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Hedge Accounting

Posted: Wednesday 15 December 2010 by Nick Topazio
Replies : 1
Keywords: Financial Instruments, IFRS

The IASB have issued an exposure draft which proposes requirements for hedge accounting that should enable companies to reflect their risk management activities better in their financial statements, and, in turn, help investors to understand the effect of those activities on future cash flows. 

The proposed model is principle-based, and will more closely align hedge accounting with risk management activities undertaken by companies when hedging their financial and non-financial risk exposures. The proposals also include enhanced presentation and new disclosure requirements.

One of the criticisms of current hedge accounting is that its complexity does not allow economic reality to be reflected in the financial statements and that this deters companies from undertaking valid hedging activities.  Do the proposed hedge accounting rules correct this? 

The IASB have published a summary of the proposals at the link below.  Those involved in hedging activities will be interested - please leave your views below.  The deadline for comments is 9 March 2011.

http://www.ifrs.org/Current+Projects/IASB+Projects/Financial+Instruments+A+Replacement+of+IAS+39+Financial+Instruments+Recognitio/Phase+III+-+Hedge+accounting/edcl/ed.htm

CIMA's Response

Posted by Nick Topazio on Wednesday 09 March 2011 16:09
The main messages from CIMA's response to the IASB are as follows:

We understand the need to sub-divide the work of replacing IAS 39 into manageable portions but, once the separate projects have reached conclusions, we would urge the Board to expose the complete IFRS 9 for comment prior to final approval.

CIMA believes that one way in which corporate reporting can be improved is with greater alignment of internal and external reporting.  We welcome the Board's proposal to link hedge accounting with the entity's internal risk management policies as this will help to remove the situation where entities are managing risks effectively in practice but not able to reflect this in their financial statements due to the criteria in IAS 39.

We would not like to see a situation where companies can choose either to adopt or not adopt hedge accounting.  If the management policy is to use financial instruments to hedge and manage risk they should reflect that in the financial statements through hedge accounting - if the hedging strategy is then ineffective the ineffective element should be recognised in the income statement.  If however the management policy is to use derivatives for speculative purposes this should be reflected in the financial statements.