Replacement of IAS 39: Hedge Accounting
Eligible hedge items: Groups and net positions
The Board considered eligibility criteria for groups of hedged items that constitute a gross position and groups of hedged items that constitute a net position in the context of a general hedging model. These positions constitute common risk management strategies and are a building block of a portfolio hedging model.
The staff suggested limiting the discussion only to firm commitments as forecasted transactions would be discussed at a later stage. Some Board members clarified that the groups of items relate to a closed portfolio of instruments in contrast to a full portfolio hedging model that would be discussed after the general model is finalised.
Some Board members also questioned whether some of these issues are not influenced also by the application of the mechanics of a cash flow hedge to a fair value hedge.
The aim of the discussion was to consider whether and how to relax the restrictions on the types of groups of items that qualify for hedge accounting under IAS 39.
Eligible hedge items: Groups of hedged items
The Board debated whether any specific eligibility criteria are necessary for groups that are gross positions of hedged items of the same nature, with different risk characteristics, that impact profit or loss in the same period. Most Board members tentatively agreed that in these narrow circumstances no specific eligibility criteria are necessary.
Some Board members expressed their view that such positions should be eligible only if the groups are constantly re-measured. They believed that ultimately such decisions would lead to structuring and would lead to failure of effectiveness testing. The staff clarified that effectiveness would be considered at a later stage of the project. In addition, it noted that there are issues in the practice that even this narrow set could influence (e.g. seed corn hedge dependent on the benchmark corn price component and seed corn yield component).
Another Board member was concerned with the notion of same reporting period. He pointed out to the interactions with guidance in IAS 34 and questioned whether eligibility should depend on the fact whether the company prepares interim accounts. The staff would further analyse the issue.
Eligible hedge items: Net positions
The Board considered eligibility and presentation of some types of net positions for hedge accounting. The staff suggested that the designated hedged items would not be adjusted but instead the offsetting gain/loss resulting from the hedging instrument would be presented in a separate line of the statement of comprehensive income.
For most Board members the scenario (based on two form commitments - purchase of material and sale of goods in a foreign currency leading to a net risk position) was predominantly a presentation issue. Some Board members suggested that the staff considered presentation in its entirety as the suggested approach would lead to a separate line when hedging a net position but not when these transactions were hedged separately. These Board members questioned whether such presentation would increase transparency in dealing with derivatives.
In addition, one Board member expressed his concerns that the Board continues to require separate lines in a primary statement that could lead to a situation that the primary statements would become too cluttered by separate disclosure to be useful. He questioned whether note disclosure would not address the transparency issue.
Finally, despite seeing merits in the suggested approach, the Board agreed that the staff should consider presentation issue for hedge instruments in its entirety.
The Board then extended its discussion on multiple reporting periods. The Board considered the mechanics of the accounting for hedged items and hedging instruments. Some Board members questioned the mechanics of the proposed model that would lead to revaluation of both hedging instrument and hedged items related to the hedged risk directly in the other comprehensive income (that is, would differ from the current cash flow hedging mechanics). Such mechanics would include direct reclassification from profit or loss to the other comprehensive income. Several Board members questioned such reclassification as well as the fact whether the Board agreed such mechanics.
The Board did not conclude this issue and continued its discussion on Thursday.