International Accounting Standards Board Bares Latest Changes in Hedge Accounting Model

Lucas Gilmore, “Big 4″ observer
December 10, 2010 /

Responding to the call of G20 to address complex and burdensome aspects of hedge accounting, the International Accounting Standards Board (IASB) has released a new Exposure Draft (ED) as part of the completion of the IAS 39 financial instruments accounting model.

With the proposed changes in the hedge accounting model that simplify burdensome requirements like quantitative threshold and retrospective evaluation of hedge effectiveness, financial institutions may now find it easy to carry on with their current hedging relationships that have been previously threatened to be renewed, which is prohibited, said Enrique Tejerina, KPMG’s deputy leader for global IFRS Financial Instruments practice and partner in the US firm.

The hedge accounting changes proposed in the ED, which are quite different from the proposals under the US GAAP as noted by Tejerina, would address occasional discrepancies between hedging strategies and risk management under the existing rules. Tejerina said that what might finalize the necessary changes in hedge accounting model would be the portfolio or macro hedging which he expected to be reflected in another ED by mid 2011.

Tejerina said that although the macro hedging would likely complete the ‘puzzle,’ the latest changes in the hedge accounting model have already substantial benefits to financial institutions as they allow for the integration of the hedge accounting and risk management guidelines and objectives, aiding financial statement users in their decision making.

Non-financial institutions are also likely to benefit from the hedge accounting changes in the ED which included non-financial risks associated with commodity components of operating exposures.

The hedge accounting changes also extended its scope to purchased options as hedging instruments and hedged items, which are essential to both the financial and non-financial sectors.

IASB will solicit feedbacks from all stakeholders within three months as part of its consultation on the hedge accounting changes.


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