iGAAP Alert: September 2012
Hedge accounting draft: A closer reflection of risk management
The IASB has issued a draft of the new hedge accounting guidance that will form part of IFRS 9. The draft follows an exposure draft published in December 2010; the guidance is likely to be finalised early next year
The draft includes amendments to hedge accounting requirements, made in response to criticism of IAS 39 which was often viewed as too stringent and not capable of reflecting risk management policies.
The three types of hedge accounting remain: cash flow; fair value and net investment hedges. However, there have been significant changes to the types of transactions eligible for hedge accounting, specifically a broadening of the risks eligible for hedge accounting of non-financial items.
Changes in the way forward contracts and derivative options are accounted for when they are in a hedge accounting relationship will reduce profit or loss volatility when compared with IAS 39 and therefore will be attractive for some entities.
In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is no longer required.
The flexibility of the new accounting requirements is counter-balanced by enhanced disclosure requirements about an entity’s risk management activities.
The accompanying Basis for Conclusions is lengthy as it includes extensive explanations of the differences between the new guidance and IAS 39.