This article was first published in the February 2011 UK edition of Accounting and Business magazine
The third phase of the International Accounting Standards Board’s (IASB) project to replace IAS 39, Financial Instruments: Recognition and Measurement, has resulted in an exposure draft (ED) that sets out proposals for hedge accounting. When finalised, the requirements will be added to IFRS 9, Financial Instruments.
The IASB considers that the proposed model will more closely align hedge accounting with the risk management activities undertaken by companies when they hedge their financial and non-financial exposures.
Under IAS 39, it is possible to hedge components of financial items but not components of non-financial items. The ED requires consideration only of whether a risk component can be identified and measured, rather than determining what can be hedged by reference to the type of item.
The ability to use hedge accounting will also be extended to net positions, currently not permitted under IAS 39. It is further proposed that the mechanics of fair value hedge accounting will be changed, so that it is reflected in other comprehensive income in the same way as already required for cashflow hedges.
The new model will be accompanied by comprehensive disclosures focusing not on the hedging instruments, but on the risks the reporting entity is managing, how those risks are being managed and the outcome of the risk management activity, including the effect on the financial statements.
Yvonne Lang, director, Smith & Williamson
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