The Board discussed whether a third-party contractual guarantee affects the fair value to the debtor of the liability related to the contractual guarantee. The Board concluded that such a contractual guarantee does not affect the fair value unless payment of the guarantee by the guarantor to the creditor results in the release of the debtor from its obligation.
In addition, the Board agreed that if payment of the guarantee by the guarantor to the creditor results in the release of the debtor from its obligation, the debtor should recognize an asset as well as measuring the fair value of the liability based on the combined probability of cash flows from the debtor and cash flows from the guarantor.
Statutory guarantees (such as deposit insurance)
The Board agreed that statutory deposit insurance and similar non-contractual guarantees do affect the debtor's obligation and should be included in the valuation of the liabilities with statutory and similar non-contractual guarantees by the debtor. (Some Board members, while agreeing with this conclusion, disagreed with the staff's rationale. The rationale, some of which is included in Observer Note 7, will be revised.)
The forthcoming Discussion Paper would reflect these views.
The staff noted that the Due Process Document (DPD) treats hedge accounting as a departure from normal recognition, measurement and presentation principles. The staff then presented a number of situations and asked the Board which, if any, of the situations justified a departure from the general principles. The staff noted that hedges of the foreign currency exposure of a net investment in a foreign operation were not addressed in the Due Process Document.
The Board then discussed each of the following issues:
- Exposures to changes in the fair value of a recognized item in the scope of the DPD
- Exposures to changes in the expected future cash flows of a recognized item in the scope of the DPD
- Exposures to changes in the expected cash flows of a forecast transaction to buy or sell an item that, when recognized, would be within the scope of the DPD.
The Board agreed that the Due Process Document should express a Preliminary View that there is no justification for an exception to normal accounting principles for these items. Board members noted that information about risk exposures required by IFRS 7 should address many of these items.
Exposures to changes in the fair value of assets or liabilities (including firm commitments) outside the scope of the DPD
The Board was sympathetic to permitting a 'fair value option' for exposures to changes in fair value outside the scope of the due process documents, for example, commodities traded other than for normal purchase and sale. Such an approach would permit both the hedged item (the purchase commitment) and the hedging instrument (presumably a derivative) to be marked to market through profit and loss. Designation would be required. Board members stated that components (that is, specific risks) of hedged items (for example, inflation risk) could not be hedged. A hedge need not be for the entire period of the commitment, nor for the entire quantity of the purchase commitment. Any gains and losses on such hedges would be recognised in profit and loss.
Some Board members were cautious, noting that they did not want to create additional accounting mismatches. Others were worried about the possibilities for obfuscation presented by permitting hedge accounting. These Board members were worried that there would be no disclosure of non-financial items exposed to economic risk (because they were not hedged). Again, it was noted that IFRS 7 should address much of these concerns.
It was also noted that the Due Process Document should acknowledge, although not necessarily resolve, the challenges posed by firm commitments denominated in a foreign currency. Although such transactions were outside the scope of the document, the Board noted that they were inextricably linked to the issues addressed in it.
Exposures to changes in the expected cash flows of a forecast transaction to buy or sell an item that, when recognized, will be outside the scope of the DPD
The Board expressed a preference that the Due Process Document should state a Preliminary View that there should be no exception to normal accounting principles for such items, provided that the document discussed the related presentation and disclosure issues. Some Board members suggested that, if the item eventually recognised was a fixed asset (for instance, an aircraft or a ship), the exposure to changes in cash flows should be presented as a Financing cash flow; if related to inventory, it would be an Operating cash flow.