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Financial instruments – Hedge accounting - Education session

Date recorded:

Education session

The IASB and FASB held an educational session for the IASB staff to present the proposals in ED 2010/13 Hedge Accounting to the FASB.

FASB questions on the hedge accounting proposals were primarily clarifying in nature, focusing on such topics as:

  • basis adjustments related to time value of options
  • recognition of hedge ineffectiveness when the hedge relationship is rebalanced
  • the "other than accidental" offsetting requirements in the effectiveness criteria
  • presentation of the hedged item risk adjustment
  • application of hedge accounting to groups of items
  • application of the disclosure proposals.

The FASB then asked the dissenting IASB member for a summary of his concerns with the proposals. The IASB member gave a brief overview of his concerns primarily focusing on potential abuses including the ability of entities to circumvent the requirements within IFRS 9 and also the ability to "park" amounts within other comprehensive income through designating a hedge relationship. He also cited that the hedge accounting model within IAS 39 has been flipped so that derivatives are now eligible hedged items and cash instruments are no eligible hedging instruments.

The acting Chair of the FASB mentioned what she viewed as a contradiction the IASB's proposals on hedge accounting and the decisions made on the joint offsetting project. In her view, the hedge accounting proposals permit an exception to adjust the recognition of items in profit or loss to more accurately reflect an entity's risk management activities. However, in the offsetting project, an entity is not permitted a similar exception to adjust the balance sheet presentation to reflect their management of credit risk (i.e., through the use of a master netting agreement for derivative settlement in bankruptcy).