vice chairman of the hedge accounting technical taskforce at Reval.
New York-based Reval provides a Web-based platform that automates corporate financial risk management for a range of interest rate, foreign exchange, commodity and credit derivatives. “The more hedges that qualify for hedge accounting treatment, the more risk a company can hedge,” Wilson says.
The IASB board is accepting comments on its proposals until March 9, 2011. Once the consultation period is over, the IASB says it will finalise its requirements for general hedge accounting in the first half of 2011 and then add these requirements to IFRS 9 Financial Instruments. The requirements will be effective for accounting periods beginning on or after January 1, 2013, with earlier application permitted. The IASB is proposing prospective application with no requirement to restate the comparative information.
The IASB will consider comments on the effective date and transition requirements proposed in the exposure draft when finalising its proposals.
During the comment period, IASB members and staff will undertake outreach activities to discuss the proposals with a wide range of interested parties.
These outreach activities will include:
• discussions with investors, preparers of financial statements, audit firms, regulators, national standard-setters and other interested parties;
• webcasts, podcasts and presentations.
“Given that the comment period is only 90 days, we at Deloitte expect very few changes to the draft,” said Kush Patel, Senior manager and IASB practice fellow at Deloitte. “Even though the effectiveness date for the rules is in the future, it is essential that companies look to see how these rules might affect them, and that they get their comments to the IASB,” he urges. Mr Patel was speaking in London at a Webinar organized by Reval in December 2010.
After developing the general hedge accounting requirements for financial and non-financial instruments (for example oil futures), the IASB says it intends to move on to develop a portfolio hedge accounting model. This model will take into consideration the comments received on the general model. The IASB is not ruling out the possibility of adjusting the general model as a result of its deliberations on the portfolio model.
The IASB will announce on its website (www.ifrs.org) the dates of any meetings at which it discusses the feedback on the ED. To stay up to date about the project, you can also subscribe to email alerts on the IAS 39 replacement project web page. To view the ED, submit your comments or subscribe to email alerts on this project, visit www.ifrs.org. The IASB will publish a feedback statement, as an accompanying document to the standard, to show how the Board responded to views received during the consultation process.