The IASB met to continue the discussion on the proposed revaluation approach for accounting for macro hedging activity. At the meeting the IASB discussed two topics that had not been previously considered. Although the forthcoming Discussion Paper will not be limited in scope to the management of interest rate risk, the focus in both discussions was on the dynamic risk management of interest rate risk in the banking sector, because it is a well-known example of where a solution for accounting for macro hedging activity is required.
Income statement and balance sheet presentation
In the development of the portfolio revaluation approach for accounting for macro hedging activity, the discussion so far has focused on the net impact of the resultant accounting entries. At this meeting the IASB discussed the possible geography of the accounting entries within both the income statement and the statement of financial position.
The IASB discussed two alternatives for income statement presentation as follows:
• stable net interest income approach; and
• actual net interest income approach.
Three presentation alternatives for the statement of financial position were discussed by the IASB:
• line-by-line gross-up;
• separate lines for aggregate gross adjustments to assets and liabilities; and
• single net line item.
The IASB discussed all the alternatives, in particular considering the usefulness of the information provided by each presentation.
What the model should apply to
The IASB also discussed the ‘scope’ of the accounting for macro hedging. The staff categorised the key issues into the following aspects:
• What portfolios are to be revalued when an entity applies this approach?
• Is the application of the accounting for macro hedging mandatory or optional?
The IASB discussed the above aspects in the context of divergent views on the purpose of the accounting for macro hedging activity. One of the views considered is a ‘holistic’ view, which would result in applying the approach to the whole portfolio to which dynamic risk management was undertaken, including both hedged and intentionally unhedged positions within that portfolio. The other view is to focus more on hedging activity. The discussion focused on what the holistic view means, in particular when a bank manages interest rate exposures separately by geographical region, etc. The discussion also highlighted the implications of including ‘intentionally un-hedged’ open risk positions as part of the proposed portfolio revaluation approach as well as the operational difficulties of excluding proportions of portfolios from the application of the approach.
The IASB was not asked to make any decisions at the meeting.
The staff will continue drafting the Discussion Paper, which will incorporate the alternatives presented in the Agenda Papers as discussed by the IASB at the May meeting.