At this meeting, the IASB continued its discussions of the portfolio hedge accounting model. In particular, the Board discussed portfolio fair value hedge accounting for interest rate risk, often referred to as 'macro-hedging'. (The Board has completed its discussions on the general hedge accounting model and staff are preparing an exposure draft that is expected to be published in December 2010.)
At this session the Board discussed:
- the typical economic interest rate hedging strategy of a bank that hedges interest rate risk on prepayable debt instruments;
- the hedge accounting alternatives available for banks under IAS 39 Financial Instruments: Recognition and Measurement;
- the hedge ineffectiveness that arises under the macro fair value hedge accounting model in IAS 39 today; and
- an alternative hedge accounting objective that supports the use of a bottom layer approach for defining the hedged item.
During this session, the Board discussed whether the hedge ineffectiveness that arises under the current macro fair value hedge accounting model is appropriate. The Board noted that the premise of the IAS 39 model is to replicate, on a portfolio basis, the hedge accounting result that would arise on an individual hedged item basis. For this reason, when less than the entire portfolio is hedged, the hedged amount is defined as a proportion of the total portfolio. Given this accounting objective, the Board noted that the ineffectiveness recorded is appropriate.
However, during the outreach activities it was noted that banks tend to hedge on a portfolio basis, to intentionally derive a different hedging result to that which would arise on an individual basis.
The Board discussed whether the new model being developed could accommodate hedging on a portfolio basis where the accounting outcome is different to hedge accounting on an individual basis. Such an approach would characterise hedged cash flows of the portfolio in the bottom layer as less susceptible to prepayment risk than the unhedged cash flows in the top layer.
The Board tentatively decided to consider further the concept of defining the hedged item as a bottom layer of the overall portfolio of prepayable debt instruments.