Global Standards for the world economy

Monday 23 January 2017

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Meeting summaries and observer notes

 IASB December 2006 - Interest Margin Hedging


Representatives of the European Banking Federation (FBE) presented a summary of their proposal for an interest margin hedge accounting model. One of the reasons for the proposal was a view that some provisions of IFRSs prevent some banks from applying the existing hedge accounting models in IAS 39 Financial Instruments: Recognition and Measurement.

Board members asked why a new hedge accounting model was needed. Those Board members suggested that the IFRS provisions that some banks believe prevent them from qualifying for hedge accounting are not, in fact, impediments. The FBE representatives acknowledged that if such clarifications were made, perhaps the existing cash flow hedge accounting model in IAS 39 could be applied. Board members observed that the interest margin hedge accounting model proposed by the FBE would then be unnecessary.

The FBE representatives agreed with a number of points made by Board members, including that:

  • any deferral of gains or losses on hedging instruments must be reported in equity.
  • under any hedge accounting model only a gross amount of assets, liabilities, or forecasted transactions should be designated as the hedged item—although the gross designated amount could be arrived at by a risk-management analysis of net exposures in each time period.
  • assets, liabilities, or forecast transactions that have no interest rate exposure cannot be designated as hedged items for any exposure to interest rates. Hence zero rate liabilities cannot be designated as a hedged item. Therefore, measurement of core deposits is irrelevant, except as needed in the risk-management analysis of net exposures.

Ineffectiveness must be measured and recognized in profit or loss in any hedge accounting model.

One Board member also observed that the interest-margin hedging approach might be considerably more complex than a proper application of the cash flow hedge accounting model in IAS 39.

On the basis of the discussion and the points of apparent agreement, some Board members and FBE representatives suggested that another approach would be more constructive and consistent with both parties’ objectives. Representatives of the FBE agreed to prepare a list of specific paragraphs that are perceived by some to prevent the use of cash flow hedge accounting. The IASB will then analyse the paragraphs determining whether any clarifications are necessary and appropriate.

Date: 12/13/2006