Eligibility of groups of hedged items
The staff presented a summary of the Board's tentative decisions to date on the eligibility of groups of hedged items, including net positions. The staff also summarised concerns that had been expressed by various Board members about the staff's responses to those concerns.
The purpose of this summary was to allow the Board to see how their tentative decisions interact and how their concerns were being addressed.
The Board tentatively decided that the proposed general hedge accounting model should include some criteria restricting the eligibility of cash flow hedges of net positions in some circumstances. The Board requested the staff to produce more examples to help determine what restrictions are necessary.
Measurement of hedge ineffectiveness
The Board tentatively decided that the principle in IAS 39 Financial Instruments: Recognition and Measurement, that all hedge ineffectiveness should be measured and recognised, should remain in the hedge accounting approach the Board is developing. Hedge ineffectiveness would be determined using a 'dollar-offset' approach.
The Board also tentatively decided that measurement of ineffectiveness should be based on the actual performance of the hedged item and hedging instrument, including the effects of the time value of money.
The Board also tentatively decided that guidance about the use of a ‘hypothetical derivative’ to measure the present value of the expected future cash flows of the hedged item that is then used as an input to a hedge effectiveness testing method or for measuring hedge ineffectiveness should be improved.
Presentation: basis adjustments and hedging FX risk of firm commitments
The Board discussed 'basis adjustments' for hedges of forecast transactions (the adjustment of the initial carrying amount of a non-financial item for the hedging gain or loss) and the interaction with the hedge accounting mechanism for hedges of FX risk of firm commitments (the choice between a fair value or cash flow hedge).
The Board tentatively decided to replace the accounting policy choice that is in IAS 39 Financial Instruments: Recognition and Measurement and and require entities to adjust the initial carrying amount of the hedged item for the hedging gain or loss (basis adjustment).
The Board also tentatively decided to continue to permit the accounting choice that is in IAS 39 and allow hedges of FX risk of a firm commitment to be accounted for as a fair value hedge or as a cash flow hedge.
Scope of hedge accounting disclosures
During the staff's outreach activities on hedge accounting, users of financial statements have indicated that it is important for them to have information on the risks that an entity is exposed to and on how those risks are being managed.
To enable the staff to develop proposals for hedge accounting disclosures, the Board first had to determine what type of information would fall within the scope of such disclosures.
The Board tentatively decided that, in developing possible disclosures, the staff would follow an approach whereby:
- disclosures in IFRS 7 Financial Instruments: Disclosures are expanded to include the exposure to a specific risk for financial and non-financial items when an entity applies hedge accounting; and
- hedge accounting disclosures are restricted to the risks that an entity is exposed to that are tracked as part of the risk management process.