At its meeting in October, the Board discussed whether to provide additional guidance on what can be designated as a hedged portion of a financial instrument under IAS 39. The Board directed the staff to develop a proposal on the form and content of any additional guidance. At this meeting, the Board discussed the staff’s proposals.
The Board first discussed whether IAS 39 should specify the risks that are eligible for designation as hedged risks. IAS 39 allows an entity to hedge all of the cash flows of a financial instrument for one or more specific risks. However, IAS 39 does not specify which risks are eligible to be designated for hedge accounting. The standard states only that the hedged risks must be identifiable and separately measurable.
The Board decided to propose an amendment to IAS 39 to specify the risks that qualify for designation as a hedged risk. The Board noted that the proposed amendment would not be intended to change existing practice. The risks eligible for hedge accounting would be those risks that are commonly hedged in practice and would include:
- market interest rate risk
- foreign currency risk
- credit risk
- prepayment risk
- risks associated with the cash flows of a financial instrument that are contractually specified and are independent of the other cash flows of the same financial instrument.
The Board directed the staff to carry out further research to determine whether there are any other risks that are commonly hedged and should be included in the list of eligible risks. In particular, the staff were asked to consult members of the Financial Instruments Working Group.
The Board then discussed whether to clarify which portions of a financial instrument are eligible for designation as a hedged item. A portion of a financial instrument is any situation in which the entity hedges anything other than:
- all of the cash flows of the entire instrument for all risks; or
- all of the cash flows of the entire instrument for changes attributable to one or more specific risks.
Portions that qualify for hedge accounting include partial term hedges, hedges of a proportion of the cash flows of an item and hedges of one-sided risks. These types of portions are clearly permitted by IAS 39 and the Board did not discuss them. The Board discussed the designation of ‘other portions’ of a financial instrument.
The Board considered four possible approaches to providing guidance on what can be designated as an ‘other portion’. It decided that guidance should restrict the use of ‘other portions’ to specified situations. The eligible risks specified in the first issue would form the basis for the identification of the eligible ‘other portions’.
The Board decided that the proposed amendment should be developed by the Board rather than requesting the IFRIC to develop it. The basis for conclusions on the proposed amendment would explain how the change contributes to the Board’s long-term objectives for financial instruments. The Board also decided that the proposed amendment should be developed as a stand-alone amendment to IAS 39 rather than as part of the Annual Improvements process.