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Accounting Alert - November 2013

Staying on top of developments

Accounting AlertHedge accounting reforms 

The International Accounting Standards Board (IASB) has published an amendment to IFRS 9: Financial Instruments incorporating its new general hedge accounting model. This represents a significant milestone as it completes another phase of the IASB’s project to replace IAS 39: Financial Instruments: Recognition and Measurement. The new general hedge accounting model will allow reporters to reflect risk management activities in the financial statements more closely as it provides more opportunities to apply hedge accounting.

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.

The effective date of IFRS 9 has been removed (previously 1 January 2015), however, early application is still permitted.

Deloitte’s newsletter IFRS in Focus: Hedge accounting reforms: A closer reflection of risk management is available for download at: http://www.iasplus.com/en/publications/global/ifrs-in-focus/2013/hedging/at_download/file/IFRS%20in%20Focus%20-%20Hedge%20Accounting.pdf 

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