The Board considered possible approaches to hedge accounting during this session. FASB Board members and staff joined the debate via video link.

The staff presented a wide range of possibilities for the future of hedge accounting ranging from its complete elimination to retaining and amending the current conditions and criteria. The staff recommended replacing fair value hedge accounting by permitting recognition outside profit or loss of gains and losses on financial instruments designated as hedge instruments (an approach similar to cash flow hedge accounting). The staff further proposed some simplification of current cash flow hedge accounting model. A majority of the Board agreed with this basic approach. Several Board members focused on the need for further simplification of the hedge accounting requirements and development of a single set of hedge accounting rules.

Nonetheless, some Board members were concerned with some detailed issues as well as interaction of the project with the Classification and Measurement phase of the financial instruments project.

One Board member was concerned with the proposed approach as he believed that it would create more questions and issues than it would solve. He was particularly concerned with evaluating the effectiveness of hedge accounting.

Several Board members were concerned by the lack of convergence with FASB. The FASB clarified that it had not yet considered (either publicly or privately) the hedge accounting standards. The FASB and several IASB Board members seemed to be particularly concerned with the application of fair value hedge accounting to financial instruments measured at amortised cost due to the application of business model. For them the intuitive argument would be to prohibit the usage of fair value hedge accounting for such instruments. The staff replied that that interaction must be fully analysed and would be addressed by both Boards at a later stage.

The Board generally agreed that initially general requirements for hedge accounting had to be developed and agreed (in the form of an ED) and, based on the adopted approach and public consultation, application for portfolio hedging should be developed.

The Board agreed that portfolio hedge accounting was a very complicated area that would need to be assessed at a later stage and would require significant time to be completed.

The Board continued with discussion on hedge accounting for net investments in a foreign operation. Most of the Board agreed that this issue should not be addressed at this stage as the issue did not relate as much to hedge accounting as to IAS 21 requirements. Nonetheless, some Board members stressed the need for a single hedge accounting model. The Board agreed that it would address this issue at a later stage, when basic model of hedge accounting was agreed.

One Board member suggested that definition of hedging instrument should be based on cash flow characteristics. The staff will investigate how to fit this suggestion into the model.