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.”
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By GlobalDataVials 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.
