Phase III - Hedge accounting
As part of its project to replace IAS 39 Financial Instruments: Recognition and Measurement, the IASB is addressing hedge accounting.
Next steps…
The IASB is currently reaching out to interested parties with the objective to gather feedback in developing an exposure draft on hedge accounting. The Board will be discussing hedge accounting at its upcoming joint meeting in February.
The Board tentatively expects to publish an exposure draft on hedge accounting in the first quarter of 2010.
Where are we?
3 March (extra meeting)
The Board continued discussing eligibility for designation as a hedged item in a hedge accounting relationship. The Board tentatively decided that derivatives could be designated as hedged items in several situations. In particular, that would apply when the hedged exposure is a combination of a derivative and a non-derivative. The Board also tentatively decided that proportions of nominal amounts and one-sided risks would be eligible for designation as hedged items.
5-19 February (joint meeting)
The boards discussed possible criteria for designation of eligible hedged risks and possible bifurcation-by-risk approaches for hedged financial items.
The IASB tentatively decided to explore a new criterion for the purpose of determining risk components eligible for designation as hedged items.
The FASB tentatively decided that bifurcation-by-risk would be permitted for hedged financial items within the context of the recognition and measurement model agreed to by the Board for accounting for financial instruments. The Board will continue to discuss issues relating to hedge accounting, specifically how to identify the hedged risk and how the assessment of effectiveness will be determined.
2 February 2010 (extra joint meeting )
The boards discussed possible objectives for hedge accounting and whether hedging risk components (bifurcation-by-risk) should be permitted. No decision was made on the objective.
The IASB tentatively decided to permit bifurcation-by-risk for financial items and indicated a leaning toward permitting bifurcation-by-risk for non-financial items. Furthermore, the IASB requested that the staff explore a possible approach that the hedged item must be both separately identifiable and measurable for the purpose of determining hedge effectiveness for consideration at a future meeting.
The FASB decided to explore bifurcation-by-risk for financial items and requested the staff to develop possible approaches for consideration at a future meeting.
January 2010 (IASB only meeting)
The Board discussed two possible objectives for hedge accounting. The Board discussed the possible objectives in the context of whether risk components could qualify for hedge accounting under any hedge accounting approach that the Board might propose. The Board noted that a hedge accounting objective should permit or require hedge accounting for risk components if a risk component is separately identifiable and measureable for the purpose of determining hedge ineffectiveness. The Board also noted that a hedge accounting objective and the treatment of risk components should apply to both financial and non-financial hedged items.
No decisions were made.
January 2010 (joint meeting)
The boards discussed possible timelines for completing the hedge accounting phase of the joint financial instruments project and the issues that might be addressed under each timeline. The boards tentatively decided to address hedge accounting comprehensively.
However, in light of the FASB’s goal to publish a comprehensive exposure draft on financial instruments in March 2010 and the IASB’s goal to publish an exposure draft on the remaining main phases of the project to replace IAS 39 in the first quarter of 2010, the boards will first jointly consider hedge accounting issues relating to financial hedged items, and issues that are more directly related to the boards’ respective decisions to date on the classification and measurement models for financial instruments.
The boards will subsequently discuss other hedge accounting issues, including hedge accounting for non-financial hedged items and portfolio hedge accounting. The boards expect to address all hedge accounting issues in the first half of 2010.
15-16 October 2009 (extra Board meeting)
The Board discussed an analysis of the eligibility of financial instruments managed on a contractual cash flow basis in a fair value hedge. The Board tentatively confirmed that financial instruments managed on a contractual cash flow basis are eligible hedged items of a fair value hedge (not withstanding that cash flow hedge accounting mechanics would apply as the Board tentatively decided before).
6 October 2009 (extra Board meeting)
Applying cash flow hedge accounting mechanics to a fair value hedges
In September 2009 the Board tentatively decided to replace fair value hedge accounting. This would be done by permitting recognition outside profit or loss of gains and losses on financial instruments designated as hedging instruments (an approach similar to cash flow hedge accounting).
At this meeting, the Board tentatively decided to retain the existing 'lower of' test as required in IAS 39.96(a) for cash flow hedge accounting and not to extend that test to fair value hedges.
September 2009
The Board tentatively decided:
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to simplify today's hedge accounting requirements by replacing fair value hedge accounting with an approach that is similar to cash flow hedge accounting.
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to further simplify the existing cash flow hedge accounting model to reduce complexity.
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to address general hedge accounting first before considering the implications on portfolio hedge accounting.
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to consider separately any implications on hedge accounting for net investments in a foreign operation because there are also interactions with IAS 21 The Effects of Changes in Foreign Exchange Rates.