Income statement volatility. Complexity. Misalignment with risk policies.
Do these outcomes meet the objective of hedge accounting under IFRS 9 Financial Instruments? You have one month to tell the International Accounting Standards Board (IASB) how the IFRS 9 – Hedge Accounting Review Draft will impact you, or you can take Reval's three-question poll now >>
Aggregated results will be reported to the IASB and made available publicly by mid-December.
Here’s the background:
The IFRS 9 – Hedge Accounting Review Draft was issued September 7, 2012, with the final standard planned for the end of December 2012, barring any ‘fatal flaws’ identified in the Review Draft.
In consultation with corporate clients reporting under IFRS, Reval has identified fatal flaws in the Review Draft that could have severe adverse consequences to financial results and economic hedging strategies for most corporations hedging currency risk.
The issue arises in the application guidance as outlined in Para B6.5.5 of the Review Draft in relation to measuring ineffectiveness using hypothetical derivatives. Specifically, this section implies that for hedges of currency risk, the exposure must be measured based on non-market, theoretical forward rates rather than observable market data.
For those currencies pegged against the US dollar, this interpretation means that hedging derivatives cannot apply hedge accounting at all.
This guidance was never exposed for public comment or discussion during the lengthy due process undertaken by the IASB in compiling IFRS 9 for hedge accounting.
Reval’s three-question poll will assist Reval in communicating the impact of Para B6.5.5 to the IASB so the full scope and implication of this guidance is fully understood.
Reval recommends that the IASB replace the guidance under B6.5.5. We suggest a hypothetical derivative be defined as a ‘perfect hedge’ of the hedged item in the observable market. Such a definition will resolve the three fatal elements Reval has identified, and it will ensure the accounting outcomes in the measurement of hedge ineffectiveness align with the risk management outcomes as per the objective of hedge accounting. The use of observable market data will also reduce complexity as this data is easier to access and much more transparent.