Fair value hedge accounting mechanics
At a previous meeting in September 2009, the IASB tentatively decided to improve hedge accounting requirements by replacing the mechanics used for fair value hedge accounting with an approach that is similar to cash flow hedge accounting (the tentative approach). In response to feedback received from the outreach activities on that tentative approach, the Board changed its tentative decision to an approach for fair value hedge accounting that presents the cumulative gain or loss on the hedged item attributable to the hedged risk as a separate line item in the balance sheet. That line item is presented within assets (or liabilities) for those reporting periods for which the hedged item is an asset (or liability). The fair value changes of the hedging instrument and the hedged item attributable to the hedged risk are taken to other comprehensive income, and any ineffectiveness (ie any difference) is transferred immediately to profit or loss.
At this meeting the Board discussed whether it should require linked presentation for fair value hedges. Linked presentation results in the gross assets and gross liabilities that are related because of the application of fair value hedge accounting being presented in proximity to one another (ie on the same side) on the face of the statement of financial position. The Board tentatively decided not to allow linked presentation because of the many different types of relationship that can exist between assets and liabilities, which would make it too difficult to establish an appropriate basis for determining when linked presentation would be required.
Eligible hedged items: groups and net positions
At this meeting the IASB continued its discussions of hedging groups and net positions focusing on two particular aspects.
First, it discussed the merits of permitting hedge accounting for net positions of forecast transactions. The Board looked at an example of forecast sales and cost of sales hedged on a net basis for foreign currency exchange risk using forward exchange contracts. The Board tentatively agreed to permit hedge accounting for such net positions, subject to consideration of other consequences of hedging net positions that may arise as the staff continue to explore the issues.
Second, it discussed different ways by which hedged items could be identified when they are hedged as part of a group. The Board looked at what an appropriate method would be to identify the hedged items when a net position is hedged. The Board tentatively decided that items in a net position hedge could be identified as individual gross items that can offset both within and across reporting periods provided that this could be done with a clear and robust link to risk management.
The discussions of whether net positions should qualify for hedge accounting will continue at a future meeting.