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November 19, 2013

IASB hedge accounting model completed

The International Accounting Standards Board (IASB) has issued an amended model for hedge accounting aimed at better reflecting companies’ risk management activities in their accounts and also at improving disclosures related to their risk management strategies.

For that purpose the IASB has introduced a new chapter to IFRS 9 Financial Instruments, which ends the hedge accounting phase of the international standard.

Entities apply this accounting practice to reflect their exposure to risks in financial statements and to indicate how they are dealing with them. Up to now hedge accounting requirements were regulated under IAS 39, which is being replaced by IFRS 9.

According to the IASB, the IAS 39 hedge accounting requirements have fallen short in providing investors with the information they demand, namely:

  • the risks an entity faces,
  • what management is doing to tackle those risks, and
  • how effective the risk management strategies are.

The IASB said the new model aligns hedge accounting more closely with risk management activities. Also, unlike IAS 39, it allows the hedging of components of non-financial items, with the exception of risk derived from foreign currencies which was permitted under IAS 39.

"An example of a risk component in a financial item is the LIBOR risk component of a bond. However, risk managers often hedge a risk component for non-financial items as well, for instance, the oil price component of jet fuel price exposure," the standard-setter stated.

In a statement the IASB said the most significant improvements apply to entities that hedge non-financial risk, and therefore it is expected to be of particular interest to non-financial institutions.

The new hedge accounting model also allows companies to use their internal risk management data, (i.e. information produced specifically for risk management purposes) instead of using metrics designed only for accounting purposes.

In the IASB’s view, this should also reduce hedge accounting’s implementation costs compared with those determined for IAS 39.

ReactionsThe Institute of Chartered Accountants in England and Wales (ICAEW) has welcomed the amendments and said in a statement that the new hedge accounting model will make companies’ financial statements more understandable.

ICAEW head of financial reporting faculty Nigel Sleigh-Johnson said that the current hedge accounting standard is rules-based and doesn’t reflect risk management activities well.

Sleigh-Johnson explained that hedge accounting is a way for companies "to reduce volatility in their reported results stemming from, for example, foreign currency exposure, and is widely used by both financial and non-financial companies".

In the view of ICAEW, the amended IFRS 9 will require more disclosures because it is more principles-based than IAS 39.

"Replacing IAS 39 has proved a much slower and tougher task for the standard-setters than originally thought. They are not there yet, but the hedge accounting standard is an important strand of what has become a rather tangled and complex web of much-needed financial reporting reforms," Sleigh-Johnson added.

Effective date Companies are required to apply the standard by 1 January 2015, although early application is permitted.

However, the IASB has removed the mandatory effective date in which IFRS 9 should come into force, as among other factors, the impairment phase of the standard hasn’t been completed yet.

"We have responded to concerns that the mandatory effective date for IFRS 9 provided insufficient time for companies to adequately prepare," the IASB chairman Hans Hoogervorst said.

The IASB said a new date will be decided upon when the entire IFRS 9 project is closer to completion.

Related link

The International Accounting Standards Board


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