The IASB met on 22 May 2013 to analyse comment letters received on the Exposure Draft ED/2013/2 Novation of Derivatives and Continuation of Hedge Accounting (Proposed Amendments to IAS 39 and IFRS 9) that was published in February 2013.
The IASB had received an urgent request to clarify whether an entity is required to discontinue hedge accounting for hedging relationships in which a derivative that has been designated as a hedging instrument in accordance with IAS 39 Financial Instruments: Recognition and Measurement is novated. In particular the request related to a circumstance in which that derivative is novated to a central counterparty (CCP) following the introduction of a new law or regulation. The IASB concluded that an entity is required to discontinue the hedge accounting for a derivative that has been designated as a hedging instrument in the existing hedging relationship if the derivative is novated to a CCP. The new derivatives, with a counterparty being the CCP, would be recognised at the time of the novation.
The IASB, however, was concerned about the financial reporting effects, specifically the discontinuation of hedge accounting that would arise as a result of the novation that occurs as a result of new laws or regulations. The IASB also noted that widespread legislative changes across jurisdictions were prompted by a G20 commitment to improve transparency and regulatory oversight of over-the-counter (OTC) derivatives in an internationally consistent and non-discriminatory way. Consequently, the amendments proposed in the Exposure Draft provided relief from discontinuing hedge accounting when the novation to a CCP meets three criteria: (1) novation is required by laws or regulations; (2) novation results in a central counterparty becoming the new counterparty to each of the parties to the novated derivatives; and (3) only specified (limited) changes are made to the terms of the novated derivative.
A great majority of respondents to the Exposure Draft requested the IASB to expand the scope of the amendments. They proposed that voluntary novation to a CCP should be provided with the same relief as novation required by laws or regulations. Some respondents also described circumstances in which an entity accesses a CCP indirectly, for example by novating to a clearing member of a CCP, and requested that the same relief should be provided in these circumstances.
Having considered respondents’ comments, the IASB tentatively decided to expand the scope of the amendments to also provide relief from discontinuing hedge accounting for (1) voluntary novation to a CCP associated with a legislative or regulatory change and (2) novation that provides the entity with indirect access to a CCP. The IASB also tentatively decided to clarify some of the drafting in the final amendments. The IASB tentatively decided that the amendment should be applied retrospectively as proposed in the ED. In addition, the IASB concluded that equivalent amendments should be made to IFRS 9 Financial Instruments and that, consistently with the ED, no additional disclosure requirements arising from these amendments to IAS 39 and IFRS 9 were necessary.
The IASB tentatively decided that re-exposure is not necessary and that the mandatory effective date of the amendments should be 1 January 2014. The IASB also confirmed that it has completed the due process steps that are necessary to date for the finalisation of a narrow-scope project in accordance with the requirements set out in the IASB and IFRS Interpretations Committee Due Process Handbook and asked that the balloting process should begin.
Fifteen IASB members agreed. One member was absent.
The IASB expects to issue the amendments to IAS 39 and IFRS 9 in June 2013.