Exposure Draft Gives IFRS Reporters Greater Flexibility
An exposure draft (ED) for public comment issued today by the International Accounting Standards Board (IASB) proposes hedge accounting rules that more realistically reflect the strategies companies use to hedge commercial risk, enabling them to hedge more risk, says Reval, the leading financial risk management solutions provider to companies globally. The ED on IFRS 9 focuses on hedge accounting and represents the third phase of the IASB project to replace IAS 39 Financial Instruments: Recognition and Measurement. It is open for public comment until 9 March 2011.
“The proposed rules provide greater flexibility in the types of hedge relationships that will qualify for hedge accounting treatment,” explains Blaik Wilson, Reval Solutions consultant and vice chairman of Reval’s Hedge Accounting Technical Taskforce (HATT). “The more hedges that qualify for hedge accounting treatment, the more risk a company can hedge.”
According to Reval, the ED is broad in nature, allowing companies to:
· Apply hedge accounting treatment to net positions to better reflect real hedging strategies
· Consider derivatives as hedged items so more hedging scenarios qualify for hedge accounting
· Narrow commodity exposures to the hedged component (hedge the aluminium component in the aluminium can)
· Adjust their existing hedge relationships and their effectiveness methodologies to accommodate unexpected hedge ineffectiveness, without the need to de-designate and re-designate
These features are not available in the recently released FASB ED, which Reval says tweaks rather than overhauls existing hedge accounting rules. “Even in areas where the FASB and IASB agree on issues such as the current ‘bright line’ effectiveness criteria, the response from each Board has been very different,” Wilson explains. “The FASB is essentially making the bright line broader, while the IASB has moved away from any kind of benchmark effectiveness level, looking instead to align effectiveness objectives with the company’s risk management policy. Either way, from Reval’s perspective, Reval supports companies reporting under both FASB and IASB standards.” Reval was founded in 1999 specifically to bring companies a Web-based solution that would help them properly account for the derivatives they use to hedge commercial risk.
“The IASB has listened to its constituents regarding the impracticalities around current guidance and, for the most part, has met the objective of this phase,” Wilson says. “This phase of the project to overhaul hedge accounting rules under IFRS 9 should improve decision-making for users of financial statements.”
