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September 10, 2012

Big Four firms welcome final draft of IFRS 9

The International Accounting Standards Board (IASB) has issued a draft of general hedge accounting requirements to be added to IFRS 9 Financial Instruments.

The modified proposals allow closer alignment between companies’ risk management activities and their hedge accounting procedures and according to Ernst and Young (E&Y) will “allow many entities better to reflect their risk management activities in the financial statements.”

KPMG said that while some industries, such as banking and insurance, may see the proposals as of lesser importance than the Board’s forthcoming macro-hedging paper, sectors with substantial commodity related risk such as airlines and manufacturers will welcome the opportunities provided.

KPMG UK’s technical accounting partner Andrew Vials said these companies would “be able to reflect in its financial statements an outcome that is more consistent with how management assesses and mitigates risks”.

E&Y’s global IFRS Financial Instruments leader Tony Clifford said this would create a simplified, more principle-based hedge accounting model linked to an entities risk management model. Such a system would best benefit “non-financial services entities” who could hedge for clearly defined individual risk items.

He added that this is an improvement on the current model which “includes complex rules, some arbitrary limits, and onerous hedge effectiveness testing that often result in an entity not being able to apply hedge accounting to its economic hedging relationships.”

Vials warned that while the proposals will allow for more flexible hedge accounting, the guidance remains complex in some areas and to properly comply some companies “may need to apply a greater degree of judgement”. He added that the more principles based approach will need additional disclosures of how a company is managing risk.

Clifford concludes that until the completion of the macro hedging product in 2014, banks will need to be careful about reconciling their hedge accounting policies with the new IFRS. However, they will benefit as the standard “should reduce the operational burden of hedge accounting and provides more flexibility.”

The IASB is not seeking any comment on the draft, which reflects decisions resulting from its technical deliberations, and has been made available online until early December.

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