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Replacement of IAS 39: Hedge Accounting

Date recorded:

Eligible hedge items: Net positions

The Board continued the discussion from Wednesday on net positions consisting of a closed group of existing, non financial hedged items, with different risk characteristics that affect profit or loss in different reporting periods (for instance, a group of partially offsetting FX firm commitments that settle over five periods, with a forward FX contract used to hedge the net risk).

Several Board members were unhappy with the proposed model and challenged the staff that the proposed model (which would require changes of both the hedging instrument as well as the remeasurement of the fixed commitments to be recognised in the OCI) is inconsistent with basic features of the model as discussed by the Board. These Board members believed that the new hedging model should be limited to the pure cash-flow hedge mechanics (that is, only remeasurement of the derivative hedging instrument). Those Board members would prefer to recognise the results from recognising remeasurement of the unrecognised firm commitments as assets and liabilities that have an effect on the profit or loss (rather than the proposed accounting in OCI with a corresponding 'double entry' in the profit or loss). Those Board members also asked the staff to further clarify the criteria when the hedged items (with respect to the hedged risk) would be remeasured in the OCI and when not.

On the other hand, a majority of the Board members wanted the staff to pursue the proposed hedging model and develop it further. They encouraged the staff to explore the model so that the Board may be able to make decision whether the developed model is improvement over the current requirements. Consequently the staff would come back with further features of the model at a future meeting.


Eligible hedge items: contractually specified risk components

The Board considered the eligibility of contractually specified components of an item for hedge accounting (both financial and non-financial items). Most Board members agreed that that a contractually specified risk component should be eligible for designation as the hedged item in a hedging relationship for hedge accounting purposes, irrespective of whether it is the component of a financial or a non-financial item and thus that the current restrictions in IAS 39 should be softened (currently IAS 39 restricts eligible risk components to separately identifiable and reliably measureable risk components of financial items and foreign currency risk for non-financial items).

Some Board members expressed their reservations to the proposal. They argued that the current restrictions in IAS 39 were introduced as a way to ensure that the items are not marked away from the market.

Finally, the Board agreed to pursue these criteria. Some Board members indicated that some of the eligibility criteria need to be tightened to make the model operational. The staff would provide additional analysis at a following Board meeting.