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IFRS 9: Financial Instruments

IASB Meeting Summaries and Observer Notes

 IASB 19 October 2010



At this session the Board discussed:

  • the interaction between hedge accounting and the ‘own use’ scope exception;
  • hedge accounting for interest risk exposures at sub-LIBOR’; and
  • disclosures.

Interaction between hedge accounting and the ‘own use’ scope exception

The Board discussed the interaction between hedge accounting and contracts that meet the ‘own use’ scope exception under IFRS 9 Financial Instruments (which uses the scope of IAS 39 Financial Instruments: Recognition and Measurement).

During the outreach activities, the Board learnt that for some commodity processors and service providing broker-traders the accounting for commodity contracts under IFRSs:

  • can result in an accounting mismatch;
  • is not aligned with how commodity broker processors and some types of commodity broker-traders manage risk in the context of their business models; and
  • may not provide useful information to users.

Many commodity processors and service broker-traders manage their overall commodity risk position on a fair value basis. The net risk exposure to the commodity price risk is managed such that it is close to zero by using derivatives.

The Board noted that hedge accounting is not an efficient solution because in the circumstances considered entities manage a net position of derivatives, executory contracts and physical long positions in a dynamic way. Hence, the Board tentatively decided that derivative accounting would apply to contracts that would otherwise meet the ‘own use’ scope exception if that is in accordance with the entity’s fair value-based risk management strategy. The Board believes that its tentative decision will provide a more accurate reflection of the financial position and performance of entities that manage their entire business on a fair value basis and provide more useful information to users of financial statements.

Designation of LIBOR (or other index) components in sub-LIBOR interest-bearing financial assets and liabilities

The Board discussed whether there is a LIBOR-component of an interest-bearing financial asset or financial liability if the effective interest rate of the instrument is lower than LIBOR

The Board discussed the restriction in IAS 39 regarding the designation of risk components when these exceed the total cash flows of the hedged item. The Board considered some scenarios in which allowing the designation on such a risk components basis would create counterintuitive outcomes.

The Board noted that the counterintuitive outcomes that could result in some scenarios when allowing designation on a risk component basis that would result in exceeding the total cash flows of the hedged item are inconsistent with economic characteristics of the hedged item.

Hence, the Board tentatively decided to retain the restrictions regarding the designation of risk components when the designated component would exceed the total cash flows of the hedged item (paragraphs AG99C and AG99D of IAS 39). However, hedge accounting would still be available on the basis of designating as the hedged item all of the cash flows of the entire hedged item for changes attributable to changes in LIBOR.

Hedge accounting disclosures

The Board tentatively decided on objectives for hedge accounting disclosures. The tentative disclosure objectives provide information about:

  • the effect that hedge accounting has had on the entity’s statement of financial position, income statement and statement of comprehensive income;
  • how an entity’s risk management strategy is applied to manage or transform risk; and
  • how the entity’s hedge activities may affect the amount, timing and uncertainty of its future cash flows.

To meet these objectives the Board tentatively decided that:

  • all hedge accounting disclosures should be provided by type of risk;
  • the effects of hedge accounting on the primary statements should be disclosed using a tabular format (by type of risk and type of hedge);
  • when an entity provides information on its risk management strategy (for each type of risk) it should also explain the exposure it has to that particular risk and how it has hedged that risk. This should be done for each future period for which the entity has designated a hedging relationship for that particular risk.

The Board also discussed disclosures suggested by the staff to meet these objectives, and tentatively agreed with the suggested disclosures.

Date: 10/19/2010