Replacement of IAS 39: Hedge Accounting
The objective of hedge accounting
The Board discussed the objective of hedge accounting. Some Board members expressed their concerns that this issue was being discussed at a separate meeting and not at the joint meeting. In their view, this approach would not lead to perception of joint project. The staff responded that the FASB was not prepared to discuss this issue at the joint meeting earlier this week, and the staff believed that a kind of educational session was required to start the discussion given the ambitious project plan. The FASB would have held a separate educational session. Finally, the objective of hedge accounting would be deliberated jointly at one of the following joint meetings.
The Board decided that this would be an educational session. As a consequence, no decisions were taken.
The Board considered two possible objectives of hedge accounting:
- to provide a link between entity's risk management and its financial reporting, or
- to mitigate the recognition and measurement anomalies between the accounting for hedged items and to manage the timing of the recognition of gains or losses on derivative hedging instruments used to mitigate cash flow risk.
In general, the Board members expressed divergent opinions on this subject. They perceived the first objective as being too broad and thought that it needed to be scaled down, whereas on the other hand, the second objective seemed to be too narrow. Even though the Board members agreed that the objective of hedge accounting should be defined at a high level and should be further limited by additional principles, many members of the Board believed that the first objective was defined too broadly.
Some Board members believed that the first (broad) objective did not capture sufficiently the difference between hedging activities (economic hedging) and hedge accounting. Moreover, they believed that the objective should focus on financial risks, as risk management might address a variety of risks that could not be captured in the financial statements.
Other Board members believed that objective of hedge accounting should tie more closely with risk mitigation. They expressed their view that currently proposed first objective was more appropriate for comprehensive risk disclosures project rather than for hedge accounting.
In further discussion on application/illustration of this objective, the Board tentatively agreed that a possibility to designate risk components should be retained if the risk component was separately identifiable and measurable for the purposes of determining the hedge ineffectiveness. The Board nonetheless asked the staff to consider how operational would these criteria be.
The majority of the Board also expressed a preliminary view that consistent principles should be applied for eligibility of risk components for financial and non-financial items.
The Board will continue its discussion at the following Board meeting.