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Thursday 17 April 2014

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IFRS 9: Financial Instruments

Exposure draft and Comment letters [Dec 2010]


Hedge accounting mechanics

(paragraphs 26-30, 37, 38, B79-B82, BC119-BC123, BC130-BC140 and BC174-BC177)


Throughout this project we have undertaken extensive outreach with investors. In particular, we have tried to understand how investors view risk management activities and hedge accounting, and how they use hedge accounting information (including disclosures) in their analysis and decisions.  

Click here for a summary of user feedback.

How an entity accounts for its hedging activities (ie those that meet the qualifying criteria for hedge accounting) plays an important part in providing relevant and reliable information to users of financial statements.

What is the problem?

In accordance with IAS 39, for a fair value hedge the gain or loss on the hedged item attributable to the hedged risk adjusts the carrying amount of the hedged item and is recognised in profit or loss. The gain or loss from remeasuring the hedging instrument is also recognised in profit or loss.
This results in:

(a) the hedged item typically being measured at neither fair value nor cost; and

(b) no clear indication to users of financial statements of the effectiveness of the hedging relationship (this is because changes in the value of the hedged item and the hedging instrument are recorded in profit or loss). 

What are the proposals?

The exposure draft proposes that for fair value hedges:

(c) the change in the value of the hedged item (as designated�ie this can be a risk component) is presented in a separate line in the statement of financial position and is recognised in other comprehensive income;

(d) the change in the fair value of the hedging instrument is recognised in other comprehensive income; and

(e) the hedge ineffectiveness (ie the difference between the change in hedged item and the hedging instrument) is transferred to profit or loss.

An example

The staff have prepared an illustrative example to show how the proposed fair value hedge mechanics would work. For completeness the staff have also prepared an example of how the cash flow hedge mechanics work.

Click hereto access the example for fair value hedges.

Click hereto access the example for cash flow hedges

Linked presentation

(see paragraphs BC124-129)

During its outreach activities, the Board was alerted to the financial reporting effect that fair value hedge accounting has on hedges of the foreign currency risk of firm commitments in a specific industry. This issue is a particular concern to that industry because of the magnitude of firm commitments that are denominated in a foreign currency because of the industry�s business model. In response to that concern the Board considered whether applying linked presentation for fair value hedges of firm commitments might be appropriate. Linked presentation is a way of presenting information so that it shows how particular assets and liabilities are related. Linked presentation is not the same as offsetting, which presents a net asset or liability. Linked presentation displays the �gross� amount of related items in the statement of financial position (while the net amount is included in the total for assets or liabilities).

For more information on the concern raised by the specific industry, please click here. Please note that this link takes you to the website of another organisation. The IASB does not assume any responsibility for the content of that web page.

The Board noted that while linked presentation could provide some useful information about a particular relationship between an asset and a liability, it does not differentiate between the types of risk covered by that relationship and those that are not. Consequently, linked presentation could result in one net amount for an asset and liability that are �linked� even though that link (ie the relationship) affects only one of several risks underlying the asset or liability (eg only currency risk but not credit risk or interest rate risk). Furthermore, the Board did not consider that linked presentation would result in more appropriate totals of assets and liabilities for the purpose of ratio analysis because the hedging affected only one risk but not all risks. Instead, the Board believes that disclosures about hedging would be a better alternative to provide information that allows users of financial statements to assess the relevance of the information for their own analysis.

Consequently, the Board decided not to propose the use of linked presentation for the purposes of hedge accounting. 

Staff papers

As part of our due process, discussions of technical issues take place during public IASB meetings. For these meetings, the staff prepare technical papers on the specific technical topics. The Board then uses these papers as a basis for their proposals.

The papers that have been prepared for the Board to discuss hedge accounting mechanics and presentation are listed below. Click on the paper reference number to access the specific paper. Click on the related month to access the summary of decisions taken at that IASB meeting. 


TopicPaper refMonth discussed
Applying cash flow hedge accounting mechanics to a fair value hedgeAgenda paper 11October 2010
Fair value hedge mechanicsAgenda papers 8A & 8CJuly 2010
Linked presentationAgenda papers 8B & 8DJuly 2010

How to get involved

The exposure draft specifically asks for your views on this (and other) topics.

Question 9 of the invitation to comment in the exposure draft asks:

(a) Do you agree that for a fair value hedge the gain or loss on the hedging instrument and the hedged item should be recognised in other comprehensive income with the ineffective portion of the gain or loss transferred to profit or loss? Why or why not? If not, what changes do you recommend and why?

(b) Do you agree that the gain or loss on the hedged item attributable to the hedged risk should be presented as a separate line item in the statement of financial position? Why or why not? If not, what changes do you recommend and why?

(c) Do you agree that linked presentation should not be allowed for fair value hedges? Why or why not? If you disagree, when do you think linked presentation should be allowed and how would should it be presented?

You may choose to answer all the questions in the invitation to comment or only some of them and you are welcome to comment on any other matter that you think we should consider in finalising the proposals. Comment letters will be posted on our website.

We will carefully consider all feedback and will discuss responses to the proposals in public meetings. We plan to issue the new standard in mid-2011.